Online supply and demand

E-procurement fell out of favour when the dotcom bubble burst. But a forthcoming conference could give the region’s e-business a chance to press its credentials

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By  Peter Branton Published  May 7, 2006

|~|epromain.jpg|~|E-procurement solutions, e-marketplaces and online auctions were championed as ideal tools for enterprises during the dotcom boom.|~|Last month Larry Ellison, CEO of Oracle, was challenged as to how he was going to convince Wall Street of the benefits of his firm’s software-as-a-service model. The stock market didn’t seem too keen on recurring maintenance revenues, the interviewer suggested. Ellison’s answer was succinct: “But then, Wall Street thought that Ariba was worth more than Daimler Benz [during the dotcom bubble],” he replied. From being one of the flagship firms of the New Economy to being held up as an example of financial analysts’ folly in just a few years may seem galling for Ariba (which was once indeed valued at far more than many more established companies). At least the e-marketplace firm is still going, albeit in a somewhat different form to its heyday. All too many other firms in the e-business space have come and gone, victims of the somewhat misguided belief that held sway in the 1990s that everything would benefit with the addition of the letter ‘e’ in front. E-marketplaces, online auctions and business-to-business commerce were all championed as delivering boons to all sorts of enterprises. Nowhere was that truer than e-procurement: businesses wou- ld be able to save money by buying their supplies online, more or less no matter what type of industry they represented. For instance, a chain of hairdressers could make little money by offering haircuts online, since clearly it needed to provide a physical service to its customers. But it could make savings by buying shampoos and other supplies online, which would cut its operating costs. Or so the theory went. In practice, e-procurement technology adoption has tended to be heaviest in larger organisations with large budgets: a 2005 survey in Europe found that only a third of firms with spending budgets of less than US$100milllion had implemented e-procurement technology. Even in the largest of organisations, e-procurement rollout is far from total, the same survey found that just two-thirds of firms with budgets greater than US$500million to spend had adopted e-procurement. Further, where firms have adopted e-procurement technology, that adoption is often far from total: two years after adopting a e-procurement system, UK bank HBOS was putting just 2% of its overall corporate spending through the system. All of which meant that the market for e-procurement solutions simply didn’t happen: between 1999 and 2003, licence revenue for e-procurement and e-sourcing applications fell 43%, according to figures from analyst house Forrester Research. So where does all this leave the Middle East? While its traditional position of being a few years behind technology adoption patterns in Europe and the US has sometimes enabled the Middle East to avoid making some of the same mistakes, the region has not been immune to the e-commerce boom and bust cycle. For instance, Commerce One — which was once ranked alongside Ariba as one of the leaders in the e-marketplace sector with a Wall Street valuation of US$20billion — failed to establish itself here in the Middle East. The firm finally closed its doors in 2004. However, supported in part by the simple fact that there are some organisations in the region that have very big budgets to spend, a number of e-procurement players are active here. ||**||Industry boost|~|Livingstonmain.jpg|~|Alan Livingston, group CEO of EOS Technologies.|~|This month will see the region’s e-procurement industry receive a positive boost, with the launch of a conference devoted to the sector, supported by the respected UK industry body, the Chartered Institute of Purchasing & Supply (CIPS). Under the patronage of HE Sheikha Lubna Al Qasimi, the UAE’s Minister of Economy and Planning, the event, to be held in Dubai, will bring together international procurement specialists from Europe with their counterparts in the Middle East. “We have been working in the Middle East for some considerable time now, working with organisations who are striving to put in place standards of excellence in e-procurement,” says Michael Campbell, director of business development at CIPS. “The use of e-procurement is growing rapidly and there is a real need for better understanding and greater knowledge of this topic to ensure organisations can continue to reap the benefits that excellent procurement can offer,” Campbell explains. The event is being sponsored by some of the region’s biggest players in the e-procurement field, including Ariba and online marketplace Tejari. Delegates will attend from a number of organisations, including airline consortium Emirates Group and hotel group Jumeirah International. “I think it’s [the CIPS conference] a two-way exchange,” claims Tejari CEO Omar Hijazi. “The benefit to the e-procurement community here is there will be a presentation of best practices from all over the world — you have speakers from Europe and the US — and I think understanding what the leading-edge practices from the West are could be very interesting for the community here,” he continues. “The reverse exchange is we’re going to tell them what we’re doing here in the region so we’ll be showcasing the people involved in the e-government initiatives here and they can talk about what they have seen,” he adds. “I think there are things that we are doing here that they’re not doing there and vice versa. That exchange [of ideas] is probably the biggest benefit and the fact that CIPs is here credentialises the level of penetration of e-procurement practices here in the Middle East,” Hijazi claims. Just how strong is that level of penetration for e-procurement practices here in the region? “Well, I think for our region the penetration has actually been very good,” Hijazi says. As examples, he cites the fact that Tejari has been able to grow auctions across the board by 25% from 2004 to last year, with the exchange having handled in excess of US$2.7billion in the course of its history. Alan Livingston, group CEO of e-business firm EOS Technologies, acknowledges that the market is currently in a healthier situation than ever before, but says the region has seen a number of wrong-turnings in the past few years. “The market was hit hard by the dot bombs and e-procurement got put on hold for a few years, a lot of people got frightened by the whole letter e thing. Then the market got a bit better and we saw a lot of the big US firms coming in with basically fantastic technology,” he says. “The reason why these firms did so badly was the complexity and the cost of the technology. In order to maintain a profitable business you had to charge your members huge sums of money but also the technology itself was quite complex to use and particularly for the smaller vendors populating and maintaining catalogues for one customer didn’t make sense,” he continues. Like other e-procurement suppliers, EOS Technologies, which was originally founded in India and has its base in Oman, has found that it makes sense to identify one major buying entity with a large number of suppliers and work with it. Once the buying entity — usually a large organisation in the oil and gas sector — has agreed to work with EOS Technologies, it will then go to the vendors it works with and ask them to become a member of its trading exchange. EOS has set up such exchanges in Oman, Kuwait, Jordan and — since March — in Qatar. The Qatari exchange was set up in collaboration with a consortium of local Qatari businessmen, an approach that Livingston says is key to the firm’s strategy. “Particularly in the Middle East, local knowledge is worth a lot, so our business model is that we have joint venture partners,” he says. Getting the right partner is critical to the success of the exchange — they need to be able to not only provide sufficient investment, they must also have the right reputation, if the exchange is going to succeed, he believes. “Our partners are going to be the guardians of the exchange,” he states. “It is like 100 years ago when somebody came in and said I’ve got this idea of a telephone exchange, nobody else understood,” he explains. “Now of course, the telephone exchange is a crucial part of the business infrastructure. We believe that ultimately our exchanges are going to be viewed in the same way,” Livingston goes on to add. While it can claim to have done a lot to boost its profile in a short space of time, of course EOS Technologies is not the only player in the e-procurement field here in the Middle East. One of those players is the afore-mentioned Ariba, which is scheduled to officially launch its services here in the region this month, but has already been working with a number of customers here, such as ADNOC and ETA-Ascon. “We have generated a lot of revenue here already, without a lot of presence, now we think we can replicate the success we have had elsewhere,” says Rony Tazbaz, regional manager for Ariba’s Middle East operations. While Ariba has had its travails in the past few years, it has — unlike some of its former rivals- kept going, albeit with a few changes along the way. “We’ve kind of had an evolution in what we do since we were launched ten years ago,” says Michael Arenth, regional director for Ariba’s European operations. “We’ve kind of had to weather the storm a bit and it has been hard, we freely admit,” he adds. Having weathered the storm, the firm is now looking at expanding its presence in the Middle East, Arenth says. While Ariba began life as an e-marketplace vendor, that particular model failed to achieve widespread adoption for a number of reasons. Suppliers of goods and services didn’t like the idea that customers would team up to drive down prices. Buyers, on the other hand, were not keen to have large amounts of information flowing through somebody else’s systems. “The whole thing of e-marketplace was an idea that the time wasn’t right for,” says Tazbaz. “The difference between that and what we are currently proposing to customers is instead of the many to many it’s the one to many,” he claims. “You [with one to many] make strategic decisions as to which suppliers to work with, instead of opening it to all,” he adds. ||**||Spend approach|~|Tazbazmain.jpg|~|Rony Tazbaz, regional manager for Ariba Middle East.|~|Ariba has labelled its approach spend management (it initially called it enterprise spend management, or esm, but has now dropped the term enterprise). Spend management, according to Tazbaz means “instead of spot buying as you need, it is making a really strategic decision as to which commodities you are going to reduce costs on, which suppliers you are going to deal with and so on and then end up either with a contract or a purchase order that you can go and deal with.” Such an approach can pay tremendous dividends — one Ariba international customer, FedEx, estimates that every US$1 it saves on its procurement cost is equivalent to increasing its sales by US$18. “The key benefit to spend management is clearly cost reduction,” says Tazbaz. While e-marketplaces have not been anywhere near as successful as initially hoped, some of the more specialist e-marketplaces have nonetheless survived — and in some cases prospered. One such is Quadrem, which was established in 2000 by a number of global metal mining companies. Quadrem has since branched into a number of other industrial supply chain areas, such as oil and gas and the automotive sector. “We are one of the largest e-marketplaces globally, we have more than 400 buyers that are participating in our services and we have more than 45,000 suppliers,” says Leo Van Rensburg general manager of Quadrem Middle East. He describes Quadrem as a full e-procurement service pro- vider, offering a range of services from sourcing, content and cataloguing services, through to financial supply chain services. “We believe that e-procurement is very close to being the way that goods are purchased in a number of industries here,” he says. “We’re very excited by the timing, it’s a great market opportunity,” he claims. While the market opportunity is clearly there for e-procurement, all the vendors admit that there are significant barriers to adoption that need to be overcome first. Not least is the fact that if e-procurement can be a tough sell in the more technologically advanced markets, it is doubly difficult here in the Middle East. “A lot of the companies in the Middle East are still caught up in their enterprise resource planning (ERP ) implementation and are still optimising their business processes [which will allow them to take advantage of e-procurement],” Van Rensburg says. “Where we have objections is where people say that they are still working on their ERP implementation,” he goes on to say. Tejari’s Hijazi points out that the infrastructure in many countries is limited, making widespread adoption of e-procurement difficult, to say the least. “We have been working with Etisalat to promote internet penetration, but here in Dubai that penetration rate is about 50%,” he says. “In Egypt, when I was there with some of its ministers a year ago, they were very happy that they had doubled internet penetration over a one year period, but it had gone from 3% to 6%,” he continues. “So there are still some fundamental infrastructure issues that need to be addressed and then there are traditional barriers to how business is conducted,” Hijazi goes on to add. These can include the need for Middle East government organisations to deal with local suppliers, Tazbaz points out. “Most governments in the region have a percentage of business that has to be done with local suppliers, that doesn’t apply elsewhere,” he says. “So if I came to you and said I could save you US$3million by opening up to all your suppliers, you would say wait a minute, you can’t use all the suppliers, 60% must come from local firms, so all of a sudden that saving has to be trimmed down,” he adds. EOS’ Livingston insists that e-procurement cannot replace the culture of face-to-face meetings — nor should it try. “We don’t expect to replace any of the face-to-face selling,” he says. “Unlike catalogue systems, our system is purely a replacement for the fax and e-mail system, all the other business processes have to be done in the traditional way,” he adds. E-procurement can plainly offer businesses here in the Middle East tremendous benefits, but it looks as if — like our colleagues in Europe — we are still some way away from seeing it being all-pervasive. ||**||

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