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Few business fads have peaked and plummeted with the rapidity of B2B e-marketplaces. Energized by the success of consumer auction sites like eBay and by savings from early e-procurement efforts, industry exchanges took off like a rocket in mid-1998. By the end of 2000 more than 1,500 e-marketplaces had been announced. They ranged from independent, multi-industry exchanges to vertical consortia led by industry giants, and most were aimed at direct, strategic materials. Business plans for these e-marketplaces often consisted of little more than a press release, but the visions were grandiose.
Then came the return to earth. As early as 1999, analysts began to warn that even the largest industries could support only a handful of e-marketplaces and it increasingly became clear that the path to value for survivors would be measured in years, not months. Helped along by the bursting of the internet bubble and a sudden suspicion of all things B2B, the creation of e-marketplaces slowed to a trickle. Announcements of failures and consolidations began to replace notices of new launches.
Technology vendors that had ridden the wave up also followed it down. As this year's first quarter ended, the leading providers of e-marketplace engines - i2 Technologies, Ariba, Commerce One, Oracle and BroadVision - joined a long line of technology companies that revised their earnings estimates downward. The Wall Street Journal said e-marketplaces had "fizzled" and began referring to the phenomenon as a "bust."
Research firms that closely watch this sector, however, are far from writing off e-marketplaces or the B2B revolution. While groups like AMR Research, Forrester Research and Gartner Group have for months predicted a shakeout among e-marketplaces and noted the unrealistic time-to-benefit claims, they also continue to forecast internet B2B sales in the trillions of dollars. Gartner recently revised its near-term projections downward, but still expects internet B2B commerce to reach $8.5tr worldwide by 2005.
There is one significant change in the new projections, however. Today, analysts are saying that much of this business - perhaps as much as 85 percent - will not go through public marketplaces but instead will be conducted over private marketplaces that companies increasingly are setting up with their key customers and suppliers.
The reason: Companies are finding that public marketplaces - at their current level of development - are not conducive to the complex sourcing of strategic materials used in production. Nor are they yet able to provide the collaborative supply-chain relationships that companies are trying to establish.
"The trend now is to move toward private exchanges where the idea is to be able to communicate and collaborate in a very secure environment with specific suppliers and customers or other partners. We see that as a very strong trend," says Sean Rollings, senior director of B2B product marketing at Oracle, which powers more than 30 marketplaces.
It may be necessary to participate in a consortium exchange for reasons of competitive equity, says John Ferreira of Deloitte Consulting. "But that won't get you competitive advantage. If you want competitive advantage, you need to work in your own private network with your trading partners to drive better economics in the business and make changes that can restructure how you win in the marketplace." One example would be to enable more customized product configurations, he says, "but there are any number of examples. Collaborative commerce has a pretty broad footprint."
John Bermudez, vice president of AMR Research, says companies should think of a private trading exchange (PTX) as the "corporate command center for B2B commerce." PTXs, he says, will become "the application platform on which a company builds its trading interface to both suppliers and customers via the internet."
AMR notes that a wave of software vendors are busy adapting or developing software for this model, which it says could become "the largest software application market ever." The research firm predicts that a few leading software providers, including Oracle, i2 Technologies, Ariba and Commerce One/SAP, will form the core of an ecosystem of PTX platform providers. "A network effect will occur around this core as other application and enterprise integration providers build their software to work on one or more of these platforms ... In effect, the platform providers will create de facto standards from which systems integrators and other software vendors, such as logistics exchanges, strategic sourcing, enterprise application integration and content management providers, can build their products."
The platform will consist of integrated enterprise resource planning, supply-chain management and customer relationship management systems. It will connect, on the buy side, with suppliers and independent trading exchanges and, on the sell side, with customers, distributors/brokers/dealers and other e-marketplaces.
While some might argue with AMR's list of platform leaders, there seems little doubt that the rise of private verticals will present new opportunities for software suppliers across a wide range of applications. Even the broadest based providers acknowledge that many vendors are likely to be involved in any solution.
"We think we bring the widest breadth of solutions available to marketplaces, but we also embrace a best-of-breed concept," says Chris Houck, director of solutions marketing at i2 Technologies. "We have always integrated with other systems, whether they be legacy or ERP or a home-grown system. That is one of our core competencies."
|There are certain components common to most marketplaces, whether public or private. Andrew White, vice president of Logility, offers the following summary:|
|Infrastructure: This is the extremely important integration layer, where you have the data base, enterprise application interfaces, security and other technology components. Private exchanges will probably also have integration to their back-office applications, and partners will have to integrate their back office to the network. This is why integration companies like WebMethods and Extricity (recently acquired by Peregrine Systems) continue to be so important.|
E-procurement: This is where you have request for quote and request for proposal engines that enable you to publish what you want to buy. There is some type of intelligent rating system so you can look at a bid, pick the top three or so, do one-to-one negotiation, then cut a deal. Anything you do in e-procurement ends up in a purchase order.
E-marketing: This is the sell side, the cataloging, how you tell the buyer who you are. Public markets generally are either buy- or sell-side focused. VerticalNet, for example, is a sell-side solution vendor while Ariba specializes in e-procurement of indirect materials.
Collaboration: This is the critical part for private networks. It is oriented neither toward buy or sell but is true B2B, where buyer and seller work together as relative equals even though they may be very different in size. This addresses how you strategically align yourself with key partners, the idea being to start working together and stop beating one another up on price. That is the leap forward in the relationship.
TradeMatrix, i2's operating platform, has a three-tier architecture: internet connectivity, messaging and integration, and applications and workflow, the latter being built around i2's proven supply- and demand-chain applications. To gain strength in other critical areas, i2 last year acquired content vendors Aspect and SupplyBase and, more recently, it added procurement vendor RightWorks. It also has partnered with other vendors - most notably IBM and Ariba - to provide infrastructure and applications for large consortia marketplaces like Transora in the consumer packaged food industry and the Worldwide Retail Exchange.
Houck says there is little difference between the basic technology employed in public and private marketplaces. "The only distinction we make is the model of participation," he says.
That model, though, is one reason that private marketplaces offer a faster path to value. One-to-many networks are easier to pull off than the many-to-many model of consortia exchanges, which AMR says won't be able to offer much more than auction, spot-buy, and excess inventory services for at least the next two years. The real power of private exchanges, AMR says, "lies in streamlining and improving efficiency in existing trading relationships, including those with resellers, distributors and logistics providers."
This is not to say that private marketplaces are necessarily easy or inexpensive to implement or that full collaborative interactions will be achieved overnight. But they can be built in stages, with benefits being realized at each stage. "You can pick your pain points, your areas of opportunity as a place to begin and find success," says Oracle's Rollings. "But the idea is to keep building toward that overall e-business transformation." With a collaboration hub serving as the foundation for a private trading exchange, he says, "you can build fully integrated capabilities instead of trying to cobble together multiple point solutions."
Vicki Morris, senior director of private marketplace solutions and marketing at Commerce One, agrees, noting that B2B marketplaces are an efficient way to address specific business problems. "Say a company wants to improve its time to market," she says. "Our approach would be to use the marketplace infrastructure and plug in different applications to that infrastructure, rather than putting in a single point solution. For example, planning, product design and strategic sourcing may be appropriate collaborative applications to address the time-to-market issue."
Commerce One powers about 150 public and private marketplaces with its MarketSite Operating Environment, many in conjunction with SAP. Looking to expand its collaborative capabilities, it recently reached an agreement to acquire Exterprise, a vendor of software solutions for building and managing business networks.
While "plugging in" solutions to a marketplace platform sounds simple, it usually is not - though this time technology isn't the culprit. Rather, it's the massive amount of internal work that often has to be done before a company is prepared to participate in and reap the benefits of an online exchange. "For any marketplace to be truly successful, a company needs to have its own ship in order, including visibility to other divisions of the enterprise," says Morris. "This is not just a middleware project of integration. Really what you are trying to create is a collaborative community that helps improve inventory management, logistics, and delivery - all the important processes of the business."
Taking a similar theme, Rollings says people at Oracle prefer to talk about an overall business place instead of a marketplace. "We see it as a business place where partners come together for complete B2B activity, where they can perform all the collaborative functions of design, planning, procurement and transportation."
Any company with revenue of $1bn is a good candidate to start a private marketplace, adds Aseem Chandra, director of B2B product marketing at Oracle. The question is deciding which of these areas to use as an entry point.
Oracle hosts exchanges in each of these areas, he says. Companies setting up private marketplaces decide which functionality they want to include. Oracle connects the trading partners and gives the customer a URL with its own branding and content. Oracle also will soon have this product available on CDs for companies that want to install it behind their own firewall.
For those that want a "test drive," Rollings suggests they take at spin at OracleExchange.com. "This is a horizontal exchange that Oracle owns and operates where anybody can go and sign up and try the offering before taking the risk of buying the software and managing a private exchange on their own," he says. OracleExchange.com may be the only solution a small to mid-sized company will need, he adds. "They can probably perform the majority or all of their B2B activity through this site."
Other vendors are working to provide a private marketplace solution that will fit the budgets of mid-sized companies. Logility, a collaborative commerce and supply-chain vendor, recently partnered with Metiom, a procurement vendor, for that purpose. "While other e-commerce developers were quick to dismiss everyone below the billion-dollar-a-year mark, we saw the need and the opportunity in the 'backbone sector' of the U.S. economy," says Chris Wagner, CEO of Metiom. "Our combined solution means that mid-market businesses can now have the same powerful electronic business tools as much bigger companies, and they can get them in a package that is appropriate and useful for their size company at an affordable price."
The Logility/Metiom solution supports direct and indirect materials planning and acquisition, supply-chain planning and execution and trading partner collaboration.
Even Ariba, which helped launch e-procurement by enabling the automated purchase of indirect goods, now has tools for private e-marketplaces and the acquisition of direct goods. Spokeswoman Holly Allison emphasizes the importance, in this arena, of being able to share computer-aided design (CAD) drawings. "There is a whole different array of functionality involved with direct materials," she says. "If you are buying scissors for a desk all you need is a catalog. If you are making scissors, you have to buy plastic handle caps, metal blades, rivets and a nut-and-bolt assembly. The supplier has to know where to buy aluminum or stainless steel and how to cut the steel. It is very complex." The RFQ (request for quote) Builder in Ariba Sourcing allows for detailed descriptions as well as attachment of CAD drawings. Buyers also are able to create multi-line RFQs so suppliers can place bids for a single component or the entire contract.
With MarketMaker, an e-marketplace product introduced last fall, BroadVision leverages its strength in personalization and relationship management applications. "We believe it is extremely important to be able to manage all of the constituents in a marketplace, whether supplier, partner, buyer or buyer organization," says Craig Stevenson, senior product marketing manager. MarketMaker not only personalizes content but enables individual accounts based on a user's channel and role within that channel. "Regardless of who you are - distributor, retailer, broker - we are able to provide you with personalized and relevant information.
"I think too often the early exchanges were about disintermediation," he says. "This was a problem because a lot of trading partners add value. We are saying that you should really look at the existing channel, and if partners add value, then help them add more by providing them with the right information."
BroadVision currently powers more than 30 marketplaces and expects that number to reach 100 over the next 12 to 18 months.
Skip King, Manugistics' vice president for e-business solutions and strategy, talks about another advantage of private marketplaces: the ability to release information concerning demand to multiple layers of the supply chain at the same time. In most supply chains, he says, a manufacturer communicates information to its Tier 1 suppliers, and those suppliers are responsible for communicating it to their Tier 1 suppliers and so on. "What that actually produces is a gray market for information, where a Tier 1 supplier might be able to manipulate the supply chain to its benefit and to the detriment of those down the supply chain, and ultimately to the detriment of the manufacturer," he says. "But no one has visibility to that."
When an OEM creates its own private trading network, he says, it takes responsibility for communicating information from Tier 1 to Tier End. "The result is zero latency. Information is known by everyone at the same time. Most importantly, suppliers see the information broken down into a multi-level bill of materials that has been designated for that particular level in the supply chain."
Manugistics' foundation for trading networks is called NetWorks Collaborate. Over this base, which provides automated workflow and integration links, are solutions bundles, such as procurement and transportation. Above that is a Profit, Revenue and Optimization layer, which makes sure that all decisions meet margin goals.
Moai Technologies' LiveExchange product is the auctioning engine used by many public marketplaces for procurement in the spot market, but with its latest releases, CompleteSource and CompleteSource Enterprise, it is expanding its offerings and targeting private exchanges. This requires a greater depth of technology because auction sites are focused on price-based transactions and have little need to integrate with the supply chain, says Arnold Waldstein, vice president of marketing and strategic alliances. "As marketplaces move from public facing entities, where people generically come to buy and sell things on the spot market, to internal vehicles that are being used to do strategic sourcing of services and materials based around the manufacturing process, things become more and more specific and integration becomes more important."
In addition to new integration features, CompleteSource includes an automated wizard to create complex electronic RFQs and requests for proposal (RFPs) and a negotiation engine that includes features for sourcing complex goods that require multi-parameter, multi-stage, multi-line bidding. Automated nego- tiations and weighted scorings help pare an original group of suppliers down to a handful with whom the manufacturer can talk face to face. "When you are spending millions of dollars, you still want to sit down with your supplier," says Waldstein.
Moai also soon will be announcing new relationships with strategic partners to support spend analysis, analytics, supplier management and other critical elements of strategic sourcing.
Sun's Dynamic Bidding
|A concern of public marketplaces always has been the question of whether major manufacturers would participate. Sun Microsystems is one company that has decided not to do so at this time. "We haven't eschewed public marketplaces or pursued them," says Tony Cavotta, senior manager of e-solutions and dynamic bidding. "We are still assessing the value proposition. Once that value proposition becomes clear to Sun, we will make a decision as to how to participate. If that value never becomes clear, we won't be moving down that path."|
Sun has decided to invest "only where we can show a clear near-term value to the business," he says. "We are focusing on areas of the business that we can pilot quickly, demonstrate results and use those results as a foundation to build upon to go after some of the harder to get at, more complex areas of e-commerce."
One project that fits this criterion is Dynamic Bidding, a controlled online auction run by Sun with suppliers that it invites to participate. "We have a very high dollar spend on direct materials and we recognized that this presented a good opportunity to create value and return value to the business," says Cavotta. Sun already has rationalized its supply base and works with a small number of key suppliers. "We probably do better than 70 percent of our direct materials spend with our top 20 suppliers and probably get close to 90 percent with our top 40," says Cavotta.
The Dynamic Bidding process begins with a very thorough and specific request for quote, which can run up to 150 pages in length. This is sent to a small group of suppliers who agree to participate in an online bidding event. Time is provided for discussion and clarification of the RFQ before the event, which usually is completed in about an hour. There are several formats, but the identify of the bidding supplier is always masked. Suppliers may or may not see the amount of the bids in play, but they always know their rank. Sun captures the data and makes an award after considering other factors that go into making a strategic sourcing decision.
Sun is on track to meet is goal of sourcing $1bn in direct materials though Dynamic Bidding is its fiscal year, which ends June 29. When compared with a traditional sourcing process, incremental savings range from 5 percent to 15 percent, Cavotta says.
FreeMarkets, which also enables direct materials procurement through auction-type exchanges, took the acquisition route to private marketplace capability. Early this year it acquired Adexa, whose iCollaboration suite focuses on supply-chain performance. FreeMarkets says it also plans to incorporate the Adexa suite into its public marketplaces to provide an end-to-end, source-to-deliver solution. More immediately, however, the Adexa products will facilitate private marketplace development.
"I think the more important and pressing need right now is for companies to build the capability to manage their own supply chain, their own community of buyers and suppliers," says Chris Givens, vice president of product development. The Adexa suite, he says, supports a private exchange environment that enables planning collaboration on the sell side and collaboration for procurement and order management on the buy side.
Aspen Technologies, which specializes in manufac turing and supply-chain solutions for process industries, also used an acquisition to get a quick start on private marketplace capability. Aspen last year purchased the assets of eChemicals.com, a public marketplace that was not able to gain enough traction to stay in business.
"We acquired eChemicals with the idea of taking advantage of the technology they had put together to enable our customers to build private marketplaces," says Stephen Doyle, senior vice president of Aspen's Internet Business Group. Aspen hosts the private exchanges, "but we really look at that as a way to deliver the technology," he says. Through the marketplace, customers have access to Aspen Buy and Aspen Sell, software configured especially for the process industries.
At this stage of evolution, most customers are interested in either procurement or selling solutions, though these customers may be different divisions within the same company, says Doyle. The idea, though, "is to eventually be able to link these two sides together, so that you drive your procurement off your demand.
"Also, you want to grow this e-business platform into being able to do things like vendor managed inventory; collaborative planning, forecasting and replenishment; capable to promise and other applications around management of the value chain."
While private and public marketplaces seem to be developing along separate tracks, most experts believe that what will eventually emerge is a landscape where the two venues will operate in a complementary way.
"I think what we will see is companies using both private and public marketplaces," says Craig Jett, an IBM strategist for B2B and the supply chain. "Companies may find services or functions within a public arena that may not be able to develop internally in their own marketplace or that they may not need because of their participation in a consortium. I think the services in the two forums will be very different."
Andrew White of Logility believes companies will turn to a public marketplace when they want to go into a new market, launch a new product or develop a new business. "They will go to the public space to advertise, to say, 'Hey, this is what I am going to do, does anyone want to join me?' But once they find each other and end up getting married, then you have a strategic relationship and you go private," he says.
Most agree that public markets will continue to play an important role as a source of indirect purchases and spot buys of strategic materials.
Dell already is providing an example of how that may look. The computer maker and e-commerce leader declined to participate in a high-tech consortium, opting instead to build its own private exchange open only to its core suppliers. However, PartMiner, an electronic component marketplace, will be included in Dell's exchange and serve as a source for spot buys.
"If you look at our suppliers, 28 provide 90 percent of the components we need," said a Dell spokesman when the marketplace was announced. "We wanted to continue to hone our private supplier network rather than go public with other suppliers."
Large consortia clearly do not want to be relegated to only a spot-buy function, however, and are working to expand their functionality. Transora, for example, recently partnered with Syncra Software so it can offer collaborative planning, forecasting and replenishment. Others are indicating they may refashion their model so they can provide private networks as a subset of the public environment.
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