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E-procurement vendors are expanding their focus from materials to services. Will companies buy it?
Scott Leibs, CFO Magazine
November 1, 2001
The billions of dollars that companies spend each year on services has become a potent lure — or perhaps one should say lifeline — for E- procurement vendors. With their stock prices flatlining, and with companies hesitant to spend money on big- ticket software, these vendors are retooling their products and their sales pitches, promising impressive ROI on systems that allow companies to procure everything from contingent workers to marketing, legal, and even landscaping services.
The biggest players, such as Commerce One, Ariba, and PeopleSoft, face competition from a bevy of smaller, often more specialized firms, many of which have targeted the huge market for contract and temporary workers. Large companies often spend in excess of $100 million annually for administrative assistants, IT contractors, and other workers paid by the hour or the project. By helping these companies acquire those services more economically, and manage those workers more efficiently, E-procurement vendors believe they can open up a significant new market, one that may ultimately dwarf the $4.3 billion that companies now spend on electronically procured direct and indirect materials.
E-procurement vendors readily admit that acquiring services is usually more complicated than buying office supplies. To enable customers to procure services electronically, software makers will have to go well beyond online catalogs and Web trading exchanges. Services E-procurement software usually combines front-end functions such as the posting of requests for quotes and comparisons of competing bids, intermediate steps such as workflow and approval routing, and back-end chores such as payments and recordkeeping.
Companies that offer such software argue that it is precisely because the task is so complex that automation can provide a sizable return. As with materials procurement, competitive bidding can help companies pay less for a service such as contingent workers. But what sets services procurement apart is the potential to save on the back end by more efficiently managing what can be a very large workforce.
John Hinshaw, vice president of IT at Bedminster, New Jersey-based Verizon Wireless, a subsidiary of Verizon Communications, points out that even something as simple as a holiday can pose problems. "You have people getting paid every two weeks," he explains, "and if a holiday falls in that period, sometimes they bill you for it by mistake, or you pay them for it yourself by mistake. Managers have a lot of things to track, and who remembers if two weeks ago everyone had Monday off? "
That sort of lament is music to the ears of companies like Chicago-based Fieldglass Inc., which supplied Verizon Wireless with a system that will help it save between 5 and 10 percent of the $150 million it spends on IT contract workers each year. Some of those savings will come from the competitive bidding that results when Verizon Wireless posts its staffing needs on the system. Better contract management will also produce savings, by eliminating oversights. For example, some contracts stipulate that workers are to be limited to an 8-hour day, yet when time sheets are processed, it's easy for such terms to be overlooked. If a contractor bills for a 9- or 10-hour day, he or she gets paid for it, and the budget for contingent workers begins to suffer.
The Fieldglass software can flag those anomalies because it (and most services E-procurement software) resides, as Fieldglass co-founder and CEO Jai Shekhawat puts it, "at the intersection of procurement, human resources, and IT." The software cuts across these business functions, capturing the terms of contracts negotiated by a purchasing department, for example, while providing HR with details about contract and contingent workers (everything from hours worked to performance appraisals) and alerting IT that network access must be granted to a new hire, or taken away from a contractor who no longer works for the company.
Much of this depends on workflow and notification capabilities, and the ability to integrate with other software such as accounts payable. The need to tackle multiple functions means that services E-procurement software could very easily morph into what Shekhawat calls a "unified human capital management platform," capable of helping companies manage the tasks associated with hiring full-time employees, such as applicant tracking.
Since the software touches so many functions, software vendors that play in related spaces are eager to expand into this area. For example, PeopleSoft, with its strong presence in human resources and financial software, is making a big push into services E-procurement. This past May, it acquired software vendor SkillsVillage, and it has been working to integrate that company's E-procurement system with complementary capabilities in its other modules. Some customers have complained that the approach in its early form feels cobbled together, and to date the firm has signed up only four clients. But at a recent conference for customers, PeopleSoft made it clear that it takes services E-procurement very seriously.
The same applies to Commerce One and Ariba, the companies that put E-procurement on the map. Scott Wilkerson, manager of solutions strategies at Commerce One, says his firm is working with such customers as General Motors to quantify the return provided by services E-procurement software. "We think companies can save 5 to 25 percent on how much they pay for contingent workers," he says, "and cut their administrative and managerial costs by a similar amount."
Competition also looms from the nationwide staffing and consulting firms that supply much of the contract labor to corporations. Many of these firms have developed or acquired technology that they then offer to clients at no extra cost. They face an uphill battle in convincing clients that their products aren't biased toward their own services, however, and the software firms competing in this arena hope to convince them to concentrate on providing labor while leaving the technology to others.
That requires a delicate balancing act, because in order for services E-procurement to succeed, the providers of the services in question must be willing to work within a new system. "Smaller [service providers] love it," says Verizon Wireless's Hinshaw, "because for years they've complained that once we start using an IBM or an EDS, we ignore them. Our move to E-procurement gives them constant visibility." Larger players, Hinshaw says, may not welcome a client's adoption of E-procurement with much enthusiasm, but to date no companies have refused to go along.
Companies such as Manpower and Kelly Services Inc. are also complying, even though their business models may be significantly affected. For example, it's not uncommon for those companies to keep dozens of employees onsite at a large client's facility, acting essentially as brokers of labor services. "My product could greatly reduce the need for such people," says the CEO of one E-procurement firm, "but since these companies are currently in the midst of multiyear contracts, I have to downplay that aspect and work within the current arrangement."
These days, with companies' discretionary IT spending virtually frozen, vendors of services E-procurement can win business only by proving near-instant payback. Almost all such products are currently aimed at large companies and have large price tags to match — typically several hundred thousand dollars. Therefore, vendors repeatedly stress that their software solves multiple problems.
"Product procurement is essentially about automating a transaction," says Diana Jovin, CEO and president of San Francisco-based CascadeWorks Inc. "With services, we are providing better visibility into spending and usage, better communication among the many parties involved, and greater efficiencies in dealing with all components of complex transactions."
The fact that services are about relationships, which are difficult to automate, is one reason Dallas-based Texas Instruments found its earliest successes in E-procurement coming on the materials side. "We process less than 15 percent of our materials order the old-fashioned way, with a standard purchase order," says Jeff McLaughlin, TI's general and services procurement director. "But you can't take an electronic-catalog approach to people — there's no part number for a factory worker or a design engineer."
Not yet, anyway. But TI wanted to reduce the $200 million it spends each year on supplemental workers and consultants. Using CascadeWorks's Clarity product, TI hopes that it will not only negotiate better rates, but also benefit from some additional features it didn't even know it wanted. For example, once an employee's end date is entered into the system, his access to computers and other systems will be terminated automatically, or extended if a manager decides to renew his contract. "That would eliminate a lot of manual purges," says McLaughlin.
Also eliminated will be invoices from suppliers. With terms agreed on and captured by the system, payments will be made automatically. Although TI has not yet begun to use the system, McLaughlin says that it expects to save millions of dollars in the first year, recouping its investment in less than 12 months.
The prospect of managing contingent workers more efficiently is so appealing that some customers are signing on for that reason alone. Bill Wells, senior vice president for strategic planning and finance for Charles Schwab Corp.'s Technology Innovation unit, says his firm's initial rollout of services E-procurement will ignore the procurement piece entirely. "Our immediate need is for better tracking, not hiring," he says. His firm was sold on the workflow aspects of CascadeWorks's Clarity system. "Now we have a central place to log on and see everything we need to know," says Wells.
One thing he wants to see is how contractors stack up against one another. Wells is among those many executives who complain that today too many contingent workers are hired as "one-offs," with no way for a manager who makes the hire to know if the person he has brought in the door is better or worse, or overpaid, compared with someone else's hire.
"By automating this," Wells says, "we'll be better able to compare one Java programmer with another. We can establish a pay range, see the cases in which we're paying a premium, and get an idea as to whether the person is worth it."
Establishing those pay ranges is not, strictly speaking, a function of the software, although Wells says that the software does give his company better data with which to negotiate rates. "We're being very aggressive in that regard," he says. "With the economy in its current state, we have the leverage to do this. We're not even waiting until contracts expire, we're doing it now."
More companies should follow suit, says David Hope-Ross, an analyst at Gartner. In fact, he argues that this sort of "strategic sourcing" should, in the short term, trump the adoption of services E-procurement software. "Ultimately, a company will need to link its procurement investment with its sourcing agreements," he says, "but with money so tight today, why spend big dollars on software if you can simply acquire services for less by negotiating better terms?"
Other analysts stress the management control that E-procurement can bring. "Anytime you outsource something," says analyst Christa Degnan of Aberdeen Group, in Boston, "you risk losing some degree of control. When you capture all the relevant data in some sort of services E-procurement system, you bring discipline and control to these deals."
So while services E-procurement does automate many of the manual processes associated with employing contingent workers, its primary value may be as a repository of information about a major expense. Hope-Ross believes that these functions will eventually be subsumed by mainstream procurement applications, and that services E-procurement won't be viable as a stand-alone niche over the long term. But it is the niche players that have found most of the early success, and their clients have few complaints about integration, service quality, or other issues. Given that more than 50 percent of corporate procurement spending goes for services, there would seem to be a ready demand for services E-procurement, however it may come to market.
Scott Leibs is a senior editor at CFO.
At Your Service
Some key vendors in services E-procurement
Cascadeworks: Its Clarity suite of software addresses staffing, consulting, and service agreements. Founded in 1999. www.cascadeworks.com
Covendis: Concentrates on contract and temporary workers with Web- based SeP (services E-procurement) platform. Founded in 1999. www.covendis.com
Fieldglass: Makes InSite, a hosted application that creates a marketplace for hiring contingent workers. Founded in 1999 as b2bpeople, rechristened Fieldglass earlier this year. www.fieldglass.com
Iq4hire: Specializes in matching client companies to consulting firms. Founded in 2000. www.iq4hire.com
Noosh: Although it bills itself as a "cross-enterprise collaboration" firm, Noosh offers procurement services in manpower, marketing, insurance, and other areas. Founded in 1998. www.noosh.com
Works: Its Procisa procurement application is aimed at midsize companies and addresses all forms of indirect spending, including such services as marketing and legal. Founded in 1997. www.works.com
In addition, broadly focused E-procurement companies such as Ariba and Commerce One have begun to develop services E-procurement offerings, as has ERP firm PeopleSoft. Several staffing and consulting firms also offer software that performs similar functions, but often on a more limited basis. — S.L.