Anyone in any doubt as to the value of e-procurement technology should go and talk to Jim Polak, director of general purchasing at global paint and coatings manufacturer PPG Industries, based in Pittsburgh, Pennsylvania. As one of Ariba’s earliest customers, he overcame considerable internal skepticism to demonstrate the value of e-procurement to the company.
“Something like 50 per cent of the relevant people within PPG were against the idea of going with Ariba, which made it difficult to keep morale up and keep the momentum going. It wasn’t until the savings started rolling in that the pressure came off: until then, it was uncomfortable,” recalls Polak, now a regular conference speaker on the merits of e-procurement.
Yet despite his long relationship with Ariba, says Polak, not long ago PPG found itself in discussions with another e-procurement vendor, PerfectCommerce – a company identified by PPG as a possible replacement for Ariba. It wasn’t until Ariba signalled a change of direction in its strategy that these discussions ceased. “We’d been pushing them pretty hard,” he reveals. “It was clear to us which was the best way forward.”
The change of direction in question? A move to an on-demand licensing model, allowing PPG to operate and benefit from Ariba’s software without having to actually install it within its own IT infrastructure. Hosted externally – in this case by specialist Ariba hosting company USi in Maryland – PPG is in the process of re-implementing all five of its Ariba e-procurement applications in their on-demand incarnations, accessed by PPG employees over the internet.
As a user of the on-demand e-sourcing platform offered by its Pittsburgh neighbour FreeMarkets, prior to that company’s acquisition by Ariba in 2004, PPG had experience of both traditional and on-demand licensing models and was clear about which it preferred. “We saw considerable value in having our e-procurement solutions externally hosted,” says Polak. “It’s very expensive to host them internally from an infrastructure point of view, it’s very expensive to buy the licences, and it’s very expensive to set up applications inside the firewall.”
A sea change in buying habits
Hype springs eternal in the technology world, but for once it’s hard to escape the conclusion that a genuine sea change is under way in terms of how e-procurement applications are bought. On-demand e-procurement has clearly arrived, spearheaded by US software companies such as PerfectCommerce, Ketera Technologies and Procuri.
Ironically, this is both a threat to established vendors such as Ariba and a situation that is very much of their own making. For while this year marks the 10th anniversary of Ariba’s founding – a decade in which the company claims to have saved its customers a collective $10 billion – those savings have been concentrated among a particular group of companies: namely the Fortune 500 and comparably sized organisations.
The result, undeniably, has been to exclude smaller companies from the party. As Mickey North Rizza, director of sourcing and procurement at AMR Research in Boston puts it, “companies with under $1 billion in sales revenues can’t afford e-procurement solutions from the Aribas of this world – it’s just too expensive”. Hence the attractions of on-demand technology: “It substantially lowers the cost,” she explains. Research by AMR indicates the rate at which smaller businesses are seizing the opportunity offered to them by the on-demand model. Among companies with over $1 billion in sales, she says, the licensing of e-procurement applications rose only 4 per cent between 2004 and 2005, the latest period for which figures are publicly available. Yet the same period saw a rise 10 times higher – an eye-popping 40 per cent – among companies with under 30 million in revenues. Much of this growth, observes Rizza, is accounted for by on-demand applications.
Yet it would be a mistake to imagine that on-demand e-procurement software is only of interest to smaller companies. Not only does the testimony of PPG belie that view (with global sales revenues in 2005 exceeding $10 billion, the company is no minnow), but research from analysts is increasingly highlighting that on-demand e-procurement offers organisations of every size clear benefits over the traditional “licence-and-install” deployment model.
A survey by Aberdeen Group published in June looked at the experiences of 135 organisations that had implemented on-demand procurement and supply chain solutions, examining their merits across a range of factors, some 12 in all. Not only did on-demand solutions generally perform better, it found, but on arguably the most critical factors – return on investment, ease of upgrade and implementation timescale and effort –the advantages of on-demand technology over traditional licensing were greatest.
With respect to implementation time and effort, for example, Aberdeen found that 52 per cent of organisations rated the on-demand approach as better, compared with 39 per cent rating it the same and just 8 per cent rating it worse. On ease of upgrade, the perceived advantages of on-demand were even more marked: 56 per cent said it was better, against 34 per cent the same and 9 per cent worse.
Looking at overall return on investment, 57 per cent rated on-demand as better, 33 per cent rated it the same and 10 per cent regarded it as worse. On average, Aberdeen found on-demand users were able to improve spend under management by 27.5 per cent within a year of deploying an on-demand solution, whereas traditional “behind the firewall” users were only able to achieve an improvement of 21.5 per cent. The reason? The on-demand model’s rapid speed of implementation. “Best in class” on-demand users were up and running in less than two months, according to the survey – a fraction of the implementation time for installed software.
Yet, despite this apparent endorsement, views about on-demand e-procurement remain sharply polarised, and subject to not a little confusion. For example, what exactly is it? At its simplest, the on-demand model means little more than “externally hosted”, with a third party responsible for maintaining the hardware and software required to run the application and expanding resources as required. Being outside the corporate firewall, goes the logic, implementation and maintenance issues are simpler to resolve, with the burden of responsibility and management falling to the third party. At the other end of the spectrum lies a view of on-demand as “software as a service”, or SaaS.
Making IT provision simpler
Once significant, the difference between these two definitions is shrinking as more and more vendors – such as Ariba, earlier this year – announce genuine on-demand technologies that amount to more than a label and some contractual legalese. In the SaaS model, the core software (and legal title to it) never leaves the developer’s ownership, with users “subscribing” to
it, as a service, over the internet. With hosting, especially in its traditional guise, the user has some claim to the software (a “license” to use it, in perpetuity), and the objective of hosting is to simplify the IT provision. Between the two extremes lie any number of variants, with software hosted by the vendor itself a commonly encountered option.
Whatever the precise nature of the contractual relationship, on-demand software is seen as offering an organisation technology as a utility. “The basic logic is that technology should be no different from any of the other utility that the organisation consumes – water, electricity, and so on, that are made available on-demand,” says Javier Urioste, a former CPO of JP Morgan Chase and head of Ariba’s CXO Council, a group of senior procurement executives the company has brought together to advise on its technology strategy.
“On-demand is just a different way of delivering software,” adds Chris Sawchuk, global practice leader for procurement at business process benchmarking company the Hackett Group, based in Atlanta, Georgia. “It’s about turning technology into a tool, like electricity, that can be consumed as required, and where the responsibility of provision lies with another party. It’s more of a renting and leasing model; the procurement functionality aspect is quite peripheral.”
But if the procurement functionality embedded in the software is little different, the procurement of the software itself is very much so. Indeed, says Tim Minahan, a former vice-president of global supply chain research and strategy at Aberdeen Group, the difference played a major part in his decision to leave Aberdeen for his current role as vice-president of marketing at Procuri, which offers an on-demand model. “I could see that a major shift in buying perceptions was taking place, with on-demand becoming not just acceptable but the preferred way of gaining e-procurement capability,” he says.
To Minahan, on-demand e-procurement offers three clear advantages. First, it’s a usage-based business model. “Analysts say that a typical businesses uses around a third of the functionality
embedded in most enterprise application suites. On-demand allows organisations to buy and subtract as they want,” he notes. Support, too, is available on a contractually guaranteed basis – around the clock, if required.
Most significantly of all, he argues, on-demand represents a major shift in the buying decision. The final say on buying an application used to lie with the organisation’s chief information officer or senior IT director. Now, with the much smaller footprint that on-demand places on the IT infrastructure, it’s often the business function leader – in the case of on-demand e-procurement, the CPO. “On-demand affords them the ability to quickly gain access to the functionality that they need to drive their benefit and risk management goals, but at the same time offers affordability,” Minahan says. “The cost of that functionality moves from the capital budget to the expense budget.”
Everybody benefits
It’s a move that seems to benefit both users and vendors. As Jim Cebula, director of global purchasing and travel at specialist US metals manufacturer Kennametal, points out, the cost of accessing his company’s Ketera Technologies on-demand e-procurement system is not only significantly cheaper than equivalent licensed-and-installed technology, but equates to a consistent month-on-month cost.
“The subscription fee is always the same, no matter how frequently people access the system,” he stresses. “The result is a budget that doesn’t vary, which has to be a good thing.”
While on-demand e-procurement vendors that have adopted that model from the start, such as Ketera, can only theorise about the advantages of moving the cost of software provision from the capital budget to the expense budget, vendors that previously offered a licence-only model have first-hand knowledge. Lou Unkeless, Ariba’s chief marketing officer, is positive about the impact of the change on his company’s finances. “Customers aren’t spending as much money upfront, but are committing to multi-year subscriptions, which improves our cash flow,” he says. “It brings an end to the traditional end of the quarter ‘hockey stick’ effect as we close deals, and so stabilises our month-on-month revenues and makes them more predictable. Plus, it allows us to report our revenues as they occur, and Wall Street likes that.”
The downside, of course, is that those revenues are stable and consistent as long as users want to continue paying them. As Aberdeen Group’s research found, compared with the 10-to 15-year commitment that selecting an ERP system implies, on-demand e-procurement solutions are generally considered with a two- to three-year horizon in mind, after which a company may choose to re-evaluate it.
The message is clear: on-demand’s touted advantages – flexibility, speed of implementation, reduced IT footprint and freedom from the oppressive hand of the IT function – can cut both ways. Selecting an on-demand solution is easier than ever, but so too is deselecting it. For both on-demand vendors and their customers, these are uncharted waters.
CASE STUDY: REGUS
Posting big savings
For Melissa Cooper, UK procurement director of serviced office accommodation provider Regus, Ketera Technologies’ on-demand solution appeared far less complicated to install and use than the equivalent functionality built into the company’s ERP system of choice, PeopleSoft. Regus is currently part way through implementing on-line ordering and spend analysis, she explains, with electronic invoice processing scheduled for the fourth quarter of 2006.
“The system is hosted by Ketera, so there’s been no particular requirement on us in terms of IT resource,” she says. All the relevant staff, scattered across Regus’s 100 or so sites around the UK, already had internet access, so for them the impact has been little more than logging on to a new web address. “Our data is secure, is backed up regularly and kept for six years,” she adds. “We’ve done some integration with our financial systems, which has been very straightforward. There really hasn’t been any significant IT impact.”
It’s too early to assess the financial impact of the move, she explains. “Ketera wasn’t the cheapest system on the market, but it wasn’t the most expensive, either.” One impact is already clear, though: the removal of the requirement to mail purchase orders and invoices between the company’s various sites and its Belfast-based finance centre. “Our postage bill is dropping through the floor,” she says.
CASE STUDY: ORACLE
Touch-free cataloguing
For Greg Tennyson, vice-president of global strategic procurement and travel at Oracle – the company’s most senior procurement executive – on-demand vendor Aravo Solutions offers a way of accelerating the enterprise application giant’s progress towards what he describes as “touchless procurement”.
“Our goal is to remove our buyers from as much of the transaction as possible,” he says. But while the company’s purchasing catalogues seemed a clear way of achieving that, it turned out that too much of Tennyson’s buyers’ time was still absorbed by pre-transaction processes: the minutiae of what Aravo chief operating of. cer Brian Davidson describes as “onboarding suppliers and supplier enablement”. Translation: getting suppliers’ products into catalogues – in Oracle’s case, a problem exacerbated by the company’s requirement for local catalogues, in local languages and pricing, applicable to each of the countries in which it operates.
Aravo, which specialises in just this area, offered an obvious appeal, says Tennyson. “The Aravo solution allows suppliers to clean, parse and load their own catalogues, freeing up our buyers to do more valuable work. They aren’t spending their time stewarding catalogues through a process.”
It’s an appeal amplified by the solution’s on-demand model. “It sits outside our firewall, isn’t integrated with any of our applications, and I don’t have to worry about freeing up IT resources to deploy it,” says Tennyson.
This, he adds – choosing his words carefully – is especially helpful given Oracle’s current focus on acquiring other software companies. “The priorities of our IT people are on promoting merger and acquisition activity, followed by revenue-raising projects. Back-office projects, such as this, are further down the priority list. Thanks to Aravo’s on-demand model, I don’t have to worry about this – I can just do it.”
Malcolm Wheatley ( malcolm_wheatley@compuserve.com ) is a freelance business and technology journalist who writes for a range of leading UK and US publications
