Gartner
Strategic Planning, SPA-21-4430 D. Hope-Ross
Research Note
17 November 2003
Predicts 2004: Supplier Relationship Management
Enterprises using technology to improve supplier relationships should pay attention to changes in 2004 that will affect contract management, e-sourcing, spend analysis, service procurement and "on demand."
Despite the growing recognition of the long-term value of an effective purchasing function, enterprises continue to invest tactically in supplier relationship management (SRM) applications. Gartner expects this trend to drive important market developments during 2004, including convergence among application segments and a greater emphasis on complementary services. This, in turn, will affect three key areas:
• The convergence of e-sourcing and contract management • Market volatility and vendor failure in service procurement • More-pronounced use of professional services to
complement enterprise applications
Prediction — Contract management vendors will clash with e-sourcing and spend analysis providers
Contract management vendors will compete on two fronts: 1) They will compete with e-sourcing application providers that are leveraging a heritage in negotiation to expand into contract management. 2) They will compete with spend analysis solution providers that leverage business intelligence (BI) to drive contract compliance. Convergence in these sectors will accelerate in 2004, permanently changing the competitive landscape.
Strategic Planning Assumptions: By YE05, e-sourcing solutions will be part of full contract life cycle management application suites, as e-sourcing and contract management converge into a common market sector (0.8 probability).
Core Topic
ERP II, Supply Chain & Manufacturing: Supply Chain Management — Strategies, Applications and Technologies
Key Issue
How will successful enterprises select, deploy and manage SCP and SCE solutions to minimize risk and achieve optimum ROI?
Strategic Planning Assumptions By YE05, e-sourcing solutions will be part of full contract life cycle management application suites, as e-sourcing and contract management converge into a common market sector (0.8 probability). By YE07, more than 30 percent of the remaining service procurement vendors will exit the market, merge or be acquired (0.8 probability).
Through 2006, 80 percent of enterprises will abandon their exclusive focus on software and rely on services as a key component of operating supplier relationship management application environments (0.7 probability).
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Action Recommendation for 2004
The convergence among contract management, spend analysis and e-sourcing does not imply higher vendor survival rates in any particular segment, nor does the convergence suggest that customers adopting solutions from any one segment will achieve better results. Rather, vendors from each sector will survive, and enterprises will create unique portfolios of applications to meet business objectives. Enterprises selecting and implementing these applications should:
• Rationalize e-sourcing, spend analysis and contract management initiatives — Using separate applications for each function is a viable strategy, but the selection and implementation of multiple applications should be coordinated to maximize return on investment (ROI) through lower costs and better integration.
• Write strong contracts — Software vendors and service providers from each market segment will continue to exit the market, merge and be acquired. Enterprises should focus on protecting their interests early in the contracting life cycle, especially for hosted solutions.
• Develop a conservative business case and justification for all contract management application implementation projects — It should take less than two years to deliver positive ROI. Given convergence and rapid development, many applications that are implemented during the next 18 months will be replaced.
• Conduct an inventory and an audit of established applications to gauge the extent of contract management capabilities — Enterprises that leverage established tools may be able to avoid licensing new applications and simplify the selection process based on the functionality of tools for the e-sourcing of spend analysis.
• Put little faith in established partnership agreements among vendors in these segments — Given the likelihood that these partnerships will dissolve in the face of competition, enterprises should avoid indirect licensing agreements among these partners.
Prediction — One-third of service procurement vendors will exit the market
Service procurement applications are synonymous with HR service procurement applications, which are used to automate recruitment and manage the time sheets of contingent workers. However, in 2004, service procurement will expand beyond its roots in HR to include multiple service types — including metered
services (such as utilities) and retained services (such as accounting) — as well as larger volumes of expenditures. This will introduce major challenges for established service procurement vendors, because they will lose their ability to compete. There are several reasons for this:
• Application vendors — such as enterprise resource planning (ERP), e-procurement and e-sourcing providers — with larger R&D budgets and installed bases will increasingly develop applications and acquire competitors for broader categories of service expenditures. This will marginalize narrow applications focused on contingent workers and render smaller vendors less able to bring functionally competitive products to market.
• Larger human capital management (HCM) vendors, such as providers of HR management systems (HRMSs) and workforce management solutions, will eclipse the procurement capabilities of services procurement specialists. HCM vendors will increasingly deliver functionality full-time, as well as contingent workers in a single application suite. Encroachment will isolate HR service procurement from a crucial buying center, as HR departments seek integrated solutions for temporary and permanent hires.
• Vendor-managed service (VMS) providers are increasingly giving away free (or only charging nominal fees for) applications for automating the hiring and administration of contingent workers. These applications are bundled as part of a broader workforce solution, including the provisioning of the workers and outsourcing. VMS vendor marketing will erode the value of stand-alone solutions (vs. bundled software and services), and their pricing will radically undercut current HR service procurement price points.
As a result of these factors, service procurement applications focused on temporary workers will become increasingly commoditized and less valuable. Many, but not all, vendors in this sector will be forced to seek an exit strategy, given the lack of upside revenue and investment capital.
Strategic Planning Assumptions: By YE07, more than 30 percent of the remaining service procurement vendors will exit the market, merge or be acquired (0.8 probability).
Action Recommendation for 2004
When selecting and implementing applications, users should explicitly define their objectives, scope and requirements of service procurement initiatives. This will help selection teams develop focused selection criteria. Enterprises embarking on projects focused solely on contingent labor should seek tactical
SPA-21-4430
applications with short-term payback and known risk. These enterprises will find their "best bet" among the offerings of VMS providers or tactical, hosted, "pay as you go" HR procurement niche solutions. Enterprises with a broader focus on HCM should choose applications from their HRMS or workforce management vendors. Enterprises with a focus on broader types of procurement should choose vendors based on strengths outside HR procurement, based on the vendor's longer-term potential to automate all categories (or at least broader categories) of service expenditures.
Given the volatility in this sector, all enterprises should be vigilant in protecting their interests when signing contracts for software or services. Enterprises should insist on functional equivalence clauses and on preserving entitlements in the event of insolvency or acquisition. They should also look beyond functionality and delivery models in selection cycles and focus on vendor viability and exit costs.
Prediction — Small and midsize business customers will drive on demand
The economics of licensing and installing applications in support of SRM become less favorable as the size of the enterprise (and its expenditure) decreases. Large enterprises have been challenged to demonstrate positive ROI with some applications, which raises troubling questions about the economics of SRM for small and midsize businesses (SMBs). Thus, vehicles that depress total cost of ownership (TCO) will become increasingly important.
Lower licensing prices will not go far enough to address the needs of the low end of the market. Instead, service providers — also known as on-demand providers, shared services or service aggregators — will begin to drive SMB adoption. Furthermore, service providers will supply incremental value for large enterprises running projects for the internal deployment of applications. Such projects will proliferate.
Strategic Planning Assumptions: Through 2006, 80 percent of enterprises will abandon their exclusive focus on software and rely on services as a key component of operating SRM application environments (0.7 probability).
Action Recommendation for 2004
Enterprises should evaluate, select and contract with suppliers of on-demand services with the same rigor applied to application selection. Enterprises should decide, in advance, which portions of e-procurement or e-sourcing should be sourced from
applications, rather than from service providers. Given the current climate of instability and the immature state of the market, enterprises should be concerned about startup costs, ongoing costs and the likelihood of high exit costs. Therefore, enterprises contracting for these services should seek service-level agreements (SLAs), document specific deliverables and define the scope of all projects with penalties for nonperformance.
Enterprises should focus on providers that can deliver such services as:
• Aggregated pricing and consortia buying
• Process re-engineering, end-user training and help desks • Supplier on-boarding and enablement — outsourced
business-to-business (B2B) application integration and catalog management
• Offline, event-based strategic sourcing and spot buying Bottom Line: The market for applications supporting supplier relationship management will continue its sluggish evolution during 2004. Based on vendor evolution, enterprises should begin to align projects focused on strategic sourcing, spend analysis and contract management. Enterprises embarking on service procurement application projects should let long-term objectives drive solution selection and implementation. They should also investigate the opportunity to leverage "on demand" providers as a source of application functionality and professional services to support e-procurement or e-sourcing activities.
Acronym Key
B2B business-to-business BI business intelligence ERP enterprises resource
planning
HCM human capital management HRMS HR management system ROI return on investment SCE supply chain execution SCP supply chain planning SLA service-level agreement SMB small and midsize business SRM supplier relationship
management TCO total cost of ownership VMS vendor-managed service
