Online trading exchanges, hubs, or e-marketplaces - there are many names for them - have been in the news for all the wrong reasons lately. It seems the wind has gone out of their sails.
One recent failure was the Jupiter exchange, which involved some of the hospitality industry's leading companies, including Whitbread, Bass and Compass. The main reason cited for its closure was that the main protagonists decided to halt further investment in favour of pursuing their own separate schemes.
So, should companies be taking a closer look at what e-procurement strategy is best for them rather than immediately looking to a trading exchange?
The hype surrounding e-marketplaces drove businesses to believe that they were the route to low-cost procurement, with instant savings for all purchasing spend. Businesses were tempted by the ability to improve their buying power, without the need to form close relationships with suppliers. It was seen as a quick-fix solution, requiring minimal investment in technology but still producing results.
What the market failed to realise is that automating procurement does not necessarily mean going online and trading in an e-marketplace. There is a lot more to e-procurement than taking this road.
When a company considers e-procurement it should first consider where internal efficiencies can be made. E-marketplaces and trading hubs are concerned with commerce and trading, whereas the focus of e-procurement should surely be procurement (the process that exists within the organisation to source, purchase and contract).
E-marketplaces and trading hubs actually devalue the role of the procurement professional by removing the close working relationship between a company and its suppliers, letting the trading exchange take over instead.
Trading exchanges not only remove the established relationships but, as only a handful of suppliers are e-enabled, the potential of such exchanges is limited. Many suppliers are either unwilling or unable to subscribe to e-commerce initiatives.
But does that mean they are poor suppliers that should be abandoned in favour of e-enabled rivals?
Of course not. Many of the organisations I have spoken to do not want to abandon trusted relationships with proven suppliers simply because those suppliers cannot trade over the Web. In fact, for many organisations, such as in the public sector and charities, the political implications of doing so would be serious.
It is evident that trading exchanges cannot replace existing systems. They just add to the already complicated processes that e-procurement hoped to alleviate. Indeed, trading exchanges are proving unpopular because people do not see them as a viable way of controlling procurement. They effectively take purchasing responsibility away from the buying organisation, outsourcing it to the trading exchange host.
This is a problem when a company needs to maintain tight control over procurement, especially when trying to cut costs. Many financial directors need procurement solutions that implement true cost-control procedures and rigidly enforce budgets and approval processes.
It is important to be able to access - at any moment - valuable sales and purchasing data that e-procurement systems generate. The inability of many marketplaces to provide back-office integration with mission-critical systems such as accounting and finance packages is a major hindrance to tighter budgetary control.
It seems that companies simply need to get the basics right when it comes to managing procurement. The best option may yet prove to be getting your own house in order before leaping in to the unknown.
Mark McCarthy is marketing director at Get Real Systems
This was first published in October 2001