Eighteen months ago, electronic procurement sites for education seemed to be flooding the market, with new players appearing on the scene at a staggering pace.
As the internet economy softens across the board, however, most of the education-focused eProcurement sites are facing leaner times, according to venture capitalists and industry experts. That could leave schools using some of the online purchasing systems in a precarious situation.
In stark contrast to the circumstances a year and a half ago, venture capitalists and other investors today are generally reluctant to commit more money to eProcurement companies. Many eProcurement firms, in turn, have found it hard to cope with the long lead time that can separate start up and profitability in the school field. They also face the challenge of trying to establish a new genre of school service in what one executive called “a historically bad venture market.”
As a result, some companies have simply disappeared from the scene, while others have been forced to adopt a new business model that involves charging school districts for their services.
Early school adopters, meanwhile, have been reporting mixed results. Some say online purchasing has saved them time and money, as promised, but others report that integrating eProcurement systems with their existing back-end business software has been a slow, painful process.
Despite these problems, observers still see a future for eProcurement in education. But players and stakeholders agree: The softening of the internet economy has created a significant shake out. Consolidation is the key word. And the expert consensus is that the several companies that survive will do very well indeed, only those with the most “patient money” will be left standing.
Streamlining the purchasing process
Instead of selling supplies directly, companies such as Simplexis, Epylon, eSchoolMall.com (not affiliated with eSchool News), KawamaCommerce.com, SHOP2gether.com, and DemandStar promised to bring schools and vendors together in a way that would help school officials streamline the traditionally arduous purchasing process.
Between them, they hoped to win at least a small portion of what the market research firm Gartner Group estimated in 1999 was a $115 billion market.
Besides ordering supplies, many of the companies broker sales of services, including landscaping and building maintenance. They generally facilitate ordering without ever taking possession of the goods.
Although electronic procurement is nothing new in the business world, each of these online companies said they had tailored their services to the specific needs of school districts. “We sell everything it takes to run the business of education, from hundreds of gallons of floor wax, to grandstands, to pencils and paper,” said Jared Cameron, vice president for communications at San Francisco-based Simplexis, in an interview last year.
Traditionally, school purchasing officials get on the phone or turn to catalogs to get information on products. Then, they must submit request forms, which are shuffled from department to department, often taking weeks and using up valuable time and money before finally being approved.
By estimates of the U.S. Department of Education, completing a single requisition form costs a school district $125 in labor and paper costs. Nationwide, school officials handle an estimated 25 million purchase orders per year, according to industry sources.
“There’s a lot of paper and a lot of suppliers doing nothing but trying to make a sale,” said Steve George, Epylon’s founder, president, and CEO. “We want to create a paperless solution to allow more time for teaching kids.”
Last year, Ben Holsinger, education product manager at SHOP2gether.com, told eSchool News, “We started doing electronic procurement in the small-business market and had a number of education customers, but the system wasn’t quite right for schools. So we built a new system just for schools, using educators’ input.”
But SHOP2gether is one of companies that didn’t make it through the internet shake-up, changing its business model and downsizing so that the once web-based service now sells procurement software to schools.
At least, that’s according to chief executive Ami Grynberg, who called eSchool News from traveling in Europe. Other company representatives did not answer phone calls or return messages.
Mixed reactions from schools
Educators’ opinions about whether eProcurement has been a success so far are mixed.
eSchoolMall.com customer Brenda Bray, business administrator for Pennsylvania’s Palisades School District, said web-based purchasing offers an advantage over shopping directly through separate vendor catalogs.
“We can cut across several different vendors and compare their products and prices,” she said.
“From the time we’ve started using Epylon, it has made us more efficient,” agreed Mary Simms, director of internal business affairs for the schools of Kern County, Calif. “We are getting better pricing and saving on labor and supplies.”
It used to take Kern County a week or longer to process one order, Simms said, but by purchasing through Epylon, her office can submit orders within a couple of hours.
“Before, you had to start from scratch each time,” she said. “This way, you can just resubmit orders that occur on a regular basis.”
But some educators using the sites have expressed reservations. They caution that integrating the process into their schools has been slow going.
Marylou Atwell is an assistant to the technology director for Interboro School District in Prospect Park, Pa., a district that is using eSchoolMall.com’s product.
“Right now, eSchoolMall is implemented, but it is still in the trial phase,” she said. “There are still some kinks. For instance, it has to interact with our business-end software we use for budgeting.”
According to Atwell, the feedback from purchasing officers has been mixed. “My experience with this is that it takes just as long to place an order online as it does with paper, at least from the school end,” she said, adding there is no way to gauge cost savings yet, since only a portion of the district’s purchasing staff is using the web-based solution.
“In my opinion, it’s a lot of screens to go through, and the forms do not look anything like the forms we have always filled out,” she said. “There is definitely some getting used to this.”
Another issue is the list of vendors these companies supply to their customers.
“School districts always have their ‘tried and trues,'” said Atwell. “They are the companies we’ve been dealing with for years, and they’ll give us discounts.”
Interboro still uses those companies, even though eSchoolMall doesn’t have them on its vendor list. “Sometimes [online procurement] is not worth it, because we still have to fill out paperwork for these types of orders,” Atwell said.
Regardless of early glitches, most educators still see online purchasing as inevitable.
eProcurement “will probably replace older methods to a big extent,” said Simms. Before that happens, though, the volatility of the market space will have to subside.
Venture capital bottoms out
Market analysts and venture capitalists agree that new investment opportunities for online purchasing have all but dried up, and even those companies with sufficient initial funding are having a hard time finding sustained financial backing in the current market.
“Right now, it is not a matter of whether eProcurement will get a toehold, it is really a matter of revenue and business model,” said Lou Pugliese, entrepreneur in residence at Novak Biddle Venture Partners in McLean, Va.
According to Pugliese, the viability of an eProcurement company depends on how fast its business will scale inside of schools.
He thinks schools will adopt more readily once they begin to see a monetary savings, but that might not be before the venture capital runs out.
According to an industry insider who wished to remain anonymous, some of the top names in eProcurement might not have much time left to start turning a profit.
“School districts move slowly, and there’s a lot of inertia in the current purchasing system; the transaction-based model would take years to become profitable,” said this insider.
The “transaction-based” model was one that most online purchasing companiesbacked by healthy doses of venture capitaladopted as their means of revenue.
Basically, it meant that schools were allowed to use the service for free, while vendors paid a small transaction fee each time a school customer purchased their products through the eProcurement site. Most online purchasing companies have now abandoned that model as a primary source of income.
“A fundamental problem with companies that try to be the middleman is that competition drives price towards cost. What ends up happening is that the consumer saves money, but the middleman companies don’t make any money,” said Jack Biddle, general partner at Novak Biddle Venture Partners.
“The new strategy is to keep going at a subsistence level and focus on revenue,” agreed the anonymous source. “For example, Simplexis is now charging school districts for implementation and use of the system, which actually makes a lot of sense. Relying solely on transaction fees was a pipe dream.”
“It should be easy for a district to share part of [its] savings with Simplexis,” said Simplexis founder and chief executive Amar Singh, who added that the company now receives revenue from a combination of transaction fees and fees from schools.
‘The customer always pays’
Despite the market turmoil, companies still see the potential for education-focused eProcurement. Peoplesoft, a leading provider of large student information systems, recently announced that it will become involved in online purchasing at the K-12 level.
Peoplesoft’s director of strategy for education, Bert Landau, said the company has no illusions about the profitability of transaction fees.
“We have always said there would [have to] be a license fee,” he said. “All the firms that are going to survive now charge license fees, and those that signed large contracts without license fees are hunting for ways to [make] money.”
According to Landau, charging vendors will only increase the cost to customers anyway, because vendors will turn around and hike prices to account for their extra expenses.
“One way or another, the customer always pays,” said Landau.
Landau said a number of companies have approached Peoplesoft with the hope that it would acquire them and take some of the pressure off the flailing venture market.
“We’ve noticed recently that when we invite one of the [eProcurement companies] in for a ‘show and tell’ of their functionality, during that meeting their first idea is whether or not we’d be interested in buying them or investing in them,” said Landau.
One company reportedly walking a thin line is Simplexis.
“It’s obvious we’re heading into a period of consolidation, with one or two companies left standing at the end,” said the anonymous source. “All the major players are flirting [with potential partners that can help sustain them]. It’s a bit like a high school dance, wondering who’s going to hook up with whom.”
Simplexis was caught in a difficult position because of the declining fortunes of its primary investor, Internet Commerce Group, the source said. ICG started putting pressure on Simplexis to show revenues sooner than plannedor else close up shop.
“From ICG’s point of view, they wanted to cut their losses; Simplexis still has more than $10 million left in the bank that could be returned to investors,” said the source. “For Simplexis, it was like a script change in the middle of a play.”
According to the industry insider, last fall ICG’s representatives on Simplexis’s board of directors reportedly tried to liquidate the companybut they were one vote short.
Company officials have not confirmed this report.
“Right now … we project we’ll start to make money in early 2002,” said Simplexis’s Singh. “There are about a dozen districts using our entire solution.” That figure refers to districts that have implemented the company’s system fully and trained their staff to use it, he said.
The anonymous industry insider tells a different story. “Basically, the management was subjected to a yo-yo effect from investors, who handed them $35 million in March last year and told them to ramp up like crazy,” he said. “Less than six months later, the investors did a one-eighty and told Simplexis management to cut costs, regardless of the consequences.”
The company’s only realistic option was to scale down operations drastically. Indeed, Simplexis, like almost every one of its competitors, began cutting staff. The company, which at one point had more than 100 employees, is now down to about 30.
“The lure of ‘free’ clogged the market for a while. It seems like everyone forgot the lesson we learned from our grandfathers: there is no such thing as a free lunch,” said Peoplsoft’s Landau.
Is the worst over?
To hear company officials speak, you’d never know the market had suffered a decline.
“We’re extremely bullish going into our second quarter,” said Mark Smith, senior vice president for product, marketing, and strategy at eSchoolMall.com. “It was a tough fourth and first quarters, but the fact that we’re still here talking to you best explains it. We’re still here, and we’re healthy.”
Epylon’s Steven George echoes Smith’s sentiments. “The business itself from a micro perspective is booming,” he said, though he acknowledged that “on a macro perspective, [venture capital] and public funding [have] basically come to a stop in almost every industry.”
And though Singh acknowledged significant layoffs at Simplexis, he said, “We still have more than half our initial investment in the bank. There is no other company with that much money in the bank.”
In fact, most company executives seem to believe the worst is over, and the companies that still remain are in it for the long term.
eSchoolMall’s Smith said his company also had to lay off employees, but he said it was not an unhealthy change, as it forced the company to step back and examine its business model.
Layoffs “make us no different from Lucent or General Motors or whomever,” he said, adding that the company has since rehired a significant number of staff. “A lot of the latecomers have already dropped off the radar screen. I think there will be three players at most, all with their own particular niches.”
One of those players is likely to be Epylon.
“We have 256 people todaythat’s probably the largest our company has beenbut we’re all struggling with a historically difficult financing market,” said Epylon’s George. “It’s happening globally, and we’re not immune to it. In fact, because we’re new, we may be more susceptible.”
KawamaCommerce.com’s partnership with the American Association of School Administrators, which endorses the company to its members, makes the company another candidate for survival, though CEO Jeff Goh said he “would not rule out” acquisition by another company if such a move would be best for its customers.
KawamaCommerce works with educational service agencies that represent several school districts. The company has developed an application for the King County Directors’ Association in Kent, Wash., that enables the group’s 290 school districts to solicit Requests for Proposals electronically to the vendors they already deal with.
“I’ll be honestit hasn’t been a runaway, but education is never a runaway,” said eSchoolMall’s Smith. That sentiment was echoed across the board.
“The good thing for eProcurement companies is that schools are usually very conservative customers, to the extent that once you get that customer, you can usually hold onto them,” said venture capitalist Biddle. “Conservative customers are harder to get, but they are also harder to lose.”
Winning the market
The question remains: What are the defining factors that will allow companies to win this hotly contested battle for market share and profitability in the K-12 field?
Company executives continue to squabble over the particulars. One sticking point revolves around system architecture.
Both Epylon and Simplexis are run on the backbone of a larger purchasing system that is not education-focused.
According to Steven George, Epylon decided early on to go with software from Ariba. Ariba provides online purchasing power to the business world, where web-based purchasing systems have seen more acceptance.
Simplexis has adopted the Commerce One architecture for its school-based product. “Back in January 2000, we knew there was no sense reinventing the wheel. We took Commerce One’s engine and customized it,” said Singh.
The advantage of using a commercial product is that both Commerce One and Ariba have been functional for some time and have had several revisions and improvements.
“The Commerce One product is very scalable, and all the kinks have been worked out. Everyone knows that it can take seven, eight, or nine versions to get the bugs out,” said Singh.
Simplexis and Epylon have adapted their respective platforms for school use by changing their user interfaces to better meet the needs of school purchasing officials.
eSchoolMall has taken a different approach than its competition by developing its own software.
“The school market channel is not the same as the private sector. You are not going to re-engineer this market channel. Schools are slow adopters, and certain business model assumptions don’t apply here,” said eSchoolMall’s Smith.
The nice thing about owning its own software is the company’s ability to make adjustments to its product, he said. “Simplexis and Epylon use big business software.”
Because eSchoolMall owns its own software and can license it to vendors, the company is able to leverage those licensing fees as an alternative source of income.
“We’ve had an enormous reception to our software, because it was designed for schools,” said Smith. “Our software fees are a major source of revenue.”
But Simplexis’s Singh sees it differently: “If eSchoolMall tells me they spend even close to what Commerce One has spent developing [its] solution, then I’ll switch. But we know they haven’t been able to invest that much.”
According to venture capitalist Lou Pugliese, the winners are going to be the ones who have oriented their architecture to the buying patterns of a particular school district.
“Most vendors have a ‘vanilla’ architecture. They are not education-specific,” he said. “I think eSchoolMall has done the best job in mimicking the strategies of purchasing agents, and that helps the rate of adoption.”
The winners will have the best catalogs, offerings, services, and the best architecture for meeting the needs of schools, Pugliese added. They’ll also be the ones that work very quickly and quietly to accumulate market share.
A new take on the idea
Another company that uses Commerce One’s architecture is AcquireX. But that company puts a completely different spin on the traditional eProcurement business model, which has allowed AcquireX to remain above the struggle for venture capital that has consumed so many competitors.
According to Jack Allewaert, president and CEO, AcquireX is privately funded by Davidson Networks, LLC and is dedicated to building an eProcurement system that will streamline school purchasing systems, in order to make more money for the real purpose of education.
“We are not dependent on [venture capital] to continue our funding,” he said. “The Davidsons are committed to seeing this through until we scale. So that is comforting in light of the financial climate.”
AcquireX considers itself to be an aggregator, or reseller, of educational products. “That’s different from our competitors,” said Allewaert. “They are facilitators. A facilitator charges a fee for introducing the buyer and the seller.”
Instead of facilitating sales, AcquireX actually sells to schools. All financial transactions are run through powerful Oracle software.
“Through the facilitation model, if [educators] don’t like what they receive, they have to go to the vendor,” said Allewaert. Unlike its competition, he said, AcquireX is the first line of defense for customer service issues, encouraging customers to contact it directly for problem solving and trouble-shooting.
“To be successful in the school business, you have to be a patient investor,” said Allewaert. “Our business plan is based on the idea that you have to prove yourself as a company, and you have to make money before you go public.”
But Allewaert acknowledges his company faces the same challenges as all eProcurement companies that are struggling to win acceptance in schools.
“I think one of the biggest challenges we face in this space is that it’s our job to educate the schools and their administration about the benefits and cost savings associated with all these companies,” he said. “School administrators are very cautious buyers. They should be. They have people looking over their shoulders waiting for them to make a mistake at all times.”
Novak Biddle Venture Partners
Palisades School District
Kern County Superintendent of Schools
Interboro School District