When tiny Ariba Technologies made its initial public offering in June, investors could have been forgiven for yawning. After all, Ariba makes its living off things such as paper clips and stationery. Actually, Ariba doesn’t even sell the paper clips and stationery. It sells software that helps corporations manage the process of buying them.

In any event, Ariba was one of the hottest new stock offerings this year. From an IPO price of $23, Ariba soared to $90 on the first day of trading and has kept rising, to more than $150, giving it a market capitalization of nearly $7 billion.

Despite the apparently dull business it has chosen, Ariba and a handful of other similar start-ups, such as Commerce One and Concur Technologies, have tapped into a deep corporate need. Think about it this way: Seven years ago not one of these three companies existed. Now more than $200 billion in goods and services is purchased through them on an annualized basis.

These three new companies provide a radically more efficient way of buying just about all the goods and services that corporations need to run their daily operations. Visio, a maker of technical drawing software, says it used to spend $113 processing every purchase order; using Concur’s software, it now spends $6. Visio figures the software added about two-thirds of a percentage point to its profit margin last year.

Because so-called operating resources cover such a broad range—from paper clips to mainframes, from maintenance services to raising capital—they account for more than a third of the average corporate budget, and anything that makes buying them more efficient can have an enormous impact.

Besides, Ariba, Commerce One, and Concur offer corporate customers far more than a cheaper way to purchase legal pads and A4 envelopes. They also provide their customers a gold mine of information. By understanding just where they spend money, and by being able to manage that spending more carefully, corporate customers can settle on certain preferred suppliers and negotiate hefty volume discounts. As a result, the new software often pays for itself in a matter of months.

While Ariba, Commerce One, and Concur are making the broadest assault on corporate purchasing costs, a host of others also are attacking costs for specific industries, products, or buyers. Metalsite addresses the steel industry; PlasticNet.com, the plastics industry; and RapidAutoNet, the auto-parts industry. Chemdex helps buyers of chemicals get far better prices than they did in the past. General Electric’s TPN trading network forces its suppliers to auction their products and services, usually at significant discounts to previous prices. FreeMarkets sets up on-line auctions for any corporate buyer that wants to go that route.

By 2003, the research firm International Data Corp. estimates, corporate buyers will use electronic procurement to buy $1.4 trillion of goods and services. The savings? A whopping $103 billion.

Because processing a purchase order manually costs companies as much as $150 apiece, whether they’re buying a dozen pencils or a dozen computers, the processing can sometimes cost more than the items being bought. Someone from purchasing typically does some negotiating, or at least coordination, over the phone. Someone else has to key in the information for the purchase order—and still another person might have to rekey the information later, to correct errors. And so on.

Traditional purchasing practices not only waste time, but they also can waste money. Often, employees outside the purchasing department don’t know where to buy products to get the best deal or even the best service. So they walk down the street and pick out a new desk calendar or cellular phone at the nearest store, saving the receipt so they can add it to their expense report at the end of the month. They wind up paying full retail price, regardless of whether their company has already negotiated much better rates with the same supplier.

With Ariba, Commerce One, and Concur, everything about the process is more automated. When someone needs to buy some legal pads, for instance, he launches his Internet browser and logs in to the procurement site on his company’s intranet, which has been built based on the software provided by one of the three companies. He searches his employer’s catalog of goods and services and sees the prices that already have been negotiated with suppliers. When he clicks on an item, he is linked to the manufacturer’s Web site for a more detailed description. He quickly completes an electronic requisition form, which is then automatically sent to whoever needs to approve the purchase. At that point, the order is routed to the wholesaler or manufacturer that sells the item. (Commerce One adds a couple of wrinkles. It not only sells the software, which starts at about $500,000, but also is creating a Web-based marketplace and charging transaction fees for bringing together buyers and sellers. Commerce One says it also plans to offer on-line auctions and "reverse auctions" so that buyers can have suppliers bid for their business.)

But, talk to a company that uses one of these systems, and the efficiency of automating processes barely even comes up. Guardian Industries, which makes automotive glass and fiberglass insulation, acknowledges that it became an early user of Concur’s software so it could reduce the costs of processing travel and entertainment expense reports. But the company soon lost interest in tracking how much it was saving through automation. Although such "process savings" weren’t negligible, Guardian discovered that the software allowed it to gather data that have a far bigger impact on its bottom line. Because all of its travel and entertainment expenses go through the centralized system, the company now knows exactly how much its employees spend every year at each car-rental company, airline, and hotel. "That’s where the money turned out to be for us," says Curt Castillo, manager of tax, international and human resources at Guardian.

Before it had that information, Guardian had negotiated discounted rates with only one airline because it thought most of its employees were flying that airline. In fact, only 40% of Guardian’s travel was with that airline. Guardian has since struck deals with three more airlines. The company also arranged discounts with hotels. Previously, it didn’t have any way to track where its executives were staying.

"We were really in the dark. We didn’t have a solid grasp on what our volume was," Castillo says. "All of a sudden, we were able to get a much better deal." For instance, it now gets a set discount on the price of employee stays with a major hotel chain. It has reduced the closely held company’s overall annual spending on air travel by 10%.

Such information is especially useful to smaller and even midsize companies. Cypress Semiconductor, which had sales last year of $489 million, says it can get the kind of discounts with suppliers that might usually be extended to a General Motors or a Microsoft.

The procurement systems "give you a better opportunity to make a better deal for the corporation because you’re combining your buying power and you’re going to one place," says John Ramacciotti, vice president of procurement at the chip maker. Cypress, which has been using Ariba software since November 1998, gets a discount of anywhere from 5% to 30%, depending on what it is buying. "You can’t do that if you’re just calling and placing orders ad hoc," Ramacciotti says. He expects the company eventually will order all its office supplies from a single supplier, with every employee routed automatically to that same source. The company expects to see a return on investment from the Ariba software in less than a year.

"Every corporate buyer is trying to corral buying power, and finally we have a tool for doing that," Ramacciotti says.

But even giants such as GM and Nestle think they will see benefits from the operating resources management software and have become Ariba customers. Philips Electronics, the Dutch electronics giant, had tried to develop its own way of handling operating resources more efficiently. It negotiated discounts on 80% of the products and services that it needs to run its operations. It has since discovered, however, that only 20% of the products its employees actually bought were covered by those discounts. It, too, has become an Ariba customer.

MAKING A SPLASH

Lots of companies have tried to find ways on their own to become more efficient, largely taking advantage of a standard called electronic data interchange. The idea was to create a software standard so buyers and suppliers could exchange purchase orders, invoices, and several other common business documents. More recently, corporate buyers tried to find ways so their individual companies could use the Internet to communicate with suppliers.

But those efforts were only moderately successful—the equivalent of having a swimming instructor make someone’s stroke a bit more powerful and efficient. By contrast, Ariba, Commerce One, and Concur are like three sumo wrestlers who have just done cannonballs in a small pool full of people. They’ve knocked most of the water and people out of the pool, and those who remain are being banged in every direction.

The big issue, of course, is that if corporate buyers are going to save more than $100 billion within three years, as IDC predicts, that money is going to come out of somebody’s pocket. "This is a zero-sum game," says Dave Rome, vice president of marketing at Ariba. And $100 billion is a lot to lose.

The initial losers seem likely to be those who work in purchasing departments, thousands of whom are likely to lose their jobs. In addition, small suppliers may find they just can’t compete with their bigger brethren when price becomes the paramount issue. "Companies end up aggressively pruning their suppliers," says Mark Temkin, research director for business e-commerce at Forrester Research.

Motorola expects that its use of Ariba software will help it weed out a number of its roughly 40,000 different suppliers. The company had been buying personal computers from a dozen vendors but now plans to make all its purchases from Dell Computer. The estimated annual savings are expected to be in the neighborhood of $40 million.

Especially vulnerable will be those suppliers that have been able to keep prices high because of longstanding relationships with buyers. Albert Pang, e-commerce software analyst at IDC, says: "The Internet has changed everything."

 
But not all is bleak. Even little suppliers may find ways to grab new business as purchasing becomes more electronic. If a single department in a big headquarters building puts a local pizza parlor on its purchasing system so it can order food for staff meetings, the rest of the company may begin ordering their pizza from the same place. A small printing shop in New England, which had been printing business cards for a division of a major corporation before the company began using procurement software, now has the potential to reach all parts of the company on a global basis.

Big companies, such as Staples—an office supply chain that would seem to be a sure loser because the procurement software will put so much pressure on its prices—say they can adapt just fine, too. The reason is that the software can make them much more efficient.

Currently, suppliers such as Staples tend to get lots of small, handwritten orders, faxes, or telephone orders. The possibility of human error is significant as the information gets processed, and the hassle factor is high. When someone orders a toner cartridge but leaves out some key bit of information, such as the printer it will be used with, someone from the supplier has to call the buyer. Or, perhaps, the order will just fall into a black hole, leading to lots of other problems.

With operating resource management software, an incomplete order is refused and instantly kicked back to the screen of the buyer, who needs only a few seconds to complete the order. Opportunities for other types of mistakes and miscommunication drop away, as well.

Staples was trying to figure out how it was going to hook into all the different electronic purchasing systems its customers were developing. "What really concerned us was the likely scenario that we were going to have to create custom technical systems for every single one of our customers," said Anne-Marie Keane, vice president of contract markets at Staples. "And that was going to cause us to more or less be a technology shop rather than be selling office supplies. We said, ‘This is going to be crazy.’"

Instead, Ariba allowed Staples to satisfy many of its customers all at once instead of worrying about a lot of custom connections. Now that Staples has linked with Ariba and a number of other procurement systems, it’s almost no work for Staples to go to other customers in those networks to offer them preferred pricing. It’s that sort of network effect that can make these systems attractive for both buyers and suppliers.

"The savvy ones are trying to respond to [the new way of doing business] and embrace it," Ariba’s Rome says.