Strategic Sourcing Predicts 2003: Impending Change

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1 Strategic Planning, D. Hope-Ross Research Note 5 December 2002 Strategic Sourcing Predicts 2003: Impending Change The criteria for success in the strategic sourcing application market are changing. In 2003, the market will be reinvented, offering users ample opportunities for benefit and unforeseen challenges. Core Topic ERP II, Supply Chain & Manufacturing: Supply Chain Management - Strategies, Applications and Technologies Key Issue How will successful enterprises select, deploy and manage SCP and SCE solutions to minimize risk and achieve optimum ROI? Strategic Planning Assumptions By year-end 2005, functional expansion of strategic sourcing applications will increase implementation costs by an average of 50 percent (0.8 probability). Through 2005, continued market evolution will force 30 percent of strategic sourcing application vendors to exit this market sector, be acquired, merge or cease operations (0.6 probability). By 2004, "behind the firewall" implementations will outnumber hosted deployments of new strategic sourcing applications by 25 percent (0.8 probability). The drivers and market forces that have sustained spending on strategic sourcing applications will serve to solidify, yet transform this market during Strategic sourcing applications have "prospered" in an otherwise slow technology adoption and spending environment because of their ease of implementation and relatively short return on investment cycles. In addition, these applications have been simple for enterprises to understand and implement. However, these factors are attracting competition and changing the basis of differentiation in the evolving market. In 2003, for these strategic sourcing applications, we expect functionality will increase and price will decrease, with intensifying competition and a return to more traditional deployment styles. Prediction: Application functionality will explode. The era of experimentation by early adopters, during which sourcing functionality was understood in terms of structured negotiation (electronic sourcing/electronic request for information, proposal, quotation/reverse auction), is coming to a rapid close. We expect that the commoditization of structured negotiation will be complete by year-end 2003, driving vendors toward further functional depth and expansion. Increased application functionality will begin to erode the traditional "quick win" marketing advantage of niche vendors as negotiation capabilities become ubiquitous. The decline of the "quick win" message is healthy for the market, ultimately increasing the total return to buying organizations and the total value of sourcing applications. Yet the increased value will come at a cost. By year-end 2005, functional expansion of strategic sourcing applications will increase implementation costs by an average of 50 percent (0.8 probability). Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Impact on 2003: As the basic sourcing technology becomes commodity software, niche vendors will attempt to expand their offerings while larger market entrants move into the market space. In 2003: Quests for differentiation among start-up companies will not be wholly successful. Vendors will develop basic functionality in project management (including productivity reporting), interdepartmental workflow/collaboration, basic contract management (such as time-phased expiration) as well as spending analysis and optimization based on reseller/embedded relationships. External service providers (ESPs) will be increasingly attracted to this market by the growing complexity and duration of sourcing implementation projects. The shift to richer functionality and the subsequent commoditization of structured negotiation have important implications. It is imperative that enterprises begin planning now for the implications of mass acceptance and changes in this application market. Reacting in 2003: Enterprises selecting sourcing applications must build consensus on their objectives of technology implementation before evaluating and selecting vendors. In other words, enterprises need a sourcing strategy for sourcing applications. Selecting vendors based on a tactical, short-term basis is a viable strategy, but it should trigger different selection behaviors vs. longer-term, broader approaches that require the transformation of purchasing practices. Application initiatives with short payback cycles (less than 12 months) should focus on structured negotiation functionality such as electronic request for information, proposal, quotation and reverse auctions. Enterprises should take advantage of the commoditized nature of this functionality and negotiate competitively for such applications, with a focus on minimum functionality and maximum navigability. When making short-term decisions, enterprises should not underestimate the inertia created by application implementation. Although, in theory, it may sound simple to "swap out" tactical applications, the realities of migrating less technically experienced sourcing staff among multiple applications make such changes difficult. Although short-term savings driven by low-cost applications may be attractive, enterprises should consciously (as opposed to automatically) balance short-term gains against 5 December

3 the possibility of missing longer-term opportunities. These will arise from architectures that support heterogeneous integration capabilities which enable enterprises to assimilate negotiation into multiple supplier-facing processes, such as purchasing and inbound logistics. Note 1 Representative Vendors of Strategic Sourcing Applications ERP Oracle SAP PeopleSoft E-Procurement Ariba Commerce One Solutions/Services FreeMarkets AT Kearney/eBreviate Zeborg Structured Negotiation MindFlow Technologies Emptoris B2eMarkets Frictionless Commerce Perfect Commerce Procuri Moai Technologies (acquired by Medebiz) Data Quality and Analytics SAS Institute Informatica Dun & Bradstreet Design/PLM Agile Software Matrix One SCM or Other i2 Technologies Verticalnet/Atlas Commerce Menerva Technologies (acquired by imany) SupplyWorks Healy Hudson Diligent Technologies Nextance Enterprises making more strategic selections should choose vendors based on strengths that lie beyond structured negotiation or new functionality. Examples of such strengths include: broader application suites, installed base (in other application markets), financial strength, professional services or the demonstrable delivery of broader strategic sourcing capabilities. Additionally, enterprises taking a more holistic approach should not rely on reference accounts to determine their own deployment times and budgets. Early application customers and projects (from 2000 to 2002) will not reflect the high cost and extensive complexity of newer application deployments. The expanded application functionality of these newer deployments will require more resources than for earlier deployments. Finally, when deploying larger functionality sets, enterprises should consider a phased approach. Implementing less complex elements first can help deliver returns to the business and generate project momentum. When trying to estimate project costs, enterprises should endeavor to understand the costs that extend beyond software. Enterprises should be careful not to exclude the costs of training (for sourcing personnel and contending suppliers), reengineering tendering processes and (potentially) implementing new supplier agreements. Prediction: Prices will collapse as the market for strategic sourcing begins to coalesce. As e-sourcing becomes marginalized, there will be increasing recognition by enterprises (and vendors) of the need to holistically treat all phases of sourcing, as opposed to the isolated approaches fostered by structured negotiation. This recognition will begin to favor vendors that can support multiple phases of the sourcing life cycle, including strategy development, spending analysis, supplier discovery, structured negotiation and awards (for more information, see "Understanding the Five Styles of Strategic Sourcing"). This implies that new types of vendors will increasingly have increasing relevance enterprise resource planning II (ERP II), supply chain planning, service providers (traditional, large technology consultancies and "sourcing boutiques"), analytic/business intelligence vendors, product life cycle management (PLM) and more (see Note 1). As the application market matures, e-sourcing functionality will 5 December

4 increasingly become a "loss leader" for a variety of players, undermining its value and, of course, its price. As prices collapse, some undercapitalized niche vendors will be unable to make this transition, thus falling on hard times. Through 2005, continued market evolution will force 30 percent of strategic sourcing application vendors to exit this market sector, be acquired, merge or cease operations (0.6 probability). Impact on 2003: As the recognition and adoption of strategic sourcing as a money-saving initiative continues: Vendors will try to differentiate themselves by increasing the breadth and depth of their offerings through focused development. Market pressures (and delays in delivering new functionality) will drive smaller niche vendors into opportunistic, marketingdriven, partnering arrangements. Such agreements will increase in intensity, yet decrease in durability as market volatility blurs the lines between cooperation and competition. ESPs will emerge as a viable channel for sales and select implementation services for application vendors. Most major ERP II vendors will expand referenceable strategic sourcing accounts; each one of these vendors will be able to provide at least four accounts by the end of 3Q03 (0.8 probability). E-sourcing players will move "down market" or to the small and midsize enterprise segment. Alternatively, niche vendors may move to other, more defensible niches with a focus on specific categories, such as services (for example, print, services and temporary labor), capital equipment and real estate. Reacting in 2003: In 2003, enterprises will have an opportunity to benefit from this scramble for differentiation and leadership. In 2003, we expect to see some attractive prices, since start-up and established vendors badly need large, stable reference accounts, although for very different reasons. Prices will rise toward the end of 2003 and the beginning of Enterprises that want to save on licensing fees (especially from expansionist vendors) should consider licensing the applications in the first two quarters of 2003, even if plans call for deployment in 2004 (see "Product Life Cycle Management Predictions for 2003"). 5 December

5 Enterprises should audit license agreements to determine whether the expanded capabilities of their vendors are available at no additional license costs. Enterprises should go to the source and avoid licensing applications via partnership or reseller agreements. In general, the churn in the partner ecosystem makes licensing via reseller partnerships risky in the long term. However, there may be exceptions to this rule for example, service and support agreements from large stable vendors may offer some protection from the vulnerability of smaller application vendors. Enterprises should insist on functional equivalence clauses to avoid being "burned" as the application vendors bring their own products to market, or switch applications/architectures to acquired assets. Multiple applications and technologies are applicable to strategic sourcing challenges. Some applications that help with sourcing challenges are well outside of the traditional strategic sourcing markets. Enterprises must try to understand the business benefits of multiple application types and the potential benefits of adding sourcing capabilities. This will help them understand how (or when) a vendor may expand strategic sourcing capabilities. Prediction: The assimilation of applications into enterprise architecture will accelerate. The expansion of strategic sourcing will be contingent on a transition from hosted, tactical models to deployment styles in which applications are tightly coupled with the rest of the enterprise computing infrastructure. After all, applications can't expand functionally, coalesce from multiple sectors or undergo customization in a vacuum. As strategic sourcing applications grow in capabilities, the deployment tasks will move beyond uploading static user/supplier profile information. Instead, strategic sourcing application vendors will seek to create and leverage workflows, using (their own and others') published application programming interfaces (APIs) to create integration with adjacent applications. In addition, as enterprises begin to acquire more strategic goods via these applications, the degree of customization will continue to increase. By 2004, "behind the firewall" implementations will outnumber hosted deployments of new strategic sourcing applications by 25 percent (0.8 probability). Impact on 2003: Incumbent and encroaching vendors have recognized this trend and have begun to react. Therefore, during 2003, enterprises should expect: 5 December

6 Expanded deployment options and an increase in perpetual license opportunities Improved performance, but awkward administration navigability and poor system documentation in early behind the firewall releases Limited integration points (and integration ability), configuration and customization options throughout 2003 Reacting in 2003: Enterprises should include deployment styles and license options as a formal part of requests for proposals and product selection. However, enterprises that are new to these applications should consider delaying full-blown deployments until references become available. Enterprises should ask incumbent and potential vendors for documentation of existing and planned system architectures, published APIs and integration strategies based on message-oriented middleware to assess suitability/compatibility with their current environments. Enterprises should ask incumbent vendors (where they exist) for documented plans and commitments for shifting deployment. Note, plans do not necessarily require a 2003 delivery, but the vendor strategy should be in place by 4Q03. If the incumbent vendor is an ERP vendor, an upgrade may be required to take advantage of new application sets (see "ERP II 2003: The Year of the Version Upgrade"). Acronym Key API ERP II ESP PLM Application programming interface Enterprise resource planning II External service provider Product life cycle management Bottom Line: Enterprises should expect improvements in the functional and architectural capability of strategic sourcing applications. Increasing maturity will improve sourcing process support, integration and application architectures. This will pave the way for sustainable improvements in technology and facilitate enterprise sourcing practices. However, these improvements will come at a price of market stability and simplicity. Enterprises should be concerned about vendor viability, but they can take advantage of instability to secure lower license costs. These opportunities must be balanced against more strategic investments in longer-term, more-transformational sourcing programs that rely on technology as a change catalyst. 5 December