E-Marketplaces: At What Cost?

Online purchasing could save firms up to 4 percent this year and 8 percent by 2003, but those cost savings will come with a hefty price tag, according to a report released Wednesday by Forrester Research.

The report, "What Does eMarketplace Buying Cost?" said that over the next five years, business purchasers will spend an estimated US$5.4 million to $22.9 million each to integrate into business-to-business (B2B) e-marketplaces, resulting in big business for e-marketplace vendors and cost performance pressures on e-marketplaces themselves.

"E-marketplaces offer significant opportunities for buyers to lower prices and streamline buying processes, but those savings require a significant investment," Forrester analyst Matthew Sanders said. "Companies can make the most out of these outlays by documenting workflows, leveraging their integration efforts, and pushing their purchases online."

In order to recognize the cost-savings benefits of B2B e-marketplaces, Forrester said that purchasing organizations will need to spend money on: changing internal procurement systems, integrating e-marketplaces into internal systems, purchasing B2B applications and paying e-marketplace transaction fees.

ABCs of B2B

B2B spending will not be equal across the board, Forrester said. The Cambridge, Massachusetts-based research firm identified three different online purchasing approaches:

• Buyers just getting started in e-marketplace procurement -- called "baseline buyers" -- are seeking to trim transaction costs associated with maintenance, repair and operations (MRO) purchases. These buyers will spend $5.6 million, mostly on transaction fees, integration software and internal staffing.

• Other firms -- called "spot market dabblers" -- will use e-marketplaces to make spot purchases of direct materials to help manage inventory and avoid shortfalls. These buyers will spend $10.7 million, most of it on new software installation and related consultant fees.

• The last category -- the "aggressive spenders" -- are expected to spend the most on e-marketplace integration because they intend to use the Internet and other networks to manage all of their purchasing. These buyers will spend an average of $22.9 million, mainly paying consultants to implement their e-marketplace approach.

Big Spenders

Forrester is not the only research firm predicting that companies will spend big money on e-marketplaces. A report issued by Jupiter in January predicted that businesses worldwide would increase their spending on business-to-business (B2B) e-marketplaces from $2.6 billion in 2000 to $137.2 billion by 2005.

Despite the billions they will spend on e-marketplaces, "buyers aren't blindly enthusiastic," according to Sanders.

"More than half of the purchasing executives we interviewed acknowledge that in-house adoption hurdles like user-level resistance might delay their savings," Sanders said.

Companies also stand to increase productivity through e-marketplaces, according to an October study by the Boston Consulting Group (BCG). BCG predicted that by 2004, B2B e-commerce will bring about productivity gains equivalent to 1 to 2 percent of sales. By 2010, that figure could grow to 6 percent, the firm said.