The B2B Exchange Myth

Why e-procurement is not what it was cracked up to be.
Jennifer CaplanMarch 20, 2001

When the dot com bubble burst, and business-to-consumer companies lay vanquished in their own blood, optimists claimed that the big winner would be the business-to-business sector. The Internet might have failed as a means of selling goods and services to consumers, they reasoned, but it could still transform the way companies purchased materials from suppliers, creating huge efficiencies and significantly reducing costs.

The reality, however, is more sobering, according to a recent report by Jupiter Research. Almost half of the procurement agents surveyed in the report said they would do less than 20 percent of their procurement online through at least 2003. And this month, the Gartner Group scaled back its forecasts for worldwide business-to-business commerce to $8 trillion by 2005 from $9.3 trillion it forecasted last year.

In 2000, the value of worldwide B2B Internet commerce sales transactions surpassed $433 billion, a 189 percent increase over 1999 sales transactions, according to Gartner. It still projects worldwide B2B Internet commerce to reach $919 billion in 2001 and $1.9 trillion in 2002.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

“Although their bosses tout the benefits [of online procurement], the buyers in the trenches are held back by lack of knowledge, lack of trust, and most of all, the fact that their current, favored suppliers do not transact online,” the Jupiter study asserts.

The number one reason that purchasing managers are avoiding the Internet is that their traditional suppliers have not yet made the move to the web, according to Jupiter.

“Many suppliers are just not ready technically to transact online with their customers,” says Chris Sawchuck, director of e-procurement at Answerthink, a technology consulting firm. He contends that only industries such as technology are currently most comfortable to embrace e-procurement.

So is e-procurement just not what it was cracked up to be? No.

“The potential for savings is still there,” says Lauren Shu, research director at Gartner. But companies have not yet laid the necessary groundwork to reap the benefits.

The available technology, for instance, often doesn’t match the processes within the firm, says Sandy Jap, a marketing professor at MIT’s Sloan School of Management. There is also a general lack of people with sufficient experience at implementing the technology, and not enough training has been done to facilitate implementation, she adds.

“We have seen firms panicking and throwing money at technology without thinking what it means for their internal processes. That’s the hard part,” Jap says. And it is where most companies have fallen short.

“Some of these [procurement] departments are just so archaic,” says Answerthink’s Sawchuck. Fundamental changes, such as rationalizing the supply base, need to take place first, he says. Many companies didn’t realize the enormity of implementing e-procurement, adds Sawchuck. “Getting 30,000 or 50,000 suppliers electronically enabled with you is a humongous task.”

He contends that procurement managers are still not ready for the Internet in large part because it makes their jobs more complex. Technology frees up time, placing more strategic decision-making responsibilities on procurement managers, something they are not used to. “They haven’t had to do all the cost-modeling and analysis that they should be doing,” he adds. “There’s a lot more complexity to procurement now than there was before,” which is putting additional pressure on decision-makers.

And to make matters more difficult, corporate purchasers are averse to altering their traditional relationships with suppliers that have a proven track record of reliability and quality.

“Procurement agents are not only nervous about Internet procurement in general, but they also view qualifying new sellers as expensive, time- consuming, and risky,” the Jupiter report claims. Forty five percent of respondents said that a lack of trust in unknown suppliers prevents them from making online transactions.

Companies that have benefited most from e-procurement, says Shu, are those where upper management has made it a priority and communicated its importance downward. “It’s all about human change management and that’s the difficult issue,” Shu adds. She contends that tying compensation to e-business goals is one way to get people across the company to buy into the initiative. “Firms have to give their employees incentives to use the technology over time and incorporate it in their processes,” adds MIT’s Jap.

So procurement managers are putting on the brakes. But to be fair, if an order is made and is not delivered on time or is faulty, the blame ultimately lies with the procurement manager –not with the honchos anxious to get on the e-business boat.

“Procurement managers are running scared because they feel like they have to do something,” says Sawchuck. E-procurement has gotten so much visibility that they have to show that they are doing something on this front, he says. “The issue is that they are ill-prepared to do so,” he adds.

And it is this lack of preparation and the complexities involved that have caused procurement managers to drag their feet despite pressure from above to speed along e-business initiatives.

A depressed market may indeed exacerbate the reluctance to embrace e- procurement. “The knee-jerk reaction might be to put e-procurement on hold in an economic downturn,” says Shu. It is counter-intuitive, she comments, because when it is difficult to increase sales, companies should turn to cost savings mechanisms.

“Companies should go ahead with e-procurement, but must first do the due diligence and ROI calculations to understand what it will take to reap the cost savings that e-procurement promises,” Shu cautions.

So what will it take for both buyers and suppliers to exchange more products online? Time and a lot of patience on both sides of the equation, analysts say.

Shu concedes, “It is taking longer than people thought. It will be more of an evolution than a revolution.”