Porter’s Five Forces and Procurement Technology Suites: Customers/Buyers

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Applying a Porter five forces framework to a given industry, sector or company is like baking. It will be a recipe that results in success. Or failure. There’s not much in between. And it can be surprisingly tricky to get right, especially if you’re prone to trying to improvise the various ingredients or measurements.

One of the challenges in pulling off an affective forces representation is separating out the different elements effectively. The points that make up each of the individual five forces, in classic consulting speak, should be mutually exclusive and clearly exhaustive (MECE) — and they must also fall into their appropriate “force.”  

I recently authored a five forces framework exploring procurement technology suites based on Porter’s model. Let’s see today how effective the exercise was in representing the market by exploring customer and buyer power from a Porter context.

Within the procurement technology suite market today, we see several pricing trends for different types of solutions (specifically, what buyers are willing to pay). These include:

  • Stable pricing for core e-sourcing and related modules
  • Materially variable costs for P2P solutions
  • Significant variation in services procurement technology pricing (we’re doing a survey on this at the moment, in fact!)

By way of comparison, procurement technology is not undergoing the same type of pricing pressure as audit recovery services in sectors such as retail.

Yet pricing is not always straightforward. Procure-to-pay (P2P) cost models can vary materially, for example. And while buyer-funded business models tend to predominate overall, there are exceptions to the rule here. For instance, in the services procurement areas, including sourcing, transactional and supplier management costs, supplier fees still comprise a significant portion of revenue paid to vendors.

For customers, switching costs tend to vary based on the procurement technology area. Switching costs tend to be lower for non-transactional procurement solutions such as e-sourcing and spend analytics, although this is not always the case either.

One of the challenges in understanding the buyer perspective of the overall procurement technology suite market is that many customers use multiple solutions, even in the same area. For example, an organization may have a source-to-pay (S2P) suite, inclusive of lightweight e-sourcing capability, but it may also use multiple other sourcing solutions, as well, across the procurement function.

What has become more standard, however, is that there is not an information vacuum. Buyers are increasingly aware of the options available to them via free and low-cost subscription information services such as Spend Matters. They know that contract duration (for SaaS solutions) is now typically three years as a starting point. And they know they’re buying a solution for which their peers are also typically price sensitive in process-oriented areas (unless material differentiation exists in the solution).

In broader buyer trends, procurement collaboration with the business is increasing the potential of broader adoption and usage of solutions overall. With customers, we are also seeing increasing interest in putting supplier management at the core of sourcing activity, with core master data becoming as important as the process steps and definition. To this last point, certain companies are moving in the direction of adopting source-to-contract (S2C) or end-to-end models either centered around the buy/contract or supplier management (especially for direct materials spend).

Finally, customers are increasingly expecting value-added capabilities, including integrated analytics with actionable intelligence, template libraries, benchmarks and more.

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