12 April 2001
Last week's battering of US e-commerce software companies in the wake of worse-than-expected results could have unpleasant knock-on effects for purchasers, reports Geraint John
It wasn't supposed to be like this. Business-to-consumer dotcoms may have been dropping like flies in recent months, but business-to-business e-commerce was an entirely different proposition. E-procurement, in particular, was heralded as a "must have", even a "no brainer" that companies of all kinds needed to stay competitive.
The events of last week have shattered that consensus. US market leader Ariba was the worst affected, reporting that revenues for its second quarter would be half Wall Street's expectations. It also announced that its takeover of supply chain firm Agile Software - seen as key to its future strategy - was off and that it was sacking 700 staff, a third of its workforce. All this just a month after it trumpeted its business prospects at a packed gathering of press and analysts in New York.
Bitter rival Commerce One followed suit, admitting that its revenues would be less than predicted, though nowhere as short of predictions as Ariba's. Both companies' share prices sank to new depths, dipping below $6, and those of other business-to-business e-commerce firms such as Oracle and i2 Technologies took yet another hammering.
Many purchasing professionals will doubtless be rubbing their hands with glee at this news. Since these software companies were largely responsible for the massive hype around e-procurement, they will point out, why shed any tears for them now? It is certainly true that expectations about the speed and scale at which e-procurement could deliver benefits have been wildly inflated. But it would be wrong for purchasers to think they can now go back to doing things the old way.
With hindsight, we should really have seen the crash coming. Several recent surveys, including a major one for CIPS published this month found that companies were adopting a cautious stance. And as long ago as last September, SM reported that software vendors were finding e-procurement a harder sell than they anticipated and that sales cycles were getting longer. Indeed, these were two of the reasons blamed for Ariba's woes by its chairman and chief executive, Keith Krach, last week. Throw in talk of a global economic slowdown and static corporate IT budgets, then perhaps a "correction" - to borrow a stockmarket phrase - was inevitable.
What stopped people accepting this logic was the notion that because e-procurement software and e-marketplace technology is heavily geared towards cutting costs, its suppliers could escape a downturn.
Last week's events suggest that this view was misguided, though opinions in the business press, at least, are mixed. Only last month, Fortune urged its readers to buy Ariba (at $17 a share) on the grounds that: "What better time than a slowdown to buy software that helps squeeze out every bit of cost." But last week, the Financial Times took the opposite view, concluding that "the belief that these companies would prove immune to, or at least resilient in the face of, an economic slowdown… has proved a myth".
Purchasing directors canvassed by SM last week seemed unconcerned about events. As Gerry Walsh, vice-president of global procurement at American Express, an Ariba customer, noted, it would be wrong to overract to stock-market conditions when the business case for e-procurement, and the software itself, remains robust. If it forces companies to be more realistic about the expected benefits and the time it will take to get them, that can only be a good thing.
However, there is a potential danger for purchasers here. Anecdotal evidence suggests that some chief executives, especially those that felt pressured into jumping on the e-commerce bandwagon in the first place, have lost interest. Last week's events will only add to their belief that waiting and watching is the best policy.
If the US slowdown does deepen and the rest of the world economy begins to slide into recession, purchasers may well find themselves being told to slash costs further but without e-procurement systems to help them. That would be a major setback for the profession.