By Lori Hawkins Talk about retooling your business model. Works.com, an online purchasing service in Austin, Tex., set up shop in 1997 to help small and midsize businesses save money by buying their office supplies and equipment online. Two years and $50 million later, it's thinking big to reach the small by selling its software to major corporations, who will then offer the service to their small-business clients. And it also has teamed with industrial-supply giant W.W. Grainger, giving it quick access to 1.4 million small-business customers and adding things like plumbing and lighting to the stock list.
Works.com's evolution isn't surprising given the challenges facing online procurement services. Thousands of e-procurement sites have been set up in the past couple of years, only to find it tough to persuade buyers and sellers to join -- not to mention getting them linked with the high-speed Net connections to make it all work. What sets Works apart is that its partnership with Grainger, and its revised marketing and pricing plans, have given it a new lease on life. "It's a different world out there," says co-founder and CEO Bo Holland. "But we're ready for it."
GOLD-PLATED PAPER CLIPS. No one doubts that small businesses could benefit from automating procurement and eliminating redundant purchases of office supplies, equipment, and furniture. Today, most small companies spend more to order supplies than they do on the supplies themselves -- an astounding $107 per $27 order -- largely because of duplication, unnecessary purchases, and worker inefficiency, according to Aberdeen Research in Boston.
The promise of savings from efficiency may push global e-procurement of office and industrial supplies to $9 billion in 2003, up from $2.9 billion in 2000. Hoping to grab a piece of that, a number of small companies -- including PurchasePro of Las Vegas and Escout of Kansas City, Mo. -- are offering various types of online purchasing services. "Works is a leader, but it's too early to call them the leader," says Tim Minahan, an Aberdeen analyst. "This market is still too young, and there are too many other small players to make the call."
Works helps the little guys save 5% to 10% by pooling purchases and simplifying the ordering process for a company's back office. One of the savers is Teresa Vives, purchasing manager at Phoenix House, a drug-rehabilitation center based in New York. She buys everything from paper clips to furniture, even vacuum cleaners, through Works for $1.50 per order. (Works also makes a small commission on each sale.) Instead of thumbing through dozens of catalogs, each of her employees now has an account and can access Works.com's database of 400,000 products. To order an item, they fill out an electronic order form, which goes to Vives for approval and gives her control of what's being bought. "The prices are always lower, there are no shipping fees, and records of every purchase are kept online," she says. "It has changed the way we operate."
BUSH SIGNS UP. That's the idea, says Works.com CEO Holland. He left his marketing job in 1997 at Austin-based Pervasive Software, which makes data-management software, with the aim of helping small businesses get the same good deals as large companies with volume buying power. Holland and co-founder Roy Kipp, another Pervasive veteran, initially raised $50 million from investors that included Bowman Capital, Merrill Lynch, and Hummer Winblad. Since its launch in 1999, the service has attracted 1,500 small and midsize business customers. Among them: George W. Bush's Presidential campaign, which used the service to set up each of its 50 state election headquarters.
But Works is counting on even bigger fish for faster growth. So far, it has reeled in 24, including Dell, Merrill Lynch, and Compaq, which pay anywhere from $10,000 to $100,000 a month to offer the service from their Web sites. Dell Computer, for example, uses the Works service to offer its small and midsize business customers the ability to purchase online for less. In return, Dell receives a share of fees paid by businesses that use the procurement service. The advantage for Works is that instead of having to target small businesses directly -- something many dot-coms have found much harder and more expensive than they expected -- it can reach hundreds of thousands of potential customers through a single site.
To win over small businesses, simplicity is key. "We have to be as easy as eBay or Amazon or we aren't going anywhere," says Holland. Unlike Ariba and Commerce One, which sell complex, high-end procurement software to large companies whose IT departments install and run it, Holland wanted a service that was hassle-free. It all happens through accounts set up on the Works.com site: A company signs up for the service, types its employee names into the system, and designates which purchases need approval and which don't. When a worker places an order, it is sent to a higher-up for approval if necessary, and the order is placed and delivered the next day.
TOUGH SELL. Besides shifting its marketing strategy, Works is introducing a new pricing plan for its individual customers while tightening its belt with an eye to turning a profit within 12-14 months. Instead of the $1.50 fee per transaction, customers who want to access an upgraded version -- with such extras as letting CFOs cut budgets on the fly and allowing users to add their own vendors -- will pay $20,000 a year.
To cut expenses, Works in January closed a Chicago office it inherited when it teamed up with W.W. Grainger and laid off 50 workers, or 25% of its workforce. Under the deal, Grainger took a 40% stake in Works, and Works received Grainger's OrderZone.com online marketplace for industrial goods and $21 million in cash.
Now its job is convincing companies, many of which are holding back on Web expansion, that adding procurement to their Web sites will help them retain customers. It must also continue to win over small businesses, many of which remain unconvinced that moving procurement to the Web will really save them money. At a time when companies are increasingly skeptical about the magical promises of the Web, Works has its work cut out for it. Lori Hawkins covers technology for BusinessWeek from Austin, Tex.