A hard sell.

Spend management first entered the executive lexicon back in 1983, following a seminal article in the Harvard Business Review. In it, management consultant Peter Kraljic argued that corporate purchasing should become a strategic function, streamlined and reactive, capable of driving down costs and maximising profits.

In the 20-plus years since then, technology has played an increasingly important role in helping organisations track spending and work towards the possibility of achieving Kraljic's vision.

In the late 1990s, e-procurement became a catch-all term for technologies designed to help analyse and standardise business-wide supplier contracts, as well as those for optimising negotiations with those suppliers. Amid a flurry of enthusiasm, e-procurement vendors were heralded as harbingers of a new age of streamlined corporate efficiency.

But then, reality bit. Initial optimism gave way to a dawning realisation that the first generation of tools had limited benefit: they could help identify cheap suppliers for commodity items, but lacked the sophistication to deliver strategic value in the longer term.

"Pity the poor e-procurement application," says Andrew Bartels, vice president at IT analyst Forrester Research. "Once heralded as the app that would revolutionise how companies buy goods and services, it now is often viewed as a mere electronic order-placement tool."

That view is echoed by Steve Tucker, managing director of e-sourcing consultancy Intersources. "In terms of e-sourcing, the early adopters that came in during the late nineties and the early part of this decade were buying very high cost, consultancy-heavy e-sourcing tools," he explains. "Their problem was that once you've rolled that out, there becomes a diminishing return. Through e-auctions, they have taken a lot of margin out of the commodities that they buy."

The simple, price-only e-auctions that used to be standard e-sourcing tools were too simplistic for many companies, and frustrating for suppliers - their relationship with customers having been reduced to a single numerical price value. Tools that accommodate compl-exity are far more valuable for both parties.

The disillusionment with e-procurement saw the vendors take a hammering. Electronic marketplace vendor Commerce One was once worth $20 billion on Wall Street; it finally closed its doors in 2004, selling off its last remaining intellectual property assets.

Likewise, rivals such as i2 and Ariba have undergone similar - though not necessarily fatal - tribulations.

But now, e-procurement is undergoing something of a revival, albeit a very slow one. Where once spending had completely flat-lined, there are indications that businesses are still willing to invest in the technology (see graph).

Whether that paves the way for the traditional e-procurement vendors to rebound remains to be seen. Much of the increased spending looks set to take place away from classic e-procurement tools. And there are a host of new challengers that may be better placed to attract investment. These included hosted e-procurement vendors, enterprise resource planning (ERP) application makers and business process outsourcers.

Reaching maturity

In part, the return to e-procurement spending is being driven by the increasing capabilities of e-sourcing, says Intersources' Steve Tucker. "We find that increased complexity actually increases adoption in this space," he says. "So all the vendors - SAP, Oracle and Ariba included - need to push up functionality if they are to push up the adoption."

That complexity may include allowing a supplier to communicate its pricing structure, rather than providing a single quote. Deals can then be struck on the basis of delivery date or location; suppliers can offer compelling deals that are not solely based on price. And by aggregating that information from many suppliers, the buyer can optimise its sourcing strategy.

Vendors hope that tools to optimise sourcing will reinvigorate the market and provide more sustained value for their customers. But not all sectors require very complex tools, argues Pierre Mitchell, president of business analyst company the Hackett Group.

"For those spend categories that are complex, such as freight and telecoms, that's when you need complexity," he says. "When you are buying commodities, such as paper, it really is just about price." Mitchell is not convinced that complex optimisation capabilities will be much of a draw to e-procurement tools. "Just because a complex feature is available in the technology," he explains, "doesn't mean it will be used. If multi-variant sourcing is not in the culture of the buying organisation, the technology won't take off there."

Of course, optimising the sourcing process is only one component of e-procurement. Tools that subject business spend to detailed analysis in a product-by-product or contract-by-contract manner can also help highlight areas of inefficiency and duplication in spending.

"Analysing your spend on a ledger level, as ERP packages do, only gives a very generalised view of outgoing funds, geared more around financial accounting needs," explains David Hsieh, chief marketing officer at on-demand spend management supplier Marrakech. "It does not give the detail that you need to eliminate inefficiencies."

Today's spend management tools help deliver the sustained value simplistic e-sourcing could not, says Paul Hampton, marketing director at Ariba. "The procurement department can run an e-auction, and get some great deals and be very happy with it," he says. "However, if the spending is not properly managed, they might find out at the end of the year that various departments were not using those deals, so therefore the e-auction investment was wasted."

New markets

Historically, e-procurement technology was aimed at the very largest companies: it is these companies that have the largest procurement budgets, and therefore they have the most to gain from streamlining their buying processes.

But as with other enterprise applications, a new breed of vendor has emerged, offering procurement software as a service, and dramatically lowering the entry costs.

"The hosted e-procurement companies provide a good way of getting started," says Hackett's Mitchell. "You can run a reverse auction, say, on your procurement department's operational budget without getting IT involved. As they go on, though, companies tend to look to integrate their e-procurement technologies with the rest of their infrastructure." But while the potential market for e-procurement technology is expanding, traditional e-procurement vendors could still lose out.

Typically, mid-market businesses are technologically conservative and risk-averse. That may push them towards using the procurement functionality supplied by their ERP vendor, says Mitchell: "The fewer different systems you have, or rather, the fewer different points of processing, then the smaller your transactional costs are."

Outsourced procurement

Technology is only a small part of the movement to reform procurement as strategic spending that began twenty years ago. As so many vendors argue, the tools support decisions; they don't make them. But it would appear that the businesses that began selling the tools alone are looking to pre-empt competition from the business software giants by selling not just the technology, but the people and the processes as well.

In 2004, e-procurement stalwart Ariba purchased business process outsourcing provider Alliente. Its executives had spotted an opportunity to use in-house procurement expertise with outsourcing skills of Alliente, to deliver value in process efficiencies and in lowering prices for its customers.

Instead of buying the technology from them, customers can move the whole procurement department into Ariba's hands. And further still, Ariba operates a Supplier Network that links its customers to subscribing suppliers: the technology partner becomes the supply chain matchmaker. "In a lot of cases, our consultants have been making markets in our customers' categories for longer than those customers have existed, and so we often have more understanding of that side of their business than they do," says Ariba's Hampton.

Ariba is not alone in spotting the opportunity for procurement BPO - IGC Commerce, IBM Global Services, Accenture and AT Kearney all offer similar services.

However, the challenge for all these vendors is that few companies will outsource every aspect of its entire purchasing function, says Bartels of Forrester.

"Effective sourcing and purchasing of direct materials, for example, is generally seen as a core competency of manufacturers and retailers, and one that they consider gives them a competitive advantage."

"Furthermore, the sourcing and purchasing of capital expenditures and key services - such as outsourcing partners, advertising agencies, auditors, and outside legal counsel - are generally considered strategic decisions that should not be outsourced," concludes Bartels.