Shop Till You Drop
Too much choice can be paralyzing, as companies in the market for E-procurement software are finding out. Even measured by Internet time, E-procurement is a fast-moving target, with longtime players and freshly minted competitors offering new products and services almost daily. Designed to simplify the buying of goods and services over the Internet, E-procurement may indeed be a boon to corporate shoppers–if they can decide which E-procurement option to buy.
Recent announcements from Oracle Corp., EDS, and a small company called eBenX give some idea of the activity in this market, which is glutted not only with suppliers, but also with methods. Customers can buy software, lease software, participate in exchanges, participate in auctions, or, more likely, craft some combination of these various approaches.
Oracle (www.oracle.com) has announced version 11i of its Internet Procurement application, which will be sold both as a stand-alone product and as part of Oracle’s suite of E- business software. The software is designed to handle the purchase of both production and nonproduction (including MRO, or maintenance, repair, and operations) goods, which means a customer could roll it out to a sizable percentage of company employees. To facilitate that kind of broad usage, Oracle has redesigned the interface so that it feels very much like the simple point-and-click style of retail Web sites.
“We’re emphasizing its function as a self- service application,” says Vance Checketts, the company’s senior director for Internet Procurement and Oracle Exchange. “Much of the cost-savings from E-procurement comes from removing administrative costs from the purchasing process.”
Those costs can be staggering; some estimates place the average cost of processing a purchase order at $120 or higher. TPN Register LLC (www.tpn.com), a joint venture of General Electric Corp. and Thomas Publishing Co., claims that its clients have seen a 70 percent drop in invoice-processing costs once they were up and running on TPN’s E-procurement system. And while MRO items may constitute only a small percentage of a company’s total spending, they can account for up to 75 percent of transactions. “That’s why driving costs out of those transactions through an automated solution can be such a huge win,” says TPN president Raymond P. Schiavone.
TPN provides access to the goods of many MRO suppliers, either through an online marketplace or by embedding its service in software from leading E-procurement software vendors, including Ariba Inc. (www.ariba.com) and Clarus Corp. (www.claruscorp.com). The option of subscribing to a service rather than buying software has enormous appeal for some companies, such as 3M Co. The Minneapolis- based company now has 2,000 employees buying goods from TPN with a 3M-issued procurement card, rather than the manual purchase-order system it once used. Procurement specialist Kathy Van Keulen says that next month the company will begin to quantify how much it has saved with TPN, but a pilot program suggested that a 70 percent reduction in invoice processing costs is possible.
Materials To Manpower
Given such potential upside, it’s not surprising that companies are racing to provide E-procurement of everything from raw materials to manpower. Some vendors provide more than one way to conduct such business. Oracle, for example, not only offers E- procurement software, but also sponsors Oracle Exchange, an online forum where supply-chain partners can conduct all manner of business, including E-procurement. Other E-procurement software makers also sponsor exchanges and auction sites. And vendors like Oracle, Commerce One, and Ariba are helping corporations and consortiums set up their own trading exchanges, such as General Motors’s TradeXchange and Ford Motor’s Auto-xchange (see “Going Virtual,” CFO, May).
Although this profusion of choices can confuse customers, there is something to the argument that each approach meets certain needs. Exchanges, for example, can strengthen supply chains and provide a way not simply to conduct transactions but also to share customer data, market projections, and other useful information. Integrated software can automate many internal processes, freeing employees from drudge work.
And auctions may be the best way to save significant money on big-ticket purchases. FreeMarkets Inc. (www.freemarkets.com), which creates custom online markets for companies, auctioned more than $2.7 billion worth of purchase orders in 1999. EDS’s CoNext subsidiary (www.edsconext.com) launched a new business unit in April called eBreviate, which arranges business-to-business auctions. New Orleansbased utility Entergy Corp. used the service to acquire cell phones and cellular service, and says the auction knocked another 15 percent off the lowest bid it had received prior to the auction.
“It’s just part of our entire E-procurement effort,” says Kerry Sabathia, senior sourcing leader at Entergy. “Auctions can’t address everything. They make the most sense for high- dollar purchases that span an organization, and for things that you haven’t already contracted for.” Sabathia praises eBreviate for creating a low-cost service that ensures that would-be sellers are compared on total cost of ownership, not just price. “They factor in warranty cost, help-desk support, installation, delivery, everything you’d need to deal with,” he says.
Rosy, or Oversold?
Still, despite rosy predictions for the growth of the market, even early adopters are unsure how to proceed. Kathy Van Keulen is a self- described veteran of the bleeding edge, as 3M is among the first companies to roll out the TPN Register service. While she’s happy with the money her firm has saved, she says that as her company devises a broader strategy for E- procurement, “we see so many things happening that it’s overwhelming.”
Some believe the market is not just overwhelming, but also oversold. “E- procurement is very high-profile right now,” argues David Hope-Ross, an analyst at IT research firm Gartner Group Inc., “but it’s headed for the trough of disillusionment, once some companies see that spending a huge sum of money to automate the buying of pencils doesn’t make a lot of sense.”
Albert Pang, an analyst at IDC in Mountain View, Calif., is more sanguine. He points to big drops in price as software vendors begin to adopt an ASP (application service provider) model as one positive sign, and partnerships between E-procurement vendors and traditional players in supply chain and IT infrastructure as another important direction. “Ariba teaming up with i2 and IBM to address a broad set of direct materials and related needs is typical of the direction you’ll see more of in E- procurement,” he says. “The spot buying of incidental products will evolve into a more sophisticated view of what E-procurement can be.”
That evolution will almost certainly be rapid, and not without pain. Hope-Ross suggests that E-procurement will soon be subsumed into the general flow of E-commerce and supply-chain integration, losing its cachet as a stand- alone effort. In the meantime, he believes companies that focus on simple, low-cost approaches will fare best. “The market is young,” he says. “You have to take a hard look at what a product or service will cost, and what it can do.” In other words, shop around.
Killer Contracts for Hire
There was nothing micro about MicroStrategy’s recent fall from grace. The software maker saw its stock price plunge in March, when its questionable revenue-recognition practices led to a restatement of earnings, and a 15-cent- per-share profit metamorphosed into a 51-cent loss.
Better software might have saved the day. Not its own, but a product from diCarta (www.dicarta.com), a small firm in Redwood, Calif., that helps software companies track and report the various revenue streams that typify the industry.
“There are more esoteric rules than you can ever imagine” governing how software revenue should be reported, says Chris Russell, CFO at Persistence Software, in San Mateo, Calif., a diCarta customer. The license fee, for example, can be booked in the quarter a sale was finalized, or may need to be handled on a cash basis if a customer’s creditworthiness is in question. Professional services, such as the consulting fees that are often a software vendor’s bread and butter, must be recognized as the services are performed–even if paid for up front. Support, maintenance, and exclusivity arrangements all have different guidelines. Sign up a customer for the whole package, allow for the fact that ambiguous SEC guidelines allow for a fair amount of latitude, add a substantial dash of pressure from Wall Street, and the situation is ripe for everything from honest mistakes to outright chicanery.
Enter diCarta, which in 1998 began developing a product simply intended to help software firms manage license registration and renewals, but which quickly expanded to include revenue recognition when that thorny topic began making headlines last year. Its diCarta Contracts software is sold via an ASP model in which clients pay about $75,000 to access it via the Web (although new options, including per-transaction fees via Web exchanges, are in the offing). Scott Martin, president and CEO, says the software helps companies navigate revenue recognition by providing a “sort of dashboard for risk analysis.”
Companies can use the software for what-if analysis; for example, says Martin, “if pushing 30 percent of licensing fees into the previous quarter boosts revenue by only 3 percent, would you want to do it?” The software provides an easy way to see the effects of various approaches to revenue recognition, but, as CFO Russell notes, “At the end of the day, professional judgment is always the issue.”
While Martin says that the revenue-recognition features of Contracts are driving about 75 percent of sales, diCarta is not resting on those laurels. Russell says she was more attracted by the product’s ability to create an Internet portal where customers can renew their licenses automatically, sparing Persistence the 3 to 6 percent commission it had been paying to telemarketers and salespeople. “And those people can now focus on lead generation and follow-up, bringing us more business, which makes it very easy to justify the cost of the software,” she says. A cost that, presumably, diCarta will report in a timely fashion.
The Language of Money
The Internet provides an invaluable way to retrieve financial data, but once the information has been downloaded, the hapless Web surfer faces the arduous task of wading through it, looking for key figures or points of comparison. A consortium of software companies, Big Five accounting firms, and other parties hopes to change that. The XBRL Project Steering Committee is developing a methodology for encoding financial data so that it can be more easily published, extracted, and exchanged via the Internet or any other form of electronic interchange.
The methodology, XBRL (extensible business reporting language), is an extension of the XML (extensible markup language) specification that is becoming an increasingly important part of most E-commerce software (see “The XML Connection,” Techwatch, October 1999). XBRL would make it easier for companies to prepare and, perhaps more important, analyze financial statements, tax returns, regulatory filings, and similar reports and documents.
Mike Willis, a partner with PricewaterhouseCoopers LLP who heads the steering committee, says XBRL will “give CFOs a better way to communicate.” For example, if the financial data that public companies routinely post on their Web sites was encoded in XBRL, an investor or would-be acquirer could pull the data from one or several companies into a spreadsheet in seconds. “Today you can’t tell the computer to retrieve a specific figure, such as a depreciation expense,” Willis says. “But if the document were encoded in XBRL, each figure could be tagged and identified, making retrieval and analysis much simpler.”
It could also make the posting of such data simpler, since a company could create an XBRL document once and then print it, post it to a Web site, file it on EDGAR, relay it to an appropriate government agency if required, and so on. The steering committee is actively seeking input from financial executives, and hopes to see XBRL-coded statements begin to appear next month. Its Web site is www.xbrl.org.