In 2000, major utilities across the USA and Europe realised that the internet gave them a unique opportunity – not necessarily to make money, but to reduce costs. The result was the creation of several major e-procurement portals, including Eutilia, Enporion, Achilles Marketplace and Pantellos.
These portals were created with the same objective in mind: to reduce the costs involved in the purchase of equipment by the utilities, and to use the utilities’ collective buying power to reduce the purchase price of that equipment.
The portals follow the same central marketplace model and operate on the same principals: the founding utilities take an equity stake in the portal, which charges a small fee for each transaction. This fee will not only cover costs but is also likely to see the portals make a tidy profit.
According to CommerceOne, a global B2B e-commerce solutions provider and a partner in Pantellos, this ‘single hub’ model dominates the B2B e-commerce world, connecting buyers with suppliers, and potentially connecting the buyers with other hubs either in a different geographic region or a different industry.
There is a strong business case for e-procurement, according to CommerceOne. For buyers, automating the entire indirect goods and services supply chain can reduce the cost of goods by three to five per cent, lower administration costs, reduce cycle times from seven to two days, and lower inventories, possibly to zero-stock. Automation can also prevent employees buying goods off-contract, and savings made will go straight to the bottom line.
There are also benefits for suppliers, who can improve the efficiency of their supply chains and increase revenues by opening up new sales channels and increasing on-contract buying. Automation of the supply chain will increase the accuracy of orders, resulting in fewer returns, a lower inventory and reduced costs. Customer service and accounting can also be improved.
As e-commerce began to play a part in business operations, early e-procurement models began to emerge such as the buyer-centered model, where several suppliers serve one buyer portal, and the seller extranet, where buyers go to supplier portals for procurement.
The management costs of these models proved high, however. In the buyer-centered model, buyers required a single, complete catalogue of suppliers and their products, but the suppliers’ catalogues come in various formats. The costs of amalgamating and updating these catalogues was therefore high, especially when the buyer dealt with a thousand or more suppliers. The solution to this would have been to mandate suppliers to a certain format, but this merely pushed the problem and its costs to the suppliers. As a result, cost savings were minimal for both the supplier and buyer.
The seller extranet model was more successful, but like the buyer-centered model, it was not scalable. While it gave sellers control over their brand and the opportunity to offer sales support tools, it could be inconvenient for buyers who might have to go to hundreds of supplier portals to procure their goods.
The need to eliminate these problems resulted in the evolution of e-procurement to the marketplace model – a single point of business integration where both buyers and supplier can expect a return on investment.
The marketplace model is an open, scalable solution where even small companies can participate using a web browser. It has a ‘plug-in and play’ interface and many processes – for example ordering – can be automated with XML.
Central to the marketplace is the marketplace operator, which supports the entire ‘trading’ processes and ensures that the needs of the buyers and suppliers are met. The operator will provide the portal and drive the ROI for participants by managing the catalogues. It can also offer peripheral services such as business intelligence reports, logistic services, billing and payment, news channels, bulletin boards and so on.
A central portal will, says CommerceOne, have a ‘network effect’: as the number of participants increases, the value of the portal to each participant increases, thus drawing new buyers and sellers. On the buyer side, participants will be able to find and source new products and services, lower internal process costs and reduce the cost of goods purchased. Meanwhile, suppliers can reduce customer acquisition costs, grow product revenues, and increase sales to existing customers.
By charging fees, the market operator will be able to generate revenues from the portal. Revenue streams can include marketsite access fees, hosted subscriptions, content service fees, transaction fees, commissions from auctions, fees for business services and connection services. But crucially, the market operator must have credibility, focus, long term funding and strong objectives.
There are two types of e-procurement portals that have emerged in the last few years: regional and industry vertical. Regional portals have a focus on indirect goods and services, and are driven by barriers such as culture, language, taxes and tariffs, and time zones. However, industry vertical exchanges have proved popular across a number of industries, for example, automotive, aerospace, financial, oil and gas, mining, and now utilities.
In March 2000, Spanish utility Endesa announced a major drive to increase revenues from e-commerce initiatives, including Opciona.com, a regional e-procurement portal. Opciona.com was launched in May 2000, and is 78 per cent owned by Endesa, 12 per cent by Pricewaterhouse-Coopers and 10 per cent by CommerceOne.
Opciona.com has an equity of $13 million and required an initial investment of $18 million. Endesa is forecasting revenues of $170 million within three years from the portal. By September 2000, Opciona.com had held 124 auctions, transacted around $400 million, and achieved savings of 15.4 per cent for Endesa.
The marketplace model offers value for both buyers and suppliers
In spring 2000, 15 North American utilities announced the formation of Pantellos Corporation to operate and manage an open, independent internet marketplace for the purchase of goods and services. The company executed agreements with CommerceOne and PricewaterhouseCoopers, and began operating in January 2001. Prior to starting operation, the company, which now consists of 27 utility members, held regional workshops to encourage the participation of suppliers, of which there are now more than 25 registered on its site.
Pantellos participants can now purchase both direct and indirect goods via the portal, ranging from computer equipment and mobile telephones to equipment and services for the maintenance of their transmission and distribution systems.
In August 2000, five other north American utilities announced the formation of Enporion, an open global procurement exchange for the energy industry. The founders include: Allegheny Energy, New Century Energies, Minnesota Power, Northern States Power and PPL Corp.
In Europe, two e-procurement portals were created in 2000: Achilles Marketplace and Eutilia. Achilles was established by six UK utilities – National Power (now Innogy), PowerGen, Anglian Water, South West Water, Yorkshire Water and GPU Power Distribution – together with the Environment Agency.
In May 2000, 12 European utilities from eight countries announced the creation of Eutilia to capture the bulk of the €66 billion ($60 billion) spent annually in goods and services, other than fuel, by water, electric and gas utilities in Europe. The 12 founding utilities, led by ScottishPower of the UK and Spain’s Endesa, have a combined spending power of €30 billion. Other members include Electricité de France, Enel of Italy, Germany’s RWE and Electrabel of Belgium.
The 12 founding utilities say that they expect the prices of the goods they purchase through the Eutilia portal to fall by around ten per cent, and the cost of carrying out the transactions to halve. They will procure goods and services either through an on-line catalogue or via auctions, and estimate that within three years, there will be some $20 billion transacted.
Throughout 2000, Eutilia members worked on creating common terms and specifications for certain pieces of plants and equipment. The portal will charge transaction fees of approximately 0.5 per cent, and could undergo an initial public offering (IPO) within 18 months.
Eutilia opened for business in June 2000, and now approximately 11 suppliers have registered with the site. Other members include Vattenfall, Nuon, National grid, United Utilities and Northern Electric.
As these, and other, e-procurement exchanges grow and gain critical mass, it is likely that alliances will be formed to provide participants with increased value and savings. E-procurement is therefore revolutionizing the structure of the supply chain, and turning it into a revenue-generating opportunity for market makers.
Traditional supply chains may consist of several tiers of suppliers all communicating manually. Planning cycles are unsynchronized and planning is inefficient, resulting in excessive inventories. The next generation of supply chains will feature real-time connectivity, visibility, reduced cycle times and new collaborative supply chain activities to improve planning.
Attributes of a successful marketplace
- Marketplace delivered as an operational service
- Incorporates information, community, business services, transactions
- Has core competence
- Supports a wide range of buyer and supplier sophistication
- Supports a wide range of document standards
- Is open: supports a wide range of buyer and seller technologies
- Has a deep buyer and seller process integration
- Has access to other e-communities on a global basis
- Drives participation and liquidity
Opciona.com: key economic data
Equity ($m): 13
Initial investment ($m): 18
Procurement volume (year 1, $bn): 1.7
Revenue forecast (year 3, $m): 170
Number of suppliers (year 3): 10000
B2B market share forecast in Spain (%): 30
Forecast cost reductions for Endesa ($m): 60-120