Epicor Picks Clarus' Bargain At The Software Flea Market Part 2: Challenges and User Recommendations

In October Epicor Software Corporation (NASDAQ: EPIC), signed a definitive agreement with Clarus Corporation (NASDAQ: CLRS), a provider of buy-side e-Business applications to the mid-market, to acquire substantially all of its core products, including procurement, sourcing, settlement and analytics written on Microsoft platforms, in an all-cash transaction for a purchase price of $1 million. The transaction is expected to close in Q4 2002, subject to Clarus shareholder approval. Epicor will provide service and support to the majority of Clarus' installed base of procurement customers, and it has been engaged in reselling Clarus' procurement product for more than two years. Epicor believes the acquisition should enable it to leverage its experience in procurement and sourcing, its integration expertise, as well as its .NET architecture to deliver an expanded suite of supplier relationship management (SRM) capabilities as part of its enterprise suite offering or as stand-alone offering.

Nevertheless, the job of gaining traction will by no means be easy for the merged companies, both being long in a conundrum of down-spiraling revenues. The competition will be fierce, primarily from IBM that, on top of an attractive hosted e-procurement offering alliance with Ariba called Leveraged Procurement Services, also features the group-buying contracts functionality generally lacking in most mid-market e-procurement products. One should not discount the Oracle's recent aggressive online offerings for small business either, with PeopleSoft and SAP crafting similar offerings down the track (see PeopleSoft Internationalizes Its Mid-Market Forays and SAP Tries Another, Bifurcated Tack At A Small Guy).

It is also quite puzzling why Microsoft stayed away from a paltry acquisition of a hopeful beleaguered partner. Has it been content with the recent over thousand times more expensive Navision acquisition and its subsequently chartered business applications strategy (Microsoft Lays Enforced-Concrete Foundation For Its Business Solutions), will provide the e-procurement application on its own (via, e.g., Microsoft Business Network), was the possible insignificant traction of the Clarus' partnership within Great Plains' global network of over 2,200 channel partners the reason, or maybe the giant has no problem with OEM reselling a product of its partner/competitor Epicor?

Furthermore, integrating the Clarus application to all major back office products, as well as to a broader set of trading services such as content management, suppliers' integration, procurement cards, pre-aggregated contracts and catalogs, and payment settlement services, remains a major undertaking for Epicor despite the promise of nascent Web Services.

Epicor has recently also made attempts to logically group and brand an unwieldy number of its products. In manufacturing, which would be approximately half of its customer base, Epicor has Vantage and Avante as its midmarket ERP products while the 'e by Epicor' suite includes the components for back office operations, CRM, business intelligence, PSA, and eBusiness.. This solution caters to non-manufacturing industries. The Manufacturing Solutions Group, which includes the Vantage, Vista, Avante, DataFlo, ManFact and InfoFlo products remain strategic to Epicor and will continually be enhanced both with core ERP functionality and with extended-ERP components such as enterprise portals and Web storefronts.

One may also note that some of Epicor's more advanced modules like advanced planning and scheduling (APS), have been sold via OEM agreements by other software vendors. The company will particularly strive to make the similar success with its Clientele CRM.NET and Clarus additions. The R&D effort with Clientele is, nonetheless, only a harbinger for what is coming for the next generation of all Epicor's product lines throughout next year and beyond, with new web-based technology that exposes all the business rules and logic (via XML and BizTalk) as web services, and one should expect that in the long term (although quite a long term) the suites will converge in this way.

Additionally, the wealth of product names and a still somewhat unwieldy slew of products, presents sales and marketing confusion for the company, both internally and externally across the globe. Therefore, as Epicor has a myriad of products in its portfolio that could benefit from integration with Clarus and/or CRM.NET, it must clearly articulate its plans and the timeline for integration for each of its products. Otherwise or it may face confusion and/or anxiety amongst both its current and potential customers as well as within its VARs. That would be the music to its direct competitors' ears, some of which have better viability and revenue momentum at this stage.

Competition

The competition is indeed flying from many directions since the company now competes in many diverse markets. To that end, in the traditional back-office market, the threat comes from the likes of Intuit and AccountMate in the small business accounting market, via its peers (e.g., Microsoft Business Solutions, ACCPAC, Exact Software, Best Software and Scala to name only some), to the Tier 1 vendors storming down the market. In the pure-CRM mid-market, that would be the likes of Onyx, Microsoft CRM, Pivotal, Kana, Salesforce.com and FrontRange. Not to mention that SAP, Oracle, PeopleSoft and J.D. Edwards will likely be faced in all the above markets as well.

Epicor still needs to undertake worthwhile actions with its products portfolio to further provide the cost-reduction ROI value proposition that has been so deeply lacking in mid-market e-procurement forays of many ill-fated e-procurement has-beens. For instance, on the sourcing side, one could envision the need to link the Clarus product more tightly with the product design and supply chain side, as to address the product lifecycle management (PLM) side of SRM.

On the e-procurement side, sprucing up the direct materials side could address some users' intricacies around better Web-based direct procurement execution and supply chain collaboration. While Epicor indisputably has to deal with the above challenges in a sunken market, by harnessing .NET possibly more zealously than its creator Microsoft, the company has a fair shot at remaining in the mid-market leadership race amongst a slew of formidable opponents.

Epicor Picks Clarus' Bargain At The Software Flea Market

Epicor Software Corporation (NASDAQ: EPIC), one of leading providers of integrated enterprise, e-Business and collaborative commerce software solutions solely for the mid-market, announced its financial results for the third quarter ended September 30, 2002. Total revenues for the quarter were $34.0 million, a 14% drop compared to $39.4 million for Q3 2001, while software license revenue totaled $6.8 million, a sizable 23% drop compared to $8.8 million a year ago (see Figure 1). However, net loss for the quarter, which includes $1.8 million in amortization of capitalized software development costs and acquired intangible assets, was $1.4 million, which is less than a third of a net loss in Q3 2001 of $4.5 million which included $1.5 million for the gain on the sale of a product line and $2.2 million in amortization of capitalized software development costs and acquired intangible assets

Epicor ended Q3 2002 with cash and cash equivalents of $28.9 million, as this was the fourth consecutive quarter in which the company generated positive cash from operating activities. Still, as the continued economic slowdown and severely constrained enterprise software spending environment does not appear to be improving any time soon, the company has recently taken decisive actions to further reduce its cost and expense structure going into 2003 with targeted savings of approximately $3.0 to $4.0 million per quarter. These actions include a reduction in workforce of approximately 15% and the consolidation of facilities. Epicor believes these actions will allow it to continue its focus without materially impacting its ability to deliver enhanced product functionality and new technology platforms, as well as maintaining its high standards of product quality and customer satisfaction. With these actions the company expects to achieve profitability in the first quarter of 2003, as it expects to incur charges in the range of $3.0 to $5.0 million in the fourth quarter 2002, while it anticipates revenues for Q4 2002 to be flat to slightly higher than those in Q3 2002.

A week earlier, on October 17, Epicor signed a definitive agreement with Clarus Corporation (NASDAQ: CLRS), a provider of buy-side e-Business applications to the mid-market, to acquire substantially all of its core products, including procurement, sourcing, settlement and analytics written on Microsoft platforms, in an all-cash transaction for a purchase price of $1 million. The transaction is expected to close in Q4 2002, subject to Clarus shareholder approval. Epicor will provide service and support to the majority of Clarus' installed base of procurement customers, and it has been engaged in reselling Clarus' procurement product for more than two years. Epicor believes the acquisition should enable it to leverage its experience in procurement and sourcing, its integration expertise, as well as its .NET architecture to deliver an expanded suite of supplier relationship management (SRM) capabilities as part of its enterprise suite offering or as stand-alone offering.

During the quarter, in September, the company shipped the market's first CRM.NET product and has been successful with a number of early adopters as well as new customers, including its first customer, The Boeing Company. Unveiled earlier this year (see Epicor Claims The Forefront Of CRM.NET-ification) Clientele Customer Support 8.0 is the first application in the Clientele CRM.NET Suite available to customers. The company is scheduled to release a number of new products on the .NET platform over the next several quarters, including CRM.NET Portal and its enterprise services solution on the .NET platform for project-driven organizations. Clientele Customer Support 8.0 is available immediately in North America, the UK and Australia, as well as select countries in the Asia Pacific region. Existing customers on maintenance will receive the upgrade software at no charge. Standard List Pricing starts at $1500 per user with quantity discounts available.

Despite the challenging environment for attracting new account sales, Epicor reportedly added over 110 new customers in the quarter and has added over 350 new customers year-to-date. It has also launched a number of new business development initiatives to further relationships with vertically focused value-added resellers (VARs) and to expand its international reseller distribution, and its lead generation programs will focus on specific targeted verticals and specific customer size and will continue to leverage co-marketing efforts with partners and industry trade groups. Epicor reportedly continues to invest in its sales, service and support organizations which have undergone significant training on a series of new products as well as value vision methodology training to improve its success in the current economic environment.

Clarus Background


As a preamble, if it weren't for the inevitable �ifs and buts', the acquisition would be logical for various reasons. Clarus would be yet another software vendor that has experienced a dreadful rise-and-fall trajectory. Originally a mid-market enterprise resource planning (ERP) vendor, Clarus' prime was in �remote' 1998, when its revenues reached an all-time high of $41.6 million.

But the arguably hasty sell-off of its financial and human resources software to Geac Computer Systems early in 2000, followed then by a risky all-out dive into e-procurement and Internet exchange realms have apparently not paid off. The strategy had a short-lived immediate success though, with its stock price reaching an all-time high of $144 per share in March 2000 (see With New Clothes and Hairdo, Clarus Asks for Pin Money). Since then, however, the vendor has only seen its revenue and its stock price nose-dive, with 2001 revenue of $17 million and a current stock price of just hovering over $5. For the quarters ending June 30, 2002, and September 30, 2002, Clarus reported revenue of only $1 million and of less than $2 million respectively, with grim prospects on any future revenue levels.

Clarus has been nevertheless regarded as a best-of-breed indirect materials e-procurement application provider that has not only garnered notable expense management and Private Trading Exchange (PTX) applications, but has also espoused a reverse auction, e-settlement, content management, and expense processing capabilities to round out its suite towards a decent supplier relationship management (SRM) suite, a recently emerged new category of enterprise applications (see Clarus - Sprinting or Going the Distance?). From a product perspective, Clarus had also added to its portfolio an Internet marketplace platform, Clarus eMarket, and Clarus Content Services for content management.

In May 2000, the company entered the e-sourcing market through the acquisition of iSold.com, an auction and dynamic pricing vendor, while the acquisition of Ireland-based SAI/Rodeo Technologies has added support for the payment and settlement process. Clarus has also partnered with TPN Register for content management, webMethods for its Clarus Fusion integration toolkit, and with Silver Oak Partners for strategic sourcing expertise for both direct and indirect goods and materials and for expense segmentation and reporting.

In an attempt to increase and make its revenues more predictable, the company had even introduced an ongoing, usage-based revenue model, spreading out revenue from each customer over a protracted period of time. It had also tried to extend its indirect sales channels (albeit at the expense of negligible direct sales force, which has proven to be critically counterproductive revenue-wise), in addition to its partnerships with infrastructure and integration partners Microsoft, Compaq, and Deloitte & Touche, and to partnerships with enterprise applications vendors like Epicor, Ross Systems, Microsoft Great Plains (Microsoft Great Plains Procures eProcure At Last), Manugistics and Commerce One, all throughout 2000/2001.

Unfortunately, few if any of these initiatives have generated the traction needed to reverse the company's sagging revenues bundled with overwhelming costs. Possibly the mortal blow happened when UK-based independent trading exchange BarclaysB2B ,one of Clarus' biggest customers, recently decided to close its operations. Last summer, the company closed its operations in the UK and Canada, concluding an ongoing downsizing of operations in the past year. Clarus has since been operating with approximately a few dozens of staff from its Suwannee, GA headquarters and a skeleton customer support staff at its facility in Ireland, with a vast majority of them only engaged in servicing existing disconcerted customers.

Due to the above adverse events, Clarus ended up in a peculiar situation of its net assets being greater than its market capitalization, prompting an influential group of shareholders to demand that the remaining asset value be delivered back to them. The other faction of the Clarus board has been proposing the sale of the company as a going concern, still without a clear indication from the board which direction the company will take after the above sell-off.

Epicor Background

On the other hand, Epicor had long grappled with shuffling the many brand names/products that have emerged during last few years from now proverbial merger of its ancestors, former Platinum Software and DataWorks. Epicor seems to have nonetheless somewhat successfully refocused on its core areas following the turmoil of the merger and steep revenue decline due to other relevant factors (i.e., enduring sluggish economy and product divestitures) in addition to the above-mentioned internal tumult. The acquisition initially made Epicor one of the largest mid-market ERP vendors (with ~$250 million in 1999) and the company thereby gained some strong products and a large customer base in a number of new markets, especially in the realm of manufacturing, distribution and supply chain management (SCM). Nevertheless, the burden of an unfocused, multi-product and multi-technology (Microsoft, Oracle, Progress Software, etc.) strategy in markets with diverse dynamics also multiplied sales, R&D, and service & support costs, while many of these products could not have sustained long-term success in their respective target markets.

However, the divestiture of certain secondary and focus-diverting product lines (see Latest Development on Epicor's Trying The Divestiture Tack) has therefore allowed Epicor to lately concentrate on developing applications and functions based on Microsoft's .NET technology framework and SQL Server database. Consequently, it is more likely Epicor will succeed in integrating its internally developed applications by concurrently expanding its Web services and collaborative commerce capabilities.

With its solid cash position and current development work in progress for contemporary Internet-based, 'software as a service' enterprise and collaborative commerce applications, and given its intentions to continue to sell both directly and indirectly with accredited VARs within certain vertical segments, a return to better days does not seem as a far-fetched possibility for Epicor. Attempting differentiation, Epicor will continue to invest in its products in order to assemble the right mix of back-office, front-office, and collaborative e-Business functions, delivered under a single-point accountability (one-stop shop) approach that is desired by its target market.

Epicor's Strategy

To that end, Clarus' acquisition for a little dent in Epicor's purse makes sense, given Epicor has resold in an OEM fashion the Clarus eProcurement product as part of its application suite from February 2001. Epicor will have thereby proven itself successful at selling and implementing the Clarus solution, and the experience with the eProcurement product will have given Epicor a deep understanding of the Clarus products from a selling, service and support perspective. Epicor was consequently among the first vendors to offer Web-based e-procurement at an affordable price for the mid-market and, with this acquisition, Epicor should soon offer an expanded set of SRM solutions, including e-procurement, e-settlement and e-sourcing, as viable add-ons to an overall applications suite for the mid-market segment.

Epicor's and Clarus' products seem to be very complementary in terms of their technology, their mid-market fit, and the business value that they deliver. Both Epicor and Clarus have recently focused their development efforts on Microsoft technology and, specifically, on the Microsoft .NET platform lately. Like Epicor's products, Clarus' products provide advanced functionality, but have been designed keeping the challenges of a mid-size company in mind (i.e. limited IT budgets and limited IT staffing resources).

As an example, Clarus' applications do aim at enabling companies to streamline their operations and significantly lower costs associated with e-procurement. Clarus eProcurement is a slick e-procurement product for small to medium enterprises (SME) rather than an overkill application with unneeded, complex functionality demanded by trading exchanges. Clarus' Microsoft-centric product architecture, the support for many languages and alliances with trading exchanges that do not charge transaction fees should be additional attraction for the intended customers.

Further, the product could reduce significantly the costs of goods and services by enabling supplier performance analysis and tracking and cost analysis and directing purchasing to more profitable sources. It also enables search capabilities internally and externally to both online marketplaces and directly to suppliers for more strategic product selection and pricing. Integration with an online marketplace enables organizations to conduct auctions, reverse auctions and comparison shop, ensuring a competitive price.

Clarus features an architecture that can be configured to mirror almost any organization's operating structure, by using strong mapping capabilities for unlimited levels of approval. Purchase orders can be routed according to price, category, job classification or a number of other attributes. Moreover, with mid-market companies focusing on increasing efficiency and lowering costs more than ever, Clarus eSourcing, which provides a complete auctioning, bidding and weighed RFQ solution, becomes a pivotal component of a solid SRM solution.

Additionally, Epicor has a large customer base that can provide valuable input into future direction of these products, in addition to cross- and up-sell opportunities for the vendor. The company should also benefit from an additional revenue stream from several dozens Clarus' customers and from some ancillary Clarus applications, like a business intelligence (BI) module and an e-learning application to boot. There are significant opportunities for Clarus' international expansion owing to Epicor's strong international presence in the EMEA, Latin America and the Asia Pacific regions.

Epicor Picks Clarus' Bargain At The Software Flea Market Part 2: Challenges and User Recommendations

In October Epicor Software Corporation (NASDAQ: EPIC), signed a definitive agreement with Clarus Corporation (NASDAQ: CLRS), a provider of buy-side e-Business applications to the mid-market, to acquire substantially all of its core products, including procurement, sourcing, settlement and analytics written on Microsoft platforms, in an all-cash transaction for a purchase price of $1 million. The transaction is expected to close in Q4 2002, subject to Clarus shareholder approval. Epicor will provide service and support to the majority of Clarus' installed base of procurement customers, and it has been engaged in reselling Clarus' procurement product for more than two years. Epicor believes the acquisition should enable it to leverage its experience in procurement and sourcing, its integration expertise, as well as its .NET architecture to deliver an expanded suite of supplier relationship management (SRM) capabilities as part of its enterprise suite offering or as stand-alone offering.

Nevertheless, the job of gaining traction will by no means be easy for the merged companies, both being long in a conundrum of down-spiraling revenues. The competition will be fierce, primarily from IBM that, on top of an attractive hosted e-procurement offering alliance with Ariba called Leveraged Procurement Services, also features the group-buying contracts functionality generally lacking in most mid-market e-procurement products. One should not discount the Oracle's recent aggressive online offerings for small business either, with PeopleSoft and SAP crafting similar offerings down the track (see PeopleSoft Internationalizes Its Mid-Market Forays and SAP Tries Another, Bifurcated Tack At A Small Guy).

It is also quite puzzling why Microsoft stayed away from a paltry acquisition of a hopeful beleaguered partner. Has it been content with the recent over thousand times more expensive Navision acquisition and its subsequently chartered business applications strategy (Microsoft Lays Enforced-Concrete Foundation For Its Business Solutions), will provide the e-procurement application on its own (via, e.g., Microsoft Business Network), was the possible insignificant traction of the Clarus' partnership within Great Plains' global network of over 2,200 channel partners the reason, or maybe the giant has no problem with OEM reselling a product of its partner/competitor Epicor?

Furthermore, integrating the Clarus application to all major back office products, as well as to a broader set of trading services such as content management, suppliers' integration, procurement cards, pre-aggregated contracts and catalogs, and payment settlement services, remains a major undertaking for Epicor despite the promise of nascent Web Services.

Epicor has recently also made attempts to logically group and brand an unwieldy number of its products. In manufacturing, which would be approximately half of its customer base, Epicor has Vantage and Avante as its midmarket ERP products while the 'e by Epicor' suite includes the components for back office operations, CRM, business intelligence, PSA, and eBusiness.. This solution caters to non-manufacturing industries. The Manufacturing Solutions Group, which includes the Vantage, Vista, Avante, DataFlo, ManFact and InfoFlo products remain strategic to Epicor and will continually be enhanced both with core ERP functionality and with extended-ERP components such as enterprise portals and Web storefronts.

One may also note that some of Epicor's more advanced modules like advanced planning and scheduling (APS), have been sold via OEM agreements by other software vendors. The company will particularly strive to make the similar success with its Clientele CRM.NET and Clarus additions. The R&D effort with Clientele is, nonetheless, only a harbinger for what is coming for the next generation of all Epicor's product lines throughout next year and beyond, with new web-based technology that exposes all the business rules and logic (via XML and BizTalk) as web services, and one should expect that in the long term (although quite a long term) the suites will converge in this way.

Additionally, the wealth of product names and a still somewhat unwieldy slew of products, presents sales and marketing confusion for the company, both internally and externally across the globe. Therefore, as Epicor has a myriad of products in its portfolio that could benefit from integration with Clarus and/or CRM.NET, it must clearly articulate its plans and the timeline for integration for each of its products. Otherwise or it may face confusion and/or anxiety amongst both its current and potential customers as well as within its VARs. That would be the music to its direct competitors' ears, some of which have better viability and revenue momentum at this stage.

Competition

The competition is indeed flying from many directions since the company now competes in many diverse markets. To that end, in the traditional back-office market, the threat comes from the likes of Intuit and AccountMate in the small business accounting market, via its peers (e.g., Microsoft Business Solutions, ACCPAC, Exact Software, Best Software and Scala to name only some), to the Tier 1 vendors storming down the market. In the pure-CRM mid-market, that would be the likes of Onyx, Microsoft CRM, Pivotal, Kana, Salesforce.com and FrontRange. Not to mention that SAP, Oracle, PeopleSoft and J.D. Edwards will likely be faced in all the above markets as well.

Epicor still needs to undertake worthwhile actions with its products portfolio to further provide the cost-reduction ROI value proposition that has been so deeply lacking in mid-market e-procurement forays of many ill-fated e-procurement has-beens. For instance, on the sourcing side, one could envision the need to link the Clarus product more tightly with the product design and supply chain side, as to address the product lifecycle management (PLM) side of SRM.

On the e-procurement side, sprucing up the direct materials side could address some users' intricacies around better Web-based direct procurement execution and supply chain collaboration. While Epicor indisputably has to deal with the above challenges in a sunken market, by harnessing .NET possibly more zealously than its creator Microsoft, the company has a fair shot at remaining in the mid-market leadership race amongst a slew of formidable opponents.

Commerce One Conducts Its Soul-Searching Metamorphosis Part Two: Challenges and User Recommendations

Market Impact Continued

Commerce One (NASDAQ: CMRC), one of the pioneers in Internet-based software applications and once powered the world's largest e-commerce trading network, which has consistently strived to be at the forefront of delivering advanced technologies that help global businesses collaborate with their partners, customers and suppliers over the Internet, announced the general availability of Commerce One Conductor�, its new composite application platform. Based on open industry standards, the Conductor platform's aimed charter is to transform and accelerate the way applications and business processes are deployed within and between enterprises, and it should supposedly allow organizations to more quickly and easily create, connect, and coordinate business processes between customers and trading partners without being limited by the constraints of existing applications or platforms.

Commerce One's idea of its Conductor as one the first unified, technology- neutral platform's that enables businesses to execute and share processes easily across disparate applications and systems seems innovative and should help the needs of the higher-end of the market, whose paramount concerns have been the enormous costs of integration and the general lack of responsiveness by enterprise application vendors to address this issue. The vendor's embracing of standards-based Web services as a technology enabler may appeal to customers that are keen on preempting dependencies on proprietary Application Programming Interfaces (APIs). Conductor tries to deliver the above requirements of building, managing and orchestrating composite processes, bundled with an easy maintenance of the generated system afterwards, which could finally make up for missing pieces of its erstwhile failed exchanges' value proposition.

Although Commerce One would not be the only one to go in this direction given, e.g., SAP's NetWeaver, Siebel's UAN (Universal Application Network), PeopleSoft's AppConnect, and J.D. Edwards' eXternal Process Integration (XPI) composite applications approach through Web services and business process integration, Commerce One might be going a step ahead by providing a non application-centric integration platform, allowing customers to rather focus on acquiring most appropriate applications rather than the integration platform. The product is particularly tuned to Web services infrastructure including choreographies, routing and transformation, with an idea to separate data and processes from hard-coding within applications.


Tackling Data Exchange Issues


Although integration or applications servers may reduce that complexity to a degree because all the applications plug into a central hub, the EAI servers themselves tend to be proprietary and non-standard. Customers are increasingly desiring to do away with point-to-point integration approaches at that data level (with extensive lists of custom APIs and connectors/adapters) and to replace it with more inter-enterprise ranging integrations, based on business processes that extend beyond the traditional definitional boundaries of a single application suite.

Conductor's architecture is also in keeping with the current trend of making multiple applications viewable through a single GUI. Empowered business analysts, rather than nerdy programmers, should thereby be able to compose whole business processes and add new application features and functions that complement customers' existing systems through the intuitive GUI.

Therefore, Commerce One's strive for standards-based business processes to plug into industry-standard servers, may raise the least common denominator of interoperability, as it should add another agnostic layer of connectivity, providing BPM and workflow on top of integration framework per se. Conductor also supports Web services standards, including many of those that have yet to reach maturity and true acceptance, with an idea to be open to changes reflected by an evolving market niche. It is important to realize that Commerce One's long commitment to eXtensible Markup Language (XML) has been far reaching and represents a real technical strength. For example, the vendor has long incorporated data field validation (i.e., �strong typing') into its XML schema language, given the standard XML is technically neutral to the values passed into fields, often resulting with systems inability to �talk' to each other and recognize the document.

While XML can be used to define data for interchange between applications, workflows are much more difficult to document, and the market has discovered the need to separate rules, processes and data. To that end, in the connectivity layer, the Conductor's Registry supports UDDI (Universal Description, Discovery, and Integration) standard, and in the semantics level, XML Common Business Library (XCBL). As for the layer for business processes, Conductor supports Business Process Execution Language for Web Services, Version 1.0 (BPEL4WS). Commerce One had no better option to pursue given the lack of its own back-office offering and its adoption by a diverse population of ERP users. Furthermore, the move will help Commerce One further componentize its upcoming Commerce One 6.0 sourcing an procurement products, as standards like XML and eXtensible Stylesheet Language (XSL) make it possible to share data and have a common look-and-feel across an application, without necessarily digging in the source code. The latest release will likely exhibit some intra-suite rationalization and process integration, which has lacked in previous monolithic incarnations.


Challenges


However, while Commerce One might have hereby given some homework to many composite applications integration aspirants, the vendor is nonetheless burdened with many challenges which are both of internal and external nature. It is unfortunate for the vendor that it is entering the highly contested integration & infrastructure market, while still suffering from the collapse of its sales & marketing capabilities and customer mindshare in its native SRM and exchange markets.

The firm is seemingly stuck with yet another identity crisis being a novice provider of a Web services-based integration platform and being a still fledgling provider of business application suite built on top of that platform, and which has not yet successfully competed in the SRM arena. The problem also stems from the fact that these two markets are very different, and focusing on one dilutes the effort of focusing on the other.

Deep functionality and domain expertise characterize SRM products coming from pure players like FreeMarkets, Ariba or Entomo, which are sold to very discerning procurement and supply chain managers within the customer's organization. A Web services strategy, on the other hand, is dependent on selling the platform into the IT department and also cultivating an ecosystem of enterprise solutions to build on top of the platform. Having a �cuckoo in the nest' strategy to sell one with the up- and cross-sell value of the other has not apparently been working out so far, and Commerce One might not have enough resource to sustain both businesses without the appropriate revenue level.

Further, the Conductor approach might not be embraced easily and quickly either, since Web services have a ways to go before they are secure and reliable, both being key features of BPM attractiveness. One other issue will also be whether Commerce One will convince customers to rely on it for extended enterprise business processes integration, given Tier 1 ERP vendors' strides in that regard. This challenge may not be that insurmountable in some instances given Commerce One's expertise of extending supplier-centric business processes within its industries of focus (e.g., retail, consumer packaged good (CPG), etc.). But, the vendor will have to emphasize business benefit rather than technology advantage, given the current market's aversion to unproven innovation.

Another obvious challenge is a mere volume of the imminent work that is ahead of Commerce One and its partners to offer almost �out-of-the-box' integrated functionality in shape of a pre-built library of business processes. Commerce One has reportedly brought in Baltimore Technologies and VeriSign for security, Sonic Software for messaging, Actional for integration, Contivo for data mapping, Cognos for analytics and Satyam for systems integration, to bolster its massive Web services endeavor. Now, at least by the above mind boggling announcement and description of Conductor, it may be clearer how complex SRM integration is. SRM integration requires that a client can obtain an enterprise wide view of suppliers and share it accurately across all channels and divisions. One should imagine how humongous the job of delivering plug-and-play packaged middleware components for a number of disparate applications, particularly outside Commerce One's expert domain like CRM, or product lifecycle management (PLM) will be. It would not be surprising to see customers opting for the expert vendors in case, even if there was no a viability concern for Commerce One.

Although Commerce One's due diligence in terms of providing a number of customer benefit examples as proofs of concept was commendable, it may still not be enough for much needed traction. It currently has 11 early adopter Conductor users that are boasting factual benefits, including BOC Gases (using Conductor to speed its ordering processes by exposing internal product codes and specifications directly to its customers), Eastman Chemicals (to streamline financial reporting errors), or Enporion (to enhance spend analysis). While Conductor could prove to be very attractive to Commerce One's existing customer base, the customer base has nonetheless lately shrunk, particularly after fallout with SAP and sellout to eScout, which additionally reduces the maneuvering space. The company is in a sort of a vicious circle � it needs to expand its Source to Pay/SRM customer base into which it can further sell Conductor platform, but with currently all but stalled new license revenue, it has rather to resort to cash-saving rationalization and limited SRM product enhancements and marketing. That, in turn, creates viability issue and poor market perception, which means more difficult and impaired new sales effort.

Commerce One thus needs many more new customer wins, such as the very recent one, Hitachi Europe, which will be using the buy-side vendor's products within its procurement and sourcing group. The win may again indicate that, despite Commerce One's remaking as a Web services infrastructure provider, it is still primarily perceived, and paid, as a provider of sourcing technology. However, Commerce One's messaging is becoming ever less about sourcing and procurement. Hitachi will reportedly deploy Commerce One to source goods and materials to be used by its European manufacturing facilities for computer products, home electronics, automotive, semiconductor, and air conditioning products.

Vendor Recommendations

Thus, Commmerce One's should carefully explore its strengths in the CPG, retail, automotive, and discrete manufacturing verticals and it needs to narrow its focus. Besides targeting only a few manageable verticals, it also needs to identify "composite" Web services-based applications that are applicable to these markets and to concentrate on real business problems and/or industry initiatives in this area where the prospects may need a new platform (e.g., the Xpress product for UCCnet support is seemingly needed in CPG/Retail sector). Sample processes, interfaces and templates will be helpful, as the proof will still be in how easily business rules can be maintained and users administered. Outside of the Commerce One's client base, it will be much tougher to sell though, as most of the major applications vendors are beginning to develop platforms that are based on services and business process rules, such as the above-mentioned.

Further, the infrastructure and integration are not easy segments to compete within either, with wealthy and viable competitors coming also from the EAI specialists, the infrastructure (platform and tools) providers and packaged applications vendors. Therefore, running away from one challenge may bring about other challenges in another still fragmented and morphing market. Commerce One has to act fast given already a strong competition from many directions such as best-of-breed BPM vendors (e.g., Intalio, Fuego, Handysoft, Savvion, Longview, Cartesis, Comshare, etc.), business modeling players (i.e. IDS Scheer), workflow management vendors (e.g., Filenet and Staffware), infrastructure providers (e.g., IBM, Microsoft, BEA Systems, Sun Microsystems, etc.), EAI/middleware providers (e.g., webMethods, Tibco, SeeBeyond, and Vitria), and many large enterprise vendors' (e.g., SAP, Siebel, PeopleSoft and Oracle) intrusion into the BPM arena, in the manner they have done with the CRM or Supply Chain Management (SCM). Also, some may doubt Commerce One's success in the possibly burgeoning BPM market that still represents a morphing and confusing landscape, as its decision to abandon many once also prosperous spaces and again suddenly re-focus on BPM may be regarded as a not quite deliberate move, but rather as a sudden act of taking yet another plunge.

While standards may imply "cheap" or even "free" albeit also "immature" in some prospects' imagination, many mission-critical integration undertakings will still likely go to seasoned companies with proven track record and large customer reference bases. Possibly a best example would be IBM, which might soon have a flexible integration framework that can provide BPM across data management technologies (i.e., directories and databases) and applications. Holosofx was IBM's third integration-oriented acquisition in only the first nine months of 2002, starting with CrossWorlds in January and Metamerge in June. Consequently, Metamerge should provide integration technology (Metamerge Integrator integrates directory services, databases, and messaging systems rather than providing direct application-to-application integration) that should complement IBM's growing line of integration products, including BPM product from Holosofx, the application connectors and workflow rules of respective Extricity and CrossWorlds acquisitions. As IBM further strengthens its position and expertise on the B2B and supply chain management (SCM) side, there will be more pressure on all integration aspirants to provide simpler Internet-based options at lower prices.

Hopefully, Commerce One can cling long enough onto its still sizable cash position (~$100 million) to see its vision of a Web services Conductor platform realized in full swing. The short-term goal should indisputably be to stabilize the company internally and to increase its current customer base based on sales of the current SRM product suite. While bolstered sales execution through its own channels while concurrently keeping costs in check, as to reverse the proverbial perception of a cash-burning concern (see Commerce One: Everything but Profits) should remain the Job One, the focus on true value creation for customers must follow. Nobody could be deluded to say it would be an easy feat.

Commerce One Conducts Its Soul-Searching Metamorphosis

One vendor that has lately had more than a fair share of troubles, and that is still reeling from the effects of plummeting market capitalization (with a tenfold reverse stock split), multiple severe rounds of layoffs, excruciatingly painful losses, and an eroding corporate image, has been also making notable strides to reform itself, or, at least, to sell its skin more dearly. On March 24, Commerce One (NASDAQ: CMRC), one of the pioneers in Internet-based software applications that once managed the world's largest e-commerce trading network, which has consistently strived to be at the forefront of delivering advanced technologies that help global businesses collaborate with their partners, customers and suppliers over the Internet, announced the general availability of Commerce One Conductor�, its new composite application platform. Based on open industry standards, the Conductor platform's aimed charter is to transform and accelerate the way applications and business processes are deployed within and between enterprises, and it should supposedly allow organizations to more quickly and easily create, connect, and coordinate business processes between customers and trading partners without being limited by the constraints of existing applications or platforms.

Moreover, in an intensive pre-release program, Commerce One worked closely with both new and existing customers to deploy the Conductor platform to solve specific business problems. As a result, eleven customers including BOC Gases, Eastman Chemical, Open GIS Consortium, Enporion, Industrial Technology Research Institute (Taiwan), MSX, Siemens, and UCCNet have reportedly already deployed a pre-release version of Conductor to launch integrated business processes across both internal and external systems.

The vendor claims Conductor's unified architecture is designed to lower the time and cost of creating and deploying composite applications, as compared to the common alternative of using a combination of multiple point solutions like business process management (BPM), enterprise applications integration (EAI), portals, identity management and various design tools. Through a graphical user interface (GUI), business analysts can compose end-to-end business processes and add new application features and functions that complement customers' existing systems. Thus, these "composite" applications should supposedly transcend the limitations of traditional enterprise applications by enabling companies to gain new value from their existing systems and to bridge the gaps between disparate applications.

Commerce One Conductor is made up of a number of components, but the platform's brain is its central and shared Registry, which defines user and system interfaces as services. Conductor's Registry provides a possibly unique approach to centrally and dynamically managing process changes that are common in most business environments, which can improve flexibility and total cost of ownership (TCO). Accessible though a single, graphical design interface, and supported by a services-oriented architecture, the Conductor platform leverages software-based configuration engines that pull from a deep and modular registry of services and defined relationships. This approach should enable businesses to define disparate applications or services in a common fashion and dynamically bring them together to create new standards-based composite capabilities.

To dynamically execute these services in their correct context, the Registry also maintains full definitions of user roles and access, systems, business processes, data schemas, transformation maps, choreographies, rules and security requirements. All relationships, interactions, and attributes of every item defined in the platform can reportedly be maintained, modified, mixed and matched from the services and definitions held and shared in the Registry. This abstraction of key attributes of composite processes, users and services should allow for significantly lower TCO, since, through the Registry, the time-consuming and difficult work of creating and maintaining adapter connections and business relationships is hereby fully automated across the entire network of internal and external participants.

The Interoperability Engine, on its hand, provides document-level interoperability across applications participating in the business process. Working with the Registry, it dynamically determines the document formats, locations, security requirements, and various other required characteristics to connect to the applications, and it also performs transformation and versioning, message and document security, signatures, routing and transport needed for secure, reliable interoperation. In situations where a customer already has an EAI or business-to-business (B2B) infrastructure deployed, the Interoperability Engine can supposedly leverage these investments. Via gateways, the Interoperability Engine can also connect into existing electronic data interchange (EDI) infrastructures that a customer may have deployed.

Conductor also features a number of smaller components such as the Process Manager, a run-time engine where the business process is executed from the services accessed by the Interoperability Engine. When processes change, versions are upgraded, or new applications are added, the Process Manager leverages the Registry to dynamically make the changes. Also included are reporting and analysis tools and the ability to present services for manual user input through a GUI. The Graphical Process Builder (GPB) allows a business analyst to visually construct business processes from the resources listed and defined in the Registry. Processes can be reused or combined to create new functionality or to leverage differing registry resources inside the same process structure. The Design Suite provides tools required to create business processes and composite applications. These include the Graphical Process Builder, UI Framework, Common Object Framework, and XML tools. The Systems Management component handles end-to-end message tracking, component monitoring, topology management, installation, configuration, and initial data loading for participating services.

As an extension to the Conductor platform, Commerce One also plans to release Process Accelerators that will provide ready-to-run business processes that can be implemented easily within the Conductor platform. These accelerators will supposedly address common business processes within the Commerce One's expertise, such as supply and demand planning and management, invoice handling and commonly accepted best practices. The accelerators will be developed both internally by Commerce One and externally by its business and integrations partners to help customers running on Conductor to deploy more quickly and execute with greater certainty. Similar to the process accelerators, the Conductor platform will leverage the library of existing Commerce One Supplier Relationship Management (SRM) applications to provide specific business process functionality to complement the platform. To support the SRM applications, Conductor might offer a valuable resource to enhance, extend and expand their functionality

Commerce One's odyssey continues, with many siren songs still lying ahead. The vendor might even be compared to a feature character of a tragic stage play, given it has often gone ahead of its times, which has only proven adversarial to the company, but often beneficial to others. While enterprises may still be leveraging Commerce One's earlier applications to collaborate over the Internet, the way in which they conduct e-Business has quite evolved from what Commerce One initially envisioned a few years ago. Namely, instead of running Internet-based trading exchanges (marketplaces) for entire or even multiple industries, Commerce One customers now rather focus on streamlining e-procurement and strategic sourcing processes within their individual enterprises.

Thus, the most recent benefactor from Commerce One' technology could be eScout, an e-procurement marketplace provider, to whom Commerce One recently (in December 2002) sold off its former Commerce One.net exchange-related businesses. Indeed, the combination of eScout's content and transaction handling services savvy with recently acquired Commerce One.net's network trading infrastructure may finally fulfill a venerable vision of the procurement exchanges' promise � to match buyers and sellers within an industry via a virtual marketplace, facilitate their consummation of trade and transactions, and charge a small fee for the service. To that end, it might even be ironic that eScout could actually deliver soon on what Commerce One aspired to a few years ago with its former Global Trading Web idea, which had not materialized then.

In addition to eScout's up-sell potential due to the inherited Commerce One.net's customer base, the acquisition may also create one of the world's most comprehensive exchanges, possibly showing a viable value proposition to many companies flirting with the idea of finally handling their procurement and sourcing tasks online. The offering might also lessen the difficulties of dealing with multiple procurement exchanges and suppliers, since the combination of eScout and Commerce One.net also seemingly espouses a buyer-system agnostic architecture that should allow different e-procurement on-ramps to connect to the exchange. Enter some group buying contracts (featuring aggregation optimization) and native e-procurement functionality, bundled with the growing volume of transactions and participation of buyers and suppliers -- the value proposition of e-procurement could finally move down to the mid-market, particularly given the recent move toward indirect materials procurement outsourcing.

Historical Perspective

One cannot omit mentioning the once highly-touted and now extinct partnership with SAP either, which began in June 2000 and was at the time touted by SAP as a proof of its new approach to true partnerships (see SAP Gives Up, Declares Victory. Again.), and which was formed to target the online e-procurement and then booming electronic business-to-business (B2B) marketplaces. As a part of the deal Commerce One and SAP combined their on-line marketplace efforts into a single offering called MarketSet and pledged to jointly sell each other's e-procurement software.

In June 2001, SAP even increased its stake in Commerce One to little over 20% by injecting up to $250 million in new investment capital into the company. Inevitable speculation over whether SAP would then acquire the partner, has, however, meanwhile been proven utterly unfounded. It appeared, in the pure numbers, with 20% ownership of Commerce One, SAP's results would often get indirectly affected with Commerce One's ballooning losses. SAP finally realized at the end of 2002 that, to just acquire the part of Commerce One it might still need, would not be worth the trouble of possible liabilities.

While SAP benefited from the relationship owing to the fact that the exchange infrastructure of its recent NetWeaver/ESA platform (formerly mySAP Technology, see SAP Weaves Microsoft .NET And IBM WebSphere Into Its ESA Tapestry) still likely incorporates B2B integration capabilities from Commerce One, as even pointed out by SAP during its launch of mySAP SRM product (SAP To Take Care Of All Suppliers), the general feeling has been that the partnership is what allowed Commerce One to survive to this point given almost 95% of its license revenues have long been coming from SAP royalties. Many still believe that only a buy-out by SAP will ensure Commerce One's long-term survival. Given it has now become a moot argument, many are speculating about other potential buyers, while a rare few are indicating that Commerce One might still make it on its own.

Surviving With an Independent Product

Indeed, the vendor has so far shown its ability to have a few lives like a cat, by a series of subsequent chameleon-like transitions and brand recognition making anew within the exchanges, e-procurement and supply relationship management (SRM) respective markets. Following up on the collapse of the public (and, to a degree, even private) trading exchanges concept, and having seen the writing on the wall regarding SAP's affair ending, in December 2001, Commerce One, announced Commerce One 5.0 that included Buy, Source and the Collaborative Platform, its online sourcing application which it developed independently of SAP and which is the first product to have been developed solely by Commerce One since they initiated their partnership. This new suite of collaborative sourcing and procurement solutions was aimed at automation of enterprise source-to-pay processes, while also enabling deep connections between an organization and its trading partners.

However, gaining traction in strategic sourcing has not been an easy feat for Commerce One thus far, in great part because the market had in the meantime got used to the idea of its success only via piggy-backing on SAP and by being eventually acquired by the giant. The fact indeed remains that the lion's share of Commerce One's revenue comes from SAP's customer base, given Commerce One's newcomer status in the SRM arena and its relative lack of experience within more prosperous direct materials sourcing.

This predicament has been unfortunate for Commerce One, given the recent attractiveness of SRM solutions, since customers have recently been focused on saving money and, particularly in today's buyers' market, they are utilizing competitive bidding into as many categories as possible. Often, the expenditures pertaining to suppliers relationship can even exceed 30% of revenue, and customers will likely embrace any software that is able to restrict this expense and/or concurrently create a more effective and successful relationship between customers and their suppliers. The direct materials e-sourcing wave thus seems to be overtaking the procure-to-pay market for indirect materials. Given direct materials procurement execution also has much more laborious nature, the e-sourcing opportunity has presented itself, especially with ERP vendors like SAP, Oracle and PeopleSoft entering the market in earnest.

Consequently, the escalating competition, depleting revenues, crippling losses and numerous restructuring moves, have resulted with many Commerce One's business plan changes, Conductor being the last �order of the day'. Since Commerce One had long struggled to cost-effectively manage its former three distinct businesses � 1) a UCCnet consulting and implementation services (stemming mainly from the AppNet acquisition in 2000), 2) a Web services-based Conductor platform, and 3) a set of procurement, sourcing and infrastructure (the platform � was MarketSite, Collaborative Platform) exchange business applications -- selling one of them to eScout to bolster cash reserve and further narrow focus was justifiable. Commerce One has since turned its attention almost exclusively to Web services with the Conductor set of applications aimed at supply chain visibility and facilitating automated processes between trading partners.

By devising Conductor, a hybrid between an integration platfform and a platform for building composite applications or business processes, Commerce One seemingly made yet another �bet-the-company' move mid-2002 by turning to harnessing Web services and thereby turning itself into a standard-based, application-agnostic integrator. It is a hub-based back-office integration functionality based on the Web services technology acquired through Commerce One's earlier purchase of Exterprise.

Longer term, this vision could theoretically become the foundation for Commerce One's brighter future, since its focus on integration, coupled with its other core skills in BPM and content management, should serve the company well in a diverse enterprise applications environment, where exchanges in particular are faced with the challenge of integration of technologies and processes between multiple back-end systems. Commerce One claims it might in fact be easier to integrate its system to two different versions of the same ERP system than it would be for any ERP vendor itself, given there are many Commerce One customers resident on SAP, Oracle, or PeopleSoft enterprise systems.

A blessing in disguise has at least been that the vendor has learned in the process that a major weakness in many exchange-based approaches was the intricacy to integrate all the systems involved running on disparate hardware and software, and particularly to connect all the parties at a business process level. Not to mention its injudicious and harmful "build it and they will come" approach at the end of 1990s, without grasping all the ramifications for all the participating parties. For suppliers, participating meant adding layers of complex integration atop an already overtaxed infrastructure, with little if any benefit to them other than to remain a supplier (often with a negative aspect of being pressed to cut their prices and margins due to open auctions' nature of trading).

For the holder of the exchange, the pain also included managing a wide variety of community members, creating and controlling new workflows, maintaining and administering business rules, and making sure that participants only receive information that they are entitled to see. Thus, from its work in pioneering marketplaces and managing complex supply chain relationships, Commerce One has learned the hard way the challenges of executing business processes across the differing technologies of numerous trading partners.

To that end, Commerce One's idea of its Conductor as one the first unified, technology- neutral platform's that enables businesses to execute and share processes easily across disparate applications and systems seems innovative and should help the needs of the higher-end of the market, whose paramount concerns have been the enormous costs of integration and the general lack of responsiveness by enterprise application vendors to address this issue. The vendor's embracing of standards-based Web services as a technology enabler may appeal to customers that are keen on preempting dependencies on proprietary Application Programming Interfaces (APIs). Conductor tries to deliver the above requirements of building, managing and orchestrating composite processes, bundled with an easy maintenance of the generated system afterwards, which could finally make up for missing pieces of its erstwhile failed exchanges' value proposition.

The Hidden Gems of the Enterprise Application Space Part Two: Sorting and Selecting SRM Software

Sorting the SRM Software Suppliers

Given the enthusiasm from early adopters, it is hardly surprising that a wide range of software suppliers is adopting the SRM acronym. There are several dozen vendors that are offering suites of SRM functionality and coming from different worlds, based on their origins. A great part of these logically hail from the SCM space such as i2 Technologies, Logility, and Manugistics, which regard SRM as a natural extension to their core supply chain planning (SCP) and procurement applications. These vendors have recently added functionality to support some sourcing business processes between manufacturer and supplier. As for most ERP vendors, which first extended their offerings to include supply chain activities, they have also added functionality and staked their claims in the SRM market. These vendors have the advantage of being able to tap into functionality from their other core applications like ERP, CRM, PLM, and SCM to support supplier-oriented processes, given they also have access to data in those systems to support such processes.

To add SRM modules to their own software suites, most enterprise applications suite vendors have launched portal initiatives that should tempt partners to share information about customers' demands in return for deeper product knowledge, training, and for more efficient ways of involving suppliers.

Then, as seen many times before in the enterprise software market, many specialist SRM start-up vendors have already jumped at the opportunity and have come up with by and large partial answers to the above market needs. A number of the still existing pioneering vendors that first offered specific SRM offerings a few years ago would include strategic e-sourcing/spend management providers like Diligent, Procuri, Emptoris, Frictionless Commerce, diCarta, Zeborg (recently acquired by Emptoris), Silvon Software, Healy Hudson, MindFlow, Perfect Commerce, B2eMarkets, Digital Union, Portum, Moai Technologies, eBreviate, etc., and vendors like SupplyWorks, Apexon, WeSupply, Eventra, RiverOne, Entomo etc., which focus more on the supply chain visibility, the tactical needs of manufacturing entities, the flow of information between the internal systems and trading partners as to keep the plants running, while supporting some strategic SRM activities.

PLM vendors like Agile Software and MatrixOne, which have recently added sourcing capabilities to their offerings, have also joined the SRM fray. Both indirect and service-oriented e-procurement vendors (A.T. Kearney Procurement Solutions, SupplyWorks, Elance, FreeMarkets, Ariba, Commerce One, CombineNet, VerticalNet, etc.) cannot be omitted either. Neither can the analytic/data mining providers like SAS Institute, Informatica, Salvos, and so on. If one is to nitpick, supplier portal providers like ClearOrbit and Izodia or on-line providers of the supplier invoice and payment services like Burnes E-Commerce, also touch on SRM.

Despite their different backgrounds, all the above vendors prove the point that the processes that make up SRM depend on a hybrid of technologies and require a significant implementation, data cleansing migration, and integration effort at most organizations. Still, two underlying results that an effective SRM project should achieve would be 1) the automation of the processes by which a company buys supplies, which can range in sophistication from automated generation of requests for proposals (RFPs) to more holistic order management systems, and 2) to provide the analysis that enables buyers to assess historical supplier data and base subsequent purchasing decisions on the results.

As a recap, SRM allows companies to integrate with their most important suppliers to streamline order management, replenishment, fulfillment, inventory management, and engineering change management (ECM). The key words pervading so far have been sourcing, spend management, and contract management. Namely, the core procurement process has become fairly mature and most enterprise application packages provide solid support for the purchasing process.

To provide a more distinct value proposition, vendors are providing value-added functionality that helps with tasks outside the procurement cycle. The most significant one is strategic sourcing, which through rating and ranking criteria, a purchasing officer chooses the optimal set of suppliers to negotiate a contract with. It enables enterprises to evaluate potential mixes of materials and services and determine appropriate suppliers and terms and conditions to balance cost, quality, and risk. The applications can capture supplier information and serve as a medium for collaboration between buyer and supplier on the requirements of the purchasing organization.

Generally, the term strategic sourcing denotes many steps that precede the signing of a contract, including spend analysis, identifying potential suppliers, RFQ and contract negotiation, and monitoring and improving suppliers (which logically may happen both and after the contract signing). As companies continue to strive to reduce the internal costs of their products and services, more pressure is on the procurement group to source from the right supplier that can deliver as needed, at the right price, but also subject to many other measures some of which can be of a non-quantitative nature, such as product availability, specifications, freight expenses, warranty, terms of contract, distribution partners, and what not. The sourcing equation can become even more complex when federal and state government regulations and corporate mandates such as sourcing from minority-owned businesses are brought into play as thresholds that cannot be circumvented.

Spend management comes in the form of software and services and allows organizations to gain control of the entire purchasing cycle, since the organizations deploying spend management across their e-purchasing operations should have a much better idea of how their money is being spent. Moreover, they must ascertain how much money is spent and where, before they can identify opportunities to improve sourcing via, e.g., negotiations with the supplier to produce a mutually beneficial contract. Knowing how much is spent on different parts, suppliers and product categories is crucial, as well as how much money has been spent against a corporate purchase contract. These enterprises are then able to instigate consistency across the business, while reducing process times and cutting costs by consistently managing spending across the enterprise, which includes visibility across diverse divisions, geographies, enterprise solutions, and all spending categories (e.g., travel, staple goods and services, projects, MRO, and direct materials). Spend management also requires rigid principles and governance to enforce compliance, which means establishing methods of monitoring spending against the budget and providing appropriate alerting and escalation processes for dealing with spending that exceeds budget levels.

Contract management is another key component of enterprise spend management, since contracts are the point around which much of a company's dealings with its suppliers pivots. Buyers and suppliers can spend an inordinate amount of time figuring out details about obligations and remuneration, incentives and contingencies. However, for companies handling dozens of contracts, ensuring that suppliers adhere to contract details is often too cumbersome to be executed. Most enterprises do not have formal systems in place to manage contracts, and thus, financial or purchasing executives often do not have visibility into contracts because they are kept in multiple different storage systems or, even, as hardly accessible hard copies.

Companies need contract management solutions that can reach across those repositories to help managers gain a comprehensive understanding of the trade agreements under which the enterprise operates. The lack of visibility and control will often cause an enterprise to fail to extract full value from the contract and the relationship with the supplier. At best, the users seem to be increasingly able to track contract expiration, which is only a minor part of total contract management requirements and potential benefits. In addition to simply standardizing contract language, payment terms and other requirements, the efficiencies are gained through analysis of all the contracts to discern trends and identify weaknesses in the process.

While many people have realized the power of e-commerce on the consumer side, there is still plenty of education to be conducted by all the SRM vendors as to prove how much leverage their applications can bring to corporate buyers.

P1-The Hidden Gems of the Enterprise Application Space

Emergence of SRM

The evolving supplier relationship management (SRM) market and its ever-evolving or emerging constituent parts like e-procurement, strategic sourcing, spend analysis and so on have lately shown great opportunities to the pure-play SRM vendors with genuine value prepositions. These have been seen in increased user awareness and adoption, certain venture capital investments in these days of scarce capital outside the trendy biotechnology sector, which then prompted geographic expansion and sporadic mergers of incumbents with complementary offerings.

It would not be a colossal discovery to realize that difficult economic times with flat and often crippling revenues have particularly forced enterprises to reduce costs in ways other than tried-and-true massive layoffs. Purchasing departments, which have long been regarded as "necessary-evil pen-pushers," have recently come to mind as the bottom line improvement opportunity makers through ensuring sourcing and procurement of all materials (indirect and direct) and services for the organization in a more strategic, streamlined, efficient, and cost-effective way.

Owing to ever increasing deployment of outsourcing, virtual manufacturing, contract manufacturing, vendor managed inventory (VMI) and many other modern manufacturing concepts due to increased global competition and the need for enterprises to focus on their core competencies, enterprises are often spending over 50 percent of their revenue on procured goods and services. Thus, suppliers' bases have been an ever-increasing factor to every organization's performance. Moreover, suppliers, many being manufacturers themselves, should be leveraged as a valuable source of expertise instead of being treated as a mere external cost center (if the user companies could glean that knowledge at all), capable of helping their customers deliver more innovative products faster and at better quality levels, and not necessarily only at lower prices. In other words, the competition has meanwhile shifted from being between individual companies to being between companies and their value chains.

However, so far, the communication between manufacturers and their suppliers has been mainly transactional and at arm's length in nature. As a result, few companies can openly claim to manage their suppliers closely and efficiently, and hence, deliberately or not, many continue to put up with being inexplicably overcharged for orders or with accepting late shipments. The situation gets even worse when the enterprises have to discern how much they spend, with whom, on what items and during which period. For that reason, they also have to maintain entire teams of employees to perform either mundane or frustrating administrative tasks generated by purchasing activities, such as checking deliveries against orders, expediting missing orders, fielding questions from requestors and suppliers, tracking down delinquent payments, and processing paper-based invoices.

Amid this chaos that leaves very little time for conducting any strategic work (e.g., crafting a sound sourcing strategy, supplier agreements, leverage aggregate spending, conducting astute supplier evaluation and tracking, and creating a viable mix of suppliers and subsequent optimal supplier business allocation, etc.), they are forced to make new purchasing decisions based mainly on inexact notions of which suppliers offer the lowest prices, or the fastest delivery at the time. The ramifications of maverick spending, redundant supplier arrangements and so on have been well publicized in the past, and almost everyone reading this could contribute with his/her version of bad experience and annoyance.

The Promise of E-procurement

automated e-procurement of indirect materials, bundled with auctions and quantity/price-based bids (requests for quotes/RFQs) via once proliferating Internet market places (often even hoping it to be a penny-pinching stint at the expense of resentful participating suppliers), the more realistic ones have always known the importance of the strategic supplier base.

The value proposition of e-procurement software focused on two areas:

1. Reducing the time and costs necessary to expedite an order

2. Getting the lowest price from suppliers


With the advent of the Internet exchanges, the emphasis was again primarily on auctioning and getting the cheapest price available for buyers. The overlooked and missing aspect in both cases was the supplier, which largely explains these once high-flying markets' not so glorified recent history.

Still, the value proposition of indirect materials e-procurement software remains considerable, promising gains in contract value with suppliers, enhanced workflow processes that can be integrated with other enterprise systems, and a more efficient purchasing process that can reduce requisitions' fulfillment time to hours instead of days. Users are however far more knowledgeable and critical about the promises made by the vendors, and are demanding more proof of the ROI attained. Consequently, the e-procurement vendors have been adding functionality for enabling purchase officers to better select vendors through sourcing features, and support suppliers through catalog management tools and portals.

Now that back-to-basic reality has indisputably triumphed, almost every company has been closely scrutinizing closely their relationships with suppliers and figuring out how best to reach, leverage and nurture them. Supplier participation remains an important consideration for surviving e-procurement vendors and their users. Namely, sourcing and auctioning functionality cannot work properly without suppliers answering RFQ criteria and submitting bids. With the core procurement functionality matured, buyers and vendors need supplier participation to achieve a level of collaboration to complement the procurement process. Given ever-shorter product life cycles and companies' ever-increasing reliance on third parties to increase customer satisfaction, the need for some form of supplier relationship management (SRM) category of software should not be questioned.

Still, the indirect e-procurement functionality has matured to almost a commodity level. Enterprises have a large number of vendors to choose from, with many bringing a wide spectrum of expertise to their offerings. Incumbent vendors such as FreeMarkets, Ariba, or Commerce One still have superior skills for building marketplaces and managing business-to-business (B2B) transactions, while traditional enterprise application vendors such as SAP, Oracle, PeopleSoft, or SSA Global have experience and ability in managing the financial settlement and integration with back-office applications like financial accounting and inventory management systems.


Consider Direct Materials


However, direct materials are where enterprises need to pay more attention to detail as to further save costs and leverage suppliers' expertise beyond customary catalog browsing and hunting for the cheapest commodity. Direct materials that go directly into the final products are often more critical to the bottom line, as they contribute to the costs of the finished goods and services provided to customers, have a major impact on profit margins and involve much more intricate sourcing and procurement practices. True, in some asset-intensive industries like mining or utilities, indirect materials associated with maintenance, repair, and operation (MRO) represent the majority of the expenses. Thus, both direct and indirect materials management have driven enterprises to take the next step by making the sourcing of products and services strategic to the organization.

A decade ago or so, material planners would scrutinize their material requirements planning (MRP)-based recommended orders' printouts, and order materials based mostly on price breaks offered by the supplier. Knowing their decisions were not optimal (i.e., that could be tangibly purported), they had to use their gut feeling and other empirical means, bundled with cumbersome or rudimentary spreadsheets to analyze and execute their decisions, even though an optimal sourcing strategy was only an abstract notion. In the case of some well versed buyer doing things almost right, these practices would hardly ever be documented, and any new buyer would have to figure these out for himself/herself upon the predecessor's departure.


Challenges to SRM Initiatives

Thus, SRM describes an emerging category of software to manage these evolving relationships between manufacturers and suppliers. Given the relative nascence of the SRM movement, it often means different things to different people. The SRM market landscape is also quite fragmented as many vendors support only one process or aspect of the entire spectrum from requisitioning to monitoring supplier performance. Also, due to its roots in both procurement and supply chain management (SCM), and given many vendors are using different names to describe their focus (e.g., sourcing, spend management, visualization, etc.) the confusion further abounds.

If one is to consider SRM as an overarching strategy (concept) of all business interactions between manufacturers and suppliers, it should encompass design, planning, sourcing (including analytics/spend management and sourcing execution), purchasing, order fulfillment, payment/settlement and feedback (e.g., scorecards and supplier performance monitoring). SRM should also try to enable some or all of the following—automation, optimization, visibility, collaboration, self-service, and cross-process integration. Of those functions above, sourcing and procurement would be more "introverted," i.e., dealing with identifying spending patterns, best supplier mix and product categories, and directing internal employees towards best-value purchasing behaviors, contracts and automated processes. The other parts of SRM are more "extroverted," dealing with automating supplier interactions (i.e., transactions, information sharing, and collaboration).

The relative immaturity of most company's SRM initiatives and of the SRM software market provides additional challenges. Namely, enterprise resource planning (ERP) solutions for the most part, cover the same, well-established basic footprint of ERP functionality. Some have gone so far as to call ERP software a commodity, although that ignores the fact that there are still key differences between many solutions, particularly for different industries. The SRM market on the other hand, covers a wide range of the above-mentioned previously unrelated software applications and the suites offered from different vendors can vary dramatically. For example, some vendors will refer to SRM as extended procurement process, others to a collaborative layer that sits atop SCM applications, and still others will refer to analytics and decision support. Some products offer tools for reverse auctions and multi-attribute sourcing logic, while others focus on the operational aspects of procurement like automated replenishment. On the other hand, some prospects' SRM needs may start with the design phase in the product lifecycle management (PLM) and extend to the processes that would rather fall under supply chain execution (SCE) like distributed order fulfillment.

In other words, the SRM market is still in its infancy compared to ERP, and is emerging from the traditional procurement applications, primarily due to expanded collaboration features and the availability of Web-based technology. Thus, no vendor provides all (if even a majority) of the required solutions for a full SRM initiative at this stage, so almost all solutions will involve best-of-breed components. Due to the number of components that are used to deliver an SRM solution, there is still a plethora of niche providers that offer compelling products yet fail to deliver on the breadth of the solution required.

Mid-size Companies Have Full-size IT Issues

The breadth and seriousness of issues that must be managed by the Information Systems Departments of mid-size companies are the same as those of larger corporations with more people and funding resources to apply to them. IT Managers of smaller enterprises must therefore do the same or more than their larger counterparts with less by necessity. Experience, working with dozens of companies of all sizes indicates that larger corporations are trying very hard to behave like their smaller, more nimble, counterparts. At the same time, small, fast moving companies are trying to establish stable IT infrastructure like that of the larger ones.

Information technology product selection is one issue that does not scale up or down with the size of the enterprise. The number of suppliers is the same, the number of products is the same and the amount of work necessary to understand products and suppliers sufficiently to make an informed decision is constant as well. Whether the product being selected is software, hardware, services or information, the challenge is to maximize business value and minimize infrastructure complexity. The former goal produces short to mid-term return on investment and the latter produces lower mid to long term cost of ownership.

The deck is stacked against the IT Manager. Internal clients rarely provide a clear picture of how the products will be used to increase business value in the short term and even less frequently for the long term. Suppliers make it difficult to compare features and functions by using ambiguous or misleading language. More often than not, time pressure is high and resources are short. There is hope. If IT managers focus on the capabilities that the products provide to the business, they can engage the right business managers more readily and they can provide essential data to help suppliers present their products.

Note: This note first appeared in a column by James F. Dowling in Mid-Range Computing. Look for other previously published Mid-Range Computing columns by Mr. Dowling at this site or visit Midrange Showcase at http://www.midrangecomputing.com.

E-Procurement Is A Starting Point

E-Procurement is a hot topic these days. There are many suppliers and even more companies pretending to be suppliers of e-Procurement solutions. There is a relatively short list of capabilities that e-Procurement systems will give to a company. Some are:

* Reduce cycle time from requisition to goods delivery and supplier payment,
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* Enable more aggressive negotiation of pricing for commodity goods,
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* Increase ability to propagate data to diverse systems from a single point of capture.

If this were the complete list of capabilities that are valuable, they represent all of the opportunities for increased business value and therefore provide the basis for computing the Return side of the Return on Investment Calculation. By documenting the way that these capabilities reduce cost or increase competitive advantage, business managers can readily establish the upper limit of investment that can be supported. This process alone will winnow down the list of potential IT investments.

The next culling step is to ask potential suppliers to explain how their products can effect the desired capabilities and to estimate the cost of doing so. This step should be done without consideration for current systems and infrastructure. By doing so, the concept is being tested without significant IT resource commitment. If suppliers can provide the capabilities at an affordable cost, specific product selection can proceed. Otherwise, the program may be put on the shelf for another try later.

If a near-current view of IT infrastructure and application systems is available, they can be provided to candidate suppliers for another round of validation. Software system suppliers know what it takes to integrate their products into diverse environments. At worst, they will guess at the complexity and risk from experience with similar situations. At best, they will make accurate estimates and identify minimal risk. In either case, a round of "Hows" is in order. Meet with the suppliers one by one and ask how systems will be integrated. By exploring the tools and techniques that a supplier will use to implement their solution, IT managers can make a good assessment of project risk. Unsure approaches, unfamiliar tools and complex interfaces generally indicate higher risk. On the other hand, strong conviction to employ familiar tools is a sign of lower risk.

Only after all parties understand business value, process implications and technology challenges is a request for proposal in order. As simple as this sounds, it is often forgotten especially in larger companies. This approach employs several principles of IT management learned from small, highly effective organizations.

1. Let business lead the discovery process,
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2. Add people to the program as needed and remove them when their contribution is made,
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3. Involve suppliers in the discovery process judiciously - respect their time.

Readers who work in government may have cringed through the paragraphs above thinking about how many procurement policies were violated. It is recognized that talking to potential suppliers one on one and some of the other concepts are disallowed. However, similar results can be obtained by attending supplier seminars and trade events, or by networking with people who have first-hand experience with the products that are being considered. Use the concepts if not the method to make each IT investment and supplier selection a series of informed decisions.

This column will continue to explore the change / size paradox. Big companies desiring speed and growing companies desiring stability. The author would appreciate feedback on material presented as well as suggestions for future study and reporting. The general theme is IT management and the goal is to make it easier to get clients what they want and what they need to succeed.

Let's Be Frank: It Was A Very Good Quarter For E-Procurement

Financial announcements from the end of their most recent quarters had a number of e-procurement vendors singing happily. Figures 1 and 2 both show the revenues for four leading pure-play companies:

• Ariba (NASDAQ: ARBA)
  
  
• Clarus Corporation (NASDAQ: CLRS)
  
  
• Commerce One (NASDAQ: CMRC)
  
  
• Purchase Pro (NASDAQ: PPRO)

Figure 1 also shows the percentage increase over the revenues for the previous quarter; Figure 2 shows the increase over the same quarter a year ago. These are fourth quarter results for Ariba and third quarter results for the others.

The two Figures indicate that the same growth is happening for both the largest companies in the space and the less well-known ones. Behind these summary numbers are lists of individual successes for each company. These are discussed in the next section.

Each of these four leading e-procurement companies has reason to crow.

Commerce One which in July predicted that it would be profitable in the fourth quarter of 2001 has moved that prediction up to point to the second quarter. During the third quarter of 2000 the company added 96 new customers, and expanded its Global Trading Web to include a total of 107 e-marketplaces of which 47 are operational. The company made huge strides in its major relationships: it rolled out joint products with SAPMarkets and expanded its relationships with Microsoft, GE Global eXchange Services, Sterling Commerce and others (see GE and Commerce One Turn on the Lights - But You Ain't Seen Nothin' Yet ).

Ariba had a fourth quarter in which the net loss was only $1.1 million - effectively zero on a per-share basis. Net loss for the year was $0.15 per share ($29.5 million). Ariba added 114 customers, making a total of 435. It says that 150 of these customers are up and running, and that half of its marketplace customers are already conducting live transactions. Ariba also announced major steps forward - in the form of alliances with such global financial leaders as Bank of America, U.S. Bancorp, and Visa International - toward its goal of delivering integrated financial services through a single global platform.

Both Ariba and Commerce One seem to have weathered the storm that hit Internet companies particularly hard earlier in the year. Not to say that the future will be smooth sailing. Even barring downturns in the overall economy neither company has yet validated the model of reaping the lion's share of its revenues from transactions. However, it seems a safe bet that these two companies will dominate the market, especially at the enterprise level, for some time to come. While the two certainly compete with each other, each continues to carve out its own niche - Ariba with the supply chain orientation it inherits from its i2 alliance, and Commerce One with its strong global network. Their partnerships - Ariba's with i2 and IBM, Commerce One's with SAP and GXS - also give them playing fields that are largely their own. While the overlap in spheres of influence and target customers is large, we think the time will come when they don't feel the urge to fight too terribly hard against each other.

The two smaller companies we looked at are also tooting their horns.

PurchasePro signed giant Computer Associates as a strategic partner, putting CA's 3,000 member sales force to work selling PurchasePro solutions. Gateway put a connection to PurchasePro on millions of desktops shipped to small and medium-sized business. The combination gives PurchasePro beachheads into both the field of mid-sized and larger companies through CA and the smaller companies through Gateway. The company also has a co-developed business with Netscape that will provide users of all AOL brands with PurchasePro's eCommerce solution. PurchasePro delivered 49 privately labeled marketplaces and added 5,311 individual companies to its network during Q3.

Clarus Corporation signed sixteen new contracts and brought its total customer base to 186. It demonstrated the speed with which it can build a solution by launching four customer marketplaces at the Microsoft 2000 Enterprise launch in September. Clarus has a new alliance with Ernst & Young, which will be an integrator of Clarus products. Clarus expanded its non-U.S. operations by 37 percent and generated 19 percent of its Q3 license fees from international operations.

These two smaller companies show that e-procurement is strong at all levels. Purchase Pro seems to have found the right formula for continued growth. Clarus, which is overall a smaller company, had the smallest of the growth rates, although as Figure 2 shows its percentage increase over the same quarter a year ago was not too different from Ariba's. Clarus had a few bumps this quarter; its strong relationship with Microsoft was questioned when Microsoft and Commerce One made partnership noises. (See Commerce One: First SAP, then Microsoft. But What About Clarus?) We don't think that the one has much to do with the other; the speculation probably had more effect on Clarus, for the few days it was in the news, than the actual partnership will.

Both PurchasePro and Clarus do have to watch out for their larger cousins Ariba and Commerce One. Not that either cares to compete directly for their target customers, but because there are other e-procurement companies that do intend to compete, and that will partner with a larger company to avoid the costs of setting up their own marketplace.

Larger enterprises should feel quite comfortable about working with either Commerce One or Ariba. There are other others vendors to consider - Oracle for one - but both of these companies should be on your e-procurement short list.

Smaller and mid-size companies have a good deal more choice. The financial results for Clarus and PurchasePro both of which belong on your long list of initial candidates, show that skittishness about the viability of e-procurement is almost certainly misplaced. However, as there is inherently less certainty about the long-term prospects of any of the companies in this space - and because we expect quite a few new entries, some of which will have very interesting stories, over the next nine months - we strongly recommend considering the ASP model for your first foray into e-procurement, whether as a buyer or a market maker.