Stephens Inc.

Internet Research
Industry Report December 27, 1999

E-PROCUREMENT
A Guide To Buy-Side Applications
Scott Alaniz, CFA, Analyst (501) 377-3762 Robin Roberts, Associate (501) 377-8026

Direct Transaction

Trading Portal

Buy-Side Solutions

Sell-Side Solutions

Exchange & Auction Solutions

Intelligent Digital Tradex MOAI OpenSite

Supply Chain Optimization Solutions

Ariba Commerce One Clarus Procurenet

Broadvision Cardonet OpenMarket Intershop

i2 Technologies Manugistics Extricity Syncra Systems

E-Procurement Technology Platform

Stephens Inc. Internet Research Team
Brad Eichler, CFA, Research Analyst, (501) 377-3761 beichler@stephens.com Head of Internet Research Team
Kyle Evans, Research Associate, (501) 377-6376 kevans@stephens.com Horizontal & Vertical Industries Noel Parks, Research Associate, (501) 377-8124 nparks@stephens.com Horizontal & Vertical Industries

Scott Alaniz, CFA, Research Analyst, (501) 377-3762 salaniz@stephens.com Supply Web Management
Robin Roberts, Research Associate, (501) 377-8026 rroberts@stephens.com Supply Web Management Barry McCarver, Research Associate, (501) 377-8131 bmccarver@stephens.com Horizontal & Vertical Industries and Supply Web Management

TABLE OF CONTENTS
EXECUTIVE SUMMARY ....................................................................................................................................... 4 Our Focus............................................................................................................................................................... 4 Key Investment Themes ........................................................................................................................................ 4 INVESTMENT HIGHLIGHTS................................................................................................................................. 6 INVESTMENT RISKS.............................................................................................................................................. 7 E-PROCUREMENT: THE BIG PICTURE.............................................................................................................. 8 The Basics Purchasing Is an Inherent Function For Every Business.................................................................. 9 How Does a Buy-Side Solution Work? ............................................................................................................... 11 The Traditional Purchasing Process Vs. The Internet-Powered Process ............................................................. 12 Our Evaluation Criteria of the Buy-Side Solutions ............................................................................................. 13 MARKET CHARACTERISTICS & PLAYERS .................................................................................................... 15 E-Procurement Is a Large, Fast-Growing Market................................................................................................ 15 How Big Is the Market?....................................................................................................................................... 18 Who Are the Players? .......................................................................................................................................... 19 What Are the Business Models?.......................................................................................................................... 23 COMPANY VALUATIONS................................................................................................................................... 25 THE CURRENT DEBATES ................................................................................................................................... 26 The War Between Ariba and Commerce One ..................................................................................................... 26 Will There Be Only ONE Winner?...................................................................................................................... 29 HOW BUSINESSES BUY ...................................................................................................................................... 30 The General Purchasing Process.......................................................................................................................... 30 E-PROCUREMENT: WHAT LIES AHEAD?....................................................................................................... 34 CONCLUSION........................................................................................................................................................ 39

TABLES AND FIGURES

Table 1 Information Week Survey of IT Priorities...... ...........................................................................................6 Figure 1 E-Procurement Technology Platform........... ...........................................................................................8 Figure 2 Organizational Areas Impacted by Purchasing ......................................................................................10 Figure 3 Old Buying Process ...................................... .........................................................................................11 Figure 4 Buy-Side Solution-Enabled Purchasing Process ....................................................................................12 Table 2 Difference Between the Old Purchase Process and New Internet Purchase Process...............................12 Table 3 The Cost Savings Created by Buy-Side Solutions...................................................................................13 Figure 5 Corporate Buyer Internet Access and Usage Metrics.............................................................................15 Figure 6 Market Adoption Curve................................ .........................................................................................16 Figure 7 Division of Corporate Spending................... .........................................................................................17 Figure 8 Types of Goods For Which Buyers Are Using or Will Use the Internet to Research and Purchase......17 Table 4 Number of U.S. Employees by Company Size........................................................................................18 Table 5 Market Size Estimate of Buy-Side Solutions .........................................................................................18 Table 6 Buy-Side Solution Competitive Landscape... .........................................................................................19 Figure 9 Buy-Side Solution Providers Market Positioning by Vertical Industry and Customer .......................20 Table 7 Competitive Profile........................................ .........................................................................................21 Table 8 Subscription-Fee, Transaction-Fee vs. License-Fee Model.....................................................................23 Figure 10 License-Fee Model ..................................... .........................................................................................24 Figure 11 Subscription-Fee or Transaction-Fee Model ........................................................................................24 Table 9 Comparable Companies Valuation Analysis . .........................................................................................25 Table 10 Ariba and Commerce Ones Battle for Blue-Chip Customers...............................................................26 Table 11 Ariba and Commerce Ones Battle for A New Market .........................................................................27 Table 12 Comparison of Ariba and Commerce Ones Partnership Profiles .........................................................28 Figure 12 Buying Activities and Suitable E-Procurement Solutions....................................................................30 Figure 13 General Purchasing Process ....................... .........................................................................................30
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Table 13 The Difference Between Strategic Buying and Transactional Buying ..................................................31 Table 14 The Difference Between Direct Materials and Indirect Materials.........................................................32 Table 15 Buying Maintenance and Repair Materials versus Buying Operating Resources ..................................33 Figure 14 Horizontally and Vertically Aligned Purchasing Activities .................................................................33 Table 16 Difference between Spot Buying and Transactional Buying.................................................................34 Figure 15 Employee-Facing Portal ............................. .........................................................................................35 Figure 16 Supply-Chain-Facing Portal ....................... .........................................................................................36 APPENDIX A PROCUREMENT COMPANIES ...... .........................................................................................41 APPENDIX B E-PROCUREMENT SOLUTION PROVIDERS ........................................................................42

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EXECUTIVE SUMMARY Tonights weather is dark, followed by widely scattered light in the morning George Carlin Staggering predictions about the amount and growth rate of commerce that is to be transacted over the Internet are cited daily in press and analysts reports. Like Mr. Carlins weather forecast, these predictions offer little insight for prospective investors, other than to say that the market potential is large and growing rapidly. Our research team has analyzed the Internet from both a top-down and bottom-up approach, and from the perspectives of traditional businesses. In short, we believe that Internet solutions used to automate the purchasing or procurement function for businesses will represent an attractive investment opportunity because of the significant value proposition these solutions provide users. Our Focus In this report, we focus on companies that provide e-procurement technology platforms, specifically Buyside solutions. These companies include Ariba (ARBA), Commerce One (CMRC), Clarus (CLRS), Concur (CNQR), Elcom (ELCO), DataStream (DSTM), Project Software & Development (PSDI),and others. This report contains an extensive overview of the e-procurement industry. Specifically, we discuss the fundamentals of the eprocurement industry, our market size and growth estimates and the investment implications of our themes and conclusions. For more company-specific discussions we suggest the following sections: For investors who own or monitor Ariba or Commerce One, we have a specific section discussing The War Between Ariba and Commerce One on page 26 We compare these companies operations, technology, and revenue models on pages 20-22 We address why there will be more than one winner in e-procurement on page 29 We discuss the pros and cons of license-fee, transaction-fee and subscription-fee models on page 23 For investors new to the sector, the specific criteria we use to evaluate e-procurement companies is on page 13

Key Investment Themes E-procurement solutions, the Internet technology platforms and services that make corporate purchasing activities more efficient and cost-effective, are moving from the early adopter stage to rapid adoption by mainstream companies. One driver of this trend is mass customization, which is the ability to produce products at the scale and speed necessary to provide individually configured (customized) products to businesses and consumers in a short period of time. This is the model Dell Computer employs and this model is expanding from the early adopter industry (the high-tech industry) into the traditional mainstream industry (e.g., the auto industry). As businesses employ these techniques, they are pressed to manage their supply chain more efficiently. Procurement, or purchasing the material and services for production and operations, is the first step of the supply chain. When companies look for means to streamline their entire supply chain, the first thing they think about is how to streamline the purchasing process. Ford recently announced a partnership with Microsoft to offer madeto-order cars over the Internet. Shortly after the announcement both Ford and GM acquired e-procurement technologies. We believe that businesses supply chains will compete against one other. Supply chain management is a natural extension for these e-procurement solution companies. Despite intensifying competition, we think that the e-procurement market is big enough to accommodate multiple winners, rather than just one. There are many types of procurement (strategic, transactional, spot) activities and these require different types of e-procurement solutions to support them. We think that Enterprise Resource Planning (ERP) vendors, such as Oracle and SAP, will catch on and become important players in the e-procurement space. Why? ERP vendors have a large installed customer base and have the necessary workflow rules already built-in for e-procurement solutions. Some ERP customers would rather buy an e-procurement solution from their existing ERP vendor than buy it from companies like Ariba because they do not want to replicate the entire work flow.
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We believe that ultimately, e-procurement technology platforms will compete on the understanding of the business process, solution agility and marketing innovation. Understanding of the business process and having in-depth vertical expertise enables e-procurement technology companies to readily deploy their solutions within the existing business setting, rather than force businesses to mold their practices in order to fit with the eprocurement solution. Consequently, understanding of the business process awards e-procurement solution providers quick market adoption and shorter implementation time. Solution agility enables the e-procurement solution providers to quickly adapt the solution to the ever-accelerating business process changes. Marketing innovation helps e-procurement companies to break from the pack with new business models and new pricing schemes that encourage quick and widespread market adoption. Because the understanding of business processes within various vertical industries cannot be achieved overnight, we think it will be challenging for a single e-procurement company to quickly expand from one industry into multiple industries. The required vertical expertise needed to expand the e-procurement business into a new vertical industry cannot be acquired simply by bringing on a new executive. The vertical expertise must be rooted throughout the entire organization (sales, marketing, and operations). Acquiring the entire operations team in another market via merger or acquisition may not always be successful due to the possible corporate cultural clashes. We think the best approach for a trading portal is to focus on its existing core competence and partner with other trading portals to tackle the new market. The distinction between an e-procurement provider and a centralized trading hub will become increasingly blurred. We believe an increasing number of the e-procurement technology platform providers will leverage their customer bases and operate as a trading portal themselves. At the same time, an increasing number of trading portals will Web-enable the buyers and sellers using the technology platform they have developed in-house or acquired via partnerships. The market forces driving this convergence are outsourcing, the network effect, and high barriers to exit. Ariba, Commerce One, and i2 Technologies are examples of companies that provide both the technology platform and operate the trading hub. We think that the current stand-alone e-procurement technology solution providers will eventually converge among themselves and with other solutions and power two types of portals: an employee-facing portal and a supply-chain-facing portal. The employee-facing portal is a corporate Intranet portal that will encompass all the information technology tools and services that employees need: indirect and direct material procurement, expense reporting, knowledge management, business intelligence, project management, human resources, time and billing, and benefit enrollment. We believe that the best candidates to put such an employee-facing portal together are application service providers (ASPs) and ERP vendors. The supply-chain-facing portals link the current productoriented trading portalsauto parts trading portals, steel trading portals, indirect material trading ports, etc.and aggregate them into a one-stop hub where a business can source all the materials, products, and services it needs for production and operation. In addition, the supply-chain-facing portal should facilitate the collaboration between trading partners on a wide spectrum of activitiesorder processing, procurement, receiving, production, distribution, and related logistical services. The big opportunity is in strategic buying solutions. Transactional buying solutions provided by companies like Ariba, Commerce One, and Clarus are adept at reducing the transaction processing cost. But we think that the cost savings in transaction processing are relatively low when compared with the reduction in prices of products and services bought via trading portals. Therefore, we believe that trading portals that facilitate strategic buying will have a bigger market opportunity. As companies deploy Internet technology to make supply chains more efficient, we think three things will happen: 1. Traditional businesses will become less focused on owning assets and will emerge as brand-owners, reducing vertical integration and giving way to outsourcing in many industries. 2. Traditional distributors product offerings will be unbundled into three components: fulfillment, reselling, and service. 3. The distinction between warehouses and assembly plants will blur.

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INVESTMENT HIGHLIGHTS Large market potential. We estimate that the market for e-procurement solutions is at least $9.5 billion and could reach several multiples of that figure as mass deployment is reached. (See Stephens Inc. market size estimate on page 18). We believe the following macro factors are driving a considerable amount of market demand for e-procurement solutions: 1) Intensified competition: To stay competitive, an increasing number of corporations are turning to e-procurement to cut costs, streamline the supply chain, and provide better services. 2) Mass customization: The on-time delivery of custom-configured products can be guaranteed only if the procurement of parts and materials is streamlined and if production and assembly are efficient. 3) Increased time-to-market pressures: As customers demand quicker and better service, companies have to streamline the first step of the supply chainprocurementin order to reduce time-tomarket. 4) Demand for per-customer and per-trading-partner profitability analysis: To better manage customer relationships and trading partner relationships, corporations need to have a clearer picture of which relationships are highly profitable, on the margin, or losing money. The detailed data accumulated via the e-procurement solution and its user-friendliness makes perrelationship profitability analysis possible. Prioritized area of corporate spending. In June, 1999, Information Week surveyed 300 information technology (IT) executives about their key IT project implementation priorities in 1999. The result of the survey (below) confirms that there is a large market demand for e-procurement solutions.

Table 1 Information Week Survey of IT Priorities

1. Improve customer service 2. Streamline business processes 3. Meet needs of external customers 4. Create marketing advantages 5. Organize and use customer data 6. Improve product development process
Source: Information Week, June 14, 1999 Reprinted with permission, CMP Media Inc., Manhasset, NY. No further reproduction is authorized without express permission of the publisher.

94% 91% 88% 82% 81% 78%

We think that e-procurement solutions help businesses achieve the second and third IT priorities by streamlining the procurement process and providing total visibility of the supply chain, which in turn creates marketing advantages. In addition, we think e-procurement solutions reduce the sale cycle time, thus achieving the sixth priorityimproving the product development process. Finally, e-procurement solutions usually aggregate the historical transaction data and provide real-time analysis reports, thus helping to organize and use the customer data (fifth priority), improve customer service (first priority), and meet the needs of external customers (third priority).

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Fast growing area. Some people question whether corporate purchasing online will grow as fast as consumer purchasing online. Experience tells us that changes usually occur much more slowly in the corporate world than in the consumer world. We agree that corporations may adopt new technologies at a slower pace than consumers. But we think that once the leaders in one industry have adopted a new technology, mainstream corporate America accepts the change faster than mainstream consumers do. Under intense competitive pressure, corporations are forced to acquire whatever new technologies the industry leaders have acquired in order to stay competitive. In contrast, in the consumer online purchasing area, mainstream consumers generally do not have any competitive pressure to adopt the widgets that the tech-savvy early adopters have. Therefore, we think that the online corporate purchasing market can grow faster from the early adopter stage to the mainstream than the online consumer purchasing market can. High barriers to entry and exit. E-procurement companies generally have the following barriers to entry: 1. Industry expertise 2. Internet technology expertise 3. Corporate business process expertise We believe that e-procurement companies have relatively high barriers to client exits due to the following factors: 1. High switching cost due to back-office system integration 2. Difficulty in re-accumulating transactional data to generate business intelligence in supply-chain management Strong value proposition. Early adopters of buy-side e-procurement solutions have seen significant returns on their investments. According to the September 1999 survey1 by Grainger Consulting Services, buyers averaged between 245% and 400% return on their investment in such solutions. Investors increasing awareness of the e-procurement companies. The successful initial public offerings of Ariba, Commerce One, and Chemdex have signaled that an increasing number of investors are paying attention to the e-procurement space. We think the investment communitys support of e-procurement companies will help to improve the end-user markets awareness of e-procurement companies and speed up customers adoption of such solutions.

INVESTMENT RISKS Although it is commonly agreed that e-procurement over the Internet has huge market potential, we think there are some challenges and risks that may hinder the fast growth of this sector. 1. Business culture change challenges. To adopt e-procurement is to move away from phone, fax, and paper that business people have grown accustomed to. Also, trading portals are moving business processes away from handshakes and established personal relationships. Nobody likes change. Consequently, the deployment of e-procurement will likely encounter various degrees of resistance. 2. Lengthy sales cycle. This is mainly due to the number of people involved in making the buying decision. Generally when a business evaluates the feasibility of acquiring an e-procurement solution, it involves the purchasing manager, the accounting manager, the chief information officer, the chief financial officer, and sometimes the chief operating officer. All of these people are from different aspects of the business and sometimes have different interests. To get these people to agree on buying one solution takes some time. As the e-procurement companies change from the software license-fee model to the subscription- or transactionfee model, we expect the sales cycle to shorten since there will be no hefty up-front capital investment involved.

Reprinted with permission from Grainger Consulting Services Stephens Inc.

3. Logistical infrastructure not in place. Although the transactions can become paper-less and virtual, the physical delivery of the product (unless it is information or a service that can be readily delivered over the Internet) still has to be conducted through distribution centers, trucks and human hands. Two impacts of eprocurement are increased velocity of inventory and reduced shipment size. However, most of the current distribution facilities were built to handle bulk-in and bulk-out shipments. They are generally not suited to handle the frequent and granular shipments generated by e-procurement over the Internet. 4. International trade over the Internet still immature. E-procurement has enabled corporate buyers to source globally over the Internet. However, not every seller is equipped to sell internationally, and not every buyer is sophisticated enough to buy internationally, either. Language, culture, regulations, customs and tariffs, and physical distribution of products across national boundaries all pose barriers for small and medium sized businesses to feasibly conduct buying and selling internationally over the Internet. E-PROCUREMENT: THE BIG PICTURE We define e-procurement as Internet solutions that facilitate corporate purchasing over the Internet. The Internet solutions include the technology platform and the services provided via trading portals. In this report, we will focus on the buy-side solution providers. We will leave the more in-depth analysis of the rest of the components to another stand-alone report that we will publish at a later date.

Figure 1 E-Procurement Technology Platform

Direct Transaction

Trading Portal

Buy-Side Solutions

Sell-Side Solutions

Exchange & Auction Solutions

Intelligent Digital Tradex MOAI OpenSite

Supply Chain Optimization Solutions

Ariba Commerce One Clarus Procurenet

Broadvision Cardonet OpenMarket Intershop

i2 Technologies Manugistics Extricity Syncra Systems

E-Procurement Technology Platform

Source: Stephens Inc.

Figure 1 depicts our view of the e-procurement landscape. According to stock market valuations of the companies in this sector, it is assumed that the business-to-business (B2B) Internet commerce market will be big. However, in order for significant amounts of B2B commerce to take place, companies must be enabled via a technology platform to buy or sell with their trading partners. We have identified four components of the eprocurement technology platform that enable businesses to trade with each other directly or via a centralized trading portal.
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Buy-side solutions that streamline the corporate purchasing process. Examples are: Ariba, Commerce One, Clarus, Oracle, Procurenet and SAP. Sell-side solutions that syndicate the vendors product information into online catalogs and streamline the sellers transaction processing activities. Examples of catalog content management companies are Aspect Development, Requisite Technologies, TPN Register, Vignette, Transium, Cardonet, Arcadia, and Shift Key. Examples of transaction processing solution providers are InterShop, OpenMarket, InterWorld, BroadVision, Smith-Gardner, and Calico Commerce. Exchange and auction solutions that enable the commerce portals to match buyers and sellers or conduct auctions over the Internet. Exchange technology companies include Tradex (acquired by Ariba), Tradeum and Intelligent Digital. Auction solutions companies include OpenSite, Moai, and Trading Dynamics (acquired by Ariba). Supply chain optimization solutions that enable the integration of supply chains and help buyers and sellers to collaboratively plan production, forecast demand, and replenish inventory. Examples of supply chain optimization vendors include i2, Manugistics and Syncra Systems.

Like building columns supporting the roof, the aforementioned components supports two types of trading formats: direct trading connections between buyers and sellers, and hub-and-spoke trading connections via a centralized trading portal. We have identified four basic formats of trading portals:

Online trading communities that are mainly driven by content (news, analysis, research reports, etc.). Examples are VerticalNet and efdex.com. Virtual catalog shopping malls where buyers can search and buy from a centralized multi-vendor catalog. Examples are Commerce Ones Marketsite.net, Ariba.com, and PSDIs MRO.com. Virtual exchanges where buyers bids and sellers asking prices are matched. Virtual Exchanges are similar to the NASDAQ in the stock market. Examples are Chematch, PaperExchange, and Band-X. Online auctions where buyers bid to buy a product/service or sellers quote in response to an RFP (Request for Proposal) or RFQ (Request for Quote). Examples are FreeMarket and e-Steel.

For a more in-depth discussion of trading portals please see our report The Internet: Redefining Traditional Business and Giving Rise to New Ones, May 1999. The Basics Purchasing Is an Inherent Function For Every Business Businesses exist to sell goods and services to other businesses and/or to consumers. To produce these goods and services, inputs or services (steel coil, bearings, computers, travel, temporary staffing) must be purchased from other parties in a business supply chain. Regardless of what business a company is in, whether it be coal mining or consulting, purchasing is an unavoidably important business function. We estimate that purchased goods/services represent roughly 50% of a typical U.S. companys revenue. The expenditures related to purchased goods and services can be categorized by the use of the product. There are two uses: direct and indirect. A direct good is an item that becomes part of an end product. A printed circuit board installed in a PC is an example of a direct good. An indirect good is an item that is not a part of the production process, but is used in other processes such as operational, selling or administrative. Office supplies, cellphones, PCs and repair parts for a copier or production equipment are examples of indirect goods. Procurement is significant to all types of businessesmanufacturing, wholesale/retail, and service. For manufacturers, raw materials and components must be purchased, value is added through some manufacturing or assembly process, then the final product is sold to the customer. For wholesalers/retailers, goods are purchased with the intent of resale to businesses or consumers. Nonetheless, a significant amount of indirect goods and services must be purchased to execute the mainline business activity. Service companies such as engineering or consulting firms dont purchase direct goods per se but spend a large amount on the procurement of indirect items such as travel, office supplies and information technology (IT) equipment.

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There are two costs involved in purchasing. One is the direct cost of the material or service purchased. Second is the process costthe cost of the purchasing function. For reasons we outline later in the report, we believe that Internet procurement solutions can have a dramatic impact on both of these costs. The cost of the purchasing function includes the personnel and overhead required to search for, compare, negotiate, and source goods and services. Less intuitive, but equally important, are other areas within an organization that indirectly represent purchasing process costs. These include receiving, inspection, and accounts payable.

Figure 2 Organizational Areas Impacted by Purchasing

Select Goods/Services

Arrange Delivery Logistics & Production Planning

Goods Arrive

Invoice Processed Vendor is Paid Accounts Payable

Purchasing

Receiving/ Inspection

Source: Stephens Inc.

Purchasing department This department is responsible for the procurement of materials, components, production machinery and equipment, and services required to manufacture a product as well as procurement of indirect materials. In a retail environment, a buyer is responsible for the procurement of goods for resale through the companys retail channel (physical locations, catalog or online). In addition, the purchasing department is responsible for selecting approved vendors and negotiating and executing contracts. Receiving department The receiving department is at the beginning of the physical flow of goods within a company. This department is responsible for storing/staging inbound items as well as initial quality and quantity checks. Bar-code and scanning technologies are becoming more prevalent and are automating the paper-handling aspects of the receiving process. Accounts payable The accounts payable department is responsible for processing the invoices received from suppliers and then releasing payment to those suppliers under agreed-upon terms. In spite of the proliferation of EDI technology, paper invoices and the associated manual processing still are in use today. Because purchasing occurs at the beginning of the value chain, the impact of purchasing decisions is magnified as the product flows downstream throughout the organization and to the customers. As an example, ABC Corp. manufactures industrial cutting tools (drill bits used in a machine tool to cut or drill steel). If the steel from which these cutting tools are made is sourced from a new vendor in a spot-buy transaction at an online exchange, the companys cost structure can be affected. Because most companies are attempting to slash the time-to-market of their products, these cutting tools are manufactured in a high-volume production environment. Consequently, a small change in the characteristics or tolerances of the steel could lower production yields and increase production cycle time which, in effect, increases the cost of the end product.

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How Does a Buy-Side Solution Work? To illustrate how buy-side solutions reduce procurement cost, we use buying a briefcase as an example.

Figure 3 Old Buying Process

Assistant manually prepares a requisition form.

Manager tells the Assistant to buy a briefcase

Assistant shows Manager the catalog.

Disapp

Manager chooses a briefcase.

roved

Purchasing Department faxes the supplier the purchase order

Purchasing Department manually prepares a purchase order.

Assistant sends the requisition form for approval.

Accounting Department keys in the proper entry and pays the invoice.
Source: Stephens Inc.

1. A Manager needs a new briefcase. He/she tells the Assistant or a dedicated requisitioner to order a briefcase of certain size, color, and style. 2. The Assistant goes through the office supply catalog (the print version) from the designated supplier and finds several choices of briefcases. Not sure exactly which briefcase the manager likes, he/she shows the Manager the catalog. 3. The Manager chooses a briefcase. 4. The Assistant copies down the product name and number into the requisition form. 5. The Assistant sends the requisition form to the Office Manager and/or Purchasing Manager for approval. 6. The requisition is approved. (If it is not approved, then it goes back to step 1). The Purchasing Department copies down the product information and types out a purchase order. 7. The Purchasing Department sends the purchase order to the supplier via fax. 8. The Accounting Department keys in the entry related to the purchase order and pays the invoice.

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Figure 4 Buy-Side Solution-Enabled Purchasing Process

Disapproved

Notification

Manager searches the online catalog and clicks a briefcase into the virtual shopping cart. The requisition form is automatically generated.

Electronically routes the requisition form for approval.

Approved

Purchase order (P/O) is generated.

P/O is sent to supplier via the Internet

Accounting entry is automatically populated and payment is made.

Source: Stephens Inc.

1. The Manager needs a new briefcase. He/she logs onto the internal procurement Web site and chooses a briefcase from the online catalog. With the click of a button, the briefcase is put in the virtual shopping cart, and the information related to the product is automatically populated to the requisition form. 2. The requisition form is electronically routed for approval. 3. If the requisition is not approved, the Manager is notified. If it is approved, it is aggregated with other similar requisitions generated around the same time within the company. One purchase order is automatically populated, extracting the needed information from the requisition orders. 4. The purchase order is sent to the supplier via the Internet. 5. The related accounting entry is automatically populated into the accounting system and the invoice is paid electronically using a corporate purchase card or an electronic fund transfer account. The Traditional Purchasing Process vs. The Internet-Powered Process We have outlined six criteria for comparing the traditional purchasing process with the purchasing process that has been enabled via a buy-side solution. The results of our analysis are depicted in Table 2. Table 3 shows those costs that are affected by the use of a buy-side solution. These six factors manifest themselves in four areas of savings for corporations: 1) the price of the materials and services; 2) the purchase and fulfillment cycles; 3) administrative cost; and 4) inventory cost. Table 2 Difference Between the Old Purchase Process and New Internet Purchase Process Old Process High Low Paper-Intensive Low Long High New Process Low High Electronic (Paper-less) High Short Low

Amount of Maverick Buying Volume Discount Administrative Process Employee Efficiency Order Cycle Time Amount of Error
Source: Stephens Inc.

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Aberdeen Group conducted a survey and found that a typical buy-side solution would generate the following savings: Table 3 The Cost Savings Created by Buy-Side Solutions(a) Traditional/Manual -7.3 days $107 per order requisition -Internet Procurement 5%- 10% reduction 2 days $30 per order requisition 25% to 50% reduction in inventory costs (b)

Price of Material and Services Purchase and Fulfillment Cycles Administration Cost Inventory

(a) Data was collected in a sample of companies implementing procurement solutions focused on MRO purchasing requirementsnot direct material purchase requirements. (b) The percentage is average for sites that recognized inventory reduction at time of survey. Source: Aberdeen Group, June 1999. (Reprinted with permission.)

An example. MasterCard uses Clarus buy-side solution to streamline the purchasing process over the Internet. MasterCard has indicated that it has achieved significant cost savings. MasterCard has 2,300 U.S. employees and spends about $130 million annually for maintenance, repair and operating resources (MRO). Approximately 1,200 employees are active users of Clarus eProcurement. MasterCard has gained efficiency in several areas. First, the time required to fill out a purchase order has been reduced from 4 days to 1.25 days, a 70% improvement. Second, the cost of processing purchase orders has been cut from $125 to $40. Third, MasterCard is saving over $70,000 per month on its purchases because of improved pricing on contracts and adherence to its existing agreements with its suppliers (i.e., reduced maverick buying). Our Evaluation Criteria of the Buy-Side Solutions Today, the perceived success formula for e-procurement companies is to be 80% focused on sales and marketing and 20% on technology. We dont think this convention is completely accurate. To help investors wade through the flurry of press releases, we have outlined our procedure for analyzing the real business of an e-procurement solution company. In addition to analyzing the market and the company management, we think the following are important in evaluating an e-procurement solution business.

It is the business process, not the software code, that counts. Agility is the ultimate differentiation. How many high-quality buyers does the company have as customers? What do customers think of the product and servicesfunctionality, scalability, reliability, implementation, integration, and customer support? How many partners does the company have that really provide synergy?

1. It is the business process, not the software code, that counts. Software and solutions are created to make the business process more efficient. Therefore, it is imperative for the companies that create the software and solutions to understand how the business process works in the real world before they start to put the software code together. In the e-procurement space, it is very important for a buy-side solution company to have a management team that understands both the real world purchasing process and software engineering and marketing. We think that e-procurement companies should try to avoid the common mistakes that ERP vendors have made in the pastforcing customers to change their business processes in order to fit into the workflow dictated by the ERP system. The lack of business process expertise caused the rigid structure of the ERP system, which in turn caused slow adoption. Likewise, we believe if an e-procurement company gives software code priority over business process, it will not stand a chance to survive in the fast-moving marketplace.
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2. Agility is the ultimate differentiation. This criterion is closely related to the first one. Because business process changes are accelerating in accordance with the market dynamic changes, software and solutions have to be able to change equally fast to fit the business process. In addition, we believe software agility will solve the dilemma that a lot of businesses are facingthey can either build the software in house, buy packaged software off the shelf, or outsource the software development. Although it is common knowledge that outsourcing or buying packaged software will save a lot of resources, a lot of businesses still want to build the software in-house. They do not want to buy packaged software because either their business is so innovative that there is no software available to support the business, or the available off-the-shelf software does not fit their business process very well. Also, some businesses do not want to outsource the software development because they do not want to deal with the hassle of calling the outsourcer each time they want to make a change to the software solution. We think that the current build-versus-buy debate occurs because most of the existing software solutions are hard-coded and are not agile enough. Software solutions that lack agility essentially limit themselves to a very small and specific market. In contrast, software solutions that are agile enough to allow businesses to customize the solution on the fly by themselves should enjoy a larger, more generic market. Therefore, agility of the software solution becomes the ultimate competitive differentiation. One question we frequently ask in the e-procurement space is: If the business manager decides to change the business rules, does he/she have to go to a programmer to get the changes made in the e-procurement system? If the answer is yes, we have serious doubts about whether the system is agile enough to handle the masscustomized purchasing requirements of the future. 3. How many high-quality buyers does the company have? A lot of buy-side solution providers brag that they are working with thousands of suppliers. But when we ask how many buyers they have as customers, the number is usually double-digit at best. Although it is nice to have a lot of suppliers available via a buy-side solution, ultimately, it is the number of buyers and the quality of buyer accounts that validate a buy-side solution. After all, it is a buyers economy. Suppliers generally try every venue to sell to buyers and currently they are not very choosy about which venue they sell through. Therefore, we do not think having an astronomical number of suppliers proves that a buy-side solution is particularly effective. Instead, we think that having a large high-quality buyer list tells us a lot about how good a buy-side solution is. We emphasize the quality of customer list because we have seen some buy-side solution providers giving away a cut-throat deep discount or even a large amount of equity in order to sign up some big-name customers. 4. What do customers think of the product and servicesfunctionality, scalability, reliability, implementation, integration, and customer support? Unlike many business-to-consumer Internet companies such as AOL or Yahoo! that offer an investor an easy, hands-on experience, e-procurement companies usually cannot provide investors with easy access to try out the system due to the nature of the business. To evaluate the behind-the-scene e-procurement businesses, investors have little choice but to interview the existing customers of these companies. The common questions we ask are: Functionality does the system provide the functions you need to conduct procurement? Scalability can the system scale up as the number of users increase and as new modules are plugged into the system? Reliability does the system have back-up and ensure the required up-time? Implementation how long is the implementation time and how smooth is the implementation, including system installation and training? Integration can the system talk with existing back-office systems and other complementary eprocurement systems? Customer support are the service reps readily available to take care of possible system glitches? 5. How many partners does the company have that really provide synergy? Companies in the e-procurement area partner for two reasons: to embed each others technologies to provide the customers with a complete suite of solutions; and to expand the marketing and distribution channels. When we read the press releases about a new partnership, we need to ask ourselves the following questions: How well do the two partners technologies fit together? How easily can the two partners sales forces cross-sell each others products? How many new customers can the partnership bring to each party?
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MARKET CHARACTERISTICS & PLAYERS E-Procurement Is a Large, Fast-Growing Market The market potential for buy-side solutions is extremely large and poised for rapid growth, in our opinion. Four factors underpin our thesis: 1) Corporate buyers are ready for procurement over the Internet; 2) Buy-side applications are beginning to move from the early adopter to the mainstream stage; 3) The overall corporate spending on indirect material is estimated at $1.4 trillion; 4) Indirect material procurement is ideally suited for Internet buying solutions. First, we think that corporate buyers are ready for procurement over the Internet. According to a recent Purchasing Magazine survey, as of 1999, 89% of corporate buyers have access to the Internet, and 81% of buyers use the Internet extensively in their jobs. The survey also indicates that corporate buyers are using or plan to use the Internet to conduct virtually all the tasks related to purchasing. We expect that the Internet will become an indispensable tool for business-to-business purchasing in the near future.

Figure 5 Corporate Buyer Internet Access and Usage Metrics

% of Buyers With Access to the Internet
89 81 70 89

% of Buyers Using the Internet in Their Jobs

100 90 80 70 60 % 50 40 30 20 10 0 45 73 81

90 80 70 60 % 50 40 30 20 10 0 1996

1997

1998

1999

1997

1998

1999

Source: Purchasing Magazine, October 21, 1999 (Reprinted with Permission.)

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Second, we think that the current e-procurement market is at the conjunction of the early adopter and mainstream stages. We expect the market to grow at a high speed in the next two to three years as Figure 6 below depicts.

Figure 6 Market Adoption Curve

Enterprise Resource Planning

Market Adoption

Internet-Based Total Supply Chain Management

e-Procurement

Product Life Cycle

Source: Stephens Inc.

According to Statistics of U.S. Businesses, Bureau of Census, there were 5.4 million companies in the U.S in 1995. Our study indicates that only about 200 companies have purchased a buy-side Internet solution to date, with only 40 to 50 systems currently in production. However, the early adopters are usually Fortune 500 companies. When we look at the Ariba, Commerce One, and Clarus customer lists, we find most of the customers are market leaders in their respective industries. Companies such as Dow Chemicals, General Motors, MasterCard, FedEx and Chevron are trend-setters in technology adoption in their industries. When these companies achieve certain levels of operational efficiency by utilizing buy-side solutions, we expect that competitive pressure will force other firms in the industry to follow the lead and adopt buy-side solutions soon. Because this report focuses only on buy-side solutions for indirect materials/services, our market size estimates only include this specific sector. We think the overall e-procurement market would be much bigger if we included other components of e-procurement technology platforms and the trading portals. Third, overall corporate spending on indirect materials and services is currently very large. According to the Center for Advanced Purchasing Studies, a typical U.S. manufacturer spends about 28% of its annual revenue dollars on direct materials/services (materials that go into production) and 33% on indirect materials/services (materials that go into supporting and operating functions) (see Figure 7). For a professional service company, such as a brokerage firm or an insurance firm, the percentage of the indirect spending is even higher. In September 1999, Grainger Consulting estimates that the indirect supplies and services market was $1.4 trillion2 in 1998. Automating the purchasing process of indirect materials and services represents a tremendous market opportunity.

Reprinted with permission from Grainger Consulting Services Stephens Inc.

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Figure 7 Division of Corporate Spending

Division of Corporate Spending

(Typical Manufacturer)

Profit Taxes 9% 13% HR 17%

Direct 28%

Indirect 33%

Source: Center for Advanced Purchasing Studies (Reprinted with permission.)

Fourth, we think that indirect materials (MRO products) are best suited for purchase over the Internet. The October 1999 Purchasing Magazine survey also indicated that among all the product categoriesmetals, chemicals, electronic components, computers, software, energy, services, and MRO goodsMRO goods are most likely to be researched and purchased over the Internet. Figure 8 Types of Goods For Which Buyers Are Using or Will Use the Internet to Research and Purchase For what types of goods do you/will you use the Web? (% of survey respondents)
60 50 40 33 35 38 48

30 17 20 9 10 0 Metals Chemicals Electronic Components 12

21

Computers/ Peripherals Find Data Conduct Transactions

60 50 40 31 18

55

35 23 9

30 20 10 0
Software MBO & Office Supplies Energy

2
Services (logistics, telecom, etc.)

Source: Purchasing Magazine, October 21, 1999 (Reprinted with permission.)

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How Big Is the Market? We analyze the market for indirect material buy-side solutions using a top-down approach. First we made the following assumptions: The value of a buy-side solution can be converted into a per-seat or per-user basis. The pricing scheme is comparable whether it is a license fee model, a subscription fee model, or a transaction fee model. The majority of the firms will not deploy the buy-side solution among all of their employees. We assume a range of deployment from as low as 20% to as high as 80% of all employees. We use Clarus subscription fee pricing scheme of $10 - $200 per user per month in our market estimate. We think this assumption is relatively conservative because Clarus pricing is relatively low compared to Aribas and Commerce Ones. Second, we look at the number of employees by company size in the U.S.

Table 4 Number of U.S. Employees by Company Size Company size Small (<100 employees) Medium (100 to 499 employees) Large (> 500 employees) Total number of employees 37.9 million 14.7 million 47.7 million

Source: Statistics of U.S. Businesses, Bureau of Census, 1995 (Reprinted with permission.)

Third, we apply the price and the deployment assumptions and arrive at a range of market estimates.

Table 5 Market Size Estimate of Buy-Side Solutions Assume that a buy-side solution is charged on a $10 per user/month basis. Total Number Market Size Estimate ($ in millions) of Employees (in millions) 20% Deployment 50% Deployment 80% Deployment Company Size Small (<100 employees) 37.9 $909.6 $2,274.0 $3,638.4 Medium (100 to 499 employees) 14.7 352.8 882.0 1,411.2 Large (>500 employees) 47.7 1,144.8 2,862.0 4,579.2 Total 100.3 $2,407.2 $6,018.0 $9,628.8 Assume that a buy-side solution is charged on a $200 per user/month basis. Total Number Market Size Estimate ($ in millions) of Employees (in millions) Company Size 20% Deployment 50% Deployment 80% Deployment Small (<100 employees) 37.9 $18,192.0 $45,480.0 $72,768.0 Medium (100 to 499 employees) 14.7 7,056.0 17,640.0 28,224.0 Large (>500 employees) 47.7 22,896.0 57,240.0 91,584.0 Total 100.3 $48,144.0 $120,360.0 $192,576.0
Source: Stephens Inc. and Statistics of U.S. Businesses, 1995 (Reprinted with permission.)

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Looking at the above two tables, we assume that the market will adopt the buy-side solutions gradually. At the early stage, we think most businesses would pilot a relatively simple solution (with few modules) among a small number of users. Accordingly, we apply the low end of our assumed pricing scheme, $10 per user per month, and the low end of our estimated deployment rate, 20% of employees. Therefore, we think that the early-stage market is about $2.4 billion in size. As businesses phase from the pilot stage into the mainstream, we think that they will gradually add on more solution modules or adopt more sophisticated solutions among a larger number of users. Accordingly, we apply the high end of the pricing scheme, $200 per user per month, and the high end of the deployment rate, 80% of employees. Therefore, we think the mature-stage market size approximates $192.6 billion. Who Are the Players? The buy-side solution space is getting increasingly competitive. In the center of the universe are the Internet pure-plays such as Ariba and Commerce One that started with a background of operating resource management (ORM). Recently, Clarus sold off its old Enterprise Resource Planning (ERP) business and became a pure-play Internet buy-side solution provider. Also, Elcom has hired Wit Capital to spin off its buy-side solution business. The universe of pure-play Internet buy-side solution providers is enlarging. In addition, companies from other complementary backgrounds are starting to come into the buy-side universe. Internet expense management companies such as Concur and Extensity are starting to leverage their workflow rules engines and get into the procurement space. Enterprise asset management (EAM) companies such as PSDI and Datastream are adding on the Internet-based procurement solutions to complement their existing businesses. Above all, Enterprise Resource Planning (ERP) heavy-weights such as Oracle and SAP are leveraging their existing infrastructures and client bases and starting to compete on indirect material procurement as well. We expect an increasing number of ERP, EAM, and expense management companies to expand into the Internet-based buy-side solution space. We also anticipate that the Internet ORM pure-plays will further their functionality and offer complementary solutions.

Table 6 Buy-Side Solution Competitive Landscape Internet-based Expense Management Background Concur (CNQR) Extensity (IPO pending) Captura Enterprise Asset Management Background Project Software & Development (PSDI) DataStream (DSTM) Enterprise Resource Planning Background Oracle (ORCL) SAP-AG (SAP)

Internet-Based ORM Pure-Play Ariba (ARBA) Commerce One (CMRC) Clarus (CLRS) Elcom (ELCO) Netscape (AOL) Intelisys RightWorks Trilogy SupplyWorks Agentics Works.com Source: Stephens Inc.

Currently different buy-side solution providers are targeting different segments of the market. One spectrum (see Figure 9) of the market is the vertical industry alignment. Companies such as Clarus and Concur are targeting professional service companies where operating resource spending makes up the majority of the indirect material spending. In contrast, companies such as PSDI and DataStream are targeting manufacturers and other capital-asset-intensive industries where maintenance and repair material composes the majority of the indirect material spending. The other spectrum of the market is the size of the customer companies. Ariba and Commerce One target large companies, while Clarus targets medium-size to small companies.
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We have segmented the buy-side solution companies into the following market grid.

Figure 9 Buy-Side Solution Providers Market Positioning by Vertical Industry and Customer
x Ariba x CommerceOne

Size of Customers

x Project Software & Development Fortune 500 Cut-off x Clarus x DataStream x Concur x Elcom

Vertical Industry Today

Industrial
Source: Stephens Inc.

Professional

We also compare the key players from the operational and technological standpoints of view in the following table.

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Table 7 Competitive Profile

Core Competence
Ariba

Core Revenue Model

Transactionbased license fees

Who Pays
Buyer pays license fee and transaction fee and supplier lists in Ariba Network for free

Market Sweet Spot

Large companies Professional and

Catalog Content
Buyer-managed and suppliermanaged

Portal Transaction
Hub-and-spoke

Number of Customers
50

Technology Platform
Java

Procurement of operating resources

service industries

Clarus

Procurement of operating resources

Subscription fee or license fee

Buyer pays software license or subscription fee and supplier lists in the SupplierUniverse for free

Medium to small

companies Professional and service industries

Buyer-managed, Suppliermanaged, Thirdparty managed

Peer-to-peer

24

Microsoft

Commerce One

Procurement of operating resources

License and transaction fees

Buyer pays software license fee and supplier pays transaction fees

Large companies Professional and

Commerce Onemanaged

Hub-and-spoke

43

Microsoft

service industries
Other vertical

Concur

Travel expense reporting and management

License fee. Just announced subscription-fee model

Buyer pays

portals (e.g., BT, NTT, GM, etc.) Large companies Companies that have a lot of frequent travelers
Medium to large

Buyer-managed and suppliermanaged

Just announced trading portal.

0 for ecommerce network, 275 e-expense customers 5

Microsoft

Elcom

Procurement of technology products and operating resources

Subscription fees for remotely hosted version. License and maintenance fees for enterprise version.

Buyer pays

companies Financial Services, Broadcast/New Media and High Technology industries

Managed by elcom.com

Peer-to-peer

Microsoft and HP/UX

Source: Stephens Inc.

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Core Competence IProcure (Datastream)

Procurement of maintenance and repair materials

Core Revenue Model

License fee for the Enterprise Asset Management software, transaction fee for the iProcurement portal. License fee and transaction fee

Who Pays
Supplier pays transaction fee

Market Sweet Spot

Medium to small

Catalog Content
Suppliermanaged

Portal Transaction
Hub-and-spoke

Number of Customers
113 for iProcure, 25,000 for EAM product.

Technology Platform
Microsoft

companies Industrial and manufacturing companies

MRO.com (PSDI)

Procurement of maintenance and repair materials

Buyer pays for mroBuyer software and supplier pays for mroSupplier software

Large companies Industrial and

Suppliermanaged

Hub-and-spoke

manufacturing companies

Extensity

Travel expense reporting and management and billable time capture

License fee and subscription fees

Buyer pays license fee and optional subscription fee for marketplace access

Large companies Professional and

Third-party and buyer managed

service industries

Hub-and-spoke via partnership with CommerceOne to resell access to MarketSite; other marketplaces pending

43 for MRO.com, 75,000 Licensed Users for EAM product. 70

Java

Java

works.com

Procurement of operating resources

Transactionbased service fee for each order placed and commission/mar gin on goods purchased License fee or subscription fee for enterprise, Transaction based fee for Portals

Buyer pays service fee and merchant/vendor pays commission

Small/medium

companies with distributed locations Retail and professional services industries

managed by works.com

Hub-and-spoke

850

Java and C++

Right Works

Procurement of operating resources

Buyer Pays

Large companies Professional and service industries

Buyer Managed, Seller Managed, and third party managed

Hub-and-spoke, and supports Trading exchange

Java

Source: Stephens Inc.

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What Are the Business Models? There are three basic business models in the e-procurement space: software license fees, transaction fees (flat or commission), and subscription fees. Some companies have one model, and others have a combination of two or even all three models. We will discuss the pros and cons of each business model.

Table 8 Subscription-Fee, Transaction-Fee vs. License-Fee Model Subscription Fee A monthly or quarterly subscription regardless of number of transactions Transaction Fee A flat fee per transaction or a commission fee as a percentage of the value of the transaction Recurring Medium License Fee An up-front fee for the ownership of the software license

Description

Seller (1) Revenue Nature Seller Revenue Visibility Buyer(2) Accounting Treatment Buyers ROI Synchronized with Cash Outflow Sales Cycle Where Software Resides

Recurring High

Non-recurring Low

Expense

Expense

Capital investment

Yes

Yes

No

Relatively short Buyer internally hosted or third-party externally hosted High

Relatively short Third-party externally hosted

Relatively long Buyer internally hosted

Perceived Buyer Control Encourage Buyer to Transact Suitable Buyers

Low

High

Yes

No

Yes

Medium to large buyers with a large transaction volume

Small buyers with a small transaction volume

Large buyers with a large transaction volume

(1) Seller refers to the companies who sell an e-procurement solution. (2) Buyer refers to the companies who buy an e-procurement solution. Source: Stephens Inc.

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We think that the market is moving away from the license-fee model towards the subscription- or transactionfee models. Under a subscription- or transaction-fee model, companies who buy an e-procurement solution can better match their return on investment with their cash outflow than under the license-fee model. The following charts compare the three models from a solution buyers point of view.

Figure 10 License-Fee Model

In v e stm e n t

ROI

T im e

Source: Clarus Corp.

(Reprinted with permission.)

Figure 11 Subscription-Fee or Transaction-Fee Model

ROI

In v e stm e n t

T im e

Source: Clarus Corp. (Reprinted with permission.)

We think that the subscription-fee model suits the direct trading relationship between buyers and sellers, while the transaction-fee model suits the centralized trading portal where a lot of spot buying occur. In a direct trading relationship between buyers and sellers, buyers usually have a contract with sellers. Buyers usually know roughly how many transactions will occur ahead of time. Also, the volume of transactions that occur in a direct trading relationship is usually large enough to make a subscription model economical. In contrast, buyers usually do not know how many spot buys will occur ahead of time and they do not know from which suppliers they will buy. The big fluctuation in the number of spot buys that occur from month to month makes it hard to justify a fixed monthly subscription fee. In that situation, buying from a centralized trading portal and paying a transaction fee makes sense. Referencing Internet service providers (ISP) business models helps to understand the pros and cons of subscription- versus transaction-fee models in the e-procurement space. Currently, a majority of ISPs, including AOL, charge subscribers about $20 a month for unlimited usage. Some ISPs, such as Aristotle (located
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in Little Rock, Arkansas), charge subscribers $0.50 per hour. For Internet users who surf the Web at least 40 hours each month, $20 of monthly subscription fee is a great deal. However, there are also people who use the Internet well under 40 hours each month. For instance, some users access the Internet through their corporate accounts at work. When they go home, they may access the Internet just to check their personal e-mails or bank accounts. For these users, a fee of $0.50 per hour of Internet access is much more economical than a $20 a month subscription for unlimited access. Likewise, we think that in the e-procurement space, the subscription-fee model serves buyers with a large transaction volume while the transaction-fee model serves buyers with a lot of unpredictable spot buying.

COMPANY VALUATIONS We have selected all the publicly traded companies in the buy-side solution space and compared their valuation.

Table 9 Comparable Companies Valuation Analysis

Buy-Side Solutions
Comparable Company Analysis - Valuation Analysis (Dollars in Millions, Except per Share) DAMC/ CFY NFY Revenue Revenue 107.0x 370.7x 53.8x n/m 10.0x 5.1x 2.6x 12.3x 7.2x 370.7x 2.6 11.2 71.1x 62.8x 161.7x 17.0x n/m 5.8x 4.0x 2.2x 10.5x 5.8x 161.7x 2.2 8.2 33.7x

Company Name Internet ORM

Ariba Inc Commerce One Inc Clarus Corp Elcom International Inc Expense Management Concur Technologies Inc Enterprise Asset Management Project Software & Dev Inc Datastream Systems Inc Enterprise Resource Management Oracle Corp Sap Ag -Adr

Ticker ARBA CMRC CLRS ELCO CNQR PSDI DSTM ORCL SAP

Shares Out.
45.4 24.1 11.2 28.0 22.7 10.6 19.5 1,423.7 734.9

Price as of 12/15/99 $224.00 $412.31 $47.75 $12.75 $28.69 $75.50 $17.06 $90.38 $50.69

Market Cap. $10,177.4 $9,921.1 $535.9 $357.3 $651.4 $799.4 $332.8 $128,664.4 $37,250.2

DAMC $10,026.7 $9,880.1 $511.0 $330.1 $530.3 $722.2 $321.3 $126,243.4 $37,225.2

CFY Revenue $93.7 $26.7 $9.5 N/A $53.0 $141.1 $122.3 $10,260.3 $5,169.7

NFY Revenue $159.7 $61.1 $30.0 N/A $91.8 $178.6 $147.9 $11,983.5 $6,464.3 Maximum Minimum Median Average

Source: Stephens Inc. and FactSet Research Systems Inc.

Based on this analysis, the comparable companies are currently trading in a wide range from 7.4x to 149.5x NFY revenue. We believe the big disparity in the revenue multiples is caused by the following factors:

Internet pure-play vs. mixture of new Internet business and old enterprise software business. Ariba, Commerce One, and Clarus are all pure Internet businesses. These three claim much higher multiples than Project Software & Development, Datastream, Oracle and SAP because the latter four have enterprise software businesses servicing a relatively mature market. Revenue composition. Commerce One increased its market capitalization by 10 times after the announcement of its global marketplace strategy and its partnership with GM to develop the GM TradeXchange. These announcements created a perception that Commerce One would experience a significant growth in recurring transaction revenue. Ariba, on the other hand, rolled out Ariba Network but will still derive the majority of its revenue from transaction-based license fees. Clarus just introduced the zero-capital subscription model. Also, it has rolled out the Supplier Universe service. Since that rollout, its stock price has increased dramatically. We think that Clarus market capitalization multiple will continue to go higher as its strategy and product become better known in the investment community.
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THE CURRENT DEBATES The War Between Ariba and Commerce One Currently, the two most visible companies in the buy-side solution space, Ariba and Commerce One, are engaged in heated battles to dominate the space. The two are not only competing in operating strategies, but also doing a little mud slinging in the public relations campaigns. On conference call following release of its Q99 earnings, Ariba told analysts that Commerce One had thrown in the towel on the software business. Immediately, Commerce One retorted that Ariba was mimicking its portal strategy. The two are shedding blood to snatch the next big customer, the next complementary solution, the next strategic partner, and the next branding event. Watching the fireworks in the Ariba-Commerce One war can give investors clues regarding what the next big move could be in the buy-side solutions space. The battle for blue-chip customers. Because both Ariba and Commerce One are focusing on operating resource management and they both target Fortune 100 companies, sales and marketing conflicts are unavoidable. To make matters worse, we think that investors currently are rewarding e-procurement companies based on the number of customers they have and the name recognition of the customers. Therefore, to sign on a big customer and to be able to put that customers logo on the investor relations Web site can mean 5 40 points in the stock price. As a result, both companies are rushing to sign on the next blue-chip customer. We have seen in three incidents that Ariba and Commerce One competed head-on to snatch customers from each other. Table 10 Ariba and Commerce Ones Battle for Blue-Chip Customers Client Name PeopleSoft Battle Event 10/13/97 Ariba announced it will integrate the Ariba Operating Resource Management System with PeopleSoft's Enterprise Applications. The combined solution was to be deployed first at Cisco. 6/7/99 Commerce One announced it was to be selected by PeopleSoft to power the PeopleSoft Business Network (PSBN). MCI WorldCom 9/30/98 Commerce One announced a partnership with two MCI WorldCom units, MCI Systemhouse and UUNET WorldCom, to deliver Internet Procurement Automation for businesses. 7/6/99 Ariba announced that MCI Worldcom will use the Ariba solution to automate company-wide operating resource purchases with preferred suppliers. General Motors 3/15/99 - Ariba announced that GM will use Aribas solution to automate the IT goods and services. 11/2/99 - Commerce One announced that GM will use Commerce Ones solution to power TradeXchange, a trading portal between GM, GM suppliers, and GM dealers.
Source: Stephens Inc.

Both Ariba and Commerce One have paid hefty prices to acquire each others customers. To get the GM deal, Commerce One agreed to give 20% of its equity to GM in exchange for future revenue. Of course, Ariba shed some blood in the customer acquisition battle as well. We have talked to an Ariba customer that disclosed that it got the Ariba solution at a price significantly cheaper than the street price. We expect that the battle of customer acquisition will carry on. We advise investors to be aware of the real value of each customer the next time either Ariba or Commerce One announces signing one up.
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The battle to the global mega-trading portal. Although neither Ariba nor Commerce One would admit that they are mimicking each others strategies, we find that they increasingly resemble each other. They both started as a buy-side technology platform, then Commerce One announced its global marketplace strategy in September 1999, and Ariba announced its Net market maker strategy with its acquisition of Tradex in December 1999. Similar to Commerce Ones partnership with British Telecom, Nippon Telegraph & Telephone, and Singapore Telecom to deploy global trading portals, Ariba has partnered with Telefonica to deploy trading portals in Latin America, Spain, and Portugal. Both companies are trying to be a global mega-trading portals. But we think that their global portals will have limited success because they only suit multinational companies that have office locations around the world. We do not foresee a 100% U.S.-based company buying staplers from a supplier located in Japan. When considering all the hassles involved in international trade (customs clearing, international transportation, import and export documentation), we do not think the savings from e-procurement can justify the cost in global sourcing of operating resources. The battle to get into a new market. The following table illustrates the two examples of new markets into which Ariba and Commerce One are rushing.

Table 11 Ariba and Commerce Ones Battle for A New Market Market The Government Battle Event 4/7/98 Commerce One announced that it was to be selected by the County of Los Angeles to deliver e-procurement solutions. 11/9/98 Ariba announced that the State of California was to use the Ariba solution. 12/7/99 Ariba announced a partnership with American Management Systems to target the government-to-business Internet commerce market. Maintenance and Repair Material Procurement
Source: Stephens Inc.

10/6/97 Commerce One announced a strategic partnership with Indus to automate the maintenance and repair material purchasing process. 10/18/99 Ariba announced a partnership with Indus as well.

The battle for acquiring complementary solutions. Both Ariba and Commerce One have recognized that auction solutions can extend their service offerings in the procurement space. At its user conference on September 17, 1999, Commerce One announced a partnership with TradingDynamics, which was also one of the exhibitors at the conference. However, within one week of each other in November, Ariba announced it would acquire TradingDynamics and Commerce One announced it was acquiring CommerceBid. Both acquisition targets are auction software companies. Now Ariba has acquired Tradex, an exchange platform company with 18 customers. We would not be surprised to see Commerce One announce an acquisition of another exchange platform company in the near future. The battle for partnerships. Both Ariba and Commerce One issue press releases almost on a daily basis and have announced a slew of partnerships. We have aggregated the partnerships each company has into the following table. These partnerships can give us some hint regarding the next market segment and direction each company will likely target in the near future. Based on the analysis of the following table, we expect that Ariba will form additional partnerships in the healthcare and life sciences industries and in the IT content sector. We also expect that Commerce One will form some partnerships in the customer relationship management space.

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Table 12 Comparison of Ariba and Commerce Ones Partnership Profiles Partnership Category Application Service Provider Ariba USI BellSouth British Telecom, Singapore Telecom, Nippon Telegraph and Telephone Grupo Financiero (a Mexican bank), Toronto Dominion Bank (a Canadian Bank) PricewaterhouseCoopers Ernst & Young Cambridge Technology BSG SAP, Walker Indus Commerce One

Non-US Internet Service Provider Telefonica

Non-Us Financial Services Group N/A

Consulting & System Integration Deloitte Consulting

ERP Enterprise Asset Management Content Management Middleware Payment Technology Platform Sell Side Customer Relationship Management Travel & Expense Management Vertical (Healthcare) Vertical (Life Sciences) Vertical (Hospitality) Vertical (IT)
Source: Stephens Inc.

SAP, JD Edwards Indus

Aspect Development, TPN Register, BlackDot Group Grainger TIBCO NEON, VEO US Bancorp, American Express, Verifone, Visa Microsoft Interworld, Open Market Siebel GetThere.com N/A N/A Purchase Pro N/A Signio Microsoft InterShop N/A Extensity OmniCell, empactHealth.com Sciquest Primus CNET

Spin doctors are in. We have to admit that both Ariba and Commerce One are great at managing public relations. They both manage to feed the market with a steady stream of new customer announcements even though they may have entered into agreements with some customers a long time before the announcement. Also, Ariba and Commerce One often make similar major announcements within one week of each other. For instance, Ariba went public on June 23, 1999. Within one week on July 1, 1999, Comerce One went public. Commerce One announced on November 5, 1999, that it was acquiring CommerceBid. Within ten days, on November 11, 1999, Ariba announced that it was acquiring TradingDynamics. As the market-spin battle heats up, both companies user conferences and seminars are even timed close to each other. We can confidently say that if Ariba makes a major announcement, Commerce One is likely to come out with a similar announcement within days, and vice versa. Which solution is better? With all the marketing fluff spun out by both Ariba and Commerce One, it is tough to figure out which solution is superior. We think that the best way to evaluate these solutions is to listen to the customers. So we talked to a number of Ariba and Commerce One customers. Customers who have chosen Ariba think that Ariba has broader functionality, relatively smoother implementation and better integration with
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existing back-office ERP systems. Customers who have chosen Commerce One like Commerce Ones portal strategy and its ability to relieve buyers from the chores of catalog content management. At this point, we do not think that one system is technologically superior to the other. The differentiation factor lies in sales and marketing strategies and the pricing models. Where are they heading? As we discussed before, total supply-chain management is the final frontier of competition. As both Ariba and Commerce One expand globally and into the mid-tier market, the only growth area currently unexplored is supply-chain optimization. We think it makes sense for both Ariba and Commerce One to partner or merge with some seasoned supply-chain management companies (such as i2 or Manugistics) to offer buyers automatic replenishment, receiving scheduling and other supply-chain functions. We also think that both Ariba and Commerce One will evolve from MRO-procurement portals into supply-chain-facing portals. (See details of a supply-chain-facing portal on page 36.) Will There Be Only ONE Winner? There are a lot of buzzwords floating around the press these days about corporate procurement over the Internet. There is also a flood of business-to-business e-commerce solution providers that can easily overwhelm and confuse buyers and investors. For a while, it seemed that Ariba was going to dominate the entire corporate procurement universe, and centralized trading portals like Commerce Ones Marketsite.net were willing to be the magic pills to ease any kind of pain. The ultimate question becomes: Will there be only one winner and will that winner take the lion share of the market? Our answer is no. We think there will be multiple winners in the e-procurement space for two reasons: 1. The market is big enough for multiple winners. We think the competitive landscape of the e-procurement sector will resemble the ERP sector. At first, there were a large number of ERP vendors. Then the market consolidated into five winners, instead of oneSAP, Baan, Oracle, PeopleSoft and JD Edwards. We think the e-procurement market will eventually expand into virtually all industries and all sizes of companies. The e-procurement market should become big enough to accommodate multiple winners. 2. Existing e-procurement solutions are targeting different aspects of procurement; therefore, we believe there should be at least a couple of dominant players in each aspect in the near term. There are two types of materials/services that businesses buy: Direct materials/services that go into production. Indirect materials/services (such as office supplies, and travel and entertainment services) that do not go into production. There are also three types of buying: Strategic buying, which involves supplier selection, contract negotiations, and supplier management. Strategy buying is oriented towards establishing a long-term relationship between buyers and sellers. Transactional buying, which involves purchasing products according to existing contracts and processing the transactions. Transactional buying is essentially paper pushing. Spot buying, which usually involves one-time deals. Spot buys usually occur when existing contracted suppliers cannot fill the order, when there is a rush order, or when the order is one-time only and the order size is too small to justify the contract negotiation process. We will elaborate on which type of e-procurement solution suits which type of buying. We believe that centralized trading portals are more suited to strategic buying and spot buying; buy-side solutions suit transactional buying better. In addition, we believe that because the transactional buying of direct materials is very much automated via EDI and ERP solutions, the opportunity for further automation using Internet technologies lies in the transactional buying of indirect materials. The following figure illustrates the relationships between buying activities and e-procurement solutions:

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Figure 12 Buying Activities and Suitable E-Procurement Solutions

Direct Materials Procurement Indirect Materials Procurement

Reverse Auction

Strategic Buying

Strategic Buying

Reverse Auction

EDI & ERP

Transactional Buying

Transactional Buying

Buy-Side Solutions (such as Ariba , Clarus )

Trading Portal

Spot Buying

Spot Buying

Trading Portal

Source: Stephens Inc.

HOW BUSINESSES BUY The General Purchasing Process First, lets take a look at what steps are involved in the entire procurement process. Figure 13 General Purchasing Process
Forecast Demand Request for Proposal Bid Negotiate Contract

Buyer

Place Orders Process Orders Shipping Orders Receiving Orders Invoicing Payment Vendor Performance Tracking & Management Customer Service

Seller

Source: Stephens Inc.

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1. A buyer forecasts the quantity of materials, parts, and products needed in preparation for a Request for Quote (RFQ) or Request for Proposal (RFP). At the same time, the seller forecasts the market demand for the products to be sold and estimates the capacity needed to meet the market demand. 2. Buyer develops an RFP and sends it to a number of sellers. Seller bids in response to the RFP. 3. Buyer selects the final bid. Buyer and Seller negotiate and enter into a contract. 4. Buyers company places orders based on the contract. There can be multiple orders under one contract. Sellers company processes the orders. 5. Seller ships the order to Buyer. Buyer receives the order. 6. Seller presents Buyer a bill or an invoice. Buyer pays the bill or invoice. 7. Buyer tracks how well seller fulfills the orders and services the contract. In addition, Buyer tracks the quantity of products ordered to better negotiate with Seller in the future. Seller performs after-sale service and support. In the above process, Steps 1, 2, 3, and 7 are regarded as strategic buying, while Step 4 and 5 are regarded as transactional buying. Next, we analyze the different types of buying activities and the suitable e-procurement technology platforms.

Table 13 The Difference Between Strategic Buying and Transactional Buying Strategic Buying
Objective Establish and maintain long-term relationships between buyers and sellers. Comparison shopping among suppliers and contract negotiation. Helps to reduce the cost of goods sold. Data analysis, contract negotiation, relationship building. Non-routine work

Transactional Buying
Process transactions according to preestablished contracts. Placing orders with contracted Sellers. Little or no shopping among Sellers involved. Helps to reduce the paperwork processing cost. Virtually none. Anyone who can shop on the Internet can do transactional buying. Routine work

Essential Activity Impact Skills Required Nature

Source: Stephens Inc.

As a result of the differences listed above, we think buy-side e-procurement solutions are best suited to automate the transactional buying process. Solutions provided by companies such as Ariba, Commerce One, and Clarus automate the process of item selection, approval routing, purchase order placement, and payment. These solutions help alleviate the purchasing departments from the chores of processing transactions and push the transactional buying function to end-users who request the materials/services. In addition, buy-side solutions aggregate company-wide purchasing data into one repository. The aggregated data allows purchasing managers to better analyze the demand trend and negotiate with the suppliers. In other words, buy-side solutions also facilitate the demand forecast and supplier management aspects of strategic buying. In contrast, we think reverse auction best suits the supplier selection and initial contract negotiation aspects of the strategic buying process. When a reverse auction solution is integrated with the production or engineering system, an RFP/RFQ can be generated electronically based on the Bill of Material requirement, and the RFP/RFQ can be sent to multiple suppliers simultaneously over the Internet. Suppliers can respond electronically. Then all the quotes or proposals are automatically aggregated and presented to the buyer over the Internet. Compared with the traditional phone- and fax-intensive process, we think that reverse auction over the Internet can save buyers time and labor in the strategic buying process.
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Table 14 The Difference Between Direct Materials and Indirect Materials Direct Materials Use Accounting Treatment Logistical Requirement Production Cost of Goods Sold Stringent (product delivery delay may cause production interruption) High (little maverick buying) Low Indirect Materials Maintenance, repair, and support operations General and Administrative Less stringent (except for maintenance and repair parts)

Current Level of Internal Control Processing Cost Relative to the Dollar Value of Transaction Current Level of Automation in Strategic Buying Current Level of Automation in Transactional Buying Sweet Spot for an Internet Solution

Low (a lot of maverick buying) High

Low (mostly phone & fax)

Low (mostly phone & fax)

High (via EDI and ERP solutions) Manufacturing industry

Low (mostly manual processing)

Service industry

Source: Stephens Inc.

As the above table indicates, the strategic buying aspect for both direct and indirect materials is still phone- and paper-intensive. So there are a lot of market opportunities for Internet-based reverse auctions to facilitate the strategic buying of both direct and indirect materials. The transactional buying aspect of direct material is very much automated in large companies via EDI and ERP. Because both EDI and ERP are very expensive and complex systems, very few medium- to small-size companies can afford those systems. Internet-based buy-side solutions present a relatively cheap alternative for these companies to automate the transactional buying process of direct materials. More importantly, in our view, currently the transactional buying aspect of indirect materials is not automated. Therefore, we think there is a very significant market opportunity for buy-side solutions to automate the transactional buying of indirect materials. To summarize, Internet-based solutions suit the following two areas of purchasing: 1. transactional buying of indirect materials in all sizes of companies 2. transactional buying of direct materials in medium- to small-size companies

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Table 15 Buying Maintenance and Repair Materials versus Buying Operating Resources Maintenance & Repair Materials
What Is Included Maintenance & repair tools, materials, and parts

Operating Resources
Office supplies, travel and entertainment, office equipment, information technology, and services (e.g., temp services, office cleaning services, etc.)

Need to integrate with Asset Management Systems

High

Low

Industry Expertise Required for Procurement

High

Low

Logistical Requirement
Source: Stephens Inc.

Stringent

Less stringent

Due to the differences listed above, we believe that the Internet solutions for maintenance and repair resource procurement are more aligned with the vertical industries, while the Internet solutions for operating resource procurement are more horizontal and can run across multiple industries.

Figure 14 Horizontally and Vertically Aligned Purchasing Activities

Chemical Industry Maintenance & Repair Resource Procurement Apparel Industry Maintenance & Repair Resource Procurement Steel Industry Maintenance & Repair Resource Procurement

Operating Resource Procurement for Multiple Industries

Horizontally Aligned
Source: Stephens Inc.

In addition, we believe that we should not lump MRO procurement together. We think that companies such as PSDI and DataStream that have enterprise asset management expertise are better positioned to provide an Internet solution to automate the maintenance and repair resource procurement. We think that Ariba and Commerce One will try enter the maintenance and repair procurement space with their partnerships with Indus. However, we also think that Aribas and Commerce Ones core competency will remain in the operating resources procurement area. Finally, we think it is relatively easier for an M&R procurement specialist to enter the OR procurement space than vice versa due to the requirement of high industry expertise.
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Vertically Aligned

Table 16 Difference between Spot Buying and Transactional Buying Spot Buying
Transaction Nature Occurrence Situation One-time

Transactional Buying
Recurring purchase based on pre-negotiated contract Anticipated product demand Products demanded are covered by an existing contract Existing suppliers can fill the order Buyers can buy from their corporate Intranet catalog or they know which supplier has the demanded products available Making purchases from existing suppliers The shorter and the easier the purchasing process, the better

Market Knowledge

Essential Activity Buyer Preference

Unanticipated product demand Rush order Existing suppliers cannot fill the order Buyers usually do not know which suppliers have what products available Finding the supplier and comparison shopping The more suppliers and the more choices, the better

Source: Stephens Inc.

Based on the above analysis, we think that a centralized trading portal best suits spot buying, while direct peerto-peer connection between buyers and sellers using a buy-side solution best suits transactional buying. The centralized trading portals (catalog shopping malls, auctions or exchanges) benefit spot buying in the following aspects: A portal aggregates suppliers so that a buyer can easily search and comparison-shop between suppliers. A portal aggregates buyers so that the buyers can enjoy aggregated volume discounts. A portal can match buyers and suppliers that do not have an existing relationship. A portal can aggregate demand information so the supplier can better manage the supply flow. A portal can aggregate disperse transaction data so that a buyer can better manage the demand flow and reduce rush orders and unanticipated demand in the future. In contrast, we think that a direct peer-to-peer connection between buyers and sellers using a buy-side solution suits transactional buying for the following reasons: Because buyers have existing contracts with suppliers and they know who sells what, there is no need to comparison-shop in a centralized trading portal. A direct peer-to-peer connection allows buyers to have concentrated and strategic relationships with a small number of suppliers. Buy-side solutions allow buyers to improve efficiency in the administrative functions of purchasing while maintaining long-term relationships with their existing suppliers.

E-PROCUREMENT: WHAT LIES AHEAD? We foresee the following trends in the e-procurement area:

Businesses will eventually compete on supply-chain management rather than products. Accordingly, eprocurement companies will expand from procurement to total supply-chain management. Two types of portals will emerge: an employee-facing portal and a supply-chain-facing portal. E-procurement technology platforms and the supply-chain-facing portals will converge. Vertical consolidation within each industry will give way to outsourcing as integrated supply chain management becomes more efficient and sophisticated.
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E-procurement will re-intermediate distributors into fulfillment houses. Distributors will leverage their distribution expertise and break the logistics service from the reselling service. The distinction between warehouses and assembly plants will blur. The big money will be in strategic buying solutions. Single e-procurement companies will not be able to quickly expand from one industry into multiple industries. ERP vendors will grasp their opportunity and become important players in the indirect material transactional buying space.

Businesses will eventually compete on supply-chain management rather than products. Accordingly, eprocurement solution providers will expand from procurement to total supply-chain management. As an industry matures, the product differentiation will become minimal (for instance, a car is a car). However, the experience and service that a company provides its customer can be drastically different. Services differ on the level of the product customization, the order-to-delivery time, the ease of the product exchange and return, and also the price. Dell was able to become a formidable PC vendor not because its PCs are the best or the most sophisticated on the planet, but because it was the first one to offer made-to-order service. Like Dell, any company who wants to be a market leader in customer service has to be the industry leader in supply-chain management. An efficient procurement process is the first step towards efficient supply-chain management. Recently, Ford announced that it would partner with Microsoft to offer car buyers made-to-order cars. The first step it has taken towards made-to-order is to acquire Oracles e-procurement solution to streamline the material and part procurement process. Similarly, GM has acquired Commerce Ones e-procurement platform so that the transaction between GM, GM suppliers and GM dealers can be streamlined over the Internet. We expect that the next step for these companies will be to go beyond e-procurement and expand into total supply chain management over the Internet. Accordingly, we expect e-procurement solution providers to partner with or acquire complementary solution providers to provide a total supply-chain management solution over the Internet. Two types of portals will emerge: an employee-facing portal and a supply-chain facing portal. First, we believe corporations will aggregate most of the information technology tools that employees need on a regular basis to a centralized Intranet portal, which we call an employee-facing portal. The following figure illustrates what functions an employee-facing portal can include.

Figure 15 Employee-Facing Portal

Procurement

Expense Reporting

Knowledge Management Business Intelligence

Employee-Facing Portal
Human Resources Project Management

Benefit Enrollment

Time & Billing

Source: Stephens Inc.

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We believe that application service providers (ASPs) and enterprise resource planning (ERP) companies are best positioned to provide the comprehensive employee-facing portal solution. Because the employee-facing portals encompass a wide spectrum of business applications, it would take a great amount of time, resources, and programming talents to develop every piece of the portal from ground zero and then integrate the pieces into one suite. Consequently, we think few Internet technology platform start-ups have the capital or manpower to do so. Application service providers, in contrast, source various applications from technology platform companies, bundle them together, and provide a suite of application services to customers. Their core competency is integrating applications together, which is consistent with the basics of an employee-facing portal. ERP vendors, such as SAP, Oracle, PeopleSoft, and Baan, have multiple pieces of the employee-facing portal developed in the client-server environment. Their traditional focus is inward-facing and employee-facing applications. We believe that they have the capital and manpower to Web-enable their ERP systems, add on additional pieces, and become the employee-facing portal providers. In fact, Peoplesoft has announced the introduction of PeopleSoft Business Network, SAP has introduced MySAP.com. Second, we predict the emergence of a supply-chain-facing portal, a portal that facilitates the collaboration of the supply chain constituents. Currently the trading portals are product-oriented rather than supply-chainoriented. There are electronic component portals (e.g., NetBuy), plastics portals (e.g., PlasticsNet), chemical portals (e.g., e-chemicals), auto parts portals (e.g., AutoParts.com), and operating resource portals (e.g., Commerce One). For an automaker to assemble a car, its buyers have to access each of these portals to source all the necessary materials and parts. Then the logistics department of the automaker has to access some sort of transportation portal (e.g., National Transportation Exchange) to arrange transportation. These product-oriented portals can make the purchase of one type of product efficient. But the coordination of buying all the products and services required for production is still manual since these portals are not linked together. In other words, these portals are nodes that have not been connected into a supply chain. We think that in the future, the product portals are going to link together and become a supply-chain-facing portal. Within this portal, a business will be able to collaborate with trading partners and coordinate the order processing, materials and parts procurement, receiving, production, distribution, and related logistics as the following figure illustrates.

Figure 16 Supply-Chain-Facing Portal

Material B Trading Portal Material A Trading Portal Service A Trading Portal

Warehouse Trading Portal

SupplyChain-Facing Portal

Service B Trading Portal Transportation Trading Portal

Source: Stephens Inc.

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We think two types of e-procurement solution providers are best positioned to initiate the linkage of these product-oriented portals. One is the product portals that are currently serving multiple industries, possibly an MRO trading portal. For instance, Commerce One has struck partnerships with several product-oriented portals and recently it has formed a client-partner relationship with GM to streamline the automakers supply chain. The other one is the traditional supply chain optimization solution providers. For instance, i2 has announced the TradeMatrix portal that will not only link buyers and sellers but also link service providers such as brokers, logistics providers, contract manufacturers, fulfillment houses, and distributors. In addition, i2 has struck partnerships with some product-oriented portals or solutions. Recently, i2 announced a partnership with viaLink, a company that creates and maintains a centralized price book for the consumer packaged goods industry. E-procurement technology platforms and the supply-chain-facing portals will converge. We believe an increasing number of the e-procurement technology platform providers will leverage their customer bases and operate as trading portals themselves. At the same time, an increasing number of trading portals should Web-enable those buyers and sellers that are using the technology platforms that the portals have developed in-house or acquired via partnerships. We have seen Commerce One leverage its technology and customer base and roll out Marketsite.net, an operating resources procurement portal. i2 Technologies, a supplychain-optimization technology platform, recently introduced Tradematrix.com, a business commerce portal. Altra Energy, the trading portal in the energy sector, provides the trading technology it has developed in-house to its trading network members. We think the following market forces are driving this convergence: 1. Outsourcing. Increasingly, we see companies outsource non-core business functions in order to better focus on their core competencies. We believe operating as a trading portal will allow technology platform providers to meet the customers demand for outsourcing procurement services. 2. The network effect. When operating as a trading portal, the e-procurement technology platform companies can leverage the network effect and let the existing customer sell the technology to its trading partners rather than directly selling shrink-wrapped software one piece at a time. Essentially, the network will induce the smaller firms to voluntarily buy into the technology and service after their major trading partners become members of the trading network. 3. Barrier to exit. By providing the procurement technology to the members of the trading network and by integrating the transactions occurring on the trading network with the members back-office systems, the trading portals can lock in customers and establish a barrier to exit. After all, back-office system integration is no easy task and, consequently, switching costs are prohibitively high. Vertical consolidation within each industry will give way to outsourcing as integrated supply chain management becomes more efficient and sophisticated. In the past, companies consolidated upstream and downstream along the vertical industry to achieve supply-chain efficiency and acquire market share. For instance, in the electronics manufacturing industry, some contract manufacturers have acquired the suppliers and their distributors. We think that as the Internet enables supplychain management to become more integrated and efficient, companies will move away from consolidation towards outsourcing. We think companies will become more virtual rather than capital-asset-intensive. The functions that a virtual company usually keeps are research and development, sales and marketing, and supply chain management. For instance, Cisco is the best-known network equipment company, but it does not touch 80% of the products it sells. E-procurement will re-intermediate distributors into fulfillment houses. Distributors will leverage their distribution expertise and break the logistics service from the reselling service. Two years ago, it was believed that the Internet would flatten the supply chain and disintermediate all the distributors. However, what we have seen recently in the e-procurement space is that distributors are getting order fulfillment business from the trading portals, rather than being cut out of the supply chain. Because these distributors have warehouses in close proximity to customers, they are able to deliver the ordered products within hours or minutes rather than the days some trading portals take since they do not have physical distribution
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capability. For corporate customers who need the parts or tools to repair production equipment or to keep their operations running, instant delivery is critical. Therefore, trading portals are outsourcing the distribution, logistics, and fulfillment function to traditional distributors rather than keeping them out of the loop. Partnering with distributors allows trading portals to quickly scale up without tying up capital to acquire additional distribution talents and facilities. Fastparts.com, a trading portal in the electronic component industry, used to take title to the products it sells and fulfill the orders in-house just to guarantee the delivery time. But now it has decided to outsource the fulfillment and distribution functions. However, one hurdle distributors have to overcome is that they used to bundle market information and value-added services with products and sell the bundle with a mark-up. Now the market information piece falls into the hands of e-procurement portals. Therefore, distributors have to break the bundle of market intelligence, logistical services, and product, and price each piece individually. The distinction between warehouses and assembly plants will blur. As more and more aspects of the supply chain are outsourced and more collaboration occurs over the Internet, the brand owner of the product can afford to move the assembly of the final product from the early nodes towards the second-to-last node of the supply chainthe warehouse from which the product is delivered to the customer. Therefore, we think assembly lines will move from the manufacturer to the warehouse. The big opportunity will be in strategic buying solutions. Transactional buying solutions provided by companies like Ariba, Commerce One, and Clarus are adept at reducing the transaction processing cost. But we think that the cost savings in transaction processing are relatively low when compared with the reduction in prices of products and services bought via trading portals. Therefore, we believe that trading portals that facilitate strategic buying will have a bigger market opportunity. A single e-procurement company cannot quickly expand from one industry into multiple industries. Some trading portals think that they can operate in one vertical industry or a horizontal market first, copy the operations and technology platform, and then expand into other markets, leveraging existing customers. We do no think this approach is going to work well because domain expertise required in the new market cannot be acquired simply via bringing on a new executive. The expertise needs to be strong not only on the top, but also in the grassroots of sales, marketing, and operations. Acquiring the entire operations team in another market via merger and acquisition may not always be successful due to the possible corporate cultural clashes. We think the best approach for a trading portal is to focus on its existing core competence and partner with other trading portals to tackle new markets. ERP vendors will grasp their opportunity and become indispensable players in the indirect material transactional buying space. Although ERP vendors are a little late to the game in the indirect material transactional buying space compared with Ariba, Commerce One and Clarus, we think they will catch up for the following reasons:

ERP vendors have installed customer bases. Some ERP customers have spent a tremendous amount of resources to implement ERP systems. They do not want to add on any foreign modules to the ERP system in fear of incompatibility. They would rather wait for their existing ERP vendor to come out with a procurement product than buy a brand-new Internet solution from a start-up. Necessary workflow already built-in. Most ERP systems have human resources modules built-in. The information contained in the human resources system, such as job function, authority and ranking, dictates the workflow in the procurement process. For some customers who have an ERP system up and running, buying a brand-new Internet solution means replicating the entire workflow built-in to the ERP system onto the Internet procurement system. They would rather buy an e-procurement solution from their existing ERP vendor than buy it from companies like Ariba, Commerce One, and Clarus.

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CONCLUSION Today, there are a limited number of publicly traded companies available for investors to capitalize on the significant growth we foresee for e-procurement platforms. Because we believe that the e-procurement market opportunity is so large, we expect that investors will have several more investment alternatives in the next 12 24 months. Nonetheless, companies we have discussed such as Ariba, Commerce One and Clarus are all quality companies with strong momentum. Because of valuation, business model, and near-term catalysts, our favorite idea among those that we follow at this time is Clarus.

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Public companies mentioned in this report: Agile Software (AGIL-$186.00) America Online (AOL-$86.50) American Express (AXP-$153.50) American Management Systems (AMSY-$29.25) Ariba Technologies (ARBA-$130.75) Aspect Development (ASDV-$54.69) Baan NV (BAANF-$14.31) Bellsouth (BLS-$46.44) Broadvision (BVSN-$125.56) Chemdex (CMDX-$88.44) Chevron (CHV-$85.25) Cisco Systems (CSCO-$102.00) Clarus Corp. (BUY) (CLRS-$38.63) Cnet Inc (CNET-$73.00) Commerce One (CMRC-$399.44) Concur Technologies (CNQR-$25.50) ConnectInc. (CNKT-$3.38) Datastream Systems (DSTM-$22.81) Dell (DELL-$47.44) Dow Chemicals (DOW-$122.00) Elcom International (ELCO-$13.50) Entrade (ETA-$38.00) Federal Express (FDX-$39.38) Ford (F-$50.56) FreeMarkets (FMKT-$288.50) General Motors (GM-$73.38) Grainger (GWW-$46.38) Hewlett Packard (HP-$19.69) i2 Technologies (ITWO-$147.00) Indus International (IINT-$9.13) JD Edwards (JDEC-$28.75) Logility Inc. (LGTY-$10.25) Manugistics (MANU-$28.38) MCI WorldCom (WCOM-$79.81) Microsoft (MSFT-$111.38) NEON Systems (NESY-$22.38) Open Market (OMKT-$40.50) Oracle (ORCL-$95.44) PeopleSoft (PSFT-$21.25) Primus (PKSI-$51.13) PSDI (PSDI-$80.63) PurchasePro (PPRO-$113.13) SAP (SAP-$53.19) Sciquest (SQST-$54.19) Siebel (SEBL-$83.81) Smith-Gardner & Associates (SGAI-$11.50) TIBCO (TIBX-$166.00) US Bancorp (USB-$22.56) USInternetworking (USIX-$43.81) VerticalNet (VERT-$118.00) viaLink (BUY) (IQIQ-$58.00) Vignette (VIGN-$151.88) Wit Capital (WITC-$17.06) Yahoo! (YHOO-$369.50

Stephens Inc. maintains a market in the common stock of Clarus Corporation and The viaLink Company and may act as principal in these transactions.
LTM=last 12 months; NTM=next 12 months; STM=second 12 months BUYone-year price appreciation expected to be greater than 20%; MARKET OUTPERFORMERone-year price appreciation expected to be between 10% and 20%; NEUTRALone-year price appreciation expected to be less than 10%; SELLwhenever warranted

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APPENDIX A PROCUREMENT COMPANIES BUYSIDE

Company Name
Agentics American Tech Ariba Technologies Aspect Development Clarus Corp. Commerce One Concur Technologies Datastream Systems Elcom International FOB.com Hotsamba Intelisys Oracle Procurenet Project Software & Dev. Purchasingcenter.com RightWorks SAP SupplierMarket.com Supplybase.inc. Trilogy

Website
agentics.com purchasingnet.com ariba.com aspectdv.com claruscorp.com commerceone.com concur.com dstm.com elcom.com fob.com hotsamba.com intelisys.com oracle.com procurenet.com psdi.com purchasingcenter.com rightworks.com sap.com suppliermarket.com supplybase.com trilogy.com

SELLSIDE Company Name Website

Agile Software ArcadiaOne Aspect Development BroadVision CardoNet Click Interactive Exclaim Tech. Inc. Harbinger INTERSHOP InterWorld Corp. Ironside Technologies Luna Mergent Systems, Inc. OpenMarket, Inc. Partnerware Tech. Inc. Requisite Tech. RNetEC Selectica Smith-Gardner SpaceWorks, Inc. TPN Register, LLC Trilogy Vignette Yantra Corp. agilesoftware.com arcadiaone.com aspectdv.com broadvision.com cardonet.com clickinteractive.com exclaim.net harbinger.com intershop.com interworld.com ironside.com luna.com mergent.com openmarket.com partnerware.com requisite.com rnet-ec.com selectica.com smith-gardner.com spaceworks.com tpnregister.com trilogy.com vigette.com yantra.com

EXCHANGE & AUCTION Company Name Website

CommerceBid.com Connect Inc. Epicentric Fairmarket Hologix Intelligent/Digital, Inc. Moai OnDisplay, Inc. Opensite Technologies Tradeum Tradex Technologies TradingDynamics Unibex commercebid.com connectinc.com epicentric.com fairmarket.com hologix.com intelligentdigital.com moai.com ondisplay.com opensite.com tradeum.com tradextech.com tradingdynamics.com unibex.com

SUPPLYCHAIN Company Name Website

Advanced Mfg. Online Extricity i2 Technologies Logility Manugistics NONSTOP Solutions NxTrend Omnicell.com SourcingLink.net Sterling Commerce Syncra Systems VIT webPLAN Inc. Amoweb.com extricity.com i2.com logility.com manugistics.com nonstop.com nxtrend.com omnicell.com sourcinglink.net sterlingcommerce.com syncra.com vit.com webplan.com

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APPENDIX B E-PROCUREMENT SOLUTION PROVIDERS

Advanced Manufacturing Online Redwood City, California www.amoweb.com

Supply Chain

Advanced Manufacturing Online (AMO) offers an Internet-based solution (called ECnetTM - The Global Supply WebSM) to seamlessly link suppliers, distributors, logistics and financial institutions in the high-tech manufacturing industry. ECnetTM is a subscription-based service that allows companies to integrate their trading partners into their ERP/MRP workflow.

Agentics Santa Clara, California www.agentics.com

Buy-Side

Agentics offers a corporate purchasing solution called SupplyChannel that is targeted at the Global 1000 companies and the U.S. government. SupplyChannel is loaded on the buyers corporate intranet. Buyers can search for a product using an intelligent shopping agent that retrieves product data from approved vendors and creates a real-time virtual catalog from which to select the product. Under the Agentics model, suppliers would not need to modify their online catalogs. Revenues are from software licensing fees charged to buyers.

Agile Software (AGIL) San Jose, California www.agilesoftware.com

Sell-Side

Agile develops and markets product content management software for supply chains. Agiles software enables companies to collaborate over the Internet by interactively exchanging information about the manufacture and supply of products and components. Agile has over 300 customers in high-tech manufacturing.

American Tech (Purchasingnet) Holmdale, New Jersey www.purchasingnet.com

Buy-Side

American Tech offers a Web-based procurement solution for automating the purchasing process for MRO items. Over 20 customers have selected the companys procurement software. American Techs main product is PurchasingNet SGL, which provides extranet purchasing, requisitioning, inventory control and invoice matching. The Company has a 15-year history in developing software for the purchasing process.

ArcadiaOne Sunnyvale, California www.arcadiaone.com

Sell-Side

ArcadiaOne provides sell-side solutions to vertical portals. Specifically, the Company provides technology solutions to syndicate and aggregate content, such as catalog data. The Company uses Internet technology to update and schedule content extraction and delivery to and from multiple sources and at any interval required.

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Ariba Technologies (ARBA) Mountain View, California www.ariba.com

Buy-Side

Ariba provides procurement solutions for the acquisition of operating resources. Ariba has two main products: ORMS and the Ariba Network. ORMS is the in-house procurement application. The Ariba Network is a closed trading portal for buyers and sellers. It got an early lead in the sector and has about 50 customers. Ariba targets the Fortune 100. Ariba charges a license fee for its software and sells a certain number of transactions to its customers.

Aspect Development (ASDV) Mountain View, California www.aspectdv.com

Buy-Side & Sell-Side

Aspect Development develops and markets solutions for companies that enable them to manage their inbound supply chainall the parts, materials and supplies that companies buy to make, manage or distribute their products. The Company has three main product offerings: Component & Supplier Management (eCSM), eProcurement, and eContent (databases that contain information on millions of parts and supplies from hundreds of suppliers). eCSM solutions optimize product development processes by providing decision support and collaboration for design and procurement. eProcurement solutions optimize non-production/MRO spending by providing decision support and collaboration for operations and procurement. eMarket solutions provide the content and decision-support infrastructure for B2B e-commerce portals and marketplaces.

BroadVision (BVSN) Redwood City, California www.broadvision.com

Sell-Side

BroadVision, Inc. provides applications that enable companies to personalize communications, transactions, and services. These solutions generally automate the selling side of a business. For example, the BroadVision OneTo-One Business Commerce application enables companies to manage their products, prices, contracts, and buyer companies.

CardoNet Santa Clara, California www.cardonet.com

Sell-Side

CardoNet provides automated catalog content management and integration solutions for e-marketplaces. CardoNet targets Net market makers (operators of vertical trading communities or digital markets) and their suppliers. CardoNet MarketStand provides online e-Marketplacesvertical, horizontal, corporate and online distributors with supplier catalog content integration, publication and management, and automatic and periodic updating of content. CardoNets provides an engine to perform automated data cleansing and categorization for catalog content.

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Clarus (CLRS) Atlanta, Georgia www.Claruscorp.com www.Supplieruniverse.com

Buy-Side

Clarus provides Web-based solutions and software for the procurement and management of operating resources. It targets professional and service industries and focuses on the middle-market companies. Clarus has 25 customers. The Company was the first major e-procurement company to bundle its solutions into a monthly subscription model. The Company has two main pieces to its solutions, eProcurement, which automates the internal procurement process for operating resources, and Supplieruniverse.com, a trading network for buyers and sellers. Unlike many other competitors, Clarus does not charge a transaction fee on each trade. Instead, Clarus charges a flat monthly fee to the buyer. The service is free to the supplier. Each trade is completed in a point-to-point manner.

Click Interactive Chicago, Illinois www.clickinteractive.com

Sell-Side

Click Interactive provides sell-side Extranet solutions to businesses. The Companys products allow a business customers to enter orders, track payment and delivery status, access product specs and marketing information, and check on warranty and service.

Commerce One (CMRC) Walnut Creek, California www.commerceone.com

Buy-Side

Commerce One provides procurement solutions for operating resources to large companies (Fortune 500 target). CMRC has two products, Buysite, which automates the internal procurement process from requisition to order, and MarketSite, which automates supplier interactions from order to payment. Commerce One is pursuing a franchising strategy and has enabled global trading partners to distribute the CMRC platform outside the U.S. CMRC has 43 customers. It charges a software license fee to the buyer and a transaction fee to the seller.

CommerceBid.com Santa Clara, California www.commercebid.com

Exchanges & Auctions

CommerceBid.com provides software/solutions for building business-to-business exchanges, including forward and reverse auctions. CommerceBid was recently purchased by Commerce One.

Concur Technologies (CNQR) Redmond, Washington www.concur.com

Buy-Side

Concur Technologies, Inc. was founded in 1993 and is moving into buy-side solutions for maintenance, repair and operations (MRO) products from the Companys core base of travel & entertainment (T&E) expense reporting solutions. Concur has historically charged software license fees but recently announced a subscription-fee model. Concur has over 275 customers for T&E.

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Connect Inc. (CLIC) Mountain View, California www.connectinc.com

Exchange & Auction

Connect Inc. provides a platform for trading exchanges that offers both buy- and sell-side solutions such as catalog searches and fulfillment tracking, although little is available for automating the in-house buying process. The Companys main product is MarketStream 2.0, an e-commerce application software module. Connect Inc. was recently acquired by Calico Commerce.

Datastream Systems (DSTM) Greenville, South Carolina www.dstm.com

Buy-Side

Datastream Systems, Inc. entered the procurement marketplace from the Computerized Maintenance Management Systems (CMMS) and Enterprise Asset Management Systems (EAMS) markets. The CMMS and EAMS products provide software to assist manufacturers with controlling spare parts inventories, scheduling tasks that reduce equipment downtime and expediting the purchasing process. Datastream has an installed base of over 25,000 manufacturing customers that use its CMMS and EAMS systems. The Company began offering Iprocure, its Internet-based buying solution, in 1999 and has accumulated 39 customers (buyers). The software is licensed to buyers for a fee, and suppliers (sellers) pay a transaction fee.

Elcom International (ELCO) Westwood, Massachusetts www.elcom.com

Buy-Side

Elcom.com offers a buy-side solution through its PECOS Internet Procurement Manager (PECOS.ipm) product. This solution enables self-service purchasing by individual users within a company and automates the internal process from ordering via electronic catalogs, through approval routing, to delivery and financial settlement. Elcom charges the buyer either a subscription fee or a software license fee depending on which version the buyer chooses. At this point Elcom has five customers. The Company recently engaged a financial advisor to evaluate options for its Internet procurement business.

Epicentric San Francisco, California www.epicentric.com

Exchanges & Auctions

Epicentric builds enterprise and vertical portal solutions. Epicentric provides portal software and hosted services that enable companies to build custom portals for the Intranet, Extranet and Internet.

Exclaim Technologies, Inc. San Jose, California www.exclaim.net

Sell-Side

Exclaim Technologies, an application service provider, offers sell-side solutions (such as order management and tracking) to online retailers. The Company is attempting to create and operate online business-to-business marketplaces.

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Extricity Redwood Shores, California www.extricity.com

Supply Chain

Extricity provides Internet applications that allow supply chain members to collaborate with each other. The applications integrate supply chains, allow for improved inventory management and improve information flow among trading partners.

Fairmarket Woburn, Massachusetts www.fairmarket.com

Exchanges & Auctions

Fairmarkets offers an outsourced, private-label auction solution for business merchants. The company appears to be positioned in the B2C market. Fairmarket operates a network, consisting of a collection of Fairmarketpowered, private-label merchant, portal and online community auction sites connected through a shared database of goods and services. The Company recently filed a registration statement for an IPO.

FOB.com Chicago, Illinois www.FOB.com

Buy-Side

FOB.com builds and operates vertical trading communities. The FOB.com strategy is buyer centric: FOB.com uses its technologies to help businesses buy materials more cheaply. FOB has targeted large processing industries such as food, chemicals, plastics and paper.

Harbinger (HRBC) Atlanta, Georgia www.harbinger.com

Sell-Side

Harbinger is a traditional provider of EDI services to businesses and is in the midst of migrating its business to an Internet architecture. The Company historically has been focused on automating the transaction processing aspect of electronic commerce. Harbingers core competence appears to be the building and aggregation of catalogs, i.e, we view the Company as a catalog content manager. Harbinger is now creating and operating trading portals.

Hologix Phoenix, Arizona www.hologix.com

Exchanges & Auctions

Hologix develops and provides Internet solutions for the creation of B2B trading exchanges. The Company uses a categorization technology referred to as attributes, whereby buyers can search for products according to attributes (performance properties such as heat tolerance, etc.) rather than SKU number.

Hotsamba Arlington Heights, Illinois www.hotsamba.com

Buy-Side

Hotsamba offers web-based e-commerce products for more managing relationships with trading partners over the Internet, and more efficiently acquiring and managing operating resources and non-production materials. The company provides an electronic procurement solution that automates the entire fulfillment cycle from selecting vendors to placing and tracking orders on-line while complying with existing business rules.
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i2 Technologies (ITWO) Dallas, Texas www.i2.com

Supply Chain

i2 provides supply-chain optimization solutions to businesses. i2 traditional solutions have been focused on helping companies optimize their business processes and forecast, plan and collaborate with trading partners. However, i2 has its sights set on creating and running trading communities with the launch of TradeMatrix.com, a portal platform for the procurement of both indirect and direct materials.

Intelisys New York, New York www.intelisys.com

Buy-Side

Intelisys was formed in 1997 and has a few high-profile customers, mostly state governments. The company has management and financial ties to Chase Manhattan Corp. and is powering a trading community that Chase is attempting to create for its small business customers. The Companys main product, IEC-Enterprise, is a purchasing system that allows authorized employees to buy non-production goods and services directly over the Internet from the electronic catalogs of preferred suppliers. Intelisys is partnering with Intuit to launch a portal for small businesses that will be incorporated into Intuits upcoming version of QuickBooks, the finance and accounting software for small businesses. And, Intelisys is in the process of launching a business-to-business procurement portal.

Intelligent/Digital, Inc. Atlanta, Georgia www.intelligentdigital.com

Exchanges & Auctions

Intelligent/Digital, Inc. provides software that powers B2B vertical markets. It can build and operate innovative, real-time marketplaces for B2B buying and selling communities. The software allows B2B market makers to develop a multidimensional transaction strategy for deploying and managing any combination of catalogs, auctions, and exchanges in order to meet the specific needs of their buyers and sellers.

INTERSHOP San Francisco, California www.intershop.com

Sell-Side

INTERSHOP provides sell-side electronic commerce software for both business-to-business and business-toconsumer markets. INTERSHOP enfinity is the Companys sell-side e-commerce solution governing transactions, catalog, and merchandising functions. The Company automates online storefronts from both a transactional and catalog content perspective.

InterWorld Corp. (INTW) New York, New York www.interworld.com

Sell-Side

InterWorld Corporation provides a suite of sell-side solutions designed to automate online retailing. The applications enable product merchandising, order management and account management. The Company sells its products to both traditional and online retailers.

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Ironside Technologies Pleasanton, California www.ironside.com

Sell-Side

Ironside Technologies provides sell-side solutions to manufacturers and wholesale distributors. Ironworks is the Companys main product and provides an interface between the customer and the manufacturers or the distributors host order-management system, while preserving established host and network security. By integrating with the host at the application level, the Company is able to provide real-time access to order entry, order status, request for quotation, product configuration, inventory availability, promotions and e-mail communications.

Logility (LGTY) Atlanta, Georgia www.logility.com

Supply Chain

Logility Inc. provides software applications that optimize operations throughout the supply chain via collaborative planning and synchronization between demand opportunities, supply constraints and logistics operations. Logility launched i-Communitysm, a Logility-hosted, Web-based collaborative network of trading partners in July 1999. iCommunity is supposed to offer a more effective way of connecting an enterprise with its trading partners and conducting collaborative planning, forecasting and replenishment (CPFR) via the Internet. Logility will host the customer's vendor-specific sales forecasts on a Web server that is accessible by authorized users.

Luna Oakland, California www.luna.com

Sell-Side

Luna develops sell-side content management solutions. These applications are often used internally by corporations to share and manage content by business rules and organizational structure (i.e., which data can certain departments view and which data can each user view within a department).

Manugistics (MANU) Rockville, Maryland www.manugistics.com

Supply Chain

Managustics provides supply-chain management solutions to businesses. The Company recently announced its first step in moving away from client-server solutions towards Internet solutions for its customers. Like i2, Manugistics is attempting to provide a solution that will transform a supply chain into an Internet trading community. The suite of Internet applications should be available in the 1Q of 2000.

Mergent Systems, Inc. MountainView, California www.mergent.com

Sell-Side

Mergent Systems, Inc. provides sell side applications that create, aggregate, maintain, and search catalogs for ebusiness. Mergent targets Net market makers, infomediaries, vertical portals, and large organizations as potential customers. Mergents flagship product is iMerge, which automates the aggregation of multiple catalogs and other data into a single source without programming, without redundancy or replication, and without affecting other suppliers. This gives the buyer a view of a single integrated catalog.

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Moai San Francisco, California www.moai.com

Exchanges & Auctions

Moai sells software that enables its customers to create and run auctions and trading exchanges. Moais target customer base is enterprise companies, dot-coms and application service providers.

NONSTOP Solutions San Francisco, California www.nonstop.com

Supply Chain

NONSTOP Solutions provides demand-chain optimization solutions. NONSTOP sells its applications to retailers and wholesalers in order to improve their cash flow and operating results. In contrast to supply-chain software firms, NONSTOPs optimization processes are specifically tailored to the needs of wholesalers, retailers and etailers (rather than manufacturers) and are offered as a business process service. Specifically, the Companys solutions optimize the replenishment process for products.

NxTrend Colorado Springs, Colorado www.nxtrend.com

Supply Chain

NxTrend provides supply-chain applications to companies. The Company offers a full suite of enterprise software products including financial, supply-chain and sales management applications. NxTrend is in the process of moving its technology platform to the Web.

OnDisplay, Inc. (ONDS) San Ramon, California www.ondisplay.com

Exchanges & Auctions

OnDisplay Inc., provides software for powering e-business portals and e-marketplaces. OnDisplay has three main products: a content aggregation tool, a B2B document exchange application, and an integration tool to integrate e-business sites with companies internal systems. The Company completed an IPO in December 1999.

Omnicell.com Palo Alto, California www.omnicell.com

Supply Chain

Omnicell.com provides automation solutions targeted at the healthcare supply chain. The Companys products perform the following functions: automate product dispensing data management at point of use, automate the procurement process for both healthcare facilities and their suppliers, and operate an online community for healthcare professionals.

OpenMarket, Inc. (OMKT) Burlington, Massachussetts www.openmarket.com

Sell-Side

Open Market, Inc. provides sell-side solutions for customer relationship management. Open Markets software allows companies to manage all customer interactions over the Web, including the presentation of company information and products, marketing and sales activities, order taking, payment handling, fulfillment, and customer service.
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Opensite Technologies Research Triangle Park, North Carolina www.opensite.com

Exchanges & Auctions

Opensite provides online auction solutions for both B2B and B2C companies. Opensite was founded in 1996 and sells its auction solutions to businesses that generally are looking for solutions to rid themselves of excess inventory.

Oracle(ORCL) Redwood Shores, California www.oracle.com

Buy-Side

Oracle is in two businesses: database software/solutions and enterprise resource planning systems for large companies. Oracle is aggressively attempting to become an Internet company. It offers a procurement solution that automates the in-house purchasing process for indirect materials and an exchange whereby buyers and sellers can transact business.

Partnerware Technologies, Inc. Austin, Texas www.partnerware.com

Sell-Side

Partnerware Technologies, Inc. provides an Extranet sales automation solution specifically dedicated to the indirect sales model. Partnerware helps manufacturers proactively build channel loyalty and improve channel programs ROI by providing a shared system to their reseller and distribution partners over the Web.

Procurenet Fairfield, New Jersey www.procurenet.com

Buy-Side

Procurenet provides a portal solution to end-users with access to online catalogs and spot-buy services in order to locate, requisition, and purchase MRO supplies and services from approved vendors. Procurenets basic business is aggregating catalogs and aiding companies in sourcing hard-to-find items. The Company also provides catalog management services.

Project Software & Development (PSDI) Bedford, Massachusetts www.PSDI.com

Buy-Side

PSDI is primarily a provider of Enterprise Asset Management Systems (EAMS). PSDI targets the high-end customer base and has over 5000 customers for its EAMS software. Through its subsidiary MRO.com, Inc., the Company offers an Internet-based network and set of desktop requisition and online procurement software products. MRO.com recently selected technology from Moai to run auctions for MRO products. PSDI charges a software license fee to both the buyer and the seller.

Purchasingcenter.com Burlington, Massachusetts www.purchasingcenter.com

Buy-Side

Purchasingcenter.com offers a free online portal for buying MRO supplies. The Company focuses on maintenance and repair items and also offers auctions. It charges a commission to suppliers for each transaction.
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Requisite Technologies Westminster, Colorado www.requisite.com

Sell-Side

Requisite provides businesses with sell-side electronic cataloging technology and content conversion and management capabilities. Requisite offers its finding technology and content services through enterprise software vendors to large corporations. These corporations require accessible online product information to fuel their business-to-business electronic commerce operations.

RightWorks San Jose, CA 95113 www.rightworks.com

Buy-Side

RightWorks Corp., founded in 1996, provides buy-side solutions to automate the process of purchasing materials and services. RightWorks customers include Applied Materials, Align, Dynegy, Etek Dynamics, Fujitsu, SGI and Wells Fargo.

RNetEC Sacramento, California www.rnet-ec.com

Sell-Side

RNetEC offers Internet-based EDI in lieu of Value-Added-Networks (VANs). RNetEC provides electronic catalog and trading services that facilitate business-to-business and business-to-consumer electronic commerce to the retail industry. The Companys expertise appears to be in the EDI process, from the downloading of UPC codes to complex EDI mapping.

SAP (SAP) Walldorf, Germany www.SAP.com

Buy-Side

SAP is a leading enterprise resource planning vendor with a substantial installed base of ERP software customers (22,000 business locations) including more than half of the worlds 500 top companies. SAPs Internet solution is MySAP.com, which is touted as a one-stop, Web-based employee-facing portal that allows an employee to handle all intra- and inter-company relationships. MySAP.com has several components including a business-tobusiness procurement solution. This solution is Web-based and is marketed as having the capability to streamline all back-office processes associated with procuring MRO items.

Selectica San Jose, California www.selectica.com

Sell-Side

Selectica develops, markets and supports a packaged Internet Selling System (ISS) solution that enables companies to sell configurable products. The software interactively assists customers through the selection, configuration, pricing, quoting and fulfillment processes. Selectica offers online sales configurator software that guides users to optimal solutions based on user input compared against pre-defined product data.

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Smith-Gardner (SGAI) Delray Beach, Florida www.smith-gardner.com

Sell-Side

Smith-Gardner (SG) provides sell-side solutions to the direct marketing and Internet commerce industries. SGs solutions are designed to automate processes for companies that market through catalogs, space ads, direct mail, broadcast ads, and the Internet. The Companys WebOrder software provides front- and back-office operations for Internet commerce such as order entry, order tracking and customer service.

SourcingLink.net (SNET) Seal Beach, California www.sourcinglink.net

Supply Chain

SourcingLink provides supply-chain solutions for the retail industry. The Company operates an Internet-based subscription service that enables retailers to collaborate with their supply chain using standard Web browsers. The service supports both EDI and Forms-based transactions. SourcingLink provides an Internet, browser-based workflow tool which integrates electronic catalogs, requests for proposals, product offers, negotiations, ordering, order status/fulfillment tracking and full Internet EDI functionality. IBM sells, distributes, and provides end-user support for the QCS.net service, which is positioned as a strategic procurement solution in the IBM Supply Chain Solutions Portfolio. All customer, help desk, and training services are available through regional IBM/SourcingLink.net Solution Centers.

SpaceWorks, Inc. Rockville, Maryland www.spaceworks.com

Sell-Side

SpaceWorks provides sell-side Web commerce solutions for Global 2000 companies. SpaceWorks products automate these companies marketing, sales and support operations. SpaceWorks products enable personalized marketing, interactive guided selling and complex product configuration, auctions, bill presentment and payment, post-sales service and maintenance, and online customer support.

Sterling Commerce (SE) Dublin, Ohio www.sterlingcommerce.com

Supply Chain

Sterling Commerce has been a provider of electronic commerce solutions for many years. Though the Company has principally focused on licensing software that automates EDI transactions, Sterling is making an aggressive push to Web-enable its solutions, and is offering a wide range of solutions particularly data management and exchange.

SupplierMarket.com Waltham, Massachussetts www.suppliermarket.com

Buy-Side

SupplierMarket.com is an online marketplace for built-to-order industrial products. These products are generally low-value, minimally engineered parts that may have numerous configurations. The Company conducts an online reverse auctioning process where suppliers bid for a buyers business. Buyers use the SupplierMarket.com online RFQ Builder to specify criteria and upload drawings. Buyers are able to nominate or exclude specific suppliers from the process.

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Supplybase.inc San Francisco, California www.supplybase.com

Buy-Side

Supplybase.inc provides Web-based solutions that help buyers procure custom parts and assemblies. The Companys applications help buyers aggregate supplier data in order to improve the procurement process. The Company also offers a collaboration tool for manufacturers to collaborate with supply chain partners to improve the product development and sourcing processes.

Syncra Systems Cambridge, Massachusetts www.syncra.com

Supply Chain

Syncra provides Internet-based supply-chain collaborative planning, forecasting and replenishment (CPFR) to the retail industry. Essentially the Company provides software that enables retailers to share their forecasts and sales data with suppliers.

TPN Register, LLC Rockville, Maryland www.tpnregister.com

Sell-Side

TPN Register, LLC operates an Internet-based marketplace that integrates with a front-end purchasing application to link buyers and suppliers of MRO and indirect products and services. TPN aggregates and manages catalog content. Formed in April 1997, TPN Register is a joint venture owned by GE Information Services and Thomas Publishing. GE Information Services is a leading provider of global electronic commerce services with a trading community of more than 100,000 partners. Thomas Publishing, publishers of the Thomas Register of American Manufacturers, is the leading provider of product information for industrial procurement professionals.

Tradeum San Francisco, California www.tradeum.com

Exchanges & Auctions

Tradeum provides software solutions that power B2B Internet exchanges. Tradeums exchange engine uses advanced mathematical techniques and profiling techniques to optimize the matching of buyers and sellers. Tradeum is seeking to include all the parties involved in a supply chain including shippers, insurers and financiers as well as buyers and sellers.

Tradex Technologies Alpharetta, Georgia www.tradextech.com

Exchanges & Auctions

Tradex provides software for the creation of trading exchanges. The Company markets its products to vertical marketplaces and e-business portals. Tradex represents that its solutions include tools to aid buyers and sellers from initial requisition to fulfillment and payment. Tradex was recently acquired by Ariba for $1.9 billion.

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TradingDynamics Mountain View, California www.tradingdynamics.com

Exchanges & Auctions

TradingDynamics provides software for online auctions and exchanges for B2B commerce. The Company provides a suite of tools for market makers to build and customize auctions (e.g., bidding constraints, bidding increments, clearing rules). The Company was recently acquired by Ariba for $400 million.

Trilogy Austin, Texas www.trilogy.com

Buy-Side & Sell-Side

Trilogy offers both buy-side and sell-side applications but appears to be much stronger on the sell-side. The Companys products enable activities such as guided selling, personalization, content management, and order processing. Trilogy recently added a procurement application that automates the buying of goods and services.

Unibex Washington, DC www.unibex.com

Exchanges & Auctions

Unibex provides tools for the creation of digital marketplaces including auctions and exchanges. In addition, the Company has created and is operating marketplaces. Also, it appears that Unibex offers a broad suite of basic ecommerce services from business research and vendor selection, to trade lead and business proposal matching, to final payment.

Vignette (VIGN) Austin, Texas www.vignette.com

Sell-Side

Vignette offers front-end tools for personalization and content management on corporate Web sites. Through Vignettes flagship product, StoryServer, users have tools to manage and distribute content across multiple sites.

VIT Palo Alto, California www.vit.com

Supply Chain

VIT markets both supply-chain performance measurement applications and enterprise information portal software. VIT offers a suite of Web-centric applications that allow business managers and executives to see, manage and collaborate across the total supply-chain so they can measure supply chain performance.

Yantra Corporation Acton, Massachusetts www.yantra.com

Sell-Side

Founded in 1995, Yantra Corporation is a privately held Internet company that helps businesses to sell products online. PureEcommerce, Yantras flagship product, provides real-time order management and fulfillment from purchase through delivery. Yantras customers include MotherNature.com, toysmart.com, iVillage.com, Petstore.com, SciQuest.com, Honeywell, Motorola, Texas Instruments, and Rockport Shoes.

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webPLAN Inc. Kanata, Ontario, Canada www.webplan.com

Supply Chain

webPLAN Inc. offers Web-intrinsic supply-chain community software. WebPLANs eSupply-Chain family of software products creates online trading communities where every authorized entity can both see changes and simultaneously collaborate, thereby enabling shortened production and delivery cycles, reduced inventory, realtime advanced planning, and immediate synchronization of any and all changes throughout the entire community. webPLAN also offers off-the-shelf collaborative advanced planning and scheduling (APS) software.
Source: Company Web sites, SEC filings

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