1 | P a g eProject Galaxy 4 – e-Sourcing Strategy2011: Round 1Phil Willcot thought about his meeting with the MD team of directors on his train back tothe big city. MD is a prospective entrant into the e-sourcing space, looking to acquiremarket share from the dominant players by taking advantage of the best of today’s cloudcomputing technology. The analogy they used was that they seek to do to Oracle, SAP andAriba what Salesforce and subsequently Zoho has done in the CRM space to Act andGoldmine, or what Google has done in the application space to Microsoft.At first he thought they were crazy, trying to take on the mature e-sourcing marketswamped by numerous players that already had at least a ten year head-start. How couldthere possibly be room in the market for yet another entrant? How on earth could theyconvince their potential customers to adopt their offering, particularly as customers wereincreasingly looking for end-to-end solutions?However as he listened to their proposition, he began to see that their ambitions were notfuelled by experience and determination alone, but upon a sound market niche which theywere looking to exploit. Although ten years had allowed the competition to develop arobust, feature-rich toolset, it had also encouraged complacency in the market. In fact, arefreshing offering is precisely what the market needed. If marketed and positioned in theright manner, MD could even manage to create a market of their own, one that very fewcompetitors would even consider. Just a cursory glance towards their main competitor,Ariba, and you could see that the market was bracing itself for a shift, just the kind of shiftthat MD had anticipated.Phil contemplated his role as the lead for Project Galaxy, the name given to the activity forthe refinement and implementation of the MD business case. The MD directors hadconstructed the initial business case from many months of analysis as well as using theirown experience as purchasing consultants. During their previous roles they had conductedmanaged e-sourcing services for major clients in the oil and gas, manufacturing, automotiveand aerospace sectors, amongst others. During this time they had spotted something theircompetitors had not or had chosen to ignore. Phil had no doubt they knew the product andservices. However, he noted that they did not have extensive commercial experience,particularly in relation to board level strategy. It would be this top-level planning anddirection that he would most need to apply himself.Through no coincidence this was precisely his background, having fulfilled roles within theaerospace sector as a buyer then purchasing manager before joining the consultancy fieldfor a large blue-chip advisory firm. Dissatisfied with the rigid corporate structure inhibitinghis career path, he left to found his own niche management consultancy, an action which2 | P a g eresonated well with the MD directors and perhaps even secured him the work. As one ofthe first projects on his books, he was determined to make it a resounding success.e-Procurement and Reverse AuctionsBillions of pounds are tendered every year on goods and services by companies across theglobe. Procurement as a profession is becoming an ever more important focus. Companiesrealise that in these times, coming out of a recession with increased global competition, anefficient procurement strategy can mean the difference between profitability andreceivership. Simple analysis at OEM’s such as Rolls-Royce shows that a 1% reduction onprocurement costs can relate to a 10% increase in gross profit.Figure 1 below shows the growing trend for e-procurement which is enabling theprocurement profession to evolve and gain the much needed efficiency.[Appendix 1 shown at the end of this case study also indicates the potential growth in theSAAS sector of e-procurement]E-procurement entered the scene in the mid-nineties with the dotcom boom and e-marketplaces. It took time for the real value to come to light after the initial surge and3 | P a g econsolidation. One technology which emerged in assisting companies efficiently andeffectively reducing costs of their purchased goods and services was the reverse auction.A reverse auction is an auction in which the roles of buyers and sellers are reversed. In anordinary auction (also known as a forward auction), buyers compete to obtain goods orservices, and the price typically increases over time. In a reverse auction however, sellerscompete to obtain business, and prices typically decrease over time. It is widely recognisedthat the reverse auction does not conclude all negotiations but has its place in the buyer’stoolset where it can be hugely beneficial when used correctly. Traditionally reverseauctions in the procurement space were utilised solely for commoditised and readilydefined goods and services. Typical examples are office supplies and furniture, printingservices, IT hardware, utilities and so on. However, today they are increasingly being usedto negotiate for strategic goods and services, such as raw materials, logistics, manufacturingprocesses and precision engineering services.To make a reverse auction a success, there are several criteria you need to examine.
Specification – The category needs to be defined exactly. The reverse auction willfocus on price so to be able to compare everyone’s prices, they all need to be
bidding on exactly the same commercial terms, service levels and standard ofproduct or service.
Market Liquidity –The probability of a successful reverse auction increases withevery supplier involved who is willing to bid. It would be risky to run an auction withfewer than three motivated bidders.Scheduling – The timing has to be right. The categories could involve hundreds of
parts for example and all the contract end points need to be examined so any resultfrom a reverse auction can be concluded swiftly, otherwise it will adversely affectyour potential market liquidity. Savings potential – A reverse auction can be quick but will generally involve a fairamount of work. The most successful events will have well written RFQ’s andinvolve personally calling the supplier base to sell them the idea and get theminvolved. Thus you would not generally embark on this direction unless there issufficient ROI for the work involved. Typically you would look at tenders over£250,000 to ensure not only that the bidders are attracted to the contract but alsothat you see a return from the costly investment of time and resource.Due to procurement professional’s poor level of understanding of this new technology, theprimary method of delivering benefits from reverse auctions was via a managed auctionservice. This is where a third party consultancy or service provider manages and carries outall the work during the reverse auction process, from composing the RFQ, sourcing,qualifying and motivating suppliers to take part, expediting and analysing the quotations,4 | P a g emanaging and hosting the auction event and on occasion assisting with the implementationwith the chosen supplier(s). From start to finish the activity takes 6 to 8 weeks, requiringboth a project team from the client to sign off the documentation and suppliers lists and torespond to any questions, and a project team from the service provider, typically a projectmanager and a sourcing manager.The companies who emerged offering this activity derived their benefits from their skilledresource, cutting edge methodologies, robust technology and their proprietary supplierdatabases. Some prime examples of such companies would be TradingPartners,BravoSolution and FreeMarkets (now part of Ariba).The most common form of remuneration for such an activity was a gain-share model of upto 30% of the contingency savings. An upfront fixed fee may also have been applied formore complex and resource-intensive projects, as a way of sharing the risk. The total feesfor such a service could command upwards of £60,000 on the turn of the millennium.However, as the market matured and cost became a greater differentiator, a managedauction service can now be bought for less than £30,000, despite the service being almostidentical to when it first hit the market. This was having a noticeable effect on the serviceproviders, provoking many to diversify their software and services into the broader costreduction and e-procurement arenas.With sales revenue of managed Reverse Auctions apparently on the decrease, Phil Willcotconsidered what the next s-curve in innovation would look like. With the generalunderstanding of reverse auctions vastly improved within the procurement community andwith universities teaching about e-sourcing as part of their curriculums, would procurementprofessionals wish to run their own tenders via reverse auctions? Or do they just want awider range services in the e-procurement space?Why companies would use e-auctions?To help him direct the sales and marketing strategy, Phil Willcot contemplated whycompanies actually use e-auctions (the broad term for both forward and reverse onlineauctions) in industry. They are certainly growing in usage and awareness but what are thedriving factors and who would use them?As the global economy was struggling to overcome the effects from the 2007 to 2009recession1 with companies typically facing lower sales revenue from global competition,there was an increasing pressure on cutting costs. Procurement became the heart of theorganisation. More efficient, better negotiated purchasing was required to keep the firms inprofit. The pressure on companies was immense, exemplified by the uncharacteristicallyaggressive letters distributed to the supply chain from leading public sector service firmssuch as Serco2 and MITIE3.5 | P a g ePhil Willcot recollected the variety of sourcing strategies which he used to employ in hisformer profession (Appendix 2). Reverse auctions easily fell in to the category of exploitingbuying power, which, on top of aggressive negotiation, sought other benefits such as spendand invoicing consolidation and supplier rationalisation. Aggressive negotiation could takeseveral forms. There was the demand for a cash rebate based on the previous 12 months ofbusiness or in return for a ‘preferred’ supplier status, there were cost reduction workshops,held co-operatively with the key suppliers, there were tactical negotiations based on volumeincreases, raw material price movements, currency fluctuations and other factors, therewere make versus buy decisions and there were sourcing and RFx (Request for Information /Proposal / Quotation etc.) activities. Clearly the reverse auction was just one tool to beused out of many potential alternatives. What could the reverse auction achieve that noneof these other activities alone could offer?Reverse auctions are proven to generate more savings than face-to-face negotiations, onaverage up to 25% when viewed against traditional paper-based tender processes4, assuppliers are put under greater levels of competition than they would have otherwiseexperienced. The other big advantage is the efficiency in the negotiation stages, as thesoftware could allow in excess of 50 suppliers to compete concurrently. This could not beachieved either without some form of electronic bidding technology. Reverse Auctions notonly find you the true market price for your goods and services, but can also help younarrow down your options for the final award decision process. Such a strategy can putsuppliers at ease as they know there will be a chance at the end for the top few to sell theother value-added services that they can offer.Reverse auctions have become increasingly popular in the public sector. The key reasonslisted by the government for adopting reverse auctions are 4:
elimination of paper and streamlined processesshort negotiation cyclebetter value for money procurementincreased transparency of the contract award process
These sentiments are echoed throughout the procurement field and are not just applicableto the public sector. As the government are morally obliged to represent the public andtherefore cannot rock the boat too greatly, it could be argued that reverse auctions are, inthe general consensus, the right approach. This bodes well for MD.There are many typical objections to using a reverse auction as a negotiation tool and badpractices by an unscrupulous few have not helped. Typically the objections centre on theuse of reverse auctions as nothing but a one-way negotiation on price and on the negativeimpact reverse auctions have on supplier relationships. Auctions are price-focused but ifthe adequate preparation is carried out and you clearly communicate your intentions withthe supplier at all time before, during and after the auction, such objections can be6 | P a g emitigated. With respect to supplier relationships, the open and honest approach of reverseauctions has been shown to actually strengthen ties5.Forward auctions also have much more value and application than is widely known. Themost obvious application is to dispose of excess stock or unused assets. Companies tend toput little effort into these activities as it is not their core business and in many cases theassets have been written off the accounts anyway. However, if these activities areapproached with the same rigor as the reverse auction activities, then significantimprovements can be made on their success compared to just selling the scrap to a localdealer.Increasingly many companies are realising the potential of selling their product to theircustomers via a forward auction. If your goods or services are in sufficient demand and youoperate in a seller’s market, a forward auction presents a genuine opportunity to negotiatethe optimum sales price. It makes the process extremely efficient with great repeatability;saving both time and resource.Phil Willcot could see there were some unique reasons for companies to negotiate via an eauction. There is good awareness and positioning already in the market for reverseauctions yet forward auctions were still largely underused. Perhaps it was connected to thenon-core nature of forward auctions or for their non-strategic sales process which enablessites like eBay to cater for them. Either way, it would pose a significant challenge to addressthe forward auction market, yet if successful there would be few competitors in the B2Barena.Competitors in the Reverse Auction Market7 | P a g eThe reverse auction market is very competitive yet equally there are potential niche marketswhich can be exploited. The competitors can be broken into four segments:Large multinationals: The traditional large companies such as Ariba, SAP, Emptoris andOracle dominate this segment, which offers reverse auction capability as part of a muchwider purchase-to-pay offering. They are beginning to embrace the notion of cloudsolutions with a pay as you go approach. Ariba signaled their intentions when they boughtProcuri in 20076 to be able to offer a subscription service. However as these companies arelarge, global corporations, they are less agile and responsive than some of their smallercounter-parts. In many cases it can be off-putting to companies turning over less than $1bnto partner with such dominant solution providers. On the other hand, other very largeorganisations with sales into the many billions would actively seek to partner with solutionproviders in this segment for the breadth and depth of the service that they offer, as well asthe reassurance of working with a recognised brand.Boutique consultancies: There are many consultancies in this area such as TradingPartners,BravoSolutions and Hedgehog. They offer managed e-auctions, typically hosted on theirown bespoke software, to companies on a fixed and/or contingent fee arrangement. Thesoftware used by these vendors is not developed explicitly for use by third-party purchasingprofessionals rather it has tended to be largely influenced by the e-auction process that theconsultancies follow. Nevertheless their software is on occasion licensed to their customersbut more to supplement their service offering. It is these consultancies that are facing thegreatest pressures, as the barrier to entry for an experienced procurement professional toenter this market is low, particularly if their clients have their own licensed software or if theprofessional can partner with a software vendor. TradingPartners, for example, hasundergone a major restructuring of their business, greatly reducing the headcount in theirhead office7. The question that needs answering to ensure longevity in this sector is docompanies still want a managed e-auction service or do companies want a much broader eauction and cost reduction service covering all aspects of their supply chain? Depending ontheir interpretation, they may either remain as boutique consultancies in a wider context orthey will become software vendors.Tailored software vendors: These could be typically classed as SMEs who offer bespoke eprocurement software packages solely for use by their customers. They differ from thelarge multinationals in that they traditionally aim at specific solutions and do not have theinfrastructure to support the large global corporations. Traditionally their software hasbeen locally deployed on their clients’ premises and they will have a legacy of pricing whichinhibits their ability to offer a clear price level. Companies in this sector may also offer somelevel of supplementary services or consultancy, such as supplier sourcing, bid analysis andmanaged e-auctions. However they differ from the above as they would still classthemselves as a software company. Examples here are Iasta, Curtis Fitch, Quadrem andWax Digital.8 | P a g eCommoditised software vendors: This is the sector inhabited by MD, which is where eauction software is offered to the general market as an off-the-shelf, easy-to-use product;much like the Hotmail of the e-mail world or the Facebook of social media. Increasingly thisis the sector that e-auction providers are seeking to infiltrate, with companies such asCPOConnect and Purchasing Auctions already established in this area. The differentiatorshere come down to support levels, price, professionalism and features. The software has tobe carefully balanced so that one size fits all yet is not over-complicated or insufficient totheir customers’ needs. Provision of support is also vital to provide reassurance to theircustomers, yet it also has the potential to place too great a demand on the vendor.Phil Willcot realised that it is in this sector that MD should look to uniquely positionthemselves. Yet he also saw that as they expand, the strategy must allow them to competein the other, more service-oriented sectors. He could see that this could be a difficultchallenge, particularly as MD had no intentions of becoming yet another service provider.The MD PropositionMD believes it has realised a gap in the market for a commoditised product that could caterparticularly well for the SME market. The apparent paradigm shift away from the managede-auction service towards the software-as-a-service (SaaS) model, that allows any companyto run their own e-auctions, makes the basic concept very attractive to them. Thetraditional managed auction service had been considered a luxury product in the market,affordable only by those companies with significant areas of spend, whose cash flow wouldallow for a high level of investment for a medium-term return. However, by pricing in theircloud software at a level affordable to many SMEs, MD believes they can create their ownmarket niche.Since very few companies had entered the e-sourcing market since 2001, there were veryfew companies in this industry who were in a position to radically adapt their companystructure and strategy around the SaaS model. The teams of highly-skilled sourcingconsultants recruited by all these companies would find themselves largely redundant in anSaaS company. Therefore it would take a very brave CEO to make the irreversible call toswitch to a software model. By the end of 2010, only one dominant player, Ariba, had madethe decision to focus on e-procurement SaaS when they decided to sell their sourcingservices and business process outsourcing (BPO) services assets to Accenture for $51million8. Just 6 years earlier in 2004, Ariba spent $493 million to acquire the same outfitwhich at the time was called FreeMarkets9. Despite the less-than-exemplary performanceby Ariba, MD shared the vision that SaaS was the future of the e-sourcing market.MD had spent the last 3 months designing and developing their e-sourcing and e-auctionsoftware in-house to keep the start-up costs to a minimum. The software, written in Ruby9 | P a g eon Rails, a platform shared by Twitter, Groupon and Shopify, was not innovative in terms offeature/function, as they believed that 90% of e-auction needs could be catered for by thebare essentials, but was novel in the way it could approach and be positioned in the market.The MD unique selling point and mantra is that there is no e-auction software on the marketoffering a solution which combines the following characteristics: Easy to use (no training costs), Professional processes (ensures success), Transparent pricing (great value)MD, by offering a combination of the above features, feels it is uniquely placed to take eauctions to the next stage in their evolution. Not only can they build on the understandingalready in the market place, which ironically is continually increased the more prodigioustheir competitors become with their managed e-auction services, but their software canalso be marketed to any ‘average’ purchasing professional by providing a very low barrier toentry with respect to cost, usability and best practice. The definition of the term ‘average’is any purchasing professional that has a decent grasp of e-procurement, spend analysis,RFQ compilation and supplier sourcing. MD recognises that by addressing the averagepurchasing professional, their software will not be suitable to the very large enterprises, forexample the major supermarkets, that run complex, combinatorial e-auctions almost on adaily basis. MD made this decision early in their developmental phase to help focus theirproduct yet sought to incorporate functionality to cater for 90% of the e-auction market.In addition to the reverse auction, the MD software can be used for forward auctions for
activities such as asset disposal, where platforms like eBay lack the professionalism. intends to exploit such immature markets in order to maximise their revenue potential.MD
Another prospective revenue stream identified by MD is to approach the purchasingconsultancies and interim purchasing managers, as there is a clear overlap in their sales andmarketing targets. Typically e-sourcing software would take many months to develop andwould incur significant costs; hence it is major barrier to entry for the niche consultancies,of which there are thousands in the UK market alone. Instead consultancies and interimsoffer their skills, experience and resource as a service to assist their clients with reducingcost in their supply chain. However, due to the clear and highly competitive price level ofthe MD solution, consultancies could now be tempted into adopting the software into theirown service offering to their clients. Not only would this help MD rapidly infiltrate themarket through an affiliated network but it would also generate multiple revenue streamsfrom selling either directly to the consultancies or indirectly to the clients they engage with.Very few competitors would be able to similarly perform this feat as they have their inhouse consultants to take precedence.Notably, the majority of the MD marketing plans were focused on the private sector. Themain reason was the lower barrier to entry. The public sector, whilst on the one hand has a10 | P a g ehuge market potential and has a vested political interest in e-auctions10, was on the otherhand dominated by a handful of large organizations, such as BravoSolution and Due North,who were firmly embedded within the various public sector bodies on up to seven yearcontracts. It would take a huge overhead in terms of time, cost and resource to developsoftware that could compete in this market. MD took the decision that whilst the potentialreturn could be significant, the risks involved were too great for a self-capitalised start-up.MD also had great ambitions in the horizontal market. They stated their intentions ofoffering their solution to the consumer; a completely untapped market. Their innovativeUSP of ease-of-use, clear pricing and professional software would render their solutionattractive to companies or individuals with a tender value as little as £20,000 to allow, forexample, consumers to negotiate the price for their new conservatory or for re-roofing theirhouse. Furthermore the software could cater for new initiatives for forward auctions suchas property and estates. This potential for new business is vast and would only require newwebsite designs with the same e-auction engine integrated into the back-end.One of the more unique features of the MD offering was their payment system. MD offeredtwo payment structures, the first a Pay-As-You-Go type approach, which cost £1,000 per eauction, regardless of scale, complexity or value. The second was an Annual Licence model,which cost £5,000 per user and permitted an unlimited number of e-auctions. As thesoftware could also be used as a paperless method of gathering in quotes, regardless ofwhether or not the user then goes on to run an e-auction, the Annual Licence also hadfurther benefits in this way. What was unique about this system was not the pricing, butthe way it was paid for. The payment method was transacted via a credit system, whereby1 credit cost £10. Therefore to run one successful e-auction you would purchase 100credits, which would then be expended when you invite your bidders to interact with yourevent.MD was keen to push the advantages that their customers would have from this approach.Firstly they believed it gave their clients flexibility to choose when and what to spend theirmoney on. They were not tied into any monthly subscriptions and could simply purchase ane-auction, run the auction, then not use it again for a year. The credits also allow theircustomers to consolidate their purchasing and invoicing transactions, as they could bulk buycredits and gradually use them at each opportunity.The advantages of the credit system to MD was that the credits were purchased in advance,perhaps many weeks prior to the event being created, which greatly helps their cash flow.Secondly it allows them to develop add-ons for their software, which could then be sold foradditional credits. Thirdly, MD could design various marketing campaigns that could bring inleads enticed by the offer of say 20 free credits towards their first event. Once MD grows insize, the campaigns could grow accordingly, such as 30 credits to the company that runs themost valuable e-auction each month.11 | P a g ePhil Willcot enjoyed discussing the ambitions and ideas of the MD directors. There iscertainly logic behind their reasoning but at the same time it is a difficult and competitivemarket with some interesting challenges around differentiation and adoption.ChallengesPhil Willcot was well versed in the challenges MD were going to face, relying on hisexperience to know that the process of selling e-auction software to organisations wasdemanding. The sales process was certainly going to be one major challenge, as there couldbe a little in the way of a proof of concept or a trial, due to the time and resource requiredto run a successful e-auction. Traditionally the cost of sale for these types of solutions isvery high. However, a solution sold at a commoditised price level cannot afford a high salescost. MD would have to modernise and streamline their sales process.Phil broke the sales and marketing strategy down into the constituent elements. Firstlythere was lead generation. Their best bet was to market the software very clearly on theweb, outlining the benefits and the USPs. The website could be supplemented by other leadgeneration activities such as webinars, seminars, viral marketing campaigns, cold calling, email rushes, sending hand-signed letters, SEO, networking through social media as well asattending events, paid advertising and so on. The leads would then be qualified with therealistic desired outcome being the arrangement of a demonstration, preferably over theweb due to the limited MD resource, but also face-to-face. Once a successfuldemonstration was carried out, it would be over to the sales process to sign up thecustomer by encouraging them to register on the website and make the purchase. Hereinwas their challenge, as there was no firm hook, for example, that would be provided by amanaged auction activity first which would demonstrate the potential ROI of e-auctions.The Pay-As-You-Go and credit-based approach allowed the potential customer to make thepurchase on their own terms. Without a monthly subscription, there would be no recurringrevenue, yet at the same time that was also one of MD’s competitive advantages (althoughthe Annual licence with the ability to collate quotes as a mini RFQ system would create arecurring revenue stream). Furthermore the transparent price levels did endanger theopportunity for further negotiation. If a prospective customer was not attracted by thoseprices prior to having any discussion on the benefits or return on investment, it would bemore difficult to engage them in the sales process. If, however, the price was attractive tothem as they understood the benefits, the negotiation aspect would be negated and thesales process should be a lot more efficient. Phil did wonder whether improvements couldbe made in this area, both for MD and for the prospective customer who may not befamiliar with a credit-based system.The other important consideration of the sales process is ‘who are they selling to?’. MDhad listed several key target markets but developed a brand that had a broad focus,12 | P a g eessentially aiming at any company or individual who was looking to buy or sell something forover £100,000. Whilst it could be advantageous to keep the spectrum wide, there are alsoadvantages in addressing a niche client base or industry, such as aerospace or electronics, tohelp establish some traction and brand recognition to re-invest in other areas. Philwondered whether MD would be best investing their time and energy into creating aleading e-auction brand in one specific industry.Phil also considered the typical objections from a potential customer against using e-auctionsoftware to run their own events and came up with the following list, although he knew itwas not exhaustive:
E-auctions are too price-focused, where in reality companies seek to find the “bestvalue”. Such an example would be buying a cheap kettle for £5 that breaks after ayear or buying an expensive kettle for £30 that lasts a lifetime.E-auctions hurt supplier relationships as it leads to an erosion of their margins hencea degradation of the level of service and flexibility that they offer.It may be hard to convince suppliers to actively take part in e-auctions, particularlythe incumbent suppliers, as they do not welcome such high levels of competition.Buyers may not have sufficient spend categories for an e-auction. Reasons may
range from:o Spend levels are too low,o there may be no available specifications for the goods or services,o there may not be anyone else in the market who can supply such goods orservices,o the goods or services are far too strategic to the company to take to the openmarket,o the spend categories are tied up in lengthy contracts, etc.
Buyers simply do not have the experience, resource or capability to run their own eauction. Without a capable purchasing team, the e-auction will not be a success andwill therefore not be adopted.There is a risk the buyer may not achieve a return on investment. In particular, that
risk lies with person who decided to run the e-auction.Phil compared the MD offering to the objections above and noted some short-comings.Clearly some objections to e-auctions would be extremely difficult to overcome, whereasperhaps others could be mitigated by a few simple strategies.Phil also noted that the list above would be the objections that a customer would mentionout loud. There would be other objections that would prevent a sale yet would not berevealed at a meeting. One that he had personally arrived at was that if his alternativeapproach to negotiation involves dealing directly with the incumbent supplier and heachieves the pre-defined savings target from this, what motivation would he have in13 | P a g ecomplicating and extending the process to be an e-auction for the sake of extra savings thathe would not personally gain from? Furthermore, if he achieves excellent savings in Year 1,what is left for Year 2 and Year 3? Ask this question to the Financial or Managing Directorand the answer would categorically be “get those extra savings in now”. However, MD wasnot necessarily conversing to their customers at the board level, due to their low price level,and so their marketing may need to be more embracing than simply about the bottom line.In the past some companies, such as Oracle and WhyAbe (part of Source one), have offerede-auction software for free, based on the firm reasoning that the software acted as a leadgeneration tool for them to offer their consultancy services and other solution packages.The free software had a very low uptake, mainly from its the poor design and performance,as well as the general distrust from the market in investing time and resource intosomething that is free, as it would have little or no support, the plug could be pulled at anymoment and they might be bombarded with sales calls from prospectors asking them toupgrade and try other services. Also Source One would not want to detract from itmanaged auction services. As MD has no service provision, Phil contemplated whether theirbusiness model could be destroyed by a better marketed and more capable push by thesecompanies, and others, into offering free e-auction software. However that would affectthe market to such a huge extent that it would be highly unlikely.There are also some other very professional on demand solutions out there from companieslike Ketera and Ariba. However Ketera counter-balance their low price offering for thebuyers to use their software by charging the suppliers a fee instead. This can exacerbate theobjections as suppliers now have to pay to use something they dislike, plus they factor thecosts of taking part into their final offer to their customer, which means the customer gets aworse deal. Ariba have also started to offer an on demand solution but it is too complex asit tries to incorporate every possible feature, plus it has many costly add-ons. Both theseexamples provided Phil with some very important lessons and would clearly be worthexploring further, particularly how and if Ariba make a success in the SME market.Phil also wanted to differentiate MD from the traditional boutique consultancies, as this waswhere a large proportion of the e-sourcing market value lay. The most recognisedadvantages that clients had by partnering with a consultancy were the highly skilledprofessionals with category and industry specific knowledge, the robust methodologiesdeveloped over the years, access to large supplier databases, and use of their sophisticatedtechnology. In comparison MD could only offer the technology aspect and would have toconvince their sales leads that they already have the skills, processes and knowledge withintheir company. However, supplier databases can be built over time and most establishedorganisations have their own in-house. MD offer their own free consultancy guides andadvice on their website to greatly assist the first time e-auctioneer. The MD software isdesigned and developed in such a way that the e-auction process is already embeddedwithin it. Therefore there would not be any off-piste incidences. Phil wondered whether14 | P a g ethis would all be enough, even with the ever-increasing knowledge and awareness of the eauctions process. Software and guides can never provide as much feedback and advice asan industry expert. There was still a big question whether the MD Directors should openlyoffer their skills to help manage the first few e-auctions per customer, even if they onlyinvolved themselves at key milestones, such as signing off documentation or approving thesupplier lists.One further advantage of a third party working on a fully managed auction is that they canact as a barrier between the supplier and the buyer so as to protect the buyer-supplierrelationship. MD would not be able to repeat this but could advise the buyer todepersonalise the relationship by telling the supplier the decision came from the top andwas not his/hers. The best approach MD could attempt would be to make the software soeasy to use that suppliers actually prefer it to the traditional and laborious alternatives.This, too, would be a significant challenge and is not something that has been done in the 15or so years that e-auctions have been around for.Despite MD’s unique positioning and approach to the market, Phil felt certain he needed tofirm up their strategy. He was not sure there was enough encouragement for buyers to tryreverse auctions. He was equally uncertain that the software alone would give the buyerthe confidence they needed. The managed e-auction route was certainly one way todemonstrate the advantage of the e-auction whilst also providing valuable experience tothe buyer for conducting their own. There were two ways that instantly came to Phil’s mindfor MD to overcome these issues and those were either comprehensive training sessionswith supporting documents, perhaps modular and via the web, or to focus the selling effortsof the software to the consultancy and interim network to enable them do the managed eauctions. Both were worth considering further in his mind.Phil Willcot knew that one area MD were going to find particularly challenging is offering theright level of support. A successful reverse auction on a complicated category requiressignificant preparation, which in turn can lead to numerous support queries. MD areoffering phone, e-mail and live chat technical support along with a strategic consultingsession. However, Phil could see that MD was vulnerable to a few inexperienced customerssaturating their resource. Despite MD stating that their support is technical, they would notbe in a position to risk turning down a customer’s request for assistance.There was no doubt in Phil’s mind that the recession was providing the impetus forcompanies to challenge the norm and to find savings in a more aggressive andcomprehensive way. Phil hoped to use this as the tipping point in MD’s favour. Finally, if hedoes successfully assist MD in becoming the next big player in e-auction software, his finalchallenge would be to prevent competitors and new entrants from repeating the act to MD.15 | P a g eWay forward:Phil had heard and read all he needed to. He was clear in his mind that his strategy had toembrace every aspect of the business plan from the market and competitor analysis, thesales and marketing strategy, the product positioning and branding, the pricing, and thechallenges and risks that lay ahead. MD certainly had a unique proposition and he was surehe could make it work. The SME market lay largely untapped to a tool that was creatinghuge success for the large enterprises. There were some interesting horizontal markets toexplore, such as forward auctions for asset disposal and property or expanding the productinto the consumer market. There was also the prospect of one day moving into the publicsector. Either way, for now it was simply a case of getting the basics right and getting thename MD on the map and that is exactly what Phil Willcot had in mind.2012: Round 2Phil thought back to his first engagement in 2011 and considered the success that he hadhad. The plan that he helped design, clarify and implement had been so successful that theMD team had brought him in for a second project.2011 had been a great year for Market Dojo. The sales and marketing plan Phil had helpedcreate, being varied and diverse had enabled the team to keep their fingers in manydifferent proverbial pies. This allowed them to understand the most successful routes tomarket and focus on the most relevant to bring in leads from many different directions.LinkedIn proved to be the best social media site, with ‘Spend Matters’ being the mostinfluential blogging site for the procurement community. The MD team also dabbled withtheir YouTube channel adding software videos and even virals 11. The creation of severalresellers instantly helped them to rapidly expand their sales force and they are also scoutingfor interesting software partners to help create a fuller solution.Phil had made some great other suggestions that the team had followed.Firstly he was a great believer in letting the clients develop the software. Taking this onboard and working closely with their first customer, before long they had developed anintegrated ‘Request for Quotation’12 capability along with many other smaller developmentssuch as white labeling 13 and allowing the clients to upload supplier databases.Secondly he suggested and implemented changes to the pricing structure. It was quicklynoticed that the Pay As You Go solution was less attractive than the subscription model.Due to the pricing of other solutions on the market, the quick ROI from Auctions and thesurprising interest in their solution from large enterprises14, the Annual Licence was provingto be popular. As a modification to their pricing structure, they decided to include monthlypricing at £500 a month. This made for an easier business case for buyers who wanted touse their software, whilst spreading the MD revenue across the year and generating 20%more revenue over the upfront one-off fee of £5,000 per Annual Licence.16 | P a g eLastly he knew that support was the key area to focus upon. By analyzing the process anddesign they managed to create an environment which only yielded about 20 queries over300 sourcing events. This is the key to profitability and gaining the customers’ confidence.The key word which was emphasised again and again was accessibility and this is now a keydriver for any new developments. There have been many successes with the design of thesoftware. In one instance, a company ran their first auction for over one million pounds oftelecommunication equipment with no training for the suppliers or the buyers. In anothercase, a company signed up, created an event as far as they could with the free log-in thenjust requested a month to run an event. This is the key to being able to scale quickly.Unfortunately the plans for the consumer market had to be put on hold due to resourceconstraints. However, with Phil’s help, the MD team did manage to secure some funds fordeveloping the basic capability to tackle the public sector requirements. This covered theability to create questionnaires within the software and move forward to a weighted event.A weighted event is simply an activity (RFQ or Auction) where the scoring is broken downinto the pricing and non-pricing elements. For example, 50% of the score can be based onprice, and the other 50% can be based on quality and delivery. These developments wouldtake around six months but have the capability of opening up a huge new market.The biggest new challenge though was the current reaction of the main player in theindustry; Ariba. Ariba has been the first to move and created a dilemma that the MD teammust understand. Ariba started out by creating an on-demand solution which evolved overthe year. The basic solution started out at a relatively similar price to MD, although themany necessary add-ons drove the final price much higher15. This then changed further tooffer initial discounts until they finally offered a completely free solution for two users16.Phil discovered that it is not a straightforward offering. He saw that there are a few thingsthat are worth knowing about the ‘free’ Ariba tool and that is that it is limited to two users,that you have to run at least one sourcing event a month and that between the two usersyou cannot run more than 4 sourcing events a month. Also all your suppliers get placed onthe Ariba Discovery network, for which there are subscription costs, meaning suppliers willseek to recoup their costs in their pricing to the buyer. This can get expensive to the buyerfor multi-year contracts, where the supplier can recoup their costs several times over. It alsomeans the suppliers can be bombarded by requests from any other Ariba user. Crucially, theonly support offered is via e-mail and their web-form.
How will this affect the Market Dojo philosophy?Should they change their positioning or pricing?Do supplier pay models work?How will they maintain and evolve their competitive advantage?
17 | P a g eHowever, it is clear that the market is reacting to the new environment that companies findthemselves in. Phil needed to consider all that has happened, the success that MD has had,and decide how their strategy should evolve.2013: Round 3Phil was brought back for the third time. 2012 was a decisive year seeing Market Dojo carvea path in the e-Sourcing market. By focusing on what they know and through carefulmarketing, they have firmed up a secure reputation. Basically Phil’s 2012 strategy whichwon out was to focus on making Market Dojo the best e-Sourcing application out there andbeat competition like Ariba through their dynamic support and innovative, user-friendlyproduct.By the end of 2012, significant milestones were achieved:– Their first Fortune 500 customer and first multi-licence customer with 20 users. Thisrepresented a significant milestone beating major players in the process. It has also led tothe development of a User Hierarchy in the product to give large customers the control theydesire.– A major release following the first grant enabling Market Dojo to tackle the Public Sector,especially for Sub-OJEU tenders and mini-competitions.– The award of a second grant from the Technology Strategy Board to build Category Dojo.Category Dojo is a new web-based tool to help procurement teams identify, prioritise andmanage cost reduction activities, acting effectively as the missing link between spendanalysis and e-sourcing.It was also a year which saw some serious changes to the market.– Ariba, who was feared as a company to dominate the space, was purchased by SAP for$4.3B 17. Their potential of devouring the Commoditised Software Vendors space with their‘Start Sourcing’ solution was never realised. This was due to a number of reasons althoughprincipally due to their corporate ethos 18 and the ease, through the facilitation of SaaSproducts, for companies to pick best of breed solutions 19.– Emptoris, another large multinational, was purchased by IBM. 20– Trading Partners, the original boutique consultancy, collapsed 21. Without evolving withthe market into the gap which was seen by Market Dojo, the writing was on the wall.– Enhanced competition. It seems that the market has awoken to the potential for newproviders in the sourcing space. Several years ago it was the growth of the ERP and P2Parena followed by the consolidation and mergers. Now there is much focus on the e18 | P a g eSourcing space. What is being seen is a rapid increase in the number of sourcing companieswith a similar view to Market Dojo and the ambition of being bought up when theconsolidation ultimately takes place.Market Dojo have taken the path of becoming a Best of Breed sourcing application.Through this model they can be offered to any company looking to streamline theirprocurement process and save money through auctions. Their solution can be bolted ontoexisting ERP solutions, which by their very nature and structure could not offer the sametype of solution as Market Dojo. e-Auctions are a great entry point to companies. They offera negotiation technique which procurement professionals can’t do by themselves. Howeverthey are just a part of the whole sourcing solution which is needed to offer the stickiness oftheir product for real recurring revenues.Phil asked himself: how can Market Dojo stay on pole position to grow rapidly and carvetheir share of the market? As a micro company, their dynamism and customer focus hashelped secure a loyal customer base, although without rapid expansion, is this enough toavoid being hidden next to all the other solutions? Resource is limited with manydevelopments on the go, although any disadvantage is partially curtailed through customerspaying for these innovative features.Phil needed to understand how the technological landscape is changing and whetherMarket Dojo are pioneers in this changing environment or will they just become a ‘me too’.What are the other directions that Market Dojo could move into without breaking out of thedirective of e-Sourcing?Could this expansion be achieved through automating the final parts of the sales process tomove to a zero touch model with viral marketing or would Market Dojo need to seekinvestment?19 | P a g e2014: Round 4 – [Case study – Imagine you are Phil Willcot in this year]Phil was brought back for the fourth time. 2013 was a solid year creating more growth andfocusing on new developments. No investment was sought and Market Dojo grew throughPhils plan of prioritising between sales and development. Several telesales campaigns werecompleted with fair success however Market Dojo in reality need to move to a zero touchsales model.Market Dojo’s client base grew with both large and small companies joining their ethos.Most notably Phones4U were signed up which is a great household names and very muchadd to the credibility of Market Dojo.Two new major developments were released at the end of 2013.The first was Innovation Dojo22. ”This simple, yet effective, way for managing the earlystages of ideas will help pave the way for a possible Request for Proposal (RFP) or Requestfor Information (RFI).It gives the opportunity to efficiently examine blue sky thinking and forge closerrelationships with your suppliers. It truly allows for a collaborative framework with yoursuppliers to rapidly progress innovation”.This was actually part of the first grant but it has had a proper facelift and ready to use.Many clients have expressed a view to using this tool for managing innovation from retailstores feedback to looking for cost down in engineering components. Apparently it wouldseem that the market is now looking to collect innovation as an integral part of SupplierRelationship Management (SRM) and perhaps it is slightly ahead of its time.The second innovative development was from our second grant, Category Dojo 24.“Every procurement department needs to analyse their spend, understand theopportunities and determine the correct strategy.Category Dojo delivers an innovative procurement web application that will provide spendcategory insight, strategy and opportunity assessment for public and private sectorprocurement teamsThe benefits of the unique tool will allow procurement teams to consistently address morecost reduction opportunities, reduce the time taken to compile and manage categorymanagement plans, and mitigate against the wrong procurement strategy being adopted.Category Dojo is the missing link between spend analysis and e-Sourcing.”This tool, like the Innovation Dojo23, is sourcing neutral and further pushes the bounds oninnovation within the eSourcing space instead of heading towards developing into the P2Parena for example.20 | P a g eOn top of these two developments (and many other client led additions to Market Dojo)Market Dojo was awarded a third grant which is perhaps the most exciting. Manycustomers have asked to be able to create their own eMarketplace using Market Dojo. Thethird grant facilitates the first phase in this development with an ‘Energy eMarketPlace’ asthe first candidate. This will hopefully allow business users to negotiate fairly for theirenergy in what some might call a broken market.Also any clients, who know their market well, such as their potential customers, the biddingstrategies, the suppliers, will be able to use the Market Dojo eMarketplace to make theirown ideas for creating a company become a reality. In some ways similar to eBay who allowpeople to create businesses within their environment. Clients can manage the eMarketplaceand charge their users to run events using specific templates and dedicated supplier pools.Later versions of the eMarketplace will allow clients to better manage their own users.On top of this, the development will allow current users in Market Dojo to be able to createcomplex bidding templates moving Market Dojo in line with the capabilities of a lot of themain players, but with the difference being the Market Dojo focus on usability andadoption.This year Phil has to understand how and where Market Dojo should grow? They now havea robust sourcing product as well as new sourcing neutral applications. Not to mention awhole new product to develop for mid 2014 with the eMarketplace. How should MarketDojo prioritise their time between development and growth; how should they effectivelyget their message out there? Currently they are just the 3 co-founders with offshoredevelopment resource and outsourced telemarketing. When should they look forinvestment, if at all? How do you scale the business organically?21 | P a g eReferences1 http://en.wikipedia.org/wiki/Recession#Late_2000s2 http://www.ft.com/cms/s/0/f03a34b4-e58e-11df-b023-00144feabdc0.html#axzz17Qcor4ER3 http://uk.finance.yahoo.com/news/Mitie-We-wrong-ask-10-000-fee-tele-3522750903.html?x=04 http://www.idea.gov.uk/idk/core/page.do?pageId=826755 http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/CENTIENT/iadapt.pdf6 http://www.procuri.com/aribaacquisition.asp7 http://www.spendmatters.com/index.cfm/2010/9/20/Trading-Partners-DoesRestructuring-Portend-Changes-in-the-Reverse-Auction-Market-Part-38 http://www.ariba.com/news/press_release.cfm?press_id=29209 http://www.crmbuyer.com/story/32677.html?wlc=129171702810 http://www.egovmonitor.com/node/3523311 http://www.youtube.com/user/marketdojo12 ‘Request for Quotation’: The current purchasing process in most companies starts with arequirement, or a requisition. The next stage involves taking this requirement, creatingappropriate documentation and obtaining quotations. These might be obtained over thephone, by email, or through a bespoke system. After which you could go to an auction, aface to face negotiation or just go with the lowest price. The Market Dojo system for a‘Request for Quotation’ basically allows a company who is collecting quotes by email orphone to streamline and centralize this activity through their platform. Not only that but itoffers an easier to use system to the companies who actually have a current ERP systemsuch as SAP or Oracle. In fact, the first customers using this already had their own ERPsystem and wanted a solution to sit on top of their ERP system as it was far more useable.13 White labeling: This is where a client can upload their own logo and menu colours ontothe MD platform. This means that the client and the suppliers will see the clients brandingwhen they log onto the platform. This adds to the professionalism of the solution.]14 http://www.spendmatters.com/index.cfm/2011/12/8/A-UK-StartUps-Viewpoint-on-the-ParadigmShift-in-eSourcing15 http://www.spendmatters.com/index.cfm/2010/10/5/Ariba-StartSourcingStartContracts–Commendable-SMB-Effort-Not-as-Cheap-as-they-Seem-Part-122 | P a g ehttp://www.spendmatters.com/index.cfm/2010/10/6/Ariba-StartSourcingStartContracts–Commendable-SMB-Effort-Not-as-Cheap-as-they-Seem-Part-216 http://www.spendmatters.com/index.cfm/2011/12/1/Ariba-StartSourcing-Just-How-Good-is-FreePart-1http://www.spendmatters.com/index.cfm/2011/12/5/Ariba-StartSourcing-Just-How-Good-is-FreePart-217 http://www.spendmatters.com/index.cfm/2012/5/22/SAP-to-Acquire-Ariba-at-a-20-premium-45Share18 Ariba prisoners: http://www.spendmatters.com/index.cfm/2012/12/28/Suppliers-andAriba-Prisoners-or-Not19 Best of breed: http://www.spendmatters.com/index.cfm/2012/12/10/SourcetoPaySelecting-More-Than-One-ESourcing-Tool20 http://www.spendmatters.com/index.cfm/2011/12/15/First-Take-IBM-Acquires-Emptoris21 http://spendmatters.co.uk/tradingpartners-bankruptcy-confirmed-exploring-customer-fullservice-sourcing-alternatives/22 http://buyersmeetingpoint.com/about-us/latest-news3/672-7-11-2013-crikey-now-that-sinnovation23 http://www.marketdojo.com/innovationdojo/learn-more24 https://www.marketdojo.com/categorydojo/learn-moreNotes:
(i) (ii) (iii) (iv) (v) Ariba – http://en.wikipedia.org/wiki/AribaTradingPartners – http://www.tradingpartners.com/BravoSolution – https://www.bravosolution.com/cms/ukCPOConnect – http://www.cpoconnect.com/Software-as-a-service model – http://en.wikipedia.org/wiki/Software_as_a_service
23 | P a g eAppendix 1: Global ePurchasing Solution Revenues by Product and Type of Revenue:24 | P a g eAppendix 2: Typical Sourcing Approaches applied at a large Aerospace OEM:Supplier Group Positioning Matrix:Basic Approaches from Positioning Matrix:25 | P a g e
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