Read part 1 of this interview.

ADVISOR: Frictionless software helps companies weed through all the choices and find the vendors that will affect their bottom line in terms of saving the most money and finding the best deals. What types of information does that software analyze and report on? What should companies look for in a vendor?

LEVIN: Let me start with a definition of the product. Most of the "sourcing" solutions are really focused on the online negotiation piece. Our product walks people through the entire process. In terms of what types of information they're looking for [in selecting a vendor], it really varies so widely depending on the category and the company, and the particular purchase. But it could be delivery time, past quality performance, payment terms, location, ability to service multiple locations, proximity to manufacturing facilities, breadth of assortment -- all of those types of variables that come into play.

When you talk about sourcing vs. strategic sourcing, most people say sourcing is about price, and strategic sourcing is about understanding the total cost of ownership, the impact all those variables have on the ultimate price you pay. Even if you pay less, if things show up two days late and hold up the assembly line, it ends up costing a whole lot more. ...

Let's assume that people do this anyway. One of our key assumptions is that 98 percent of the Fortune 1000 believe in strategic sourcing and do strategic sourcing. The problem is today they do it entirely manually. They either do it with spreadsheets and their own people, or they bring in consultants when they need to.

So, the idea is you're going to do those kinds of analyses. But suppose you're building a spreadsheet to do a complex RFQ where you have 20 vendors and you're judging each of 20 vendors on 30 or 40 attributes, and you have to build weighting models to score it to see who has the best overall deal. You could spend three to six weeks just building the spreadsheet to do the analysis. With our system it could be done in a day -- an hour, even -- to get to that same level of objective analysis.

ADVISOR: Who are some of your current customers who have already implemented this software?

LEVIN: The first customer we've announced is John Hancock Financial Services.

ADVISOR: And how are they using it?

LEVIN: They're a really interesting case. They have an e-procurement system, and 97 percent of their transaction volume goes through it. But that only adds up to 20 percent of their spend, which means that 3 percent of their transaction volume is 80 percent of their dollar spend. Basically, our system is going to help them with that 3 percent, because those are items that are big purchases and are not cataloged. For them, areas like temporary help and printing services for marketing are big areas of spend that they'll now have the tools to manage more efficiently.

We also announced Hasbro, the U.S. Army, and the U.S. Air Force. The government's really interesting for a different reason. The government has a very different look at purchasing in general. They not looking to improve the bottom line: They're looking to be more efficient against the spend of budgets that are already committed. They have to justify every purchase that they make. In fact, for major RFQ items, they can actually be sued by vendors that don't win the contracts. So for them, one of the things that's exciting about our product is it builds in auditability. Essentially, you build in a very objective framework for making your decision about which vendor you're going to go with, and then you follow through that framework all the way to the choosing of a vendor. That [process] is then saved for posterity. If a vendor has a question or challenges why they didn't win the bid, you can go show them in court -- which is what [the government] has to do almost every day -- why a vendor was chosen.

ADVISOR: Is each software suite tailored to the specific company that purchases it, or is it just to buy and plug in?

LEVIN: Like any enterprise-class piece of software, there's a fair amount of customization that has to happen. One of the things we found -- and we did literally thousands of hours of research in building this product with end users -- was across different verticals there wasn't much of a difference in terms of the way that people source. They follow these same steps, almost no matter what business they're in.

So the core of the product doesn't change much from industry to industry and implementation to implementation, but one of the areas where it does change is the integration point. This is a product that can work with no integration point, or can be integrated on multiple points and tied into lots of other systems to make it even more powerful.

ADVISOR: Sourcing has been one of the last areas that companies have automated. Why has that been so slow?

LEVIN: It's much harder to do -- the technology is much more difficult. If you look at what e-procurement does, you're basically automating, or electrifying, what paper used to do. Paper used to move in a certain route through a company; now it moves electronically through a company.

When you talk about sourcing, you're talking about automating the way people do their job, and automating the way that people make decisions. So it's a much more complicated set of technologies. The Internet is also a big part of why it's finally able to come to fruition.

That's one of the reasons we think we have a "first mover" advantage here. Our founders came out of MIT with amazing knowledge and patents in this area. Things like multi-attribute, decision-support algorithms; Web application architecture; intelligent agent software design -- those are some of the core technology ingredients you need to create a good product in this area. And until recently, those were just too complicated a problem to solve. Now we finally have the technology to handle some of these tough areas of automation.

ADVISOR: In terms of the next five to ten years, how will companies try to make these sourcing processes more efficient? How will your product evolve as customers expect more from the software?

LEVIN: This market moves so fast, and you try to stay nimble. In a lot of ways, the first generation of the Internet was very much an external use of the Internet. Look at B2B exchanges, for example. You basically created a dot-com-style environment where buyers and sellers could come together. It really happened outside of the corporate firewall.

But if you look at what the real power of the Internet is going to be -- and we heard this from a number of the really visionary executives among the Fortune 1000 that we talked to -- they get excited about the Internet because of the communication protocols and the ability it gives companies to talk to each other and do business with one another seamlessly, without having to get involved in complex integration.

If you look at EDI in the past, it was pretty painful. If you look at [our] product, it's one of the first of this next generation of products where you're basically integrating a traditional software automation story with Internet communication protocols. So you have the ability to use the Internet much more seamlessly within your day-to-day operations, and create efficiencies in your day-to-day operations that you could never have created if the Internet didn't exist.

I think that's going to be a really big trend. Look at what Fed-Ex does, for example, on their Web site, compared to what most companies do. You can now seamlessly do business with them without involving a person. You're going to start to see Internet technologies become seamless to the way companies use technology.

ADVISOR: Would you say that your software targets smaller, everyday repetitive purchases more over the larger, less-frequent buys?

LEVIN: Essentially, the way we look at it as this. Most Fortune 1000-size companies have between 15 and 50 people who source all day. The average Fortune 1000 company sources US$3.3 billion a year of goods and services. So these 15 to 50 people have a tremendous impact on the bottom line. They're sourcing, every day, big things, little things, and everything in between.

Our product is different in that it means to be there for these people on their desktop for every sourcing engagement, instead of just being there episodically, like the consultants or a lot of the online hosted-point solutions are. The idea is to be there for whatever they have to buy -- every day, every buy.

ADVISOR: What are some of the misconceptions about Frictionless and your product suites?

LEVIN: I think there are two major issues, and I don't think they're Frictionless-specific so much as industry-specific. There's been a lot of excitement around e-procurement, and people that do this for a living would know instantly the difference between e-procurement and e-sourcing. But a lot of the tertiary audiences out there don't. So I think one of the big things is helping people understand the difference between e-procurement and e-sourcing.

The other piece is helping people understand the different business models for approaching sourcing. Sourcing is a huge issue -- AMR is predicting this is going to be a US$3 billion software market within just a couple of years -- because of the impact it has for organizations. But there are different types of solutions that make sense for companies with different types of problems. Our product is targeted at large companies that have sophisticated sourcing and procurement groups. If you already have sourcing people in house, they need automation tools, and we're there for them. If you're a small company with no professional sourcing people, you might be better off with a host-to-point solution when you need it periodically to do a large purchase, for example.

So I think helping people understand the segmentation is important in finding the right solution for their problem, and helping them understand the difference between e-procurement and e-sourcing is another.

ADVISOR: You said about 95 percent of the companies you're targeting are still handling sourcing the "old-fashioned," manual way. How you get them to overcome their old habits and accept new practices?

LEVIN: That's such a key area that we think is one of our major advantages. So many people have come into this marketplace and asked people to change the way they buy. We've really taken a hard look at what people do, exactly what processes they use, and then model them against this product. So the product doesn't ask them to change their behavior; it just gives them some new tools.

One of the things we heard over and over, for example, was we asked, "Do you do a lot of RFQs?" They said, "We know we should do an RFQ every time we buy something, but it's so time-consuming now and we feel guilty about it." So we put [the RFQ process] there, and we make it automated and easy for them to do it. They want to do these things.

We really mirrored the product against real-world processes, instead of just shoe-horning technology in and tell people to change. That's a big reason why we've resonated so strongly with our customer base.