Wednesday, March 21, 2001

eMarketplace Savings Will Come At A Great Cost

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 new Report by Forrester Research. The result will be big business generation for eMarketplace vendors while putting cost performance pressures on Net markets themselves.

"eMarketplaces 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."

While the promise of lowering the cost of goods entices buyers, Forrester's research shows that eMarketplace participation won't come cheap. In order to capture the benefits, purchasing organizations will need to invest heavily in four areas: 1) changing internal procurement processes; 2) integrating eMarketplaces within internal systems; 3) purchasing B2B applications; and 4) paying eMarketplace transaction fees. These costs, however, won't be the same for all implementations. To gain a perspective on the range of expenses, Forrester modeled eProcurement activities across three different online purchasing approaches:

- Baseline buyers will spend $5.6 million. Buyers getting started with eMarketplace buying will seek to trim transaction costs associated with processing purchase orders for maintenance, repair, and operations (MRO) goods. The price tag for this approach will be driven by a combination of transaction fees, integration software, and internal staffing.

- Spot market dabblers will spend $10.7 million. To help manage costly inventories and avoid shortfalls, some purchasing executives will use eMarketplaces to make spot purchases for their direct materials. These buyers will pay the most for new software installation and related consultant fees.

- Enterprise enablers will spend $22.9 million. Some firms use eMarketplaces 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 projects that eProcurement consulting projects for eCommerce integrators like PricewaterhouseCoopers will swell to $3.2 billion in five years.

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

For the Report "What Does eMarketplace Buying Cost?" Forrester interviewed 50 purchasing executives from Fortune 1,000 companies. In addition, Forrester spoke with leaders from venture capital firms, technology vendors, eMarketplaces, eProcurement vendors, and eCommerce integrators.

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