Are we facing a free-for-all?

Jason Busch takes a timely look at what the future may have in store for sourcing and procurement technology.

During most polite enterprise conversations, it passes without argument that price points for applications almost always go down over time, not up. If we look back at the history of sourcing and procurement technology as one isolated area of the broader market, this certainly holds true. But what are the actual limits of downward pricing pressure?

With the emergence of open source and new advertising – and supplier-paid pricing models, many people are beginning to wonder whether “free” models are the way of the future. To understand whether or not free will take hold and for what segments of the market – in addition to whether or not it is right for your organisation – it is critical to first understand where the industry has come from.

Consider the early evolution of e-sourcing technology beginning with the advent of FreeMarkets services-enabled software capabilities in the mid-nineties. Back then, if a company wanted to run a reverse auction, it had to engage a provider such as FreeMarkets or AT Kearney on a consultative basis. On an individual level, costs ran as high as hundreds of thousands of euros for a single reverse auction.

But these price points were eroded quite rapidly as companies began to demand self-service technology which they could deploy on their own without the added expense of consultants running around in the background. Over time, organisations ran fewer and fewer full-service sourcing events with third-party providers because of the cost, opting instead to go with less expensive software they could deploy and use with their own staff, even if the full-service type of approach would yield better results.

The race to commercialise and improve self-service sourcing technology happened quickly. It included both existing providers and new entrants such as Procuri, Emptoris and Ariba. But even as vendors built out features and functionality quickly in the release cycles, price points remained stable or dropped, depending on the provider.

Today companies are able to purchase the unlimited use of sourcing suites from between $5,000-$20,000 per month, depending on the vendor and number of seats, with advanced capabilities that let organisations better manage internal category specifications, optimise award decisions based on a range of variables beyond just unit cost, and continually monitor supplier performance. Remember that less than ten years ago, not only was this technology not available from a single provider, but smaller, less developed modules cost ten or even 100 times the amount.

A lot has changed in the past decade beyond the availability of new modules, features and reduced cost to end-users that deploy sourcing and procurement technology. One of the most revolutionary shifts has been the open source revolution that has redefined the costs and effort to build and deploy applications. At the same time, the advent of advanced software development tools has cut the time needed to build new capabilities. The combination of these factors is helping to redefine software economics, making new business models – not to mention greatly reduced end-user costs – a reality.

One of these new business models is “free” – or at least free to the buying organisation using the less expensive, entry-level components of a solution such as Coupa's open source e-procurement application. Coupa was founded in 2006 by some of the business and technology leaders of Oracle's procurement technology group. Using Open Source technology and rapid development tools, Coupa has been able to build commercially viable procurement requisitioning and management technology that took early providers years to construct and deploy.

By offering a new open source e-procurement platform nearly a decade after industry pioneers Ariba and Commerce One launched their original platforms, Coupa has placed its bets that indirect and catalog procurement will remain a significant market opportunity. Fortunately, industry analyst reports from firms such as Aberdeen support their thesis that only a minority of companies, large or small, have deployed e-procurement capabilities.

The value proposition for e-procurement remains strong, especially considering the relatively low penetration and adoption outside of the world's largest companies (even the Global 2000, in fact, have a large opportunity to improve their existing deployments.

Given this need and the opportunity at all levels of the market, Coupa should have a strong opportunity to drive significant adoption of their platform if they can get the message out. Even if they do not displace a single SAP, Oracle, or Ariba installation, they still have the potential to control a hefty chunk of the middle market with open source and enterprise products.

Coupa's founders will admit that their initial release lacks some of the more advanced capabilities, such as closed loop procure-to-pay capabilities, as more established providers, but they argue that their applications ease-of-use and consumer-like interface still makes it attractive.

Moreover, there's no charity baked into the business model. Coupa plans to build a profitable revenue model by charging for support and more advanced capabilities in the Enterprise edition of its product - which includes more advanced workflow, reporting and process capabilities - while keeping the open source edition of its product free. The concept is that as companies become more sophisticated, they will want the control and capabilities that the more robust Enterprise version brings.

Coupa is not alone as a for-profit provider embracing a free-business model to drive usage and customer adoption. SourceOne Management Services is a rapidly growing US-based sourcing consultancy which built a basic e-sourcing and reverse auction tool (Why Abe) for its own internal use, but found the application had relevance beyond the hands of its consultants, so it released it as a free service over the internet to drive marketing and exposure for the firm and to provide it with an advantage over the competition by offering a free “leave behind” following category sourcing engagements.

The look and feel of Why Abe is very different from other traditional hosted and installed applications in the market. SourceOne's management team say they built the application to look like a sourcing version of eBay. While lacking the sophistication of many other sourcing applications available in the market, the user interface is self-explanatory and requires limited or no training.

From a feature/function perspective, Why Abe enables basic event-driven eRFX and reverse auctioning capability (including the ability to create events with multiple line items). In the reverse auction mode, users can choose between rank-only and price auctions. The application also makes it possible to attach drawings, RFP information, etc. Why Abe also enables the user to export all event information into a Microsoft Office format if a user decides to use another application. The tool also embeds an approval capability allowing a company to designate multiple approvers for RFP's.

On paper, Why Abe's features sound robust. But in reality, they are very similar to where vendors like Bay Builder (now Perfect), Procuri and FreeMarkets were five years ago, albeit with a less sophisticated user interface (some might say easier to use).

Still, there is no question that Why Abe and Coupa offer capabilities which both large and small companies can benefit from if they are not currently using sourcing or procurement technology. However, given the current feature limitations, security concerns that might arise, and the risk of using a “free” third-party application without a traditional license agreement that protects the user, it is unlikely they will displace traditional providers anytime – which is not their goal, at least as their marketing departments spin it.

Rather, Coupa and Why Abe argue that they will most likely gain share by reaching smaller, under-served segments of the market which have been unwilling to spend on technology to achieve results to date. Along with supplier-paid models such as MFG.com which are free to buyers, they will most likely complement – rather than replace – existing solutions already in the market. MFG.com is a great example of a free supplier identification and basic quoting tool which can fit alongside existing sourcing technology.

But the ability for free services such as MFG.com to slot in alongside existing enterprise technology will no doubt begin to blur what companies are willing to pay a premium for – and what they are not. Without question, vendors offering free sourcing and procurement technology will put pressure on traditional providers to innovate to stay ahead of free alternatives. These models might even hurt some price points for less differentiated providers.

However, while license and usage costs might drop as new models take hold, companies should be aware that the technology component is usually only a small part of using software.

Implementation, customisation / configuration, process redesign and improvement, knowledge management and training costs can contribute far more to costs than a license or yearly subscription fee.

Jason Busch is managing director of Azul Partners and is also founder and author of the blog www.spendmatters.com