The movement of business-to-business (B2B) commerce to the internet and trading exchanges continues to be the hottest trend in supply-chain management. The latest forecast from AMR Research of Cambridge, Mass., puts the value of internet-based B2B transactions by companies doing business in the United States at $5.7tr by 2004, or 29 percent of all commercial transactions.

But this figure itself is not important, AMR says in its April forecast. What is important, "is the indication that B2B e-commerce has incredible momentum and will be adopted at a faster rate than many companies realize."

Trading exchanges will be "the single most important catalyst of change," AMR says, predicting that more than half of B2B transactions, an estimated $3tr, will flow through exchanges, or e-marketplaces, by 2004. For some industries the percentage will be much higher.

"Those companies that are not assessing the potential transformative effect of exchanges are risking extinction," warns the research firm.

Sorting out all the hype on the phenomenon of trading exchanges is no easy task, however. There is clearly huge potential but, to date, little real experience. Only 36 percent of 50 leading e-marketplaces are closing more than 100 sales per month, according to a new survey by Forrester Research of Cambridge. Forrester estimates that e-marketplace trade will be about half of AMR's projections by 2004, or $1.4tr. While marketplaces have great plans to add functionality, Forrester says that today most are "loosely constructed and barely serving the needs of customers."

There also is something of a gold-rush mentality surrounding the launching of exchanges. Dan Miklovic, who leads ERP research for the GartnerGroup, a Stamford, Conn.-based information-technology research firm, says this phenomenon was demonstrated by the recent announcement that Boeing, Lockheed Martin, BAE Systems and Raytheon plan to form a trading exchange for the aerospace industry using Commerce One's portal solution. That announcement, which noted that these companies have signed a letter of intent to form a marketplace, was "almost totally content free," he says.

"Fear and greed are forcing many companies into trading exchanges," notes Charles Gerlach, director of eBusiness strategy at Mainspring, another Cambridge-based market research firm. "They are afraid that competitors will use these systems to gain a competitive edge, and they see the huge numbers exchanges have gained on Wall Street and want to grab a piece of the action. Many have not yet examined what the exchanges will deliver to them from a business perspective."

Making that determination and deciding how to incorporate trading exchanges into a business strategy is a challenge. For one thing, many of today's exchanges aren't expected to survive. GartnerGroup predicts that by 2002 there will be more than 3,000 B2B e-commerce marketplaces, but only 5 percent of these will succeed. Fifteen percent will be acquired or merged and 80 percent will fail. Similarly, AMR says that in the next 18 months the number of trading exchanges will be whittled down to two or three within each industry, as a result of bankruptcy, mergers and acquisitions.

Keys to Survival
These analysts point to a number of key issues that they believe will determine which independent trading exchanges (ITEs) will survive.

One is integration capability. Supporting electronic data interchange and flat file transfers will be insufficient to attract the large, high-volume customers that exchanges need, says AMR. Standardized integration into the leading supply chain management, customer relationship management and enterprise resource planning systems is a must. "ITEs that don't offer integration capability will wither on the vine this year," according to AMR's recent report, Evaluating the Independent Trading Exchanges.

Liquidity also is important. ITEs are finding it difficult to drive business, AMR says, a fact that will accelerate consolidation. The need for liquidity is forcing independent exchanges to re-evaluate their neutral stance. "They are increasingly accepting investments and partnering with established brick-and-mortar companies," says AMR. "Partnering with an established company provides trading exchanges not only with funds and validity but, more importantly, transaction volume. Because of this pressure, ITEs are giving away the farm to anchor customers."

Supplier reaction is another issue impacting the way exchanges evolve. Many suppliers, says AMR, are balking at ITEs because they see the bulk of transaction fees being shifted to them as buyers resist paying for the privilege of purchasing. Suppliers also are concerned about putting the new internet middlemen between them and their customers. "Suppliers do not want services and products to become commodities," says AMR, "and they have concerns about maintaining brand through an ITE."

As a result, two things will happen in 2000, AMR says. ITEs will begin to offer suppliers a better value proposition by providing logistics, materials handling and customer service capabilities, either in-house or through partnerships. And suppliers will themselves launch exchanges on their own terms.

GartnerGroup says that successful e-marketplaces inevitably will lean toward acting in the interest of the buyer. They will have fewer exclusive supplier relationships and become more "source neutral," using an auction pricing model. A key value-add may be providing editorial content and ratings on suppliers, something suppliers do not much like, says Gartner. "The key will be for e-market makers to brand themselves as buyer advocates while continuing to provide value to sellers. This may entail offering preferred placement to sellers, or it may involve sharing customer data ... This will emerge as the market's 'sweet spot' in the next five years."

Over time, says Gartner, "sellers should expect e-market makers to offer strong fincial viability, quality of product information and a variety of pricing options, as well as a clear data-integration stragegy. Real-time access to customer behavioral data and demographic information will remain a differentiator, as will service and support."

Forrester Research also believes data will prove the key marketplace differentiator, noting that a great opportunity awaits "as high-value information vaults fill up." Neutral e-marketplaces, says Forrester, "should provide data like supplier performance and price history to inform buyers during negotiations. Advanced sites will gain attention with new market-specific indexes - like ticker-tape market pricing or daily inventory levels - or through rich market lists that can be used for blind marketing campaigns."

Winning marketplaces will move toward a collaborative commerce business model that will go far beyond the facilitation of transactions, Gartner says. The research firm's vision of c-commerce differs from e-commerce in a number of ways. A recent company presentation explains: "E-commerce is designed to construct a virtual link between a pre-defined community of trading partners for the purpose of buying and selling goods and services. Content is generally confined to Web catalogs of finished goods, and collaboration mechanisms center on exchanging messages or purchasing transactions. C-commerce provides a much deeper and richer form of B2B interaction designed to allow trading partners to serve as virtual collaborators across a wide array of business processes. Thus, a c-commerce framework acts as a virtual conduit for connecting information repositories, business applications and business processes, allowing companies to exploit opportunities in the internet-connected economy more easily."

Bruce A. Bond, Gartner vice president, puts it more simply: "E-commerce is about buying and selling," he says. "C-commerce is about sharing intellectual capital."

"It is the next opportunity for corporations to gain competitive advantage," he adds. "With c-commerce, many mission-critical business processes such as sourcing, product design and production will be transformed."

The evolution to c-commerce will occur over the next five years, Gartner predicts. "Currently there are few examples of c-commerce implementations and marketplaces," it says. "By 2004, however, c-commerce will eclipse e-commerce as the dominant, mission-critical e-business model."

Whatever vision proves to be correct when 2004 arrives, it is clear that there is much work to be done in the meantime by marketplaces, vendors and within companies.

New applications must be developed if e-marketplaces are to achieve their goals, says Forrester's Stacie McCullough in a new report, eMarketplace Hype, Apps Realities.Until that happens, she says, "e-marketplaces are stuck in commerce kindergarten."

E-marketplaces, according to the report, need software applications that will enable them to help participants conduct business through all the stages of the trading life cycle - from product discovery to trade dispute settlement. This requires sites to support pre-sale activities like buyer-seller profiling as well as post-order customer services like shipment tracking. To deliver a scalable solution, marketplaces must combine services with packaged applications, the report says, but most currently available software is not designed to support the many-to-many market structure demanded by net markets.

Many vendors, including supply-chain specialists i2 Technologies, Manugistics, SynQuest and Yantra, provide pieces of needed functionality, but none yet has "hit the zone," Forrester says. As a result, vendors are pursuing a flurry of partnerships and acquisitions, such as i2's recent partnership with Ariba and IBM and its acquisition of Aspect Development and SupplyBase.

Internal Readiness
To take full advantage of the potential of trading exchanges, businesses that want to participate will have to step up implementation of supply-chain applications like advanced planning and scheduling, available-to-promise, vendor-managed inventories and collaboration, says AMR.

While leading companies are far along in this process, most others have barely begun.

"It's only been recently that companies have moved away from home-grown legacy systems to integrated ERP packages," says Chad Quinn, vice president of eBusiness strategy at Manugistics Group Inc., a Rockville, Md.-based supply-chain software vendor. "Now that they are wrapping up that work, they are looking to integrate their supply chains."

VF Corp., Greensboro, N.C., represents a typical case. "Four years ago, management decided to invest in new technology thinking it would improve our internal and external business processes," says Tim Lambeth, vice president of global processes at the firm. The company installed ERP software from SAP America Inc., Philadelphia, and has begun implementing i2's supply-chain software and Logility Software's demand forecasting tools.

As these applications come online, they have to be tied together so data will flow among them and VF hired IBM Global Services to perform that work. The apparel company, which handles 250,000 SKUs daily, expects to tie all of the applications used in its jeans business together by the end of the third quarter and then focus on other product lines, such as intimate apparel.

This best-of-breed approach will continue to be the rule for most companies, says Gartner's Bond. That makes integration crucial, especially when two or more trading partners, each with varying applications, are attempting to interact. For new application purchases, this is less of a problem since most now are equipped with application program interfaces. By 2003, Gartner says, more than 90 percent of packaged business software will offer APIs capable of exchanging documents in XML format.

Trading exchanges also are improving their integration capabilities by partnering with Enterprise Application Integration vendors and system integrators.

Standards eventually will be adopted that will make integration much easier, but not in the near term. "Partly, this is because it will be years before enterprises completely replace their older applications with systems that use the standard that is adopted," says Gartner's Ross Altman, research director. "Mostly, this will be because too many standards are being proposed, and so it is highly unlikely that all enterprises and vendors will agree on a single standard in the next five years."

Some companies avoid much of the integration problem by purchasing a full suite of applications from one provider. That was the route taken by Wickes Furniture when it decided on a supply-chain overhaul. "Because our supply chain was largely manual, our salespersons were not able to tell customers when a product would arrive as they placed their orders," says Ken Maher, vice president, controller, and corporate secretary at Wickes Furniture. "Management decided we had to change our systems because some customers would walk out the door to competitors who could give them a firm delivery date."

Wickes examined deploying a new ERP system but instead purchased Logility's Voyager supply-chain software. "We wanted to improve a customer's buying experience and supply-chain systems have a much bigger impact on that than ERP software," says Maher.

The company plans to deploy Logility's full suite: Event Planning, Demand Planning, Inventory Planning, Replenishment Planning, Demand Chain Voyager, Transportation Planning and Management, Voyager XPS and Voyager XES.

The latter two products will support Wickes's participation in Logility's hosted trading community. Wickes, which operates 32 showrooms, will use Logility's i-Community to improve communications with its manufacturers and transportation providers. It initially plans to connect with supplier Ashley Furniture of Arcadia, Wis.

VF Corp. will begin connecting its systems to key suppliers in the third quarter using i2's SoftgoodsMatrix.com, a B2B marketplace for retail, apparel, footwear, home furnishings, floor covering, and textile companies. SoftgoodsMatrix is part of i2's aggressive TradeMatrix initiative, which also includes HightechMatrix.com and FreightMatrix.com

Anchor tenant VF will initially focus on indirect goods suppliers, but plans eventually to expand its marketplace activities to include direct goods. "Currently, we do not have a good picture of where needed materials are in the supply chain," says VF's Lambeth. "Once the exchange is in place, we'll have a complete view into our supply chain and be able to fulfill new orders more quickly. We'll also lower inventory and reduce product obsolescence.

"What we've found is that trading exchanges have tremendous potential benefits, but a company has to expend a lot of grunt work to fully exploit them," he adds.

As trading exchanges mature and new software applications become available, they will begin to add more functionality and to offer valuable market information. Companies are cautioned not to wait until all the pieces are in place before developing an e-marketplace strategy, however, particularly in industries that are moving quickest to internet-based commerce. Procrastinators may well be run down in this fast-moving race.

To help companies in this process, AMR Research has developed a number of recommendations summarized below.

For Buyers:
• When evaluating exchanges, demand strong process support and integration. Select an ITE that minimally integrates with an organization's existing workflow and requisitioning processes or provides that capability. For an ITE to be an integrated component of the supply chain it must address all four phases of the procurement process: request, buy, supply and remit.

• Bargain hard on prices, setup fees and integration services. Equity is not out of the question.

• Understand the financial backers and operators of the ITE. Many ITEs solicited funding from established brick-and-mortar companies; some of those organizations may be competing firms. If a competitor owns an equity stake, does it have access to the transaction data?

• Determine how the exchange handles third-party services, such as supply-chain execution. Who is ultimately responsible for getting the product to you?

• Protect your suppliers. If you have spent the last 10 years rationalizing your supplier base, carefully consider how an ITE will impact your partners. It is crucial to understand that if an ITE gets revenue from your suppliers, they are going to be asked to deliver the same level of services at a reduced profit.

For Suppliers:
• Bargain hard on transaction fees, service fees, contract terms and margins. Contrary to the popular press, ITEs need you more than you need them.

• Develop a substantial content strategy. It will enable your organization to support multiple exchanges.

• Do not get blindsided by a significant customer that selects an ITE as its sole e-commerce platform. Proactively approach customers about their plans and ITEs within your industry.