Markets, D. Hope-Ross, C. Eschinger, A. Kyte Research Note 17 March 2003 Strategic Sourcing Applications Magic Quadrant, 1Q03 Strategic sourcing applications are emerging, despite market immaturity. Applications are initiating valuable changes, and enterprises can benefit by using our Magic Quadrant to pick the right tools. Core Topic ERP II, Supply Chain & Manufacturing: Supply Chain Management Strategies, Applications and Technologies Key Issue How will SCP and SCE vendors and markets evolve? Strategic sourcing applications have traditionally focused on structured negotiation, but this is changing as functionality broadens and users seek more-integrated, more-complete solutions. The market's transition beyond structured negotiation challenges vendors to accelerate development, extend value propositions and, in some cases, create critical mass (see "Strategic Sourcing Applications Magic Quadrant Emerges," "Strategic Sourcing Magic Quadrant Criteria: An Explanation" and "Understanding the Five Styles of Strategic Sourcing"). However, given the market's instability, many are wondering why the strategic sourcing arena is doing so well. It's because applications are providing the triggers for cultural change, higher productivity and above all return on investment. Enterprises may find the most-attractive offerings from niche vendors and, therefore, should evaluate and consider them. Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
Figure 1 Strategic Sourcing Magic Quadrant for 1Q03 Challengers Leaders Ability to Execute SAS Institute A.T. Kearney SAP B2eMarkets Frictionless Informatica Commerce Procuri Verticalnet Software Oracle Ariba Emptoris MindFlow FreeMarkets PeopleSoft i2 Technologies Niche Players As of March 2003 Visionaries Completeness of Vision Source: Gartner Research (March 2003) The Leaders and the Challengers We rank no vendors in the Leaders or Challengers quadrants because, to date, none have achieved the critical combination of corporate stability, maturity of solutions and customer implementations (see "Strategic Sourcing Magic Quadrant Criteria: An Explanation"). The Visionaries Ariba is delivering applications that are functionally competitive with smaller vendors (which have focused historically on negotiation). Ariba is leveraging its installed base, creating links with procurement, expanding functionality and developing complementary services. Although deployments are limited to negotiation, and functional gaps in analytics remain, Ariba's strong sales and development bode well for the future. To improve its position, we believe Ariba must enhance links to transaction-execution systems, item/vendor masters, product definition/engineering, and commit to vertical industries. Ariba's 17 March 2003 2
customers or potential customers of smaller, less-stable providers should consider its offerings. Emptoris is making the fastest progress in delivering functionality to customers especially in the area of bid analysis/optimization. It continues to improve in several areas, including technology, functionality and data exchange with legacy applications. Sales execution has also improved, and new customer acquisitions have increased in recent quarters. We believe that challenges remain, however, including the deepening of Emptoris' data model and decision support functionality to help customers analyze the impact of highly complex, nonmaterial costs. Emptoris has yet to scale indirect sales channels, and it must also focus development to stay ahead of expansionist vendors with enterprise resource planning (ERP) heritages. Enterprises that process bids with large numbers of line items and complex discount structures should evaluate Emptoris. MindFlow Technologies' applications are not "inexpensive," but for a perpetual license starting at approximately $350,000, it may be the best value. MindFlow provides negotiation similar to its competitors (but at lower license fees), in addition to optimization. MindFlow provides optimization to conduct modeling, trade-off analysis, and to expose the cost drivers of logistically complex supplier relationships. MindFlow has executed well in narrow vertical industries, namely food service and consumer packaged goods (food and beverage). However, with only 12 customers, MindFlow is one of the smallest vendors in our Magic Quadrant. Food services, food and beverage organizations and those with large numbers of replenishment locations or complex supplier allocation drivers should put MindFlow on their short lists. i2 Technologies provides some of the most-comprehensive spending analysis offerings on the market. Coupled with content services, i2 can provide unrivaled visibility into part-and-item attributes, which are necessary for detailed analysis. i2 has approximately 80 committed customers, most of which have invested large sums of money into software and services. i2 demonstrates an excellent vision in the role of structured product data within highly complex sourcing environments, but it lags in structured negotiation. i2 s challenges are to regain mind share, rationalize applications, and drive the commercial success of complex and expensive solutions in a market that favors tactical, low-cost solutions (see "'New i2' Is Revealed at Its PLANET 2002 Conference" and "i2's Financial Performance Improves, but Challenges Remain"). Enterprises that need spending analysis in aerospace and defense, automotive, high-technology and diverse discrete manufacturing industries, or enterprises with 17 March 2003 3
complex maintenance, repair and operations spending should put i2 on their short lists. Oracle is the only major ERP vendor with deployments of strategic sourcing applications, but generally only in simplistic hosted modes. We believe that Oracle has a substantial opportunity here, if it can deliver on such promises as integrating sourcing to the item master, purchasing, supply chain planning, product life cycle management, a computerized maintenance management system and iprocurement. To be successful, Oracle must increase its corporate focus on sourcing, improve marketing and sales execution, and expand service partnerships. Furthermore, Oracle's success also depends on the continued migration of its ERP/Financials customers to Oracle 11i. Enterprises with a corporate commitment to Oracle ERP or purchasing applications should put Oracle s strategic sourcing applications on their short lists including the analysis product Purchasing Intelligence. PeopleSoft can be lauded for its broad approach to supplier relationship management (SRM) as well as its rapid introduction of sourcing applications including Supplier Ratings, which are part of the Supply Chain Warehouse. PeopleSoft was first to market (among ERP II providers) with applications that do not require hosting, and it has shown strong sales. However, pursuing behind-the-firewall deployments has cost PeopleSoft speed and, thus, customer "proof points" are absent. PeopleSoft also lacks product life cycle management capabilities and services, which are prevalent among its smaller competitors. PeopleSoft customers (especially those in service industries) should include PeopleSoft in selection cycles. Enterprises with high aversion to vendor risk (which is not the same as product or project risk) should include PeopleSoft in selection cycles, but consider delaying final selection until reference accounts become available. The Niche Players A.T. Kearney Procurement Solutions (ATK-PS), which includes the organization formerly called ebreviate, is an operating unit within A.T. Kearney (ATK) and is known for strategic sourcing prowess. ATK-PS is showing solid sales and is wellcomplemented by attractively packaged ATK services. These services are invaluable to companies that need assistance with initiating strategic sourcing transformation. Nevertheless, Gartner questions ATK-PS s long-term commitment to the application business, based on its core competency (and potentially larger market opportunity) in services. As evidence, ATK-PS maintains partnerships with vendors (such as i2 and Tigris Consulting) that have competing products. However, corporate stability, service 17 March 2003 4
quality and aggressive pricing suggest that ATK-PS represents a good alternative for enterprises that are seeking servicefacilitated sourcing transformation. B2eMarkets is enjoying success with 23 customers and an emerging strategy for differentiation. It seeks to help customers formalize and implement sourcing strategies by providing a platform for sharing knowledge, processes, policies and procedures. Although this is appealing, customers are generally using term licenses and hosted (nonintegrated) applications. Furthermore, the knowledge-intensive approach requires more investment in training and configuration. Enterprises with disparate, decentralized purchasing processes, and those seeking knowledge-oriented tools to drive change, should consider B2eMarkets. FreeMarkets is an innovator in the use of Web negotiation. Its strength is as a provider of specialized services delivering category, process, project and global operations services. Although it is an innovator and a leader in providing services, FreeMarkets has yet to establish its software product as a major force in the separate software market. FreeMarkets has begun to move away from "event-based market making" by modularizing its solution offerings, including the additions of spending analysis, savings implementations and enterprise sourcing. Despite its competence in delivering full sourcing services, FreeMarkets has yet to revise pricing, service agreements and deployment modes in a fashion consistent with modern enterprise applications. Enterprises that require consulting support for change management of the sourcing process or for category-specific sourcing activities should evaluate FreeMarkets as a service and application provider. Frictionless Commerce is making progress with service partnerships, increasing platform independence and expanding functionality. Version 3.0, which is scheduled to be released 31 March 2003, is expected to include published application programming interfaces, bill of materials target costing, spending analysis and vendor "scorecarding." However, with fewer than 10 customers holding perpetual licenses (and fewer than 25 customers with term agreements), Frictionless must translate its technical progress into commercial success in the next 18 months. We believe version 3.0 will be pivotal in its competitive war and extension beyond template-/document-driven sourcing. Enterprises that are driving deployment and long-term transformation should evaluate Version 3.0 but protect their interests, given Frictionless smaller size as well as the market's immaturity. 17 March 2003 5
Informatica is working to leverage its market position in extraction, transformation and loading (ETL) and business intelligence (BI) within sourcing analytics but, to date, it has had limited sales. Informatica is unlikely to emerge as a "strategic sourcing suite" vendor, and thus, customers should expect no development in applications beyond analytics. However, Informatica can be expected to deliver solid technology that is critical to spending analysis. Enterprises that require spending analysis, but lack corporate application standards from vendors with BI capabilities, should consider Informatica. Procuri boasts a large customer base that uses structured negotiation and requests for quotation (RFQs) or requests for information (RFIs). Procuri s revenue model and cost structure make it a (marginally) profitable startup vendor. Customers are typically highly satisfied with Procuri, its applications and associated services. However, Procuri is growing lessdifferentiated, and customers are not always committed to it for the long term. We believe that Procuri will need to increase investment in development and marketing to propel itself into a position of leadership. Enterprises that are interested in auctions, or electronic RFQ or electronic RFI tools with short payback cycles, should consider Procuri. SAP remains the juggernaut of enterprise applications with financial strength, tremendous development resources, a massive installed base, service partnerships and a sales force. However, it has failed to field competitive products in the area of strategic sourcing, and it also lacks customer reference accounts. SAP may be a viable choice for those enterprises that are willing to wait for functionality, act as co-development partners and make a larger commitment to SAP's SRM. However, even these enterprises should consider licensing niche offerings in structured negotiation (for example, Procuri) or spending analysis (for example, i2, Informatica, SAS), given the near-term benefits of adopting such solutions. SAS Institute is increasing its emphasis on applications with the addition of SRM, which provides spending analysis. SAS has an arsenal of data manipulation and BI technologies, including ETL, data mining and data quality management. SAS has leveraged these to provide tools that are aimed at supporting process, spending and supplier visibility. SAS retains an impressive service partner network, has improved sales execution and has added a dedicated sales force. With fewer than 10 customers, however, SAS s challenges are threefold. First, it must sustain and increase its corporate focus on business applications in general and strategic sourcing in particular. Second, it must respond to increasing levels of analytics capabilities within broader sourcing applications. Third, it must respond to 17 March 2003 6
customers' preferences for integrated sourcing solutions, and propose a range of options to "sourcing challenges" as opposed to "data analysis challenges." As a privately held company with revenue of more than $1 billion, SAS can satisfy most viability concerns associated with long-term, more-strategic spending analysis projects. Acronym Key ATK A.T. Kearney ATK-PS ATK Procurement Solutions BI Business intelligence ERP Enterprise resource planning ETL Extraction, transformation and loading RFI Request for information RFQ Request for quotation SRM Supplier relationship management Verticalnet Software is one of few vendors that can deliver data cleansing and classification of spending information, spending analysis and structured negotiation. The cleansing of spending data is critical, and it is a prerequisite to making sustainable sourcing improvements. Verticalnet is also unique in attempting to join diverse disciplines within sourcing. That is, Verticalnet is working to unite supply chain planning and strategic sourcing. However, it faces financial challenges with less than 18 months of cash on hand (given the current burn rate), and has announced its intention to seek an acquiring partner. Enterprises with complex, multienterprise sourcing challenges (such as those in distributor roles) should consider Verticalnet if short-term return on investment is ensured and contractual protection is in place. Bottom Line: The market for strategic sourcing applications is emerging. However, it remains fractured along functional lines, and no vendor has yet achieved leadership status. As such, investment in applications driven by the need for immediate returns requires a focus on functionality, but it should be informed by the existence of some downside product and vendor risk. 17 March 2003 7