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E-marketplaces proliferate, but boom cannot last warn analysts

While online trading exchanges offer savings, few are long-term propositions

Everyone is doing it. General Motors, Ford and Daimler Chrysler are doing it. British Telecom, Deutsche Telecom and Cable & Wireless are doing it. Most recently British Airways, Air France and four American airlines are doing it. They are all joining electronic marketplaces - otherwise known as business-to-business (B2B) exchanges - or if not, they are setting them up.

Their example is forcing other companies to look for savings by buying supplies through these e-marketplaces.

However, analysts at Gartner and AMR Research have warned clients that the boom in online trading exchanges cannot last. While there may be as many as 10 per industry sector at the crest of the wave, they expect only three to have their heads above water at the trough.

Andy Kyte, research director at Gartner, draws a distinction between e-marketplaces and B2B exchanges. In his taxonomy, e-marketplaces offer little more than information and an online meeting place that can be used with a browser. B2B exchanges bring groups of buyers together to cut transaction costs through integration with back-office systems. It is these e-marketplaces that are heading for a fall.

Mary Hope, senior analyst at Ovum, sees different fates for horizontal and vertical marketplaces. A horizontal marketplace sells similar products across many industries - office supplies and furniture for example. She expects companies to link to one of these. A vertical marketplace sells supplies that are specific to one particular industry, such as motor parts. This is the area where companies will link to several sites in order to access different product ranges.

So how can companies decide which e-marketplace to work with?

The first stage of this decision has nothing to do with technology. Online trading exchanges must have enough participants to provide liquidity and they are so desperate to achieve critical mass that they will sell you half the shop to get your business.

Then we come to the technological criteria and here the eternal principles of effective software implementation come into play.

Firstly, those exchanges best placed to survive offer easy integration with your enterprise resource planning product. If you work for a big company, don't expect a plug-in connector to work. The customisation of most ERP systems makes this impossible.

However, according to John Watton, UK marketing director at e-procurement software supplier Ariba, ERP systems can be integrated with e-marketplaces in 30 to 60 days. In practice it often takes only two to three weeks.

Another key factor is openness to future developments. "The whole concept of e-marketplaces has only been around for six to nine months," said Watton. "Who knows what business model your technology will have to support in a year or two?"

A third factor is connectivity to other e-marketplaces. Chris Phillips, European marketing director at Commerce One, another e-procurement software supplier, said many of the biggest companies have embraced the concept of a global trading Web, where industry-specific portals are linked, and buyers and sellers can use the same software to move from one exchange to another.

This advice is common to all users, but researchers and suppliers offer diverging advice for companies that buy, companies that sell and for small and large businesses.

If you work for a company that needs to sell into e-marketplaces, AMR recommends that you develop substantial Web-accessible content that can be ported from one exchange to another. The researcher is also warning suppliers not to be blinded by one big customer that chooses to use a single trading exchange, but to check the requirements of the full range of customers, present and future.

As for buyers from exchanges, check on fulfilment systems - an area most exchanges are not involved in - and don't get drawn into a technically attractive link to an exchange that is squeezing your company's suppliers at the expense of a lasting business relationship.

Managers at small firms should look for trading exchanges that offer application service provider services. But do not get locked in to one exchange simply because of its ASP software.

According to Commerce One, the model most popular with the biggest companies is the grouping of industry giants to create a portal.

But Kyte points out that most of these exchanges exist only on Powerpoint slide creation software and co-operation between fierce rivals is tentative, to say the least.

An obvious worry for big exchanges is data security, yet Ariba finds that most customers are reassured by the standard safeguards used in other systems.

Phillips believes, however, that these concerns will not be enough to stop companies investing in links to e-marketplaces. "I haven't yet come across a company that can't make a business case for it," he said.

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