DRAFT
FOR DISCUSSION ONLY
Corporate Consortium Services Competitive
Assessment
Purchasing Consortiums
February 1998
© 1999, PricewaterhouseCoopers L.L.P.
Although the market is attractive, the competitive landscape is likely to
intensify. Although PwC appears to have near term middle market
customer acquisition strengths, its ability to obtain a sustainable
competitive advantage is questionable.
Executive Summary
• Over the past few years, numerous purchasing consortiums have been
established; however, these consortiums have primarily been structured as
“closed” consortiums targeting large corporations or public institutions
• Recently, a number of “open” consortiums utilizing a variety of business
models have been established, specifically targeting small/middle market
companies
• The low barriers to entry suggest the threat of new entrants is significant;
however the most prominent threat could come financial institutions,
eprocurement software companies, and other large industrials such as
telcos.
• Although PwC does appear to have a near-term competitive advantage over
many of the current competitors given its buying strength and customer
acquisition capabilities, an alliance or “build then sell” strategy should be
considered in light of the evolving competitive landscape
PW012999MD-Purch-Consort
1
The 1990’s has seen the emergence of numerous “closed” purchasing
consortiums, primarily within three sectors
Closed Purchasing Consortiums(1) – Examples
Large Fortune 500
Companies
Public Institutions
Managed Care
(Hospitals)
Note (1):
Note (2):
Note (3):
Note (4):
Note (5):
• Eli Lilly/Cummins
• Pacific Business Group(2) (Wells Fargo, Chevron,
other west coast corporations)
• RETEX(3) (The Gap, Barnes and Noble, MusicLand,
other large retailers)
• Erie I and Erie II Natural Gas Purchasing
Consortium(4)
• Consortium for Distance Learning(5) (29 California
colleges)
• VHA/UHC/Novation
• Health Services Corporation of America
• AmeriNet
Closed purchasing consortium refers to a formal or informal partnership where a specific group of companies come
together to combine purchasing volumes
Consortium focus on employee benefits
Consortium focus on technology products and services for the retail industry
Pennsylvania School districts consortium focus on energy
Consortium focus on remote educational programs
PW012999MD-Purch-Consort
2
Market research suggests the number of “closed” consortiums is likely to
grow amongst Fortune 500 companies
CAPS(1) Survey Highlights – Fortune 500 Use of Purchasing Consortiums
Yes
No
Currently belong to at least
one purchasing consortium
Expect the Use of Purchasing
Consortiums to be “more prevalent”
or “much prevalent” by 2001
18%
21%
79%
Note (1):
Center for Advanced Purchasing Studies
82%
PW012999MD-Purch-Consort
3
With the exception of managed care, it is unlikely that “closed” consortiums
will involve small/middle market companies
Overview – Likelihood “Closed” Consortiums Will Target Small/Middle Market Companies
• The typical “closed” consortium involves two to six participants. Dozens, if not hundreds
of small/middle market participants would be necessary to achieve the scale of a few
large Fortune 500 companies
• Initiating a “closed” consortium is not an easy process, usually involving corporate
leadership from all participants. As more and more companies participate in a formal
partnership, the probability of achieving mutual agreement amongst the parties
decreases
• There is an emergence of “open” consortium alternatives targeting small/middle market
companies which allow these companies immediate access to pre-negotiated discounts
with specific suppliers with minimal start-up expense
PW012999MD-Purch-Consort
4
Presently, a number of “open” consortiums have been established,
specifically targeting small/middle market companies
“Open” Consortiums – Competitive Landscape
• GE Commercial Direct – Service offered through GE Capital as an added feature to
their GE Corporate Plus Visa Card. Leverages the GE Corporation’s buying strength
into providing discounts, a cut of which stays with GE
• Corporate Purchasing International (CPI) – Buffalo, NY based consortium with large,
significant category offerings
• The Buying Consortium – A 1998 internet start-up, based in Austin, Texas, which
processes orders on its website
• ValueNet – Part of a broader range of consulting services offered by Value Net, a
Connecticut-based consulting firm
PW012999MD-Purch-Consort
5
GE Commercial Direct offers the consortium as part of its procurement
card value proposition
GE Commercial Direct – Business Model
Target Market
Companies of all sizes
Product/Service
Offering
Categories include long distance, overnight delivery, office supplies,
prepaid calling cards, paging/messaging, travel, and freight(1)
Number of Members
Estimated to be over 10,000(2)
Channel
Web-page and phone center (there are different 800 numbers for
categories such as travel, paging, messenger, express mail, etc.)
Customer/Interface
Characteristics
Contracts are established under GE. GE processes all orders,
except for office supplies whereby customer can call supplier
directly or access supplies web-site which is linked to GE
Commercial Direct’s Web-site. GE serves as a “Value-added”
middleman that processes orders, handles billing and
payments processing, and provides customer service
Business Economics
Revenue from margins on product categories and GE Visa
Plus card (revolving 15.75%, non-revolving 18.75%)
Business Tenure
Approximately 1993 or 1994
Note (1): GE Commercial Direct offers telecommunications and transportation management services such as software that help clients choose the
most cost effective carrier and discounted pricing (typically 10%) with a variety of carriers representing most modes of transportation
PW012999MD-Purch-Consort
Note (2): Current customer acquisition rate is 15 per day, expected to double as a result of direct mail campaigns
6
GE Commercial Direct is aggressively targeting small/middle market
companies
GE Commercial Direct – Marketing Approach
Large Corporations
(> $500 million
annual revenues)
Small/Middle Market
(< $500 million
annual revenues)
Note (1):
Source:
• Direct sales force (approximately 100 FTEs) primarily targets
the Fortune 1000
– Dedicated procurement card implementation team handles
MIS integration (e.g., p-card reporting links to G/L)
– Typical sales cycle is 45 – 60 days
– Implementation is complex… “It’s a big deal; we have to
analyze the entire procurement function and reengineer
processes, as well as integrate reporting to their G/L”
• Recently launched aggressive direct mail campaign (300,000
mailers with 200,000 more to be sent this month)
– Direct sales force will handle select middle market
companies with potential to spend at least $5 million
annually on p-card (claims some middle market
companies “aren’t attractive because of difficult p-card
implementation and tough sell on consortium”(1))
– Direct mail campaign appears to be successful… “We’re
getting amazing response; we expect our 10 – 20
customer acquisitions/day to double and we’re going to
move upstream to bigger middle-market customers”
Reference to fact that many middle-market clients GE has targeted have existing contracts in place or are not
interested because of complex telecommunications and technology requirements (e.g., long distance is just a
portion of a more complex telecommunications solution)
Interview with GE Commercial Direct Sales Representative
PW012999MD-Purch-Consort
7
CPI earns its revenues from membership fees and maintenance dues
CPI – Business Model
Target Market
Larger middle-market companies
Product/Service
Offering
Extensive, including MRO
Number of Members
Not available. Membership is application-based
Channel
Does not appear to be the Web or any other E-commerce medium
Customer/Interface
Characteristics
CPI serves only as the third-party that aggregates volume to
leverage further discounts into already existing contract –
everything else (processing, payment, etc.) is handled directly
between client and vendor. Interface medium is to call suppliers
directly(1)
Business Economics
Membership fees and maintenance dues
Business Tenure
1996
Note (1):
Assured interface based on limited information provided by CPI
PW012999MD-Purch-Consort
8
ValueNet offers a purchasing consortium as part of a broad range of
internet consulting services
Value Net – Business Model
Target Market
Small and middle-market companies
Product/Service
Offering
Approximately 20 categories. Established contracts for seven
categories including office supplies, copiers, courier, printing, long
distance, paper, and cleaning supplies
Number of Members
Minimal, estimated to be 100-500
Channel
ValueNet has a Web page which provides information regarding
the consortium; however, there is no E-commerce linking
members to suppliers. Members call suppliers directly
Customer/Interface
Characteristics
Offers consulting services, where accounts are reviewed and then
recommendations are made for savings opportunities, some
relating to process and others unit cost savings as part of
ValueNet consulting. Processing remains between client and
vendor
Business Economics
Revenue from % of overall savings brought to the company
spread over three years: first year, 50%; second year, 35% and
third year 15%. Revenue also from consulting fees related to
other services regarding customer acquisition/revenue
enhancement on the web
1993
Business Tenure
PW012999MD-Purch-Consort
9
The Buying Consortium is a new internet start-up with an e-commerce
business model
The Buying Consortium – Business Model
Source:
Target Market
Small and middle-market companies
Product/Service
Offering
Average (not comprehensive, approx. 5 categories)
Number of Members
42 members currently. Anticipate 5,000 by end of 1999(1)
Channel
World Wide Web
Customer/Interface
Characteristics
Online interface processes invoices based on billing terms.
Approximately 70% of indirect goods/services (mostly goods)
processed through TBC’s website while remaining 30% transactions
(mostly services) directly between client and vendor
Business Economics
Revenue from annual membership ($149) and mark-up on some
product categories
Business Tenure
1998
Interview with The Buying Consortium employee
PW012999MD-Purch-Consort
10
Overall, none of the business models is identical to the envisioned PwC
model; however, GE’s model appears to be superior along a number of
dimensions
Superior to PwC
Competitor Business Model Attributes Versus PwC
Parity with PwC
Inferior to PwC
Competitor
Products/
Services
Target Market/
Acquisition
Channel
Interface
Business
Economics
Comments
GE Commercial
Direct
• GE sells solutions, not just
access to contracts
• Business model is attractive to
suppliers because of GE’s
large client base and GE
serving as the interface
• Access to large client base,
small through large
corporations
• Revenue from p-card, in
addition to consortium
• Tremendous brand
recognition throughout the
marketplace
CPI
• No interface provided, CPI
clients interact directly with
suppliers
ValueNet
• No interface provided,
ValueNet clients interact
directly with suppliers
• Narrow product/service
offering; however, e-commerce
interface is attractive to buyers
and suppliers
The Buying
Consortium
Note (1):
Although category offering is not as broad as PwC, GE offers other services related to
telecommunications and freight management
PW012999MD-Purch-Consort
11
The low barriers to entry suggest a number of potential competitors
Potential Competitors
Internet
Start-ups
Telcos/Other
Large
Industrials
• Buying strength and relationships with significant portions of middle
market could make this an attractive revenue-generator or
mechanism to increase customer loyalty
Other
Consulting
Firms
• Pressure to maintain revenue growth may drive consulting firms to
pursue non-conventional services. Several consulting firms such as
AT Kearney and Mitchell Madison have deep procurement expertise
E-commerce
Software
Vendors
• Potential product extension for vendors who market the IT infrastructure
to support business to business commerce. Pre-negotiated contracts
could be an added “value-added” feature for some clients
Procurement
Card Issuers(1)
Note (1):
• Forecasted growth in internet commerce in addition to high retail
investor/demand for internet IPOs could cause a proliferation of
start-ups
• Natural product extension that could potentially increase “new”
customer acquisition rates for card issuers, particularly middle
market and increase margins
Includes American Express and issuing banks under VISA, MasterCard Association
PW012999MD-Purch-Consort
12
The projected growth in internet commerce is likely to attract new
entrants such as Biz Buyer
Potential Threat – Internet Startups
Global Internet Commerce –
Annual Revenues
Example – Biz Buyer
($ Trillions)
3
• Venture-capital backed start-up with
plans to launch in 2nd quarter 1999
2.5
• CEO is Harvard Business School
(HBS) graduate who is targeting other
HBS graduates as part of his
management team
2
CAGR = 90.3%
1
1.6
• Targeting small and middle market
companies using a Web interface
0.75
0.1
0.25
0.4
0
1998
1999
Source: Forrester Research
2000
2001
2002
2003
• Broad product/service offering,
including pcs, office supplies,
temporary services, etc.
PW012999MD-Purch-Consort
13
Several large-industrial/telco PwC clients are considering the consortium
idea
Potential Threat – Telcos/Other Large Industrials
Internal PwC Perspectives
Degree of Threat – Potential Entry
Strong Threat
“This idea has been discussed by the
president of Pitney Bowes, they target
the middle market and have
relationships with over 20,000 middle
market customers. It’s a natural fit.”
PwC Supply Chain Partner
“Several of our Telco partners have
discussed this idea with their clients;
these clients have relationships with
hundreds of thousands of businesses.”
PwC Manager E-Commerce Practice
Medium Threat
Strong
Telcos
Buying
Strength
Industrial
Products
Utilities
Weak
Small
Large
Middle Market Client Base
PW012999MD-Purch-Consort
14
Other consulting firms may replicate PwC’s strategy. However, few can
match PwC in terms of internal scale/buying strength
Potential Threat – Other Consulting Firms
Size – 1998 Revenues
Size – Number of Employees (000)
($ Billions)
$16 $15.0
160
140.0
140
$12
120
$10.9
100
$9.0
$8
$7.8
85.0
82.0
80
62.0
60
40
$4
$1.1(1)
20
4.6
$200M(1)
0.65
0
$0
PwC Anderson E&Y
Note (1): 1997 Revenues
DT
ATK/ Mitchell
EDS Madison
PwC Anderson E&Y
DT
ATK/ Mitchell
EDS Madison
PW012999MD-Purch-Consort
15
Mitchell Madison is planning a consortium launch in 1999
Overview – Mitchell Madison Consortium(1)
Client
Strategy
Client
Client
Mitchell
Madison
LLC
(Spin-off)
Commodity
Client
• Dynamic trading community arranged by commodity
• Potential revenue streams
– Subscription fees for E-procurement engine
– Transaction fees for trading within network)
(buyer & seller)
– ACH transaction fees
– Consulting fees for strategic sourcing assistance
Note 1: Mitchell Madison’s strength is in the financial services sector
• Create a new business
enterprise complementing
existing consulting line,
particularly strategic sourcing
• Play across several buying
spaces, e.g., commodity centric,
industry centric, direct, indirect,
auctions
• Engage selling community with
E-procurement as a key enabler
• Expand client reach to middle
market sector
PW012999MD-Purch-Consort
16
Most E-commerce vendors have yet to achieve significant market
penetration, however their product could enhance the “collaborative”
purchasing value proposition by lowering the cost of purchasing in
addition to lowering the cost of what customers buy
Potential Threat – E-Procurement Software Vendors
Product Description
Commerce
One
• Web-based electronic solution links
buying and selling organizations in
real-time trading communities
• County of Los
Angeles
• PG&E
Fortune
1000 with
large MRO
spend (>$20
Million)
• Purchasing automation software for
building on intranet, creating
electronic categories and order
forms, and automating the acquisition
cycle
•
•
•
•
Large
• Not yet profitable, recently raised a
manufacturing/ second round of capital
production
• Targeting large corporations
corporations
• Formed partnerships with Andersen,
Oracle,Sun Microsystems, and
PeopleSoft
Trade-X
• Internet-based commerce platform
that enables large enterprises to
manage buyer-to-supplier commerce
• Mitchell Madison Fortune 1,000, • Working with Mitchell Madison to
• Raytheon
Global 2000
establish e-commerce-based
consortium
Intelisys
• Promotes standards-based electronic
trading communities to optimize
sourcing, request order and payment
• Commerce Xpert software line
settlement
includes products for managing
transactions and automating
procurement and customer service
• Ford
• Chase Manhattan
Ariba
Netscape
Fischer
Technology
Current Clients
Target
Market
Company
Hewlett Packard
VISA
Cisco
Merck
• Sirrus
• Stamp Master
• Knight-Ridder
Comments
• Aggressively targeting large
corporations
• Partnerships with Microsoft,
PricewaterhouseCoopers, MCI and
SAP
• Strategic alliances with KPMG,
Oracle and SAIC
Fortune
1,000 and
public sector
• Acquired by AOL in Nov. 1998
• Partnerships with Lucent
Technologies, Hewlett Packard,
Real Networks and Citigroup
• Established ProcureNet consortium
PW012999MD-Purch-Consort
17
The most formidable threat could come from issuers of procurement
cards. GE Capital has already successfully implemented this strategy
Potential Threat – Procurement Cards
What is a Procurement Card
• Credit card issued to
company employees for
low dollar/high transaction
volume purchases
• Used by companies to
lower procurement costs,
specifically reduce the
volume of paper basedpurchase orders
Who Issues
• Visa and issuing financial
institutions
• MasterCard and issuing
financial institutions
• American Express
Why a Threat
• Natural extension to
product value proposition
(e.g., lower costs
associated with purchasing)
• Visa, American Express,
and MasterCard have
recently announced
intentions to target middle
market companies
PW012999MD-Purch-Consort
18
Procurement card usage is growing rapidly, with significant untapped
market potential
Procurement Card Growth
Transaction Volume
1997 Purchasing Market
Transactions with P-Cards
3.2%
(Billions)
14
12
13.2
CAGR = 116%
10
7.6
8
96.8%
Transactions
without P-Cards
6
4
2
3.1
1.3
0
1994
1995
Source: First Annapolis Consulting
1996
1997
Total $400 Billion
PW012999MD-Purch-Consort
19
Card issuers have begun to aggressively target the middle market sector
Procurement Card Usage by
Company Size
70%
60%
60%
“American Express announced that it is
now making its procurement card available
to the middle market; in the past, AmEx
had been targeting companies with annual
sales of more than $1 billion.”
Purchasing, June 4, 1998
“In the last three to four years, major
companies have entered the market. Now
we will see banks go after the middle
market.”
Bank Technology News, February 1998
50%
40%
30%
20%
10%
5%
0%
Fortune 500
Middle Market
“There are only so many Fortune 500
companies out there, in order to grow,
issuers have to move to small and
medium-sized businesses.”
Credit Card Management, June 1998
According to the Gartner Group, there is an 80% probability that virtually every midsize to large
enterprise will adopt some version of P-cards for more than 60% of its small, non-production
procurements by 2002
PW012999MD-Purch-Consort
20
Visa, MasterCard, and AmEx currently offer consortium features as part of
their small business programs
Small Business Cards – Consortium Features
American Express
• 10-20% savings on FedEx delivery
• 10% discount on Kinko’s services
• 2% discount on Mobile gasoline at participating stations
• 15% discount on Hertz car rentals
• 10-20% discount on Hilton Hotels’ standard rate
• American Express Business Travel Service clients receive discounts on airfare and hotel (open
to companies of any size, 90% of their customers spend less than $1 million annually on travel)
MasterCard
• 30% discount on DHL Worldwide Express shipping rates
Visa
• 25% off Alamo’s Small Business Plan Rates (5% cash back of >$300 spent per quarter)
• 5% rebate with Insight (provides software, scanners, printers, computers)
• 3% rebate on >$200 per quarter spend on Shell gasoline
• 5% rebate on >$200 per quarter spend on Sir Speedy Copy & Printing Centers
• 5% rebate on >$200 per quarter spend at Penny Wise Office Products
American Express just announced a partnership with IBM to offer IBM products/services
to small business cardholders at a 10% discount – February 16, 1999
PW012999MD-Purch-Consort
21
Procurement card margins lag other card products, a consortium feature
could reduce this gap
1998 Bank Card Earnings – ROA
2.7%
2.7%
2.5%
1.8%
Gold
Card
Cobranded
Small
Purchasing
Card
Business Commercial
Commercial
Card
Card
Comments
• Unlike small business cards where issuers
earn interest off of revolving balances,
95% of P-card issuers revenue comes
from interchange fee
– Scale is key
• The commercial card segment is projected
to grow at a rate which is approximately
3x that of general purpose (e.g.,
cobranded, affinity cards)
– The purchasing card market is the
fastest growing subsegment of the
commercial card segment
– Margin improvement in addition to
market growth could dramatically
improve card issuers’ bottom line
PW012999MD-Purch-Consort
22
Procurement card issuers and large telcos/industrials present the most
formidable threat, the key issue is speed to market
Superior to PwC
Capability Assessment – New Entrants Versus PwC
Equal to PwC
Inferior to PwC
Potential
Entrant
Customer
Acquisition
Capabilities
Buying
Strength
Ability to
Launch
Quickly
Comments
Internet
Start-ups
Other consulting
firms
• Unlikely to obtain significant
scale near term
• Those with procurement
strength lack scale
E-commerce
software vendors
• Need to immediately focus on
the core software product, still
in infancy stage with other
strategic priorities
Procurement card
associations/issuers
• Significant “ramp-up” infrastructure
requirements relative to direct
sales/implementation efforts
• Other near term strategic priorities
such as Y2K and merger
integration for issuing banks
Telcos/Other Large
Industrials
Near
Term
Long
Term
• Access to sizable customer base
• Strong buying power
PW012999MD-Purch-Consort
23
Four factors are critical relative to competitive positioning
Key Factors Relative to Achieving Competitive Advantage
• Purchasing volume, leverage over suppliers
• Internal strategic sourcing skills
Buying
Strength
• First-mover advantage/brand
recognition
• Switching barriers created
through strong customer
loyalty
Customer
Acquisition
Abilities
Market Entry
Timing
• Access to new customers
• Low cost per new customer
acquired
• High new customer acquisition
rate
Product/
Service
Offering
• Breadth of commodities offered
• Attractive preferred supplier list
• Accessible, easy user interface/
supporting infrastructure
PW012999MD-Purch-Consort
24
GE Commercial Direct and PwC have more buying strength than current
competitors; however, P-card issuers and other large industrials would
likely have similar strength
Buying Strength
Current Competitors – 1997 Revenues
($ Billions)
Potential Entrants – 1997 Revenues
($ Billions)
$100
$51.3
$37.6
$15(1)
$21.7
$17.7
$4.1
GE
Note (1):
PwC
1998 Revenues
N/A
N/A
$0.001
CPI
The Buying
Consortium
Value Net
American
Express
Bank
America
AT&T
Citigroup
Pitney
Bowes
PW012999MD-Purch-Consort
25
PwC appears to have a near term competitive advantage with respect to
customer acquisition in the middle market sector if an effective
sales/implementation process can be rapidly executed
Customer Acquisition Capabilities – Near Term
Competitor
Strongest
Description
Conclusions
PwC
• Direct sales force – audit
staff with existing middle
market relationships
• Leverage existing sales force (audit partners)
with access to key client contact (CFO)
• No resource constraints pending effective
training/incentive program to support selling
and implementation efforts
Procurement
Card Issuers
• Dedicated direct sales
force for large/middle
market commercial cards
team with RMs on the
corporate banking side
• Direct mail for small
businesses
• Issuing banks are not yet fully exploiting crosssell opportunity via existing middle market
relationships with corporate banking units
• Many card issuers are resource constrained
with respect to direct sales force, significant
increase in new customer acquisition will
require larger direct sales force
• Sales force for many card issuers lacks product
expertise
• Y2k/merger integration constraints limit near
term implementation abilities for many banks
Weakest
CPI
The Buying
Consortium
ValueNet
• Marketing primarily
through Web page
• No immediate access to a customer base,
“build from scratch” scenario
PW012999MD-Purch-Consort
26
CPI and PwC offer the broadest range of product/services; however, new
entrants could easily match
Long
Office
Overnight Temporary
Office
PCs Distance Supplies Travel Delivery
Services Equipment
Office
Furniture
MRO
Other


PwC








CPI

















GE
Commercial
Direct(1)

ValueNet
The Buying
Consortium

ProcureNet

Note (1):







GE Commercial Direct offers additional cost reduction solutions specific to freight and telecommunications
PW012999MD-Purch-Consort
27
PwC appears to have a competitive advantage relative to pricing on
specific goods/services versus existing competitors
EXAMPLES
Competitive Assessment – Pricing
Long Distance Interstate Rate
(cents/minute)
$0.084(1)
Overnight Express Letter
($)
$8.79(1)
$0.075
$6.50
$0.045
TBD
GE
Note (1):
PwC
TBD
CPI
The Buying
Consortium
For monthly spend >$500; for <$500, $0.099
GE
Note (1):
PWC
No service
CPI
The Buying
Consortium
For 10-20 units
PW012999MD-Purch-Consort
28
Although PwC has a near term competitive advantage over most current
competitors, longer term, procurement card issuers, particularly banks,
or large industrials could attain competitive strength
Overall Competitive Assessment – Longer Term
Product/
Service
Offering
Customer
Acquisition
Capabilities
Buying
Strength
Strong
Market
Entry
Timing
Average
Weak
Comments
PwC
• Near term can exploit direct sales channel with
access to clients’ CFO suite and ability to
rapidly implement infrastructure, limited access
beyond existing middle-market customers
GE Commercial
Direct
• First mover advantage, beginning to
aggressively target small/middle market
CPI
• Lack scale, customer access
ValueNet
• Lack scale, customer access
The Buying
Consortium
• Lack scale, customer access
Procurement
Card Issuers
Telcos/Large
Industries
• Procurement expertise, technology infrastructure,
and direct sales force/ implementation resource
constraints are near term barriers
• Relationships with significant portion of middle
market, tremendous buying power
Recent success of early movers in the internet commerce arena suggests speed to
market is critical, relative to customer acquisition and building customer loyalty
PW012999MD-Purch-Consort
29
Overall, PwC’s strengths do not appear to allow for sustainable
competitive advantage…the threat of new entrants is significant
SWOT Analysis
Strengths
• Alliance with Commerce One, ability to quickly implement Ecommerce infrastructure without other Y2K constraints
• Strong relationships with key client buyer (CFO), leverage
existing direct sales force (ABS)
• Buying leverage/strength with key suppliers via internal scale
Opportunities
• Large market potential, middle
market, currently undeserved
• Near term alliance options to
capitalize on partner strength and
weaknesses
PwC
Corporate
Consortium
Services
Threats
• New entrants, particularly large
industrials or procurement card
issuers with existing
complementary products and
access large customer base
• Supplier intervention with
proprietary websites renders
consortium value proposition
obsolete
Weaknesses
• Regulatory restrictions regarding business model structure
• Cultural history suggests inability to implement/change
quickly, political sensitivities (e.g., ability to aggressively
negotiate with audit clients as preferred suppliers)
• Limited access to middle market beyond existing ABAS/MCS
relationships (4,000), high penetration rate required to
generate significant revenues
PW012999MD-Purch-Consort
30
The competitive environment is likely to evolve in two stages with different
key success factors, PwC must exploit rapid customer acquisition
capabilities to build an immediate consortium base to be successful
Consortium Market Evolution
Revenues
Stage I – Market Growth(1)
1-2 years
Stage II – Market Maturity
X
2+ years
Timeline
Key Success
Factors
• Customer
Acquisition
• E-commerce
Infrastructure
• Scale
Note (1):
Based on Forrester Research estimates that 93% of
business-to-business commerce will be conducted on the
web by 2003
PW012999MD-Purch-Consort
31
Potential entrants have access to a larger middle market base; however,
most appear to be resource constrained near term
PwC
Chase
American
Express
Bank
America
BankOne
Middle Market
Client Base
4,000
15,000(3)
Sales Force/
Process
Audit Staff (CFO
relationships)
Direct Card Sales
Force ( ) teams with
Relationship
Managers
• Direct Card Sales
Force (200 FTEs)
• Procurement Card
• In-depth reporting
using accounting
link (maps
transactions to G/L
accounts)
• Procurement Card
• Procurement Card
• Procurement card
• Reporting MIS maps • Reporting MIS maps • Reporting
transactions to G/L
transactions to G/L
capabilities maps
accounts (Accounting accounts
transactions to G/L
Link)
• Provide reengineering • Mostly level I report
with Old Co. Coopers
alliance
• Procurement card
• Reporting MIS maps
transactions to G/L
accounts
• Paymentech fullservice electronic
payment solutions
Procurement-related
Product/Services
Consortium
Infrastructure
• Likely to involve
Commerce One Buy
Site and Supply Site
(supplier catalogues,
extranet requisitioning)
• Ordering
29,000(1)
Wells
Fargo
• Implementation staff
• Likely to involve
p-card
• Payment link
software
• Customer
Service
• Will build help desk
capabilities
• 24 x 7 support
through call centers
• Starting up its own
consortium with ecommerce
infrastructure(5)
• Launched partnership
with IBM to offer 10%
discount to small
business cardholders
Note (1):
Note (2):
Note (3):
Note (4):
Note (5):
Note (6):
> 20,000
• Leverage credit and
cash management
relationships
• Dedicated sales force
(>20 FTEs)
• Dedicated sales force
(FTEs unknown)
• Payment
Processing
Comments
23,000(2)
Clients with annual revenues $10-$500 million
Clients with annual revenues $10-$300 million
Clients in tri-state NY area $5-$500 million annual revenues, 50% penetration
Clients with annual revenues $5-$150 million
Source: PwC FVP partner; PwC FVP principal
Source: Wells Fargo employee
• 24 x 7 support
through call centers
• Leverage credit and
cash management
relationships
• 24 x 7 support
through call centers
• Currently
• FirstUSA and
developing eBankOne business
commerce business cards haven’t
model (consortium
merged
offering to small
businesses) - target
launch Aug. ‘99 (6)
PW012999MD-Purch-Consort
32
Given the threat of new entry from procurement card issuers or large
industrials, PwC should consider three strategic options with the go
alone option being the least attractive
PwC Corporate Consortium Services – Strategic Options
Go Alone
Alliance with P-Card Issuer
Build Then Sell
Benefits
• Enhance PwC brand recognition in
the E-commerce arena (could
eventually help other business
lines)
• Maximum revenues from our
middle market client base,
assuming switching barriers can be
established
Benefits
• Enhance the customer value
proposition with a total procurement
cost solution
• “If you can’t beat them, join them”
approach could assure PwC of a
sustainable position in the
marketplace, access to additional
middle market customers
Risks
• Inevitable entry by stronger
competitors could erode PwC
market share longer term or
compress margins/reduce revenues
Risks
• Partner eventually builds internal
infrastructure/capabilities and ends
partnership
• Possible conflict of interest with PwC
clients who are not selected as
alliance partner
Risks
• Potential acquirers (e.g., banks)
build internal capabilities or partner
with someone else
• More realistic valuations for E-based
businesses evolve
• Other competitors capture larger
market share; they become more
attractive acquisition candidates
Key Success Factor
• Partner selection
• “Win/win” alliance structuring (e.g.,
PwC needs to protect its client
relationships)
Key Success Factor
• High customer acquisition rates
• Self-contained E-commerce solution
established (minimal enhancements
required by acquirer)
• Key Success Factor
• Speed, enter market quickly
• High customer acquisition rates
amongst 4,000 middle market
clients
• Build customer loyalty to prevent
switching
Benefits
• Exploit near-term direct sales
advantage and maximum margin
potential (revenue stream)
• Significant market premium if
successful E-business established
and market demand remains high
PW012999MD-Purch-Consort
33
The “Go Alone” approach appears risky if PwC must compete against
lower-cost competitors for market share beyond its existing middlemarket client base, particularly within the small business segment
Go Alone Strategy
Risks
• Increased competition results in margin
compression
Acquisition Costs Per Customer
$1,923
– Scale will be key
– PwC may have to pursue customer
acquisition beyond existing middlemarket client base with a “high cost”
direct sales channel to prevent
revenue degradation
$1,000
• Alternative marketing strategy may be
required
– Marketing alliance with an internet
portal for web traffic
– Other capabilities such as data mining
to identify target customers (possibly
small businesses which represent a
segment PwC has not historically
served)
Note (1):
Note (2):
Note (3):
$12
PwC (1)
P-Card Issuer (2)
Mature WebBased Business(3)
Assumes 8 hours partner resource, plus 25% travel expense ($400,000 annual compensation/benefits expense)
Source: Credit Card Management; figure is based on average acquisition cost for all commercial cards (excluding small business)
Figure based on Amazon.com acquisition cost
PW012999MD-Purch-Consort
34
The long-term viability of the consortium concept could be threatened by
supplier intervention as a result of web-based business economics
Potential Issue – Business-To-Business Commerce
Issue
• As more and more commerce is conducted via
web, suppliers’ lower cost structure results in
different pricing strategies
– Consortium business could become obsolete
as companies of all sizes are able to obtain
lower prices/rates “direct” from supplier sites
• E-commerce infrastructure becomes a critical
success factor as customers demand
comprehensive web-shopping sites for
business-to-business commerce
– GRAINGER has launched this concept
(February 1999)
GRAINGER Orderzone
• Launched February 9, 1999, as a one-stop solution for
business-to-business commerce
• Collaboration of six industry leaders representing an
extensive array of products/services, including:
– Cintas (uniforms, clothing)
– Corporate Express (office supplies, pcs, delivery
services, etc.)
– GRAINGER (industrial/MRO equipment)
– Lab safety (protective equipment, first aid, etc.)
– Marshall (electronic components and production
supplies)
– VWR Scientific (laboratory supplies, chemicals, etc.
• E-commerce infrastructure, one site for six companies,
reduces purchasing costs by eliminating paperwork;
“simple invoice set across all suppliers”
• “Built-in response to customer demand”(1)
Note (1):
Source: Grainger press release, Grainger CEO
PW012999MD-Purch-Consort
35
An alliance with an issuing bank could potentially strengthen Corporate
Consortium Services’ value proposition
PwC/Issuing Bank Strategic Alliance
PwC
Issuing Bank
Strengths
• Procurement expertise, specifically strategic sourcing
• Access to key client contract CFO, existing direct sales
force
• Consulting services to implement client procurement
process/technology enhancements
• Alliance with Commerce-One, ability to implement Ecommerce infrastructure near term
Weaknesses
• Limited access to middle market beyond existing client
base
• Suppliers may resist idea unless significant “new”
customer base is acquired or PWC assumes
processing/customer service activities to reduce the
“supply side fulfillment expense
Strengths
• Attractive product to lower expense associated with
the purchasing function
• Existing product for which consortium is a “natural”
product extension
• Access to additional middle market clients
Weaknesses
• Y2K constraints limit ability to implement E-commerce
infrastructure near term
• Limited procurement expertise, in many cases haven’t
yet exploited internal buying power through
coordinated strategic sourcing
• Commercial card direct sales force and implementation
resource constraints
Customer Value Proposition
• Total Cost Solution
–Reduce costs associated with
purchased goods & services
–Reduce costs of purchasing
PW012999MD-Purch-Consort
36
There may be a near term window to approach alliance partners with an
attractive proposition
What Can PwC Offer Procurement Card Issuers
Procurement
Expertise
E-Commerce
Infrastructure
• Many bank issuers such as Wells Fargo, Bank America, and Banc
One haven’t yet enhanced their internal procurement capabilities(1)
–Most banks are currently utilizing or seeking outside assistance
relative to strategic sourcing
–Internal strategic sourcing core competency does not exist
• PwC could implement a Commerce One consortium infrastructure
within months, it is unlikely that issuing banks could match this given
Y2K and other strategic priorities such as merger integration
Experienced
Direct Sales
Force
• In the near term, PwC should be able to achieve higher middle market
customer acquisition rates by leveraging its existing ABAS sales force
and strong CFO relationships assuming effective training/education
Client
Implementation
• Support card issuers on client implementation regarding IT integration
and procurement reengineering leveraging PwC core competencies(2)
Note (1):
Note (2):
Mitchell Madison is currently engaged by BankAmerica and likely to be engaged by Wells Fargo for strategic sourcing
BankAmerica had alliance with Old Co. Coopers & Lybrand for this purpose
PW012999MD-Purch-Consort
37
Now may be the time to capitalize on issuing banks’ weaknesses,
specifically infrastructure as Old Co. Coopers did with Old Co. BankAmerica
Perspectives – Bank Challenges Regarding Procurement Cards
• “Most banks still make the mistake of not committing the needed resources . . .
most institutions are selling and not developing their purchasing card program from
the cash or treasury management areas of the bank, which has no expertise with
the product.”
Bank Technology News, February 1998
• “We do not have a problem in signing customers, we have a problem not signing
because we cannot service them properly if we sign a lot together . . . alone we are
not going to be able to cover the market.”
AmEx VP quoted in Supply Management, November 19, 1998
• “It’s one thing to be able to sign someone up for an account and it’s another thing to
go there and work with mid-level executives to make sure the cards are really used
. . . even the big companies, American Express, U.S. Bancorp, and Nations Bank
are undermanned.”
American Banker, September 11, 1997
PW012999MD-Purch-Consort
38
Specifically, PwC may be able to exploit implementation consulting
services
Potential Consulting Opportunities and Challenges
Opportunities
Challenges
• System integration specifically MIS
integration (e.g., G/L) with procurement
card reporting
• PwC’s IT resource constraints and MCS
rate structure is not conducive to middle
market implementation
• Policy/procedure implementation to allow
company to quickly achieve behavioral
changes necessary to maximize savings
opportunities
• Recent procurement card experience
suggests that behavioral changes must
be addressed regardless of procurement
solution
– Consortium like P-card will not be
fully utilized without changing clients’
procurement processes/practices
PW012999MD-Purch-Consort
39
The alliance not only offers attractive features to the partners, but to
suppliers and customers as well
Alliance Value Proposition
To PwC
To Issuing
Bank
To Supplier
To Customers
• Alliance partnership assures sustainable position against imminent competitive
threats
• Transaction fees associated with processing consortium customers signed up
by issuing bank
• Potential revenues/fees for customer implementation
• Outsource “non-core” procurement competency/infrastructure to third party
• Increased P-card membership, interchange fees from PwC consortium clients
• Consortium “cut” for existing or new p-card customers or new signed by bank for
consortium
• Enhances P-card value proposition, particularly for new customer acquisition
• Leverage PwC implementation capabilities
• Access to PwC middle market client base utilizing PwC direct sales force
• Access to Issuing Bank middle market client base utilizing bank RM/card direct
sales force
• Corporate Consortium Services E-commerce infrastructure reduces order
processing costs
• Total cost value proposition, reducing purchasing costs and reduced costs
associated with indirect goods and services
• “One stop shopping” for a wide range of indirect goods and services
• Seamless, user-friendly E-commerce interface with suppliers with option for
alternative ordering channel
PW012999MD-Purch-Consort
40
The build-and-sell strategy will depend on a number of variables; findings
from customer research will drive this assessment
ILLUSTRATIVE
“Build and Sell” Strategy
Key Variables
Best Case
• PwC middle-market penetration rate
– % of middle-market clients acquired
for consortium
Most Likely
• Category usage by consortium
members
Worst Case
– Specific categories likely to be bought
by members (few versus all)
• Margin opportunity for each category
• Volume purchased for each category
• Implementation timeframe, timing for
customer acquisition (by category)
1999
2000
2001
2002
PW012999MD-Purch-Consort
41