Linking to E-marketplaces: Hold That Order
Aree-marketplaces and exchanges built up on a foundation of too much hype and notenough technology? Analysts are cautioning companies to keep their options openwhen establishing links with e-marketplaces, because things are changing fast.
As 2000began, it looked like the independent e-marketplaces would be turning thebricks-and-mortar world upside down, commoditizing the lines of entireindustries. But a raft of announcements from large industry leaders thatestablished "consortia" e-marketplaces is creating uncertainty inthis nascent industry.
Business-to-business(B2B) e-marketplaces offer the benefits of reducing procurement and marketingcosts, as well extending a business's reach to new markets. To date, moste-marketplaces have been independent entities that offer a neutral ground forpurchase decisions. The benefits of such markets include the ability to findlots of buyers and sellers in one place, says Jenna Peleaz, analyst at JupiterCommunications. These sites reduce search costs, increase price transparency,and provide better deals than participants could have made through traditionalchannels, she says. The main weakness of this approach is that independentstend to focus on a single market, and tend not to support global strategy,Peleaz says. Worse yet, most "Net markets don't hook up to legacysystems," she says. "They're not attractive to large companies."Independent marketplaces typically can't hook up to back-end legacy systems,and they often only support spot buying or single transactions, Peleazexplains.
To decideon the right e-marketplaces for your company to connect with, it's important tounderstand who has control over the site, advises Richard Villars, vicepresident at IDC. "The challenge is to participate in sites across the B2Bspectrum that encourage active cooperation and trading, and don't just provideimproved efficiencies in someone else's distribution system or supply chain."Villars points out that many of today's e-marketplaces and industry supplychain exchanges lack any promise of ongoing benefits to the buyers or supplierson the other end of the connection. "Only the largest customers andessential suppliers have any sort of say in the community. Everyone else isforced to play by the host company's rules or do business elsewhere. Theseexcessively one-sided B2B solutions do not have a bright future."
Instead,B2B sites need to function as trading and community centers for allparticipants, Villars says. In addition to supporting order placing and taking,these sites should provide community-building services -- including informationon products and markets, collaboration with other industry players, and paymentsystems that make it easier for small players to participate. "Thesetrading communities deliver direct benefits to all participants, not just achosen few," Villars says. The key is to look beyond pricing advantagesfor reliability, performance, and predictability. Suppliers looking to retaincustomers should have cutting-edge customer service on their site,personalization/customization, and community services.
Large ITplayers have planted stakes on both sides of the fence. Last spring, Microsoftacquired a $300 million equity stake in VerticalNet, which supports a number ofonline industry content sites and exchanges, plus Redmond recently rolled out asoftware solution division. The software giant also has been working closelywith Commerce One, a leading supplier of e-marketplace software.
IBM hasbeen active in this area, too, allying with Ariba and i2 Technologies. Thealliance recently unveiled software that supports collaborative transactionsbetween buyers and sellers. The goal of efforts such as the IBM-Ariba-i2alliance is to provide a viable technical means for suppliers to reach a rangeof exchanges and procurement services.
Typically,the industry consortia have been buy-side, Peleaz points out. "The actualplayers are also the owners." Usually, these marketplaces consist ofbricks-and-mortar players forming a consortia to set up e-marketplaces. Peleazestimates that close to 70 coalitions have been formed within the US to date.More than 30 of these represent bricks-and-mortar companies teaming up withtechnology providers.
Theresearch firm eMarketer predicts that for the next few years more companieswill be purchasing online compared with selling via the Internet. By 2003,between 30 percent and 40 percent of companies will be selling online, while 80percent to 90 percent of firms will be buying via the Internet.
By theirnature, multinationals give industry coalitions worldwide play, Peleaz says.But while many coalitions have been announced, few have names yet, let alone aCEO, separate organization, or capital structure. Plus, it is unclear what typeof ownership structure these entities will take, she adds.
Someanalysts, in fact, see an impending implosion for consortia e-marketplaces.These exchanges "are heading toward disaster if they don't kill the hypeand face reality," states a recent report from AMR Research. Instead,private e-marketplaces -- in which a hub company can set up tradingrelationships with selected partners -- offer the best type of solution. RandyWeston, analyst and editor at AMR, estimates that 90 percent of alltransactions through public exchanges will be one-to-one or one-to-few."Private exchanges offer real cost savings and minimal politics," henotes. There is a "lucrative opportunity for private marketplaces, those one-to-oneor one-to-few relationships between a company and its suppliers that are muchbetter suited for most types of transactions between companies than massivepublic exchanges. You don't have to please 20, 30, 40 customers, just one ortwo. The private exchanges will make more money faster than some massive publicexchange."
Otherissues dog the consortium marketplaces. The cost to set up an exchange is oneissue -- which experts believe can climb into the tens, or even hundreds ofmillions of dollars. In a recent report AMR concludes that very few members ofthe new industry consortia "have an accurate handle on the time andexpense required to integrate their existing systems, such as ERP and supplychain management, into the trading exchange. And they still don't know how muchthe exchanges will impact existing business processes. Once they do the math,the exchanges could be in serious trouble."
BruceRichardson, analyst at AMR, notes, "Exchanges are too optimistic aboutdelivery dates for functionality." Coalition exchanges "often makepromises before writing any code -- even before selecting a technologyplatform. For at least the next two years, they will have difficulty deliveringmore than auction, spot-buy, and excess inventory services." Case in pointis collaborative planning, forecasting, and replenishment (CPFR) applications,which have created a lot of excitement but remain mired in the design phase.Most participating companies do not have an "accurate handle on the timeand expense required to integrate their existing systems into the tradingexchange," Richardson says. "The impact of exchanges on existingbusiness processes is also unclear."
Thesemarkets are likely to pose serious competition to the independentmarket-makers, but there is likely to be intense scrutiny from governmentagencies as to whether these markets represent illegal collusion betweendominant industry players.
Manyindependent market-makers are responding to the new market threats by movingaway from the model of relying on transaction fees alone. The marketplace valueproposition must extend beyond re-intermediation to include new ways forparticipating enterprises to source and deploy IT resources. To this end, manyare offering their e-marketplace technology as deployable packages to partiesinterested in establishing private marketplaces.
Forexample, E-Steel recently cut a deal with The Broken Hill Proprietary CompanyLtd. of Australia, whereby E-Steel offers its core functionality for aprivate-label site serving the steel industry in Australia. "We seeprivate marketplaces as a major opportunity," says Peter Regen, vicepresident of marketing at E-Steel. "We started as a marketplace formany-to-many trading. Now, we've refocused to big-to-big and known-to-knowntrading partnerships."
VerticalNetrecently announced that it formed a separate division to replicate and sell itsmarketplace solutions to other Internet market makers, as well as industryalliances.
GartnerGroupanalysts concur that the great e-marketplace shakeout has begun, but they havea different take as to what types of e-marketplaces are emerging. Threee-marketplace business models will survive the coming shakeout -- businessservices marketplaces, commodities marketplaces, and integration servicesmarketplaces -- says Carl Lenz, research director at GartnerGroup. He definesbusiness services marketplaces as those that provide support for businessprocess and trading partner relationships. Examples include financing optionsfor goods or services purchased, as well as fulfillment and delivery servicesoffered by logistics marketplaces.
Commoditiesmarketplaces will replace some of today's inefficient markets that protectprofit margins through asymmetric information, inefficient spot markets, and excessproduct auctions, Lenz predicts. Those marketplaces will also allow forspeculation of commodities and futures in product and service categories.
Integrationservices marketplaces will link trading partners and processes. Thesee-marketplaces will meet market demand for simplified interoperationapproaches, alleviating system integration strains of tying back-end systemsinto these marketplaces. This powerful new player will introduce a convergenceof the marketplace, application software, and application service providerbusiness models, Lenz says.
AMRResearch Inc., Boston, www.amrresearch.com
E-SteelCorp., New York, www.e-steel.com
EMarketerInc., New York, www.emarketer.com
GartnerGroup, Stamford, Conn., www.gartner.com
IBMCorp., Armonk, N.Y., www.ibm.com
IDC, Framingham, Mass., www.idc.com
JupiterResearch, New York, www.jup.com
MicrosoftCorp., Redmond, Wash., www.microsoft.com
VerticalNetInc., Horsham, Pa., www.verticalnet.com