Should you go to the marketplace?

Exchanges are springing up in all vertical sectors. But should your firm get involved? Andrew Robinson investigates

Exchanges are springing up in all vertical sectors. But should your firm get involved? Andrew Robinson investigates

What are B2B exchanges?

Business-to-business exchanges are collections of businesses that get together to provide a neutral site where buyers and sellers can conduct online transactions for all types of products. Exchanges tend to focus on a particular industry sector, such as chemicals. The exchange may typically include an area for the purchasing of sector related parts and equipment, bulk commodities and consumables as well as a trading area where qualified suppliers can tender for jobs.

Why did they start?

Large corporates watched technology companies like CommerceOne, Oracle and Ariba come in and dominate the online buying process and grabbing huge stock-market valuations. Corporates wanted a piece of this action for themselves and (like any business) they are constantly looking at ways of cutting costs.

What are the benefits of joining?

It is likely that online exchanges will now be a permanent fixture as the biggest players in the automotive, aerospace, and food-processing industries form their own and transfer some $600 billion of purchases to them. But what are the benefits of joining an exchange?

  • The formation of an online exchange potentially enables companies to combine their buying power to squeeze better prices out of suppliers, whilst using the Internet to cut the huge transaction costs associated with fax and paper-based procurement processes.

  • Exchanges create price transparency, enabling buyers to search for existing or new components at no incremental cost.

  • Spot markets benefit both buyer and seller by providing an excellent way of disposing of excess inventory.

  • Companies can look for ways to use the exchanges to innovate, not just cut costs. While it's true that no cooperative ever innovated, exchanges are fostering standardisation and richer collaboration among member companies, which will surely create opportunities for new products and services.

    What should companies consider?

    Companies looking to form or join an exchange must establish that they really have the buying power to participate in an exchange, as well as the technical and cultural environment needed to maximise the benefit.

  • Check that the other partners have comparable buying power. Sears Roebuck and European retailer Carrefour recently said they would team up to buy their supplies through a single on-line exchange. Wal-Mart decided not to join because it had far more buying power than its competitors and as a consequence used its buying power much more effectively. Why subsidise the competition by joining weaker players?

  • If you are large enough, make sure you get equity in the exchange in return for adding your volume. Equity may become very valuable as the exchange generates additional revenue opportunities such as market information, or goes for an IPO.

  • Problems may occur in areas where suppliers are providing competing technologies. The experience to date has been that suppliers have had very little experience in working together. Their technology partners tend to be fierce competitors and each has a tendency to believe that their solution is superior to all the others.

  • Before agreeing to join the exchange it would be good to decide not to compete on procurement with your partners. In the case of the auto exchange, partners compete on car design. They compete on innovation in engines and on-board technology, but not on procurement.

  • Companies should evaluate whether they can let other companies absorb the risks and collaboration costs associated with starting an exchange, and then join later.

  • If starting or joining an exchange is the right call, members must keep the governance simple, even though the temptation is to get complex.

  • Even if the company has considered and is comfortable with all of the above points it may still not make sense to join an exchange. If the company's existing suppliers have built dedicated plants because it is the only way to maintain the level of quality control required then such companies can't easily change their suppliers.

    What exchanges exist already?

    Hard facts on how successful existing exchanges have been are difficult to come by. Especially as most of the exchanges have only been going a few months. Some good examples of the B2B exchanges that are up and running are:

  • E-cement, which started in March and is a joint venture between Just2Clicks.com PLC and Blue Circle Industries to form an "independent based procurement and cement trading exchange".

  • TheSauce.com, which started in June 1999 in the US and brings the buying power of independent restaurants together.

  • The GM, Ford, DaimlerChrysler auto exchange, started February 2000. See www.covisint.com

  • Aviationx.com - privately funded and run by former aviation executives, started 1999. This exchange is now about to be challenged by Boeing, Lockheed Martin, Raytheon, BAE Systems and Commerce One who have formed an aerospace and defense exchange due to be launched later this year.

    The bottom line

    Online exchanges are a rapidly growing phenomenon. Many industries are adopting them and their impact will be fundamental for both purchaser and supplier. On-line exchanges will generate unprecedented information on an industry-wide level that will be used to optimise members' production, warehousing, and distribution.

    As is the case with most other online services your company's exchange will either need to be very large or extremely specialist. Anything in the middle ground is unlikely to survive long. For the supplier, exchanges will add even more pressure on cost, volume, quality control and supply requirements.

    Inevitably some online exchanges will work better than others and a period of rationalisation will follow as the largest and most successful swallow the smaller and less successful. What online exchanges represent is yet another example of where the Web has fundamentally changed the way businesses operate. When viewed in this light the decision to join an online exchange may not be one your company can put off for too long.

    Andrew Robinson is managing partner of Diamond Technology Partners' European practice.

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