Playing The E-Markets

E-marketplaces, those online business-to-business exchanges that were supposed

to revolutionize the way companies sell and procure goods and manage their supply chains, took some tough hits after the Internet bubble burst last year.

Many exchanges launched between 1998 and 2000, especially those launched by venture-backed firms, just couldn’t deliver on promises of better market visibility for vendors and better selection and lower prices for buyers. Buyers and sellers – more of the latter than the former – who jumped on the bandwagon early because it was the thing to do, jumped off just as quickly when the sellers didn’t materialize. More than a few e-marketplaces folded. Many were gobbled up by bigger competitors.

But despite widespread disillusionment and skepticism, some e-marketplaces have survived and even thrived. The successes prove there was nothing wrong with the concept. It was the execution that was more often at fault – and perhaps the motivation and level of understanding of many of those lemming-like early adopters. The fact is, business-to-business e-commerce still holds tremendous promise.

Analysts remain generally upbeat about e-marketplaces. According to an April 2001 report from Framingham MA-based International Data Corp. (IDC), worldwide spending on e-marketplace services will increase at a compound annual growth rate (CAGR) of 27 per cent over the next four years – from $5.2 billion (U.S.) in 2000 to $17 billion (U.S.) in 2005.

“The value is truly there in e-marketplaces,” says consultant and B2B e-commerce advocate George Attar, a Toronto-based partner at Accenture Canada. “Those that understand the value, the potential, they will be the ones leading in their industry groups.”

The theoretical benefits, for buyers at least, are compelling indeed:

    Reduced prices thanks to volume buying power and increased competition through globalization and market manipulation by reverse auction;Improved process efficiency through reengineering of procurement practices, automated ordering and integration of back-end processes with e-marketplaces;Improved corporatewide visibility of, and therefore control over, spending;And, leading from the last two, improved supply chain management resulting in better control of inventory.

E-marketplaces are usually Web portals that provide a variety of services including managed auctions and reverse auctions (where a buyer asks sellers to bid down the price of goods), online vendor catalogues and automated online ordering, and sometimes e-payment, online posting of tenders and requests for information, proposals and quotes, yellow pages, forums, industry news services and more. Like most technology-fueled business trends, e-marketplaces hold out promise of giving participants at least a temporary competitive advantage. But whatever advantage they confer will likely be short-lived, Attar says. E-marketplaces will just be the way we do business in future. “I think it’s inevitable that we’ll see this migration to e-business over the next five to ten years,” he says. “It’s not going to go away.”

Types of E-marketplaces

Attar believes all companies should be looking hard at the opportunities e-marketplaces offer now. What are those opportunities?

Most analysts identify three broad types of e-marketplaces differentiated by the organizing entity.

The majority that popped up in the first excitement over B2B e-commerce were launched by venture-backed dot-coms. They attempted to recruit buyers and sellers either in an industry or horizontally for non-industry-specific procurement. This is the category that saw the most casualties.

More of the survivors and solidly grounded new entrants were founded by industry consortiums – Aero-xchange and Cordiem by airlines, for example, Quadrem by mining and metals companies, RailMarketplace by railways, and Covisint in the automotive industry. Most are buyers’ groups, but there are supplier-led e-marketplaces, such as the electrical industry’s Industry Data Exchange Association (IDEA).

The consortium-led buyers’ exchanges typically have members with deeper pockets and a more mature outlook. They want the quick-hit benefits of reduced prices, to be sure, but they also have the vision and resources to be able to exploit secondary and tertiary benefits that come from tighter integration with suppliers.

For example, Air Canada, a charter member of Aeroxchange, believes it could eventually realize savings of $25 million a year. “That’s obviously a very significant improvement,” says Bruce MacCoubrey, the company’s vice president of strategic business development and chief purchasing officer. But more of that will be savings from improved efficiency in the procurement process and reduced inventory, resulting from tighter links with suppliers rather than from price reductions, he says.

Private Exchanges

Recently a new type of e-marketplace has begun to pop up: private exchanges established by large enterprises to better manage existing supply chains. Some chemical companies in the U.S. are beginning to do it, says Attar. Giant PolyOne Corp., based in Cleveland, is an example.

While they jettison at least some of the benefits of public marketplaces – globalization and the resulting increased competition among suppliers – private exchanges also do away with many of the problems public exchanges have of attracting enough buyers and sellers to make them work.

“Public e-marketplaces,” notes Toronto-based analyst James Sharpe of Forrester Research, “are predicated on high liquidity. They’re dating services, so you have inevitable chicken and egg problems. We’re seeing much more rapid traction in the private e-marketplaces set up to automate existing relationships.”

But private marketplaces are probably within the reach of only the biggest

enterprises, Attar says, companies with billions in revenues and leverage over suppliers of the kind automakers have over parts manufacturers and Wal-mart and other big retailers have over their suppliers. The problem for suppliers, he points out, will be how many of these private exchanges can they afford to join?

Integrating with each will require an investment, possibly significant.

But if private exchanges are out of the reach of most buyers and sellers, that still leaves two key opportunities even for smaller firms. They can join an existing consortium-led industry marketplace or use the services of venture-backed exchanges. While many of the venture-backed marketplaces have taken hits, the survivors still represent a significant opportunity, notes Attar, especially where no consortium-led exchange exists.

Broker Forum: A Successful Case

In a very, very few cases, venture-backed exchanges have reached a level of “liquidity” as Sharpe terms it, where they truly have become the way companies in the industry do business. Consider the case of Broker Forum.

Launched by Montreal-based start-up Mediagrif Interactive Technologies Inc.

in 1996, long before the pre-Millennial e-marketplace boom, Broker Forum is

an exchange serving the electronics industry. To be sure, it does not conform to the typical profile. Rather than a group of buyers on one side and sellers on the other, it is a closed community of equal trading partners, brokers and distributors of electronic parts and components. Many are small companies like Montreal-based Zilex Electronics Inc., that buy and sell surplus inventory.

Before Broker Forum, explains Zilex general manager Tony Stratopoulos, if a manufacturer came to him for a product that Zilex didn’t have in its own inventory, he would get on the phone and start calling other brokers and distributors to see if they had it. “The distribution business is very small,” Stratopoulos notes. “Everybody knows each other.” If he found the part at another distributor, he’d buy it and pass it on to his customer – with the price marked up, of course. But it was a time-consuming process.

Now with Broker Forum, for which he pays $240 per month, Stratopoulos can go online and do a product search on the inventories of over 2,000 brokers and distributors all over the world – 12 million products in all. In a matter of seconds. If he finds what he wants, he can generate an e-mail from Broker Forum requesting a price quote and confirmation of availability – and ultimately complete the entire deal via e-mail.

“Primarily,” says Stratopoulos, “it saves time, and time is of the essence. This allows me to process more work, do more deals.” It also generally pushes prices down because small brokers like Zilex don’t have to go through middlemen, typically larger competitors, who in the past often did the searches and took their own cut on deals between smaller players.

“There is no question,” Stratopoulos says, “that Broker Forum has become vital for everybody in this business.”

Reaching Critical Mass

That, of course, is the objective of all e-marketplaces, to become an essential tool – an essential channel – for doing business. A necessary interim step is reaching critical mass, enough buyers and sellers to make the marketplace compelling enough that players on both sides can’t afford to ignore it.

With Broker Forum, it was relatively easy to reach that critical mass. The benefits to participants were perceived to be equal for all, since all are both buyers and sellers. Pure buyers – manufacturers looking for parts – are denied access to the Broker Forum database.

Drawbacks & Success Factors

Most other e-marketplaces have been devilled by tense buyer-seller relationships. While buyers were often lured by the simple and initially fairly easy-to-deliver-on promise of lower prices, the value proposition was by no means so clear for sellers. They were apt to see e-marketplaces, with their frequent resort to reverse auctions, as a mechanism chiefly for whittling margins. And if suppliers didn’t participate, e-marketplaces could offer buyers little value.

Mediagrif has launched several marketplaces and has managed to solve this

impasse in most. None of its other sites is as successful as Broker Forum, but Mediagrif is that rare thing in the industry, a nominally profitable operator of e-marketplaces. Company chairman and CEO Denis Gadbois believes the company now understands the process well enough to repeat its success at will, something he is in the process of trying to do again with Global Wine & Spirits (GWS), a marketplace for wine suppliers and distributors launched last year.

Gadbois’ analysis of how successful exchanges work and how he is applying that knowledge to starting GWS provides insights that could be useful for companies looking for e-marketplaces to join – or looking to start their own.

One key, Gadbois says, is finding the right industry. Wine and spirits was an ideal candidate. It’s international, so it benefits from the global accessibility of the Net. It’s fragmented on both the demand and the supply side. 70,000-odd producers in scores of countries sell to buyers big and small all over the world. The market could clearly benefit from improved communication.

Another key is positioning the marketplace in the right place in the supply chain where it can provide the most benefit and create the least channel conflict or duplication of effort. With GWS, Mediagrif is putting the exchange between producers and distributors. Consumers are not in the loop.

For buyers, the value proposition is straightforward. GWS hopes to give them easy access to information they can’t get now, allowing them to efficiently find and compare products, negotiate price and then order online. “If I’m a buyer looking for a French Pinot Noir between $4.50 and $5.50 [a bottle], I want to know what are all the products that are out there,” Gadbois explains. “That’s what we’re trying to achieve.”

The value proposition for producers is that they will have greater visibility and find new markets, including overseas markets, for their products.

The Chicken And Egg Dilemma

But as in all e-marketplaces, the value propositions are interdependent. If there aren’t enough suppliers publishing their catalogues on the exchange, buyers won’t see the value, and even if they join, they won’t come to the site regularly to buy. If there aren’t enough buyers, suppliers see no value and won’t make the investment to join. It’s Sharpe’s – and every e-marketplace’s – chicken and egg dilemma.

Mediagrif has found ways to solve it. Most important in the case of GWS, it negotiated a partnership with the Soci