B2B Survivors

Why did some online exchanges survive while many others failed? It helped to have members with deep pockets.

Pop-culture experts say the nostalgia cycle is growing shorter and shorter—that someday we may all yearn for those lazy, hazy, carefree days of six weeks ago. So it doesn't seem out of line to look back with amusement at 2000. Back then, James Glassman and Kevin Hassett's Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (Three Rivers Press, 2000) was selling briskly, and experts were predicting that enterprises were set to junk a hundred years' worth of purchasing practices and instead buy everything—from manila envelopes to sheet steel—through online exchanges, or e-marketplaces.

Seems almost quaint, doesn't it?

The idea, you'll recall, was to conjure the Internet's power to form a more efficient marketplace. Suppliers would be forced to cut prices (because if they wouldn't, a competitor surely would), but the best would benefit from massive volumes. Buyers would have a world of choice a mouse click away, all at rock-bottom prices. Everybody would win. All this was scheduled to occur soon, just about the time the Dow would be closing on 36,000.

According to Keenan Vision Inc., a Berkeley, Calif.-based analyst firm, more than 200 exchanges and exchange-related products were rolled out each month from November 1999 to April 2000. Small wonder, then, that Keenan once predicted that there would be 4,070 exchanges in the U.S. by this year. Today, analysts and exchange CEOs say they believe that fewer than 200 e-marketplaces survive—though It's hard to nail down a precise number.

Carl F. Lehmann, an analyst at Meta Group Inc., says, "If you're trying to exploit economies of scale, you don't need to set up [online] markets; you need to analyze markets. All you have to do is put three good MBAs on the problem. But we learned that too late."

Most exchanges were bubble-driven businesses that quietly folded when the venture funding dried up. But some vertical e-marketplaces were founded by industry consortia whose members boast deep pockets. Many of them have flailed about for tenable business models and managers, but along the way they've learned how to deliver value to their members/customers. By signing on with Elemica Inc., an online exchange for the chemical industry, The Dow Chemical Co. "saved thousands of hours," says Dow CIO Dave Kepler, "and we think we can [eventually] reduce inventories up to 50%."

Less Tech, More Value

While the exchange boom was by its very nature technology-driven, the surviving companies universally agree that their focus has shifted. "We've transitioned from a tech company in Houston to a company with people on the ground working with [member companies'] procurement people," says John Wilson, CEO of Trade-Ranger Inc., an exchange that serves the energy industry. "Three years ago, the tech was our raison d'etre. No longer. We've gone from being IT experts to being purchasing experts."

Like their fallen brethren, the surviving exchanges once had ambitious, IT-driven plans—overly ambitious, as it turned out. For many reasons, companies were reluctant to alter purchasing practices. To succeed, exchanges had to adjust. "In 2000, we thought we'd move faster. We thought we'd bring people right to the Net and XML," says Kevin Ruffe, chief operating officer at Global Healthcare Exchange LLC. "But soon we realized we were pushing a rock uphill. Health care [IT] systems aren't the most up to date. ... People had EDI and didn't want to change that. We had to back off our aspirations of making major changes quickly."

Trade-Ranger was "conceived as a technology play, but no one knew how to make the value real," Wilson says. "The first idea was to connect the world virtually from behind a firewall in Houston. It didn't work. We then spent a few hundred million and went through many CEOs." Trade-Ranger survived its murky times because its founding companies were patient and had a five- to seven-year plan.

It's still not clear whether even the survivors will ever be truly successful. Analysts say privately that many companies that helped found exchanges have little hope that their investments will ever pay off, and they would bail out if they could do so gracefully.

The strongest exchanges appear to be those that downplayed technology from the outset. Pantellos Group LP, an e-marketplace for large utilities, is mentioned by Gartner Inc. analyst Andrew White as one of the standouts. According to Pantellos CEO Jim Neikirk, the key is that "from the beginning, we knew it was about value-add, not just technology. Our clients have had some [fiscal] struggles, so we recognized that cost management is really important to them."

Early failures—or, at best, unimpressive savings for customers—prompted exchanges to ask how they could deliver value, and the result, Meta's Lehmann says, is that "they're morphing into supply chain business-process outsourcing companies." Indeed, when exchange executives discuss their offerings, they could easily be confused with systems integrators or software vendors.

"We wanted to get buyers' ERP talking to sellers' ERP," says Elemica CEO Kent Dolby. Elemica's star offering is a software hub that allows the many industry-specific XML variants to communicate with each other. "Some larger companies want to be very integrated [with supply chain partners] and have a SAP or Oracle or Baan system," Dolby says. "Others may be simple buyers working off Excel spreadsheets. We need to talk with all of them."

Real Savings?

The big question is whether exchanges can help companies save money—and how much.

Nick Parnaby, global director of member development at the WorldWide Retail Exchange LLC in Alexandria, Va., says that since the exchange's founding in 2000, "members have saved $1.1 billion to $1.2 billion," with returns on their investments at 700% to 1,000%. Retailers save on maintenance, repair and operating equipment (known as MRO, essentially all the supplies that don't go into the product) and private-label goods. Parnaby says the typical member saves 13%, but that number rises to 20% if member companies "pool their spend" with one another to improve economies of scale.

Exchanges also point to other corporate benefits. According to Wilson, one Trade-Ranger member has cut head count in its accounts-payable department from 99 people last year to 40.

Craig Weida, vice president of supply chain and administrative services at Cinergy Corp., a Pantellos customer, says Cinergy has seen a 500% return on its investment in the exchange. The company now routes 50% of its purchase orders through Pantellos and has seen a dramatic drop in error rates, he adds. Pantellos says its members have saved an aggregate $315 million since the exchange's founding in 2000.

Elaine Callas, CIO at Englewood, Colo.-based hospital chain Centura Health, says that signing on with the Global Healthcare Exchange was a major component of a plan that let Centura cut the number of steps in its purchasing process by more than half. Callas was been sufficiently impressed to increase the chain's use of the exchange nearly 350% from 2002 to 2003.

Such impressive returns help explain why Gartner, Meta and other analyst firms predict an exchange renaissance over the next several years. If your company isn't part of an industry marketplace yet, congratulations—you may be poised to reap the benefits without having to remove arrows from your back.

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The Survivors

A sampling of extant industry exchanges:

EXCHANGE INDUSTRY HEADQUARTERS
Covisint LLC Automotive Southfield, Mich.
Elemica Inc. Chemical Wayne, Pa.
Exostar LLC Defense/aerospace Herndon, Va.
E2Open Inc.Technology Redwood City, Calif.
Global Healthcare Exchange LLCHealth care Westminster, Colo.
Pantellos Group LPUtility/energy Houston
Trade-Ranger Inc.Energy/chemical Houston
Transora Inc.Consumer goods Chicago
UCCnet Inc.Consumer goods/retail Lawrenceville, N.J.
WorldWide Retail Exchange LLCRetail Alexandria, Va.

Ulfelder is a Computerworld contributing writer in Southboro, Mass. Contact him at sulfelder@charter.net.

Copyright © 2004 IDG Communications, Inc.

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