E-procurement: on the horns of a dilemma

E-procurement will save money, rationalise supply chains and deliver substantial productivity gains, but when? Nick Huber, Hazel...

E-procurement will save money, rationalise supply chains and deliver substantial productivity gains, but when? Nick Huber, Hazel Ward, Bill Goodwin and Mike Simons look at what is really happening

Time and again the hype around e-procurement and e-exchanges comes crashing up against commercial and business reality. In the space between hype and pessimism, something is happening out there.


Retailers have been quick to exploit the Internet to place orders and exchange information with their suppliers. Over the past two years, well-known high-street names, including J Sainsbury, Selfridges and Safeway have signed up to services that are providing them with direct links into their suppliers.

These mini-exchanges are allowing retailers to cut costs by eliminating paperwork and improving the accuracy of their ordering. They also provide suppliers with feedback on stocks and sales of their goods, allowing them to tailor production to demand, and to collaborate with retailers on special promotions.

Although the third parties that provide exchange services for retailers are encouraging other retailers to join their systems, so far the picture is patchy and fragmented. Supermarket suppliers, for example, often find themselves having to sign up to two or three different, incompatible Internet services, if they want to keep valuable contracts.

But the scene is developing rapidly. In recent months, retailers and suppliers have joined forces to create a new generation of global Internet exchanges that promise to link retailers with tens of thousands of suppliers across the world. They are designed to give retailers the ability to take part in global auctions for goods, driving down costs and pushing up profits.

The retailers are backing two rival exchanges. The GlobalNetExchange, which is already up and running, is supported by French retailer Carrefour, J Sainsbury and Sears. Marks & Spencer, Tesco and Kingfisher support the WorldWide Retail Exchange.

But suppliers are not taking the retailers' initiatives lying down. Fifty of the world's largest consumer products suppliers, including Coca-Cola and Kellogg's, have joined forces to create Transora, an electronic exchange that dwarfs its retail rivals.

Transora is so big that the retailers behind GlobalNetExchange and the WorldWide Retail Exchange may have little choice other than to link their exchanges to it.

With three global exchanges plus a myriad of private exchanges, it is inevitable that there will be pressure for consolidation. "Suppliers are having to deal with a number of different systems," said Richard Cuthbertson, supply chain expert at Templeton College Oxford.

"The growth of these systems will be followed by a period of consolidation."


The Government set itself some of the most ambitious targets for e-procurement and e-commerce and has been forced to beat an undignified retreat.

Last year the Modernising Government white paper said that 90% of government procurement should be electronic by March 2001.

In April of this year the Office of Government Commerce (OGC)was established and charged with saving £1bn from Whitehall's procurement bill, largely through e-commerce.

Last month, however, in a little reported retreat, the OGC froze its plans for an electronic shopping mall. Officially, the reason was that technology is moving so rapidly that the OGC feared it could end up with out of date systems.

Instead, the OGC said it wanted to learn from early adopters and look at competing business models before finalising a system. In the mean time it will launch pilot projects for electronic tendering systems in the autumn.

Jim Norton, head of electronic businesses at the Institute of Directors, and the former principal spokesman on e-business at the Cabinet Office, thinks there is another dimension to the problem. At a SAP breakfast debate earlier this month, he said, "I detect a degree of frustration, particularly at ministerial level.

"The Government always underestimates the people dimension and how to persuade people to change the way they do things. It is immensely difficult."

Away from Whitehall, enthusiasm for e-procurement also comes up against practical problems. Several local authority IT chiefs told Computer Weekly that the set-up costs of joining some e-procurement operations are too high. One said commercial e-procurement sites are charging more than £150,000, "just to get to the starting line".

Richard Steel, head of IT contract services at Newham council in East London, said no electronic procurement is currently taking place but "it is high on our priority list".

For Steel, e-procurement offers a way to reduce processing costs on low-value, high-volume goods, but there are three key issues to be settled - cost, electronic settlement and flexibility, so the system can be used by the council's partners and the wider community.

Cardiff council's Crispin O'Connell said e-procurement fell down on the simple problem that there are no secure payment systems and because the council would not issue staff with credit cards because of the dangers of misuse.

Insteadthe council had set up framework agreements with key suppliersand could order but not carry out transactions online.

Financial services

The main high-street and corporate banks are the driving force behind e-procurement in the financial servicessector. Insurance companies are lagging behind the banks, analysts claim, while the financial markets already have their own stock exchanges.

The banking sector is now using e-procurement services on two levels.

After establishing Web-based e-procurement systems with their suppliers to cut internal costs, high-street banks - such as NatWest, now part of Royal Bank of Scotland - are offering e-procurement services for their customers.

The Royal Bank of Scotland has e-enabled its traditional plastic procurement card. The card integrates with the customer's e-commerce platform and gives the client access to an online supplier catalogue.

The e-procurement card already has one customer in the brewing industry and the bank is planning to develop e-procurement portals for other industries.

A form of application service provision, this brings together buyer and sellers from different industry sectors in an electronic marketplace. The next step is to offer online auctions for supplies and services.

But, according to recent research from Gartner Group, the vast majority of e-procurement exchanges will be out of business within a few years.

The research predicted that there will only be room for about three vertical portals in each industry. Gartner also said that 90% of all staff involved in purchasing will be linked to a handful of vertical portals by the end of next year.

Alexander Drobvik, vice-president for e-business at Gartner, said, "E-procurement and e-marketplaces are merging together."

The main suppliers cashing in on the emerging e-procurement market for financial services are software heavyweights such as SAP and Oracle. There are also about 20 small e-commerce suppliers but these concentrate their business mainly on niche markets, such as the asset management side of e-procurement.


The US auto industry shouted loudest about the development of exchanges and new mechanisms for online procurement. Six months ago, amidst huge fanfare Ford, DaimlerChrysler and General Motors launched Covisint, a massive online trading exchange.

But since then things have gone quiet. The world's leading auto companies may have wanted to merge their supply chain on a single exchange, but Covisint has yet to begin trading.

The US Federal Trade Commission is investigating anti-trust concerns about the alliance of the three car industry heavyweights, and the Justice Department is looking into T2, the US airline trading exchange. The exchange cannot start processing transactions until these anti-trust concerns are settled.

According to Lance Doughty, director for discrete manufacturing at Cap Gemini Ernst & Young in the UK, only the two original exchanges, Ford's Auto-Xchange and rival GM's Tradexchange, which merged to form Covisint, are transacting on a small scale.

"Covisint has opened offices in Europe but it will not be allowed to trade until it gets the green light from the Federal Trade Commission," he said. "I think it's a safe bet that the regulatory bodies will allow it to go ahead but there will be some restrictions put on it."

Next Steps

Learn about Basware's Purchase-to-Pay e-procurement software

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