Lately, a great deal of money has been invested in e-procurement firms, but it's still early in the game. Who will rise to the top?
If there is one harsh reality today's e-firms are finally figuring out, it's that no amount of money can overcome a bad business plan. But, obviously, several successful rounds of funding certainly help, especially when the plan involves real estate-related industries, which generally have been slow to adopt new technologies.
At times, many real estate firms appear to be waiting for "the other guy" to pull the trigger before committing to any new online system or platform. In other words, nobody wants to jump into the deep end alone anymore.
In the e-procurement business - where the purchasing of essential goods and services, including light bulbs and paper towels, is conducted electronically via the Internet - firms are in a mad dash to build size and critical mass, and willing partners will mean the difference between success and failure.
Consider, too, that some big money has been thrown at the sector lately - $15 million to San Francisco-based iBuilding; $30 million to Austin, Texas-based SiteStuff; $25 million to Atlanta-based FacilityPro. Here again, though, money helps, but a good long-term strategy and a quick peek at profitability really work wonders for longevity, too.
E-procurement providers want to build a framework that immediately enhances value for clients, says Lorraine Teel, Deloitte & Touche's national corporate real estate leader specializing in e-enabled operations and systems consulting. "Property managers, builders and corporate real estate departments are eager to gain the value that these providers promise but are unclear which can offer better products and service," she says. "The most value will be added by the company that can partner with a large number of suppliers and can offer technology solutions that can be integrated with the appropriate financial packages such as MRI, J.D. Edwards, Oracle, The Realm and Yardi. The race is on to build these interfaces, and therefore, offer off-the-shelf packages that can be easily implemented and incorporated into the processes of the organizations."
In a recent survey, Chicago-based Deloitte & Touche found that many property managers want to use e-procurement to save time and money, but they're also willing to wait for it. "They are willing to wait until the providers have a sufficient number of suppliers, have worked out the technology issues and can help them to track their own spending by property, account code, region and vendor," says Teel. "Additionally, it is important for many of these customers to be able to know immediately upon order if a product is available. This requires that technology be interfaced on both sides - the buyer and the supplier."
The true believers Raj Shah, co-founder and chief marketing officer of SiteStuff, believes that in today's bottom-line driven business world, real estate companies must purchase needed supplies such as light bulbs, paper towels, cleaning equipment and other frequently used items - to say nothing of landscaping, engineering or janitorial services - quickly and inexpensively. And he is among thousands who believe (not surprisingly) one way to accomplish this is through e-procurement services.
The owners, operators and investors involved with the trillion-dollar commercial real estate industry spend more than $300 billion each year on goods and services they need to support operations. Companies that operate multiple properties often purchase such goods as paper towels, light bulbs and janitorial supplies from local suppliers in single transactions that fail to leverage their national buying power, Shah adds. That's inefficient in today's fast-changing real estate world when shaving a few cents from transactions can mean a big change in the bottom line.
"A light bulb might cost $4 in one store but could be had for $3.50 through an e-procurement service," says Shah. "When a company purchases thousands of light bulbs, the savings can be substantial. That's where Web-based procurement sites such as ours come in. We're offering a major savings that in the past has not been taken advantage of because the industry has not had a strong emphasis on procurement."
But can it really work on a national scale? Many think so.
"Real estate has always been a regional and fragmented industry with many different offices ordering from different suppliers for the same company, and that's one reason for the slowness of the industry to adapt to e-commerce," says Bob LiMandri, vice president of business development at OpsXchange, a San Francisco-based e-procurement firm. "Now companies are recognizing they not only can reduce costs of goods and services, but also reduce the number of purchase orders per building."
Enter the consortiums Witness recent major investments by the technology consortiums such as Project Octane - made up of national players CB Richard Ellis, Jones Lang LaSalle, Trammell Crow Co. and Insignia/ESG - and Constellation Real Technologies - led by national firms including AMB Property Corp., Equity Office Properties Trust, Equity Residential Properties Trust, Kaufman & Broad Home Corp., Simon Property Group, Spieker Properties, CB Richard Ellis, Jones Lang LaSalle and Trammell Crow Co. Each is racing to create a national standard for real estate owners and managers and for good reason.
According to Boston-based Aberdeen Group, a consulting and marketing strategy firm, a single procurement transaction can cost about $107 including time spent searching for and transporting products, posting the transaction to a general ledger, management of payables and more. Using e-procurement services can help owners and operators control their procurement processes while creating new efficiencies and cost savings that increase profitability.
That's good news to e-procurement companies such as SiteStuff, FacilityPro.com, ebuyxpress.com, AvidXchange, hglobe, OpsXchange, iBuilding, Buyers Access and a host of others that are striving to serve the various property segments - multifamily, office, industrial and retail. Such e-businesses are helping to connect the fragmented real estate community with high tech by providing a one-stop shopping solution for owners and managers. These organizations assist real estate companies in finding the information, products and services they need to run their businesses, and help those companies interact and conduct transactions in real time.
"Our constituency is the real estate companies and owners and operators of real estate who are on the buy side of procuring goods and services from service contractors and vendors," says Mike Praeger, CEO of Charlotte, N.C.-based AvidXchange. "We have all those constituents interact with a bidding engine that manages the competitive bidding process."
To those in the e-procurement world, pricing is just the beginning. Internet-based procurement can dramatically reduce the cost of property operations, too. Last year, Octane selected SiteStuff as its primary Web-based procurement solution. Through SiteStuff, the alliance says it will purchase property management, maintenance, repair and operations (MRO) products and services for clients in the United States, which could represent approximately $15 billion in business over a three-year period.
"By converting the manual procurement processes employed by each alliance partner to the Web-based system developed by SiteStuff, we expect to see a dramatic reduction in the cost of goods and services as well as a decrease in operating and transaction costs for commercial office property management companies," says Ray Wirta, CEO of Los Angeles-based CB Richard Ellis, a member of Project Octane.
From the Jones Lang LaSalle perspective, the choice made sense. "Octane chose SiteStuff for its e-procurement platform as it was the alternative that provided the most viable long-term model and technology for the procurement of MRO goods and services," says Mary Taylor, director of e-business for Jones Lang LaSalle Americas based in Chicago. "In addition, SiteStuff was chosen due to the strength of its management team, which had extensive experience in building a business, as well as in procurement."
In a nutshell, Octane's members are trying to keep improving their service delivery to clients and believe that the use of emerging technology, such as the SiteStuff platform, enables them to do so.
One sure-fire strategy was unveiled in January, when SiteStuff announced its acquisition of New York-based RexOffice.com, a subsidiary of EdificeRex.com, an entity created by Insignia Financial Group's chairman Andrew Farkas. Though terms of the deal were not announced, it certainly gives SiteStuff a big leg up on the customer-acquisition front - RexOffice listed Insignia, Apollo Real Estate Advisors, Blackacre Capital and The Witkoff Group as clients.
Running neck and neck with the Octane gang is Constellation Real Technologies. Its recent $25 million investment in e-procurement firm FacilityPro.com turned a lot of heads last year.
"Every member of Constellation recognizes the impact that e-commerce technology is going to have on our industry," says David Simon, CEO of Indianapolis-based Simon Property Group, a founding member of the consortium. "FacilityPro.com is representative of the `best of breed' companies that are using e-commerce technology in new ways to benefit the real estate industry."
FacilityPro.com also just struck a strategic alliance with New York-based Zeborg Facilities. Terms of the agreement were not disclosed, but New York-based Cushman & Wakefield, an original partner in Zeborg, announced that it's using the entire combined offering as its preferred online solution for service sourcing and product procurement.
"We researched service-sourcing solutions for quite some time and looked to build or partner to continue our growth," says Lawrence "Larry" Hall, president and COO of FacilityPro.com. "Combining FacilityPro's capabilities with Zeborg's service solution represented the fastest time to market and best addressed the demand and interest from our customers. We believed that property owners and managers would find this total solution a very powerful tool. This was accelerated when Cushman & Wakefield made the decision to work with both companies in order to provide a comprehensive solution for its customers."
Though not a pure-play e-procurement firm, San Francisco-based iBuilding also saw an opportunity in this segment. "When analyzing the marketplace, we realized that very few people were offering building-focused solutions," says iBuilding's chief strategy officer Chris Hartung, a former managing director and senior research analyst with San Francisco-based Banc of America Securities. "Most real estate-related applications are trying to solve transactional problems, and then work their way back to the asset. This seems backwards to us. It's analogous to General Motors creating a just-in-time supply delivery network without first determining what was going on at the manufacturing plant."
So how does iBuilding work? It's an application service provider (ASP) delivering a patent-pending integrated suite of building-centric, workflow-based applications that help manage buildings, projects and processes more efficiently. That's a big ball of wax.
In early January, iBuilding snagged a $15 million round of funding from several strategic investors, including 12 Entrepreneuring and Benchmark Capital, both based in San Francisco.
Ebuyxpress.com, based in Dulles, Va., has chosen a bit of a different strategy. It partners with or acquires traditional - and profitable - group purchasing organizations or other successful industry organizations such as trade groups that are led by experienced professionals in specific vertical markets. "We then migrate these companies and their customers to e-procurement in a managed transition from their traditional methods utilizing catalogs, phones and fax machines," says CEO Chad MacDonald. "These vertical market partners are leaders in their industries and already have an established customer base. This approach provides us with the ability to amass customers quickly rather than spending millions of dollars on marketing to acquire customers one-by-one."
MacDonald says the real savings generated by e-procurement are in the order and payment process efficiencies achieved. "These cost savings directly impact the bottom line of property management companies increasing their net operating income," he says.
More than office applications Other property types also have discovered the advantages of adopting e-procurement systems.
Irvine, Calif.-based hglobe.com, an e-procurement company for the hospitality industry, offers members a number of options. They can make purchases online as well as find vendors and service e-providers, keep up with industry trends and access chat rooms.
Denver-based Buyers Access bills itself as the ultimate online purchasing partner for multifamily housing. It uses the combined purchasing clout of nearly 700,000 member units to secure preferred pricing, terms and delivery on more than 200,000 supplies and dozens of services ranging from appliances and maintenance supplies to floor covering and pest control services, all from major vendors across the country.
Nashville-based Bid Express, an online contract-bidding service that boasts it takes the "con" out of contracting, is billed as a one-easy-stop link between quality contractors and consumers. It now has more than 40,000 pre-qualified contractors offering myriad services ranging from garbage collection to home construction.
Bid Express partner Terry Tramel notes that the firm has carved out a niche uniting contractors with commercial property managers. "Basically we offer a database of pre-screened, pre-qualified contractors," says Tramel. "If a commercial property manager needs a new roof, he or she can log onto our site, provide the requirements, the description of the job, how many bidders they'd like, what date they need bids, when construction starts and so forth. We match them with contractors who are pre-qualified. We've streamlined the overall process for managers and owners."
Bid Express services are free to property managers. The company derives revenue from a percentage fee accessed on contractors who are picked for a job.
How will managers fare? So the question begs, how will the role of the traditional property manager be impacted by all of this proposed new e-delivery?
"Property managers will have the same role as they have in the past," says Deloitte's Teel. "Internet technology simply will be a tool to enable them to be more efficient. If vendors can provide what they promise, property managers will be able to spend less time placing phone orders and paying invoices and more time providing service to their tenants."
All is not so well in e-land Clearly, though, the writing is on the wall - all e-procurement firms will not survive.
Consider Atlanta's hsupply.com, where officials boasted that the company was reinventing the procurement process by replacing the traditional labor, paper and process-intensive procedure of ordering supplies with an automated process that enabled hotel managers to centralize their procurement activities through one e-commerce solution.
Unfortunately, even though the company had more than 10 leading hotel franchisers and management firms in the hsupply.com portfolio, including, U.S. Franchise Systems Inc. (USFS), Buckhead America Corp. and Tharaldson Cos., it went bust last year. The silver lining: company co-founder S.P. Reddy and a group of Atlanta investors resurrected hsupply as V-Prologic, which will provide Web-enabled procurement software for the hospitality industry.
In fact, it's a pretty small e-procurement world after all. FacilityPro.com's president, Larry Hall, the former president and COO of hsupply, took on his new position after former FacilityPro.com president Peter Dunning resigned in early January to take a post with another Atlanta dot.com. Dunning still holds a board seat with FacilityPro.com.
Differentiation, therefore, is becoming key. For example, LiMandri of OpsXchange notes his firm is not a group purchasing organization. Unlike an online store for MRO goods or an e-tailer, OpsXchange allows buyers to engage in real-time electronic transactions with a multitude of suppliers through a trading hub. The company's proprietary technology also maintains industry relationships - such as contract pricing - while allowing suppliers to promote their own brands within the hub.
"In a sense, we get in the middle of the transaction," LiMandri says. "We provide a way for people to be able to maintain a competitive edge in the marketplace and allow vendors to maintain brand identity. We allow buyers and suppliers to trade online directly and to deal with regional and mall suppliers as well as large national ones."
Of course, buying in bulk for less is not exactly a new concept. Buyers Access has been in business for 16 years, long before e-procurement was on the lips of real estate executives, notes president Dave O'Leary. "We've been doing it a long time and have relationships with what we consider premier vendors to the apartment industry," he says. "A vendor such as Whirlpool or Sherwin Williams contractually offers us the best price in the industry, and that's good for customers."
Buyers Access made its first foray into e-commerce two years ago, and last year launched the pilot for Buyers Access.com in Dallas with seven properties, four suppliers and about 30,000 products. From that pilot, the company developed a robust procurement model that now includes 1,000 properties with 200,000 apartment units. The four suppliers have grown to 15 suppliers with more than 70,000 actual products.
O'Leary, though, is one who questions the future of some e-procurement companies. "It's interesting because people are saying, `Gee we've got this great idea about aggregate spending, and we are going to reduce the average cost of a product by 20% or 30%,'" says O'Leary. "But we've been doing it for 16 years, and vendors don't have 20% to 30% margins."
Still, he says, "If we can reduce the time and involvement the supplier has in processing orders, then there is value to be had from the supplier's perspective, particularly if we can increase the velocity of their money."
Future shock? What is the future of e-procurement? Will it be bigger, better and faster as some have claimed? Or will the industry that has spawned dozens of players ultimately slim down?
Already, some e-procurement companies are taking different approaches. One is AvidXchange. "Today, people are looking at e-procurement from a national perspective, but we're looking at it from a regional perspective," says Praeger of AvidXchange. "Typically, 85% of purchasing by a real estate company is regional and 15% is national. We have a regional market approach. Our focus is in the Southeast so we can provide the best solution purchase through our marketplace vs. other companies that work with big national suppliers and real estate companies and focus 15% of their spending on national suppliers."
Industry analysts say that the plethora of e-procurement companies will eventually shrink to a more manageable number. Already there have been consolidations. Fsbuy.com of Anaheim, Calif., has partnered with hglobe.com, an e-procurement company serving the hospitality industry, to expand the company's offerings for businesses using hglobe's e-commerce sites. Fsbuy caters to the food-service industry and provides an e-commerce site for buying and selling food products as well as supplies and equipment.
Still, are there just too many companies in this space, doing the same thing, to succeed?
"In real estate, as in many industries, many players are starting from the ground and hoping to become the first recognized player in the space," says Deloitte's Teel. "As part of this race, smaller firms may be acquired in order to build market share or gain technology advantages faster. This market, however, has space for a large number of firms just based on the size of the market and the diversity of the products and services. Initially, companies may focus on a very specialized market (i.e. office, retail, corporate) as well as product type (construction supplies, MRO, equipment, furniture). Differentiated product types will likely remain, but as companies grow, it is more likely that most markets will be served by fewer companies."
But the allure of doing something different - making a real difference - is compelling to many.
"Even though a jump from Wall Street analyst to entrepreneur may seem radical, in hindsight the decision was easy to make," says iBuilding's Hartung. "When I heard the company's business plan, that proverbial light bulb went off and I really thought iBuilding was on to something unique.
"When I learned about the company's world-class partners and the team that was already assembled ... well, that sealed the jump," Hartung says. "It was time to try to build a product and - I hope - contribute to the growth of the real estate industry instead of just writing about it from the sidelines as an equity analyst."