Porter and Procurement Technology Suites: Exploring New Entrants/Barriers to Entry

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The procurement suite technology market today looks very different than it did a decade ago. As we continue our analysis and observations of the sector based on Porter’s five forces framework (see our initial posts on the topics here, here and here), we come to the third of Porter’s forces in our analysis: new entrants/barriers to entry.

While significantly more competitive overall — thanks to the addition of numerous suite and specialized technology vendors — the procurement technology market has also been kind to recent market entrants. For several reasons, the barriers to entry for competition have been reduced, which logically has led to greater choice for buyers, as well.

First, the cost of developing technology has declined while the speed of development is increasing. While “star” developers at companies like Google and Facebook still command salaries that look like Wall Street packages, the vast majority of software engineers — regardless of geography, including lower-cost regions — are effectively more affordable than in the past, thanks to greater efficiencies in development and a broader base talent to chose from.

Further, venture funding is increasingly available for procurement technology startups at all levels. And new interest to put investment capital to work in early stage companies in the sector continues, owing in part to Coupa’s successful IPO, which has created additional awareness among angel and early stage investors.

Other barriers to entry are changing, as well:

  • Procurement organizations are cognizant of supply risk with smaller providers but are often willing to accept risk for value and differentiation, especially when decoupled from transactional systems
  • New and emerging “online” solutions are not requiring the same type of enterprise sales focus as in the past (some are even sold via credit card transactions online, and we expect more of these options to become available in 2017)

Still, certain elements have not changed materially from the recent past. For example, the cost of sales and marketing for enterprise solutions, even cloud solutions, remains high (e.g., an expensive sales resources, lead generation, etc.). And long sales cycles in certain areas (e.g., e-procurement) can work against smaller providers with limited runway to show results.

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