Supplier and buyer: Can you profit from e-sourcing?

If you're not sure about the viability of e-sourcing - one of the current buzzwords in B2B - taking up an invite to FreeMarkets' European HQ is a must. Kate Hanaghan recently did just that and here she describes the inner workings of a vendor which badly wants to step out of shadows still cast by Ariba and Commerce One.

When you you're invited to the European offices of an e-sourcing company you don't expect to see an army of workers making sure its online auctions are 'fair'. This, however, is exactly how FreeMarkets operates.

E-sourcing isn't a particularly likeable term. For a start it's got the dreaded 'e' shoved in front of a regular word and, second, it's all too easy to get it mixed-up with e-procurement.

Let's just clear up one issue before going any further. E-procurement is the process that happens after a contract has been negotiated. You know what you want and who you have to buy it from - and of course, it's electronic. E-sourcing, on the other hand, should be a strategic process. It involves choosing the best supplier and negotiating the terms of a deal.

FreeMarkets prides itself not only on its technology but also on its hand-holding through finding and preparing suppliers for the auction, to preparing requests for quotations, to conducting an auction online.

Its European operations are run out of Belgium. The boardroom offers expansive views over Brussels but also something more intriguing. One complete side of the room is a glass wall - an e-peepshow, if you will - revealing its team of online auction observers.

Yes, that's right - in a world of frictionless transactions FreeMarkets' operations are a hive of human activity ensuring that each supplier receives a fair crack at the whip and that there isn't any inappropriate behaviour.

A team including translators, auction co-ordinators and technical staff watches the 'CBE Execution' live. And no, it's not the anti-Empire blood bath it appears to be. It's a Competitive Bidding Event. In other words, it's the actual auction.

If one supplier loses its internet connection, for instance, FreeMarkets will leap in with what it calls a surrogate bidder, someone who will work on behalf of the supplier who's incommunicado.

FreeMarkets staff constantly stress the importance of strategy - finding the right supplier and, importantly, driving down the cost of sourcing materials. In fact the company maintains a huge database of global suppliers in the markets it serves. It uses this alongside what it describes as a team of 'sourcing experts', well-versed in the intricacies of the vertical industries it serves.

Getting the best value from the most appropriate supplier is the benefit for buyers, according to FreeMarkets.

Shane Tulloch, FreeMarkets VP and MD for Europe, explained how the company works "side-by-side" with customers to make sure the whole sourcing process is implemented properly. "Suppliers are exposed to a global market and stand a fairer chance of winning business because the deal is for real," he said.

As for the buyers - FreeMarkets' customers - he claims they have saved E7.4bn (£4.5bn) and are continuing to come back for more.

How does this compare with the competition? For all the stick Ariba et al have had thrown at them you have to admire their resilience. There's just no stopping some people. Ariba's strategy du jour is now 'spend management'.

Or how about Commerce One? It promised beautiful, golden e-marketplaces. And it delivered what, exactly? Huge losses and a partnership with SAP that continues to limp along the pot-holed B2B lovers' lane. And now it tells us it too does e-sourcing.

FreeMarkets CEO Glen Meakem understandably hasn't much time for Commerce One. His gripe is that Commerce One will not make a success of its sourcing product without the kind of bundle of services FreeMarkets also offers its customers. He said: "They will fail - they are failing. We started this space in 1995 - they don't understand the space."

Yet the over-riding question remains: is e-sourcing the way to go for faster, cheaper sourcing? Well, not necessarily.

Clearly there are cost savings to be had through automation and minimising friction in the transaction process. Jamie Anderson, programme director, Centre for Management Development, London Business School, told silicon.com: "The FreeMarkets solution is tactical. It works for commodity products and it screws suppliers because the solution is completely based on price - and there's nothing too strategic about that."

Anderson explains this is not the strategic panacea it appears to be. He argues it is unlikely a company will return to use an auction again and again. "Companies can't expect to see savings over and over."

There might be a saving of 15 per cent the first time but if supplier prices are slashed each time the price will eventually reach zero. He added: "Of those companies that use online auctions, less than 5 per cent intend to use them again. Additionally, 25 to 35 per cent go back to their original supplier."

And what about the supplier in all this? Surely FreeMarkets is there with its 'auction patrol' making sure all's fair in love and e-sourcing? Well, Anderson warns that existing suppliers need to exercise caution in joining an auction. It's possible that they could find themselves with an identical new contract - the only difference being the smaller amount of cash they rake in.

For the IT director there is a role to play in all this, of course. But sourcing and procurement are company-wide issues. Your boardroom might not have a glass wall like FreeMarkets' but it's the place to be if you really want to break the back of your sourcing predicament.