Online Purchasing Services Vendors Gamble On Alternative Business Models

With giants such as Ariba Inc. and Commerce One Inc. dominating the high end of the E-procurement applications market, smaller vendors of online purchasing services are targeting small and midsize businesses and gambling on alternative business models.

Works.com Inc. is expanding its network of reseller partners as part of its strategy to spread adoption of its E-procurement software and its online marketplace for office and factory supplies among smaller companies. The vendor said Monday that it has inked deals with WorldCatch, an online exchange for the seafood industry, and ConnectSouth, a provider of digital subscriber line services to rural Southern areas.

These partnerships are similar to those that Works has with W.W. Grainger, Dell Computer, and Merrill Lynch. Dell uses Works' purchasing service to give its small and midsize business customers a portal for managing purchases with multiple suppliers. Grainger offers Works' E-marketplace to 1.4 million customers through Grainger.com.

Works and rival PurchasePro Inc. are embracing partnerships with companies with recognizable brand names among their target audience in lieu of building a direct sales force and brand recognition. For a cut of ongoing transaction fees, these partners market the products and purchasing portals as a value-added service to their customers.

PurchasePro has signed on high-profile partners in key markets, including America Online, Computer Associates, Gateway, Office Depot, and Sprint. By gaining exposure to customers through these deals, the company says it's extending its market reach more quickly and further than it could on its own. That's critical if PurchasePro is to meet its goal of turning a profit by Dec. 31, the end of its fourth quarter.

The hitch: Will partners be effective at driving adoption among users? PurchasePro chairman and CEO Charles Johnson Jr. says success hinges on this. "It's all about usage," he says.

Some partners are placing their eggs in several baskets. In addition to co-branding a portal with Works, Dell inked a deal in September with Ariba to host E-procurement apps for small and midsize business customers and to build an online marketplace for Dell products and complementary merchandise.

Additionally, there are risks in pinning hopes for success on nascent online marketplaces, such as WorldCatch, which is one of more than 20 trading exchanges targeting the seafood industry. "We predict that many independent marketplaces will fail," Yankee Group analyst Jon Derome says. "That could be a costly prospect for Works because building those partnerships takes time and money."