Creative entrepreneurship at iconstruye: a pan Andean e-procurement market maker.

The team's first step was to ensure alignment between its business model and the actual mechanism through which the construction industry procures its products. They each knew that this was not an easy task, as the industry's online procurement model was still evolving in terms of client expectations. Given this, the team decided that one of its first priorities was to modify its revenue model. Iconstruye originally had charged suppliers 1.5% of gross margin as a transaction fee; however, the team had determined during the pilot year and through input from board members that certain suppliers were not willing to pay above 1% to transact on the system. Considering this, iconstruye modified the fee structure: 1.5% for suppliers selling products not classified as a commodity (if the total sale was above 12 million pesos, the fee was reduced to 0.8%) and 0.7% for commodity products.

The pilot year also provided the team with time to understand the diversity of the Chilean market and its software requirements. These ranged from extremely large construction firms who required complete systems to small micro-suppliers of specialty products who required only a particular or unique software function. In response iconstruye revised its software pricing structure based on the size of the client company and the particular modules it would use. The team knew that it had to cover its costs and decided to charge large companies a higher joining fee, as they would require a dedicated on-site account manager for up to 6 months and the possibility of considerable software modifications. They also wanted, however, to remove the incentive for the client to develop its own system. Therefore, in order to reduce the client's cost of entry to the iconstruye system, they created a pricing structure that provided discounts based upon the volume of transactions a company performed on the system.

The second issue facing the team was that of changing suppliers' purchasing methods. Changing organizational behavior was a challenging task in an entrenched industry that had never undergone technological change on a scale iconstruye was proposing. The iconstruye team devised a strategy that focused first on finding highly visible early adopters, i.e., well-known companies that wanted to innovate. The team initially identified a group of early adopters within its investors and then worked to convince the executives of these companies that it was in their interest to change their procurement process, as the iconstruye system would reduce their costs and make them more productive. The second step of the iconstruye strategy centered upon convincing the procurement managers who actually used the system on a daily basis that the system was an aid, not a hindrance. To accomplish this, iconstruye hired eight account executives to work at client sites to ensure that user issues and queries were solved efficiently and effectively. The team recognized that while this level of training would be very expensive, without it, the end users could become disenchanted if simple problems were not solved quickly and could revert back to their old procurement methods or contemplate building their own system.

Pursuing its strategy of implementing a technology solution together with the flexible revenue sharing model and the team's continuing efforts to widen the transactional base of the system, iconstruye experienced a 400% growth in transactions during 2002-2003. The iconstruye system processed over 17,000 transactions in the first quarter of 2003, accounting for US$25.3 million in trade.

Customization and Consolidation

As the system's functions became more closely aligned to the needs of the customers, and as the initial excitement surrounding Internet e-procurement wore off, iconstruye faced two new issues. First, its customers became more interested in having their sites customized, and, second, some potential clients resisted the use of software they had not developed themselves. The strategic response from iconstruye was similarly two-pronged. In response to clients' need to differentiate themselves, the iconstruye team considered its ability to provide customized procurement software solutions to be one of its competitive strengths. The creation of customized tools was an expensive proposition for clients, but provided a profitable source of added revenue for iconstruye. To overcome resistance from companies who were considering building software rather than purchasing it, the iconstruye team developed a strategy of working with each individual construction company. The iconstruye team discussed with potential clients the technical difficulties associated with building an internal website dedicated to a specific group of suppliers, as well as the difficulties associated with building and maintaining the transactional aspect of a website. The iconstruye team worked to show suppliers the high resource costs they would incur if they wanted to go into each buyer' s website in order to complete individual transactions.

Correa explained:

Maybe you might find the very largest companies building their own

systems, such as Chile' s Codelco, (the world largest copper mining

company). They have the resources and willpower to spend the money

required on software development and training. Why would even a

large company bother hiring staff to train people on how to use

their website, especially if there is a third party doing it for

free? That is the best option you can have.

The New Software

In January 2003, the iconstruye team celebrated the second anniversary of the company's founding. The executive team also rejoiced that its original software lease was about to expire. Iconstruye had found it increasingly difficult to offer customized solutions using the leased software platform. The team had decided several months earlier that iconstruye would require total access to the code of any system with which it worked. Therefore, developing a proprietary system had become a priority. Over a period of a year working with Microsoft Consulting Services, iconstruye developed its own proprietary solution using Chilean software engineers. The team at iconstruye felt that apart from lower labor costs, the use of local engineers had helped in other ways. According to Errazuriz, "Chilean construction companies are comfortable using our system because they have helped design it, through two years of collaborative hard work." Since these companies had been so involved in developing the system, the training and conversion burden falling upon the iconstruye account executives dramatically diminished.

Chile Compra

Having built a strong, stable, and scaleable software solution that contained all the features a firm performing e-procurement in Chile would require, iconstruye looked into expanding the scope of its client base and reducing its dependence on the construction industry. During this period, the Chilean government, recognized by the World Bank19 for its leadership in government-to-business and government-to-citizen technology initiatives, had recognized the advantages of an e-procurement system for its own procurement and issued a request for proposals. The team at iconstruye realized that developing a proposal for a project of this size was a daunting task, especially for a 3-year-old start-up. The team also recognized, however, the potential of the project and that if its bid were successful, creating the Chilean government's procurement portal would allow iconstruye to become not only a central part of the government's initiative in information and communication technology (ICT), but also to increase the company's visibility, reach, and, of course, value.

The team decided that since iconstruye had the necessary software, experience, and procurement expertise, the company would bid on the project. The team was also realistic enough to understand that it could not develop such a system alone. Iconstruye needed a partner with a background in doing business with the government. The team approached SONDA, Chile's biggest system integrator, and discussions between the two companies revealed its interest in the project. SONDA understood the value of iconstruye's software, and valued the experience iconstruye had gained during development of Chile's largest e-market place. The two companies formed a 50/50 partnership and entered the bidding. The Chilean government received 10 proposals, three of which passed the technical due diligence and advanced into sealed bidding, selection being based upon lowest price. Correa recalled the outcome: "When the Government opened the three envelopes, we were the lowest priced so we won." By the end of 2004, the Chile Compra website had conducted more than 75,000 transactions (auctions and requests for quotations) worth a total of US$694 million. (20)

Future Directions