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Online trading hubs stage a comeback. But this time, there's a twist.
John Edwards, CFO Magazine
May 1, 2005
When David Mroz, a manager at Shannon Precision Fastener, needed to buy a new LCD projector for a training class, he didn't head to Staples to hunt down a bargain. Nor did he go online to search out the best price on the product. Instead, the quality manager at the Madison Heights, Mich.-based Shannon put his prospective purchase up for bid on the Internet.
The posting—the purchasing equivalent of a request for proposal—forced vendors to come to him with their best deals.
Internet-based sourcing is hardly new, of course. During the dot-com halcyon days of the late 1990s, it was generally assumed that E-markets would come to dominate the corporate purchasing scene. Some exchanges did take off, too, in vertical industries such as metals and plastics. But no B2B market emerged as the corporate equivalent of eBay—that is, an online market that's driven by bidders rather than sellers. And when the dot-com frenzy died off, so did many online trading hubs.
In recent years, though, a number of bid-based, online auction houses have popped up to service business customers. The sites appear to be gaining in popularity with those customers, who go online to solicit offers on everything from computers to consulting services. One finance manager, who declined to be named, told CFO that his company purchased 50,000 desktop computers in a virtual reverse auction (the same company also solicits bids for consulting services). Says Andrew Bartels, an analyst for Forrester Research, a technology research firm based in Cambridge, Mass.: "Despite everything that has happened over the past few years, it seems that old E-markets never die."
Exchanges—The Early Years
Apparently not. Yet today's B2B Internet-sourcing environment is much changed from the late 1990s, when lavishly funded, industry-specific E-markets emerged to serve large businesses. Indeed, the concept of companies using online trading hubs to procure bids for big-ticket items like rolled steel is diminishing. Big businesses tend to buy from other big businesses, notes Bartels, eliminating the need for exchanges. "They can connect their systems and do their own sourcing directly, without the need for intermediaries," he says.
Thus, most of the E-markets that remain have shifted gears, focusing on more modest items. Typically, the exchanges enable large buyers to seek bids from small and midsize suppliers. On E-markets such as Quadrem, BuyerZone.com, Enporion, and eWork Markets, prospective purchasers request bids on products or services. Some of these exchanges serve particular industries, some don't.
George Gordon, chairman and CEO of Enporion, an E-market that caters to energy companies, has witnessed firsthand the changes in online procurement. "The early years of online auctions were predominantly for hardware and commodities," he says. Now, Gordon sees auction activity for services becoming an increasing proportion—more than 50 percent—of Enporion's auction activity. Gordon adds that most of his customers are very specific about the products and services they need. "They're not looking for a three-year contract for an indefinite quantity of computers," he says. "They're going out for a very specific buy."
The system can also help suppliers. "Finding a qualified, ready-to-purchase business buyer is challenging for any seller," notes Sam Zales, CEO of E-market BuyerZone.com. "They can do telemarketing and a lot of other expensive direct things, but we're placing a potential customer right on their doorstep."
For Shannon's Mroz, BuyerZone.com provided a fast and easy way to pick up a quality projector at a good price without scouring the Web or haggling with dealers. "I got five quotes in about 20 minutes," he recalls. "I was able to contact each bidder for additional details; then I made my purchase." Mroz estimates he saved about 15 percent on the deal.
Mroz says he regularly uses E-markets when purchasing a wide variety of supplies, everything from insurance to gauges. "Everything is laid out in front of you—the different costs, the different features," he says. "Plus, I have all the contact information I need to get more in-depth information."
Let's Buy From The Massive Polluter!
While small or simple bidding sessions can be launched in just a day, larger, more complex auctions often require weeks to plan. When bids are sought for expensive products or customized services, companies often create formal RFQs that describe, in precise detail, exactly what they are looking for. "The most important thing is to identify, very specifically and very explicitly, what it is that you want to buy," says Enporion's Gordon.
That puts the ball squarely in the court of buyers, who must then check the market for available products, prices, features, and specifications before creating the RFQ. "You can't just say, 'We want to buy security lighting, so tell us how cheaply you can provide it,'" warns Andy Kyte, a research fellow who leads the procurement practice at technology consultancy Gartner, based in Stamford, Conn. "You don't want to enter the market blindly."
Bidding processes vary, depending on an E-market's structure and rules. Some services simply publish RFQs online in a particular category or subcategory, leaving it up to the buyers to find suitable suppliers. Other Web exchanges automatically notify relevant suppliers about a matching RFQ.
No matter how the process unfolds, buyers need to validate bidders before the deal closes. Some E-markets prescreen suppliers to ensure they meet basic identity, solvency, and honesty standards (although it's unclear what legal weight these claims carry). Others take an eBay-like approach to bidders, allowing just about anyone short of Wimpy or Manuel Noriega to participate.
That leaves it up to purchasers to investigate the credentials of bidders—a potentially time-consuming process. "No serious business would allow its procurement team to go to a public marketplace and accept tenders from unqualified suppliers," says Kyte. "The supplier could be a criminal organization, a massive polluter, or one that exploits child labor."
To ease the due-diligence burden—and to boost purchasing power—some E-market users join together to aggregate their requirements for specific products or services. Says Richard Goch, manager (strategic sourcing) for PPL Corp., an electric-and-gas energy company in Allentown, Pa.: "Group contracts and online auctions have been effective approaches to purchasing desktop and laptop computers as well as some peripherals."
But one IT consultant warns businesses not to get too carried away by the power of aggregate auctions. Why? Companies that engage in the practice, he says, could find themselves on the wrong side of an antitrust suit. "If a few small buyers get together to pool power, that's not an issue," the consultant explains. "But the more pooling of buying power that arises, the more coercive this becomes and, therefore, the more antitrust issues might come to the fore."
Whether electronic exchanges will be able to find a niche in supplier-to-bidder sales remains to be seen. The remaining players, including Gordon and Zales, are predictably optimistic. Gartner's Kyte, however, believes that E-markets are "a phenomenon that died four years ago." And Bartels thinks the future of online procurement may lie in bids that are submitted directly to company Websites and portals.
But don't tell any of this to Mroz, who is already planning on posting his next solicitation for bids. "I think it's a pretty slick way of doing business," he says.
John Edwards is a freelance writer based in Gilbert, Ariz.
These online exchanges enable companies to connect with—and solicit bids from—suppliers and contractors.
Online bidding system for dozens of categories, ranging from office equipment to financing; SMBs a specialty.
E-market for energy industry buyers and suppliers.
eWork Markets (www.ework.com)
Focuses on services; companies solicit bids from business consultants, engineers, marketers and the like.
Buyers launch, receive, and analyze bids on various types of products and services for the mining industry.
Online service for European automotive suppliers hosts live or long-term online-bidding sessions that follow buyer-set rules and procedures.