ISM - ISM Report on Business® - ISM/Forrester Research Report on eBusinessJanuary 2003

ISM/Forrester Research Report on eBusiness
January 2003

CONTACTS:

Kristen Kioa	Mariko Zapf
ISM	Forrester Research, Inc.
+1 800/888-6276, extension 3015	+1 617/613-6025
kkioa@ism.ws	press@forrester.com

Executive Summary

Purchasing organizations stepped up their online activities during this past quarter. Every segment reported an increase in the use of the Net for buying both indirect and direct materials. As a result, the average percentage of indirect materials purchased on the Net rose 1.5% to 10.5%, while the average percentage of direct materials purchased on the Net shot up 2.9% to 9.4%. The most dramatic increase was with large buying organizations -- where the percentage using the Net for direct materials jumped by more than 14%. Buyers also reported significant increases in the use of online auctions (from 18.8% in Q3 to 27.2% in Q4) and enterprisewide procurement tools (from 35.9% in Q3 to 42.6% in Q4).

Methodology

The ISM/Forrester Research Report on eBusiness measures the adoption of Internet-based procurement and tracks online activity for both manufacturing and non-manufacturing organizations.

The Report is based on data compiled from a survey sent to supply management executives in more than 600 manufacturing and non-manufacturing organizations belonging to the ISM Business Survey Committees. Membership on these committees is diversified by standard industrial classification (SIC), based on each organization's contribution to gross domestic product (GDP). All geographical areas are represented on the committees.

This Report is composed of the survey responses of 294 organizations. To understand the difference in online behaviors of these organizations, responses were analyzed along three classifications: 1) the results of all organizations; 2) a comparison of manufacturing and non-manufacturing organizations; and 3) a comparison of companies that procure more than $100 million per year and those that procure less than $100 million per year.

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year*	Buy less than $100 million per year*
Number of respondents	294	139	155	126	165
Median annual purchases (millions)	$75	$75	$75	$375	$17

*Three respondents declined to provide overall purchasing and revenue data.

The adoption rate for new online activities is measured by the eBusiness Adoption Momentum (eBAM) index. The eBAM index ranges from +5.0 to -5.0 and evaluates the number of organizations engaged in online activity as well as the increasing or decreasing pace of change in their usage. The index points to the following pace of adoption:

3.1	to	5.0	Extremely positive
1.6	to	3.0	Significantly positive
0.6	to	1.5	Moderately positive
-0.5	to	0.5	Negligible
-1.5	to	-0.6	Moderately negative
-3.0	to	-1.6	Significantly negative
-5.0	to	-3.1	Extremely negative

Overall Internet Adoption

Internet adoption continues to grow. The number of buyers reporting that they are at least halfway along the path toward fully adopting the Net expanded by 2.7% over last quarter. The biggest gains were reported by manufacturers (from 12.4% in Q3 to 20.1% in Q4) and large-volume buyers (from 25.5% in Q3 to 28.7% in Q4). 18.1% of all respondents reported no progress at all toward adopting the Net or don't currently have plans to use it.

How much progress have you made toward fully adopting the Internet in your purchasing activities?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Don't plan to use the Internet	5.1%	5.4%	4.8%	0.9%	8.2%
None, but thinking about it	13.0%	15.4%	10.9%	7.8%	17.0%
Some progress	62.5%	59.2%	65.3%	62.6%	61.6%
About halfway adopted	12.3%	10.8%	13.6%	19.1%	7.5%
Mostly adopted	6.1%	8.5%	4.1%	8.7%	4.4%
Fully adopted	1.1%	0.8%	1.4%	0.9%	1.3%

Supplier connectivity limits eBusiness adoption. When asked about issues they were encountering that affected eBusiness initiatives, respondents continued to mention difficulties with technical standards and integration. However, firms also pointed to supplier issues, including supplier readiness and the need to connect to multiple suppliers.

Large-volume buyers remain the biggest Internet advocates. Looking ahead to the next 12 months, 82.3% of organizations said that the Internet will be important to overall purchasing plans, a negligible decrease from last quarter's level (82.5%). The biggest decrease in importance was reported by manufacturers (from 82.3% in Q3 to 77.8% in Q4) and small-volume buyers (from 80.6% in Q3 to 76.4% in Q4). More than twice as many large-volume buyers view the Internet as very important or critical (48.4%) than do small-volume buyers (23%).

Looking ahead over the next 12 months, how important is the use of the Internet in your overall purchasing/supply management plans?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Not important	17.7%	22.2%	13.7%	10.5%	23.6%
Somewhat important	48.3%	48.1%	48.4%	41.1%	53.4%
Very important	26.4%	23.0%	29.4%	37.1%	18.0%
Critical	7.6%	6.7%	8.5%	11.3%	5.0%

Large-volume purchasers saw decreases in cost of ownership. While most respondents (64.3%) continue to report no change in the cost of ownership of products or services, the number of large-volume buyers that reported a decrease in costs from the Internet rose significantly from 38.2% in Q3 to 45.6% in Q4 and outpaced smaller-volume buyers (15.4%).

In the past three months, how have your online purchasing/supply management activities impacted the total cost of ownership of your products or services?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Increased	7.9%	8.2%	8.2%	8.1%	8.4%
No change	64.3%	67.9%	61.0%	48.0%	77.4%
Decreased	23.2%	19.4%	26.7%	35.8%	13.5%
Significantly decreased	5.7%	6.0%	5.5%	9.8%	1.9%

Companies increasingly changed procurement procedures. In all segments, the fraction of firms reporting major change to procurement procedures due to the adoption of the Internet increased -- after falling in the report for the previous quarter. 9.8% of all organizations reported that the Internet has introduced major changes to their procurement processes over the past three months -- an increase from last quarter's level of 6.9%. The biggest increase occurred for non-manufacturers, only 9.9% of whom reported significant or dramatic change in Q3 versus 12.5% in this quarter's survey.

How has the Internet changed your internal procurement procedures?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
No/minor change	90.2%	93.3%	87.5%	84.7%	95.0%
Significant/ dramatic change	9.8%	6.7%	12.5%	15.3%	5.0%

Online Buying Activities

Online purchasing of indirect materials increased in all segments. 85.3% of respondents bought some indirect materials online during the past three months -- a slight increase from last quarter's 81.9%. All segments saw a small increase in the fraction of firms buying online, but manufacturers saw the largest increase (from 80.6% last quarter to 84.4% this quarter). The average amount spent online on indirect materials rose significantly from 9% to 10.5%. This increase was led by non-manufacturers, which placed 12% of all indirect materials purchases online this quarter versus 9.4% last quarter.

Did you purchase indirect goods/services over the Internet via any means?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Bought some indirect materials on the Internet	85.3%	84.4%	86.0%	94.3%	78.9%
Average amount of indirect materials purchased online	10.5%	8.8%	12.0%	13.5%	8.3%

Online purchasing of direct materials surged. 70.3% of firms bought direct materials online this quarter -- a significant increase over the 63.8% in Q3. Large-volume buyers showed the most dramatic increase in this activity, jumping from 71.4% in Q3 to 85.7% in Q4. The percentage of total direct materials purchased online also surged from 6.5% in Q3 to 9.4% in Q4. While all segments saw significant increases in volume, large-volume buyers reported the most dramatic increase -- expanding their online purchases from 7% of total volume in Q3 to 13.4% in Q4. Large-volume buyers purchased twice as much of their volume online compared with small-volume buyers (6.7%).

Did you purchase direct goods/services over the Internet via any means?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Bought some direct materials on the Internet	70.3%	65.9%	74.3%	85.7%	59.9%
Average amount of direct materials purchased online	9.4%	7.3%	11.4%	13.4%	6.7%

Use of the Internet for auctions increased significantly across all segments. 27.2% of all respondents indicated that they bought products or services through an online auction, a notable increase from last quarter's level of 18.8%. All segments reported the solid increases. However, the eBAM index was constant in all segments, with the overall eBAM index increasing slightly to a modest 0.3.

Did you purchase goods/services through an online auction over the Internet?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Bought some materials through an online auction	27.2%	31.3%	23.4%	38.3%	18.3%
eBAM index	0.3	0.3	0.2	0.5	0.1

The use of electronic marketplaces and private hubs slowed slightly. Overall, the percentage of respondents using electronic marketplaces and private hubs dropped slightly from 32.7% in Q3 to 32.5% in Q4. The percentage of buyers that reported an increase in activity in these venues dropped across all segments, pushing the eBAM index down to 0.3.

Did you purchase goods/services through an electronic marketplace or private hub that links buyers and sellers?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Bought some materials through an online marketplace	32.5%	28.2%	36.3%	42.1%	24.7%
eBAM index	0.3	0.2	0.3	0.5	0.1

Non-manufacturers led increase in online RFPs. 68.4% of respondents used the Internet as part of an RFP process, an increase from last quarter's level of 64.3%. This increase was reflected in all segments, but non-manufacturers reported the largest increase -- from 64.8% in Q3 to 70.9 in Q4%. The eBAM index for online RFP increased slightly to a modest 0.8.

Did you use the Internet as part of an RFP process?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Used the Internet as part of an RFP process	68.4%	65.7%	70.9%	71.8%	66.0%
eBAM index	0.8	0.7	0.8	0.8	0.7

Manufacturers dramatically increased usage of procurement tools. 42.6% of respondents used an enterprisewide procurement tool that incorporates the Internet in Q4, which was up significantly from 35.9% in Q3. Manufacturers reported a dramatic increase in usage -- from 30.8% in Q3 to 41.5% in Q4. The overall eBAM index for the use of enterprisewide procurement tools remained positive but dropped slightly to 0.4.

Did you purchase goods/services using an enterprisewide procurement tool that incorporates the Internet?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Used the enterprisewide procurement tool	42.6%	41.5%	43.5%	57.5%	31.0%
eBAM index	0.4	0.4	0.5	0.8	0.2

Supplier Relationships

Online collaboration with suppliers continues to expand. All segments of buyers reported an increase in online collaboration with suppliers online, pushing the overall level of collaboration to 58.2% of all firms in Q4 from 53.5% in Q3. The rise was concentrated in large buying organizations -- 69.6% reported collaborating in Q4 versus only 63.5% in Q3. The overall eBAM index for online collaboration increased to 0.8 from 0.6.

Did you collaborate with suppliers using Internet-based supply chain tools?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Used the Internet to collaborate with suppliers	58.2%	56.4%	59.7%	69.6%	48.4%
eBAM index	0.8	0.9	0.7	1.0	0.6

Buyers' satisfaction with suppliers' online capabilities increased slightly. The percentage of buying organizations reporting that their preferred suppliers' online capabilities were either very good or excellent increased slightly -- from 12.6% to 13.7% -- while those reporting poor or very bad supplier capabilities fell modestly -- from 32.8% to 30%. More large-volume buyers are happy with supplier performance, with 19% of large organizations reporting that supplier capabilities were either very good or excellent versus only 9.5% for smaller buying organizations.

How would you rate the online capabilities (including content and product selection tools) of your current preferred product or services suppliers?

	All respondents	Manufacturers	Non-manufacturers	Buy more than $100 million per year	Buy less than $100 million per year
Very good/ excellent	13.7%	10.4%	16.6%	19.0%	9.5%
Good	56.3%	52.8%	59.3%	52.9%	58.5%
Very bad/poor	30.0%	36.8%	24.1%	28.1%	32.0%