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Electronic marketplaces were once poised to revolutionise the way companies bought and sold everything from paper clips to aeroplanes. Things have changed.
Poul Funder Larsen, CFO Europe Magazine
April 13, 2004
It's been an uphill struggle. Amid great fanfare in 2000, Covisint wowed the procurement world when it launched its ambitious global online B2B marketplace for the car industry, supported by the likes of DaimlerChrysler, Ford Motor Company and General Motors. At the time, the project's backers crowed that Covisint would soon generate billions of dollars of business annually as buyers and sellers flocked to its site. But they were in for a rude awakening.
Business on the big auction site never boomed, and by December 2003, Covisint announced that it was time for a rethink. Agreeing to sell its electronic auction business to rival FreeMarkets, an auction site turned electronic supply chain service provider, it's now been left to focus on a virtual messaging hub that passes information between car-parts buyers and sellers.
Covisint provides yet more evidence that procurement in cyberspace is not easy. For a host of reasons, companies — both buyers and sellers — haven't flocked to the exchanges as procurement experts had once predicted. "It was the triumph of hope over reality," comments David Rich-Jones, CEO of Xchanging Procurement Services, an outsourcing firm in London. And the reality today is that the majority of B2B procurement processes still take place "off-line," rather than via online auctions, catalogues, purchase orders and the like.
One explanation for the low take-up is that companies quickly discovered that online procurement was more complicated than they'd initially thought. "Many companies actually saw connecting to the internet exchanges as a way to solve their internal problems," says Bastiaan Soeteman, a principal at ATKearney in Amsterdam. "But in effect the exchanges are really just enablers, a set of tools. You have to already be pretty well structured internally to do this sort of thing."
Many exchanges that opened in the dotcom heyday aren't around today. A Wharton Business School study found that of the 1,500 independent B2B exchanges in April 2000, only 43% were still in business by July 2002. The researchers predicted that the number would continue to dwindle in 2003.
Yet there's reason for optimism. As G. Bruce Friesen, an independent organisation development consultant in Vancouver, puts it, "The B2B revolution isn't over. It's just out for retooling." He adds, "Online B2B exchanges have struggled to displace their offline counterparts in many ways, but corporate marketing and buying departments, and the online B2B exchanges that are still around, are finding ways to adapt themselves to each other's needs."
Not All That Bad
Indeed, many of the original benefits that e-marketplace experts touted are still enticing companies today. Both neutral and independent, sector-specific exchanges (such as GNX for retail, and ChemConnect and Transor for chemicals) or their in-house, corporate counterparts promise to make transactions more transparent and more efficient. Better still, they can generate big cost savings for buyers.
Granted, expectations aren't what they used to be. Today, companies are reckoning on savings of between 10% and 20%, instead of between the 40% and 50% touted a few years ago, says Soren Ohm, managing director of IBX, a Nordic platform owned by regional companies, such as Ericsson of Sweden and Novo Nordisk of Denmark.
One company where e-procurement has delivered on its promises is Aventis, the €20.6 billion Franco-German pharmaceuticals group that is currently the target of a hostile takeover bid from smaller rival Sanofi-Synthélabo. Aventis is itself the product of a three-way merger, and following that deal in 2001 the company decided to integrate purchasing in the US and Europe. It signed up for a hosted service package from FreeMarkets, which began buying office supplies online for the pharma company soon after.
Mike Flanagan, Aventis's Frankfurt-based head of capex, production supplies and services purchasing, says this "yielded significant savings and helped cut our suppliers from around 40 to just two." By mid-2002, the company had saved $35m (€28m) on a total spend of $130m, and integration was in the home stretch. Aventis was ready to move its online exchange expertise in-house.
According to Mikael Arnbjerg, a Copenhagen-based analyst at IDC, the technology research firm, relinquishing control of purchasing operations to a third party has been a sticking point with many firms considering independent exchanges. But e-marketplace offerings have become more flexible, having metamorphosed over the years. This certainly has been the case at FreeMarkets. It began as a neutral marketplace, then migrated into a supply chain management tool and now is heavily focused on consulting.
Like FreeMarkets, a number of the early exchanges have extended their service to advise firms undertaking complex sourcing or procurement projects, setting up requests for quotes, contract templates and so on. In some cases, the exchanges are now software vendors, catering to clients that want to set up and manage their own private, invitation-only exchanges.
The "self-service" approach is what sold Arla, the DKr40.6 billion (€5.5 billion) Danish dairy co-operative. "We want one in-house system rather than having to log on to scores of web solutions from suppliers," says Mette Windfeldt, head of the company's e-procurement programme. Having gone live with an online exchange using software from IBX in December, she says 200 of Arla's suppliers are expected to be able to join the marketplace soon.
Aventis has also taken advantage of the strategic shift. In early 2003 it switched from its hosted service contract to a new self-service package from FreeMarkets. Since then, Flanagan and his colleagues have been working on moving all of Aventis's sourcing in the US and Europe on to one platform by the end of this year. Yet while the in-house team handles about one-third of the company's total $6 billion annual spend, Flanagan still enlists FreeMarkets' help for complex sourcing and purchases, such as when he needed to buy all the materials for an €11m service centre that it recently opened in Germany.
As the online exchanges evolve, companies are starting to look for technology that "not only improves the efficiency [of their buying and selling], but also their effectiveness," says Nicolas Reinecke, a London-based partner leading the European purchasing and supply management practice at McKinsey & Company. "That's the new frontier." According to Reinecke, software vendors such as SAP, Manugistics and i2 are coming forward to provide tools that enable richer, more rigorous analysis of online and offline data, better vetting and management of supply-chain partners, and greater automation.
In from the Cold
"Not that the exchanges themselves aren't important," says Ron Kubera, senior vice president of northern Europe for Manugistics. "But what we're seeing is that what companies want is better analysis before the fact, and after the fact."
But will this leave the exchanges that have survived the last few years out in the cold? Not at all, insists Kubera. "The online exchanges that have survived are good," he says. "We just won't be hearing about a lot of new exchanges starting up the way we used to. The world has moved on and no one is going to start a new marketplace today with the same expectations that they once had."