World-wide, businesses are investing in e-procurement to buy and sell materials and products online, offering the potential for real and measurable savings in costs. New Zealand businesses have climbed on board, with numerous online exchanges and aggregated buyer consortiums formed within the last year.

What is e-procurement?
First generation e-procurement models saw larger companies on both buy and sell sides implementing front-end (usually Web-based) e-procurement systems as part of their overall IT infrastructure. On the buy side, groups of buying organisations from different companies pursue volume aggregation and other economies of scale with suppliers, or single companies set up a site where employees can purchase goods from supplier e-catalogues. On the sell side, traditional distributors automate established networks of business relationships, or single companies peddle their wares over the Internet.

Second generation Internet marketplaces (e-markets or e-hubs) are established by neutral third parties where multiple buyers and sellers exchange goods and services. These include horizontal markets (cross industry buying, most commonly in simple spend categories such as MRO items and office supplies), or vertical markets (industry specialised services for buyers and suppliers in a supply chain). In New Zealand, local horizontal e-market SupplyNet facilitates New Zealand businesses with exposure to larger international e-markets. Local vertical e-markets include markets for the timber (Woodnet), wool (Woolnet), medical (Biolab.direct), and farming industries (RD1 and Netfarmer). Sophisticated e-markets can provide dynamic pricing features, such as the posting of RFQs (Request for Quotation), with matching mechanisms that search out qualified suppliers to meet specific requirements, multi-round bidding, and reverse auctions.


What are the potential benefits?
Buyers expect to reduce purchasing costs through reduced administration, curbing off-contract purchasing, reducing errors, rework and dispute resolution costs, and allowing purchasing employees to spend more time on strategic tasks rather than the repetition of processing rudimentary order forms.



Sellers, in addition, can reduce sale costs and increase sales volume through improved customer service (e.g. alerting customers online regarding product shortages, availability and reordering) and extended market reach.

Analysts observe that e-procurement provides one of the highest ROIs of any enterprise application and, for smaller systems in particular, often pays for itself within a year.


What are the legal issues?
E-procurement involves the development of new business relationships, alliances and joint ventures with software vendors, e-market makers and other traders. Technology integration, performance standards and responsibilities, non-exclusivity, data integrity and protection, and non-repudiation requirements are some of the issues that must be adequately addressed. Security and risk management processes are necessary to foster trust and confidence in the use of e-procurement systems.

Another issue, of particular concern to purchasing consortiums, is compliance with competition laws. Some industries are forming trading exchanges made up of the leading vendors. Organisations considering this practice should seek regulatory advice to avoid infringing competition laws, such as those in the New Zealand Commerce Act 1986, though this is only likely to arise where participants in a buyer group are competitors, and the market in which they compete is fairly concentrated. Overseas regulatory agencies have considered e-market proposals. For example, in late 2000 the United States Federal Trade Commission cleared Covisint, an e-market formed by leading automotive manufacturers. Covisint subsequently obtained clearance from regulatory agencies in other jurisdictions, such as the Bundeskartellamt (BKA) in Germany.


What can you do?
For many businesses, e-procurement will be the most immediately effective means to realise the benefits of e-business. Whether your business is large or small, a key success ingredient, applicable to any e-business venture, is careful planning. As one commentator observes, e doesn't mean easy, it means experience. Some key points to consider include:

- Understand how e-markets affect your industry and what role you should play.
- Ensure business processes and systems are in alignment.
- Have clear responsibilities for achieving interfaces between third party systems and existing back-end systems.
- Document clear performance standards in service level agreements.
- Protect your data and intellectual property.
- Ensure regulatory compliance.

This is a general summary only and should not be taken as a substitute for specific advice.

x-tech group Simpson Grierson
Web site: Simpson Grierson


Contacts
Michael Sage, Partner, michael.sage@simpsongrierson.com
Earl Gray, Partner, earl.gray@simpsongrierson.com
Jan Kelly, Partner, jan.kelly@simpsongrierson.com
Justin Chan, Solicitor, justin.chan@simpsongrierson.com

April 2001