This past week, Gartner published its Magic Quadrant for Strategic Sourcing Application Suites. Over the years, I have learned that my readers love Magic Quadrants, so you can download the report itself here (courtesy of one of the “winners”, BravoSolutions).
I’d like to reproduce the “money shot” of the quadrant here, but that’s a copyright violation, so I’ve stopped doing that! Suffice it to say that, the big “winners” are Zycus, BravoSolution and iValua. The biggest “loser” would be SAP Ariba which was previously a “leader” and now fell into the “visionary” quadrant with the likes of GEP, Pool4Tool, and IBM/Emptoris. (Gartner faults SAP Ariba for neglecting its market-leading application over the last two years, precipitating its fall from grace. SAP Ariba vows to address the issues and return to prominence.)
Lessons from the Strategic Sourcing Application Suite Market
More interesting than the strategic sourcing magic quadrant itself, are the lessons we can learn from the evolution of this market over 20+ years. It’s easy to forget strategic sourcing applications were among the first truly multi-tenant cloud applications to gain mass adoption in the enterprise. Sure, Salesforce is now the King, but CRM was slightly behind strategic sourcing in the large enterprise.
I learned a few lessons from watching this market evolve:
Lesson #1: Creating value is not the same as capturing it.
Strategic sourcing applications created a ton of value over the years. Most of that value was captured by the buyers. Buyers received tremendous cost savings. Suppliers were beat up with price transparency and real-time bidding. The vendors of strategic sourcing applications, did okay, but not fabulous:
- FreeMarkets invented the market and sold for $500 million in stock and cash.
- Ariba sold to SAP for $4.5 billion, but remember to get into sourcing, Ariba bought FreeMarkets, Procuri, Trading Dynamics, and SupplierMarket for billions in stock and cash. And Ariba’s e-procurement and network businesses may have represented the bulk of the valuation.
- Emptoris and Frictionless sold for miniscule amounts, as did many other stand-alone strategic sourcing applications.
- Look at the leaders in the Magic Quadrant today. They are all fine companies, but none will be on the IPO calendar any time soon!
The bottom line is that strategic sourcing applications are simply not that hard to build, they are not that well integrated into enterprises, and they are not the stickiest of applications.
Lesson #2: Suite Revenge.
Strategic sourcing applications were initially largely separate from e-procurement applications. Companies that produced and sold one, did not generally compete in the other market. As mentioned above, Ariba largely bought its way into the e-sourcing market. Over time, many of the stand-alone strategic sourcing applications were bought by e-procurement vendors and vice versa. Take a look at the Magic Quadrant again. Each “leader” now also has an e-procurement application–either built internally or acquired. In fact, 9 or 10 of the 14 strategic sourcing application suite vendors in the Magic Quadrant offer their product as part of a larger spend management suite. This makes the “pure plays”, SynerTrade, Pool4Tool, and ScanMarket, worth watching.
Lesson #3: The drive to automation is relentless. (Duh)
The term “strategic sourcing” was created as part of a consulting business by AT Kearney. It’s probably still a great consulting business. But surely the share or, at least the growth, of that market has been eaten by software. FreeMarkets, for instance, started as a tech-enabled managed service and evolved rapidly into a software business with a much smaller managed service business (eventually sold to Accenture).
In industry after industry (e.g., facilities management, temp labor, third-party logistics, event management, travel, even investing) there is a battle raging between tech-enabled managed services and more pure software plays. In this battle, both types of players usually evolve and survive. But in this battle between software and managed service, there is always relentless, inexorable pressure on the managed service to automate and provide transparency. The arc of managed services is long, but it bends towards software! (I might trademark that.)
Lesson #4: Platform Thinking was too late.
Almost everyone who built a strategic sourcing application, built a portal for enterprise buyers to invite their suppliers. Each portal was a little one-to-many “cul-de-sac”. A buyer could only see their supply base, no one else’s. A buyer could only use their own RFP templates and supplier ratings. The thinking went that buyers would never share their supply bases or intellectual property with other buyers. This thinking contains a lot of truth, but it overlooked all sorts of counter examples such as non-strategic spot buys, consortium buying, the willingness of some industry buyers to share information for the good of the industry as a whole (e.g., fraud or safety), and the willingness of buyers to share information with non-competitors.
Ariba has tried to join its network thinking with its sourcing product (e.g., Ariba Dsicovery and Spot Buy) and perhaps others will as well. But the lack of platform thinking in strategic sourcing left open many opportunities for GPOs, AmazonBusiness, vertical industry aggregators and credentialers to build attractive businesses.
Many of you readers also watched the strategic sourcing industry evolve. What other lessons have I missed?