Supply Chain

Going, Going…

Electronic marketplaces such as Covisint were once poised to revolutionize purchasing. Now, even ''evolutionize'' might be overselling it.
Poul Funder LarsenJuly 21, 2004

Call it dot-bomb redux. Amid great fanfare in 2000, Covisint wowed the procurement world when it launched its ambitious global online business-to-business marketplace for the car industry. Supported by the likes of Daimler-Chrysler, Ford, and General Motors, 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 last December Covisint began to collapse. First it sold its electronic auction business to rival FreeMarkets, an auction site turned electronic supply-chain service provider, and then the rest of its operations were acquired by software company CompuWare in March.

The high-profile flameout provides yet more evidence that E-procurement remains a work in progress. For a host of reasons, companies — both buyers and sellers — haven’t rushed 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 still takes place offline, rather than via online auctions, electronic catalogs, and the like.

One explanation for the low take-up is that companies quickly discovered 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 dot-com heyday aren’t around today. A Wharton Business School study found that of the 1,500 independent B2B exchanges alive in April 2000, only 43 percent were still in business by July 2002, and researchers predicted that the number would continue to dwindle in 2003. Yet there’s reason for optimism. As G. Bruce Friesen, an independent organization-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.”

The Known World

Indeed, many of the original benefits that E-marketplace experts touted are still enticing companies today. The difference, they say, is that the survivors have learned how to focus.

At ForgeFinder Inc., an online exchange founded in 1999 that connects makers of die-forged and other metal products to buyers (mostly carmakers), membership continues to grow. CEO and owner Kyle E. Gillman projects a 15 percent growth in the next year, which would bring the exchange to nearly 700 participants. Gillman had considered buying Covisint’s auction service but decided not to. “Now I only need to compete against FreeMarkets, not FreeMarkets and Covisint,” he says. “The key to success is to know everything about the business from both the buyers’ and sellers’ perspectives, and to not try and sell everything to everybody.”

Simply put, expectations aren’t what they used to be. Experts say that companies now expect to save between 10 percent and 20 percent when they buy materials or components through exchanges, instead of the 40 percent to 50 percent touted a few years ago. That’s in keeping with the more-realistic figures now bandied about for E-procurement, of which online exchanges and auctions are a subset. (Indeed, while FreeMarkets now owns key parts of Covisint, as of January it was acquired by Ariba, one of the handful of companies that put E-procurement on the map at the start of the dot-com boom.)

Trend Analysis

As online exchanges evolve, companies are starting to look for technology that “not only improves the efficiency [of their buying and selling] but also their overall effectiveness,” says Nicolas Reinecke, a London-based partner leading the European purchasing and supply-management practice at McKinsey & Co. “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 of purchasing.

“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 both before and after the fact.”

Will a renewed interest in E-procurement on the part of major software firms put those exchanges that have survived in jeopardy? 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.”

Kevin Mixer, an analyst at AMR Research in Boston, says that exchanges handle certain things well, such as disseminating request-for-quote information and facilitating faster communication between buyers and sellers. “The keys are to specialize and also to provide some kind of value-add beyond the merely transactional,” he says, a delicate balance that can save money but now seems unlikely to rewrite the rules on buying and selling.

Poul Funder Larsen is a correspondent for CFO Europe; additional reporting by Mary DiDomenico.

Putting the Change in Exchange

According to IDC analyst Mikael Arnbjerg, online exchanges have been hampered by customer reluctance to relinquish control of purchasing operations to a third party. But E-marketplace offerings have become more flexible, having metamorphosed over the years to emphasize ease of use and provide advisory services.

FreeMarkets, for example, began as a neutral marketplace, then migrated into a supply-chain management tool, and now is heavily focused on consulting. The Plastics Exchange promotes its research and news coverage of the commodity-grade plastic resin market far more than it boasts of its technology, a notable departure from the early days of exchanges when the technological underpinnings were often billed as revolutionary.

Other exchanges have extended their services to advise members that want to undertake complex sourcing or procurement projects, setting up requests for quotes, contract templates, and so on. In some cases, the exchanges now act as software vendors, catering to clients that want to own and manage their own private, invitation-only exchanges.