Companies Spending Big Bucks to Move Markets Online

Companies will spend an estimated $5.4 million to $22.9 million each to integrate into online markets over the next five years, according to a report by Forrester Research. The result will be big business generation for e-marketplace vendors while putting cost performance pressures on Net markets themselves.

“E-marketplaces offer significant opportunities for buyers to lower prices and streamline buying processes, but those savings require a significant investment,” said Matthew Sanders, analyst at Forrester. “Companies can make the most out of these outlays by documenting workflows, leveraging their integration efforts and pushing their purchases online.”

The promise of lowering the cost of goods entices buyers, but in order to capture the benefits, purchasing organizations will need to invest heavily in four areas: 1) changing internal procurement processes; 2) integrating e-marketplaces within internal systems; 3) purchasing B2B applications; and 4) paying e-marketplace transaction fees. These costs, however, won’t be the same for all implementations.

According to Forrester, buyers getting started with e-marketplace buying will seek to trim transaction costs associated with processing purchase orders for maintenance, repair and operations (MRO) goods. The price tag for these baseline buyers is around $5.6 million, and it will be driven by a combination of transaction fees, integration software and internal staffing.

Spot market dabblers, those purchasing executives who will use e-marketplaces to make spot purchases for their direct materials will spend $10.7 million in order to help manage costly inventories and avoid shortfalls. Forrester says these buyers will pay the most for new software installation and related consultant fees.

Enterprise enablers will spend $22.9 million. They will use e-marketplaces to manage all of their contracts for all of their indirect and direct materials purchases. For these aggressive buyers, significant costs will come from the large consulting teams needed to implement this complex approach.

Based on these online buying activities, Forrester also projects that e-procurement consulting projects for e-commerce integrators like PricewaterhouseCoopers will swell to $3.2 billion in five years.

“On average, firms expect their online buying efforts to save 4 percent this year, doubling to 8 percent by 2003. But these buyers aren’t blindly enthusiastic,” Sanders said. “More than half of the purchasing executives we interviewed acknowledge that in-house adoption hurdles like user-level resistance might delay their savings.”

Research by International Data Corp. (IDC) found that worldwide e-marketplace services spending will increase at a compound annual growth rate of 27 percent, from $5.2 billion in 2000 to $17 billion in 2005.

“The demand for a full range of consulting, implementation and operation services has driven stunning growth for e-marketplace services,” said Leo Lipis, senior analyst for IDC’s eMarketplace Services program. “Moving forward, the greatest opportunities for e-marketplace service firms will be in integrating participants’ internal systems with those of the e-marketplace.”

By 2005, IDC found, more than 50 percent of the opportunity in the e-marketplace services market will come from participants in e-marketplaces, whereas nearly 85 percent of the revenue is currently coming from e-marketplaces.

“E-Marketplace service firms would be well served to develop preferred integrator relationships with e-marketplaces and to increase their marketing activities directed at e-marketplace participants,” Lipis said.

According to IDC, the explosive growth in e-marketplace services in North America has reached its peak. However, other regions will compensate for this slowdown. Western Europe and Asia/Pacific, for example, represent the greatest growth opportunity for e-marketplace services spending during the forecast.