Slow Growth for Business-to-Business Online Buying

Adoption of e-procurement hasn't happened as quickly as some thought, researchers say, because no single system yet dominates.

September 01, 2002

| by Meredith Alexander

In the late 1990s, market analysts anticipated that business-to-business (B2B) online transactions — commonly called “e-procurement” — would increase from $600 billion in 2000 to over $6.3 trillion by 2004. Growth has been much slower but researchers predict it will catch on and result in real savings.

“In the late nineties, we thought everything would happen on the Net,” says Antonio Davila, assistant professor of accounting at Stanford GSB. “Market analysts, journalists, and investors built up too many expectations.”

Only gradually have businesses begun to experiment with e-procurement. In recent research, Davila — along with coauthors Mahendra Gupta of Washington University in St. Louis and Richard J. Palmer of Eastern Illinois University — tries to explain why adoption of e-procurement has happened a lot more slowly than some thought it would.

In their research paper “Moving Procurement Systems to the Internet,” the researchers do not sound a death knell for these technologies, however. Rather, they show that interest in e-procurement is typical of any innovation with some businesses adopt it aggressively, while others are more conservative.

Part of the reason that adoption is slow, Davila points out, is that businesses face a dilemma: “They are not just betting on the technology, but also on which technology. That’s delaying the whole process.” No single system yet dominates. Several means of procuring goods and services online have emerged: e-procurement software, market exchanges, B2B auctions, and purchasing consortia.

E-procurement software distributes electronic catalogs to customers, whose employees can use them to make purchases online. Market exchanges are websites that include both buyers and sellers who trade online for goods and services with dynamic prices. B2B auctions are sites that facilitate bidding for goods and services. Purchasing consortia gather the purchasing power of numerous buyers, who negotiate for price discounts.

These systems serve a variety of different purposes, Davila says. “No one technology is good for everybody.” So while the multiplicity of choices slows adoption, it also allows users to match the method and their needs.

Large corporations tend toward e-procurement software, while purchasing consortia seem to suit smaller companies, Davila says. Eventually, the “final equilibrium may include several technologies, each one serving a different segment of the market.”

Another issue slowing e-procurement is their perception of risk. Executives worry that these technologies will be difficult to integrate with existing information systems and that they may alter the relationship between suppliers and customers. They also are concerned about security and control mechanisms.

As might be expected, Davila found that aggressive adopters see e-procurement as low risk. Organizations pouring the most resources into e-procurement also seem to be better positioned in more predictable market environments. They tend to rank higher in many aspects of their competitive position — including brand image and customer service — than more conservative adopters, or “laggards,” who have completely avoided adoption.

Today, many businesses experiment with e-procurement only in their non-core areas, such as when buying office products, or with maintenance, repairs, and operating expenses. Inventory, services, and capital goods are far behind, although it is expected that the most savings eventually will be found in these core areas.

Davila says he thinks that increasing numbers of companies will give e-procurement a try in the next two years including experimenting in core goods and services, such as computer companies using it to purchase microprocessors and memory chips. From a survey of 168 purchasing managers Davila estimates e-procurement-enabled spending will rise by 433 percent and expand from just 2 percent of total purchases today to a more sizeable 11 percent.

Once conservative businesses see lower risks in using e-procurement, Davila says, the market will begin to progress more rapidly through the adoption curve.

Benefits could be substantial. E-procurement users reported a hefty savings of 42 percent, on average, in purchasing transaction costs in Davila’s survey.

The research was partly funded by Stanford GSB’s Center for Electronic Business and Commerce.

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