Finding the Right Fit.

A B2B e-market strategy should not be created in a vacuum; it should take into account a broad range of business realities, and what you hope to gain.

In the past few months, the hype over e-marketplaces has waned, but the e-market landscape has only grown more complex and confusing. It is difficult even to say with precision just how many e-markets there are in operation. Those that are -- perhaps 2,000-- target various industries and functions, and all of them seem to evolve and change constantly. In short, e-markets are still a new and unknown phenomenon, and making sense of it all can be a daunting challenge.

Nevertheless, CEOs need to do just that. For most companies, participation in e-markets will not be optional. Where and how they choose to participate promises to have a powerful impact on their ability to work with supply chain partners and, ultimately, compete and profit in an interconnected world.

"The question about these [electronic] marketplaces is, are they a fit for what the business is going to try to achieve? And if they are, what is their role and how do you use them?" says William Brandel, research director in e-business at the Aberdeen Group in Boston.

In other words, executives need to develop a strategy for taking advantage of the opportunities presented by e-markets. They need to go beyond gut-level reactions -- whether to jump in or steer clear -- and make plans based on a clear understanding of what exchanges can and cannot do for their companies.

And don't let it get derailed each time the stock market coughs. The Nasdaq is not necessarily a good measure of potential, Francis says. Don't revert to the idea that you shouldn't outsource because it's too risky -- that you should build all technologies in-house. Some high-tech companies that are declining in market capitalization or stock value have great products.

For example, WMC, the international minerals producer, is working with Quadrem, the mining, minerals and metals industry exchange. WMC CEO Hugh Morgan says his company sees an opportunity in a "mechanism where supply companies can present material we would not otherwise have known about, and a conduit through which we can standardize some components of equipment." WMC has also conducted its own online auctions and is extending the exchange concept to its customers, allowing them to conduct transactions, see WMC stock levels, track shipments and settle accounts electronically. (See story, page 20.)

WMC's multifaceted approach to e-markets highlights a basic fact that is likely to color e-market strategies: There is no single "right" kind of e-market. Most companies will need to be involved in several exchanges in order to meet a range of supply chain and procurement needs.

"At the end of the day, we think nearly every company is going to take a portfolio approach to e-markets," says Roger Dik, who heads up the B2B practice for the Americas at Accenture, a leading global management and technology consultancy. "A given company will probably participate in perhaps a dozen or more, including industry consortia, independent marketplaces and their own private e-markets, and manage them as a complementary set."

Filling the portfolio

The set of e-markets that goes into a company's portfolio will depend on that company's specific needs -- its supply chain relationships, competitive situation, target customers and so on -- and how individual e-markets match up with those needs. Thus, an e-market strategy must be based on a solid understanding of the fundamental nature of the three types of e-market that have evolved over the past few years: the independent and consortium e-markets, which are both public exchanges, and the private exchange, which is operated by a single company for use by its partners.

* Independent e-markets provide "many-to-many" connections between buyers and sellers. They tend to involve the widest variety of participants, which means they can provide companies with broad access to buyers and/or sellers while addressing a relatively narrow range of products and services. They also tend to provide tools and functions that will serve large numbers of participants rather than specialized applications for intercompany trades and collaboration.

* Industry consortia e-markets provide "some-to-many" as well as many-to-many connections, but participation is typically restricted to several key members and their regular trading partners. These e-markets tend to support standard, cross-company processes rather than highly customized processes. Because they provide members with access to other members' trading partners, they offer some increase in access to buyers and sellers.

* Private exchanges provide "one-to-many" connections between a company and its close suppliers and customers, which means they do not enable an enterprise to look beyond the partners it already knows. Private exchanges offer a closed environment -- partners can operate with security and privacy, and companies can share applications and information as they collaborate more closely. "One thing a private trading exchange does is loosen up the commerce processes, so companies can be much, much more creative in how they manage their supply chain," says John Fontanella, service director for the B2B marketplace at AMR Research in Boston.

To understand how these various types of exchanges can help their companies, executives should look at a handful of key capabilities, such as product development, indirect procurement and fulfillment, says Dik. Because of their various structures, each type of e-market is better suited to some capabilities, and less suited to others. Independent e-markets, for example, are in the best position to handle payment settlements and indirect procurement, while private exchanges are usually better suited to supply chain planning and service-management activities.

There are, of course, no hard and fast rules in that regard, because e-markets continue to broaden services and explore new ways of operating, notes Bill Copacino, global managing partner in Accenture's supply chain management practice. "Independent trading exchanges will be very useful for things like spot buying, for supplementing your procurement in very fragmented markets and for the periodic disposal of surplus materials," he says.

Industry consortia, on the other hand, will be in the position to be "one-stop shopping sources" for industry-wide capabilities, Copacino continues. Like the independent e-markets, they will offer some capabilities in maintenance, repair and operations (MRO), but most will focus more on direct materials procurement. They will also be well suited to providing industry news and expert forums, and to helping accelerate the use of industry standards in terms of data, document formats and business processes. In some fields, they will support collaborative activities as well.

Private exchanges can be expected to provide the most sophisticated offerings. They will be best suited to supporting direct materials procurement and deep collaboration, because they allow for the secure, cost-effective use of specialized applications and the sharing of confidential information. Private exchanges can be especially appealing to companies that believe their supply chains are already a key source of advantage, and therefore see no reason to share their expertise on a public exchange.

"If you're a company that really does have a superior supply chain management process with your partners, [a private exchange] allows you to sustain that advantage, as opposed to having it flattened or leveled off in the public exchange," explains Andrew Bartels, vice president and research leader for e-business strategies at the Cambridge, Mass.-based Giga Information Group.

Asking the right questions

In assessing public, independent and consortium e-markets, a key issue will be viability. Consolidation in the field continues as many exchanges struggle to attract enough business to function as a useful market. Some industry consortia have also run into governance problems and delays -- not especially surprising in an initiative that tries to bring competitors together. In initial discussions at some industry consortia, "there were as many lawyers in the room as there were businesspeople, to make sure there were no antitrust violations," says Bartels. "So there's been this inevitable, time-consuming dance in getting the framework together for competitors to sit down and figure out what exactly the rules and objectives would be for the exchange."

None of this is to say that it can't be done. A recent report from AMR Research cites a number of industry exchanges that are doing well, including Exostar in the aerospace and defense arena (see story, page 9), PaperExchange in the paper industry and Chematch in the chemicals and plastics industry. Indeed, says the report, a number of exchanges have "ridden out the storm of corporate skepticism, economic downturn and investor flight" to show that they can "create value for companies within their industry."

In general, says Derek Lidow, CEO of the iSuppli electronic components e-market, "the exchanges that are successful are going to be few and far between -- but those that do survive will become very sophisticated global operations." (See story, page 19.)

In assessing the viability of public e-markets, executives should ask some key questions, says Jeff Beech, a partner in Accenture's Products industry group:

* Does the e-market have a clear, quantified value proposition at the operating level? Beech advises looking beyond claims such as "We can make doing business with your trading partners faster, cheaper, better." Instead, "look for some sort of quantifiable results, such as, 'We can reduce the lead time backlog in your order cycle in these types of categories by 30 percent.' Just having an electronic meeting place is not a value proposition," he says.

* Is there an experienced, focused, management team? "Who's on the team? What kind of experience do they have in starting or running a new business that is principally service-based?" asks Beech. Such questions are important "because running an exchange requires more than industry-specific expertise," he says. "It's good to know the industry, but what they're really doing is creating a new service-based company that also has some fairly heavy reliance on technology. And if the management team doesn't have some significant experience in that space, watch out."

* What proven execution capability can the e-market show? "You don't want to just see PowerPoint slides and press releases. You want to see a transaction, some result that shows that they actually have execution capability," says Beech. Admittedly, that may be difficult for new exchanges without a track record. But, he adds, "I am not talking about seeing a year's worth of transactions or $100 million of flow through. You probably won't find that. What you want to see is something that has been executed, because you want that technology platform and business capability to have been tested and proven with live customers."

* Does the e-market have a sustainable economic model? "That's probably the most challenging one for an executive team to ferret out," says Beech. "But if the e-market can't figure out how to make money, it will absolutely fail. So have them tell you how they are going to make money and explain their cost structure and how that compares against their revenue stream. Are they going to base this on a transaction fee? Are they going to base it on a subscription fee? Are they going to base it on a gain-sharing type of fee? If they cannot explain that, then you might want to think about turning and running."

The potential use of private exchanges should receive similar scrutiny. Executives need to ask, "What's the tradeoff we want to make in terms of the investment, in making sure that our connection with those companies is private and secure and reliable and customized, versus the cost of doing so?" says Bartels. "In many instances, you should run the risk parameters and the flexibility parameters, not just the cost parameters, of using an exchange. With smaller suppliers, you can put up with a bit more exposure. If a vendor who represents 2 percent of your purchases goes awry, that's unfortunate, but it's probably not going to kill you.

"The issue that faces a lot of private exchanges is, Will the buyers come?" Bartels continues. "A lot of companies tend to have an overly optimistic sense of their own value to their customers....In some instances it's justified -- maybe the seller is the proverbial 800-pound gorilla that companies have to do business with. But some companies are simply going to find that the buyers aren't going to participate."

Regardless of the type of market in question, an e-market strategy has to take into account the basic issues of power and relationships that have always applied to supply chain issues.

"Chief executives are realists," says Beech. "They know that if a good part of their customer base or their strategic suppliers are aggressively going in a particular direction, they either have to be in line with that direction or have a bold enough vision to pull everyone back in their direction. So beware of thinking that this is solely an internal economic modeling exercise and decision It isn't. Much of it will hinge on what your customers and your strategic suppliers are doing."

E-market strategy and business strategy

The overall lesson is that an e-market strategy should not be created in a vacuum; it should take into account a broad range of business realities. The e-market is, after all, just one channel for buying and selling goods, and it should be coordinated with an overall e-channel strategy to ensure that the company is using the right electronic vehicles to reach specific customers and suppliers in the most effective way.

Executives should also be able to articulate why they are getting involved with an exchange -- what the company as a whole is going to get out of it. "We have seen repeated evidence that e-markets can significantly increase shareholder value," says Dik. His company uses an "e-markets strategy" framework that shows how e-market capabilities can drive a hierarchy of benefits to create overall shareholder value. [See diagram. page 14.] For example, expanded customer reach and dynamic pricing can lead to increased revenues and profits; self-service capabilities for customers and automated order entry can lead to reduced operating costs; and so forth.

"All of the major value levers can be influenced through e-markets," says Dik. Understanding the links between what e-markets can do and shareholder value can help executives identify where and how participation can pay off.

"Figure out what your strategic objectives are and how B2B plays into those objectives," advises Brandel "That helps you stage your priorities in terms of what you're going to do first. If you have a tentative hold on your customers and you're concerned about losing them, customer relationship management is going to be a more important part of your strategy If it's a matter of inventory, it's going to be more supply chain. So once you've figured out your top two or three priorities, you then go about mapping out how they fit into the market model as you understand it."

Starting with that larger business perspective is critical to an effective e-market strategy -- just as it is with any technology "The questions that should be asked are, What is my fundamental business? What is my business's value proposition to its customers, and to its shareholders? And how do we use this phenomenal tool that's just arrived to enable us to do business in a smarter, better, faster way?" says Karen Francis, president and CEO of ConsumerConnect, the e-commerce division of Ford Motor Company. (See story, page 12.)

Such advice may sound refreshingly familiar in a field that is otherwise marked by change and uncertainty. "You start creating a strategy by getting back to the basics of the business," says Copacino. "There's an opportunity to create efficiencies, to move into markets more quickly, to do processes more efficiently. So you determine what technology can help you do that. You determine whether you can afford it and if it's worth the time and effort. And if it is, you move forward."

                        B2B E-MARKETPLACE MODELS
Existing Company            Public
Private                     Independent
Exchange                    Trade Exchange
* Between a company and     * A start-up intermediary
  existing trading partner  * Often partnering with
* Limited access to the       existing industry players
  marketplace                 for liquidity
* Focuses on deep           * Focus to date on matching
  integration between         buyers and sellers,
  trading partners            expanding reach,
                              transparency
Existing Company
Private                     Industry
Exchange                    Consortium
* Between a company and     * A group of companies
  existing trading partner    in the same industry
* Limited access to the       join together
  marketplace               * Typically interested in
* Focuses on deep             bringing together all
  integration between         industry participants
  trading partners          * Focuses on improving
                              industry efficiencies
                      EVALUATING PRIVATE EXCHANGES
low                                  high
Potential Fit                        Strong Fit
* Able to absorb high initial        * Able to absorb high initial
costs                                costs
* Questionable value proposition     * Strong value proposition given
given                                supply
  lack of supply chain complexity      chain complexity
Weak Fit                             Potential Fit
* High start-up cost is barrier      * High start-up cost is barrier
* Questionable benefits if supply    * Supply chain complexity presents
  chain is basic                       potential for value creation
* Stronger fit with industry         * Will become stronger fit as
  Consortium or Independent            technology standards develop
  Market Exchanges                     and start-up costs decrease
Size of Company
Complexity of Supply Chain
SOURCE: ACCENTURE

[Graph omitted]

Work Against a Strategy

Hannele Rubin

Forget the Nasdaq and the depressing numbers in your own portfolio, says Karen Francis, president and CEO of ConsumerConnect, Ford Motor Company's e-commerce division. If you and your company shy away from the Internet in general, and e-markets in particular, because dot-coms are in the dumps, you're missing the boat -- and it's likely to cost you.

Rather than getting swept up in all the hype surrounding the New Economy, Francis says, focus on the core of what the Internet offers, because that hasn't changed -- and it can offer you a competitive advantage. The Internet and its online marketplaces provide businesses with unprecedented ways to make connections, gain access to information, find suppliers, implement efficiencies and get closer to customers.

"Out of the chute, some exchanges felt that because they had the technology, customers would just change to accommodate it. I don't think that's happening so much," she says, especially when the customers are major corporations. Francis believes that e-markets in general will become much more customized for individual companies' needs. "You might argue that it becomes a private exchange at some point, depending on your definition of private exchanges," she says. "But there's a way of serving mass markets and customizing the product ... and I think that's what exchanges need to think about."

All the same, Francis advises CEOs not to plunge in without good advice. If you think you can get a handle on the technology and keep abreast of developments while also running your company day to day, she adds, you're wrong.

Only a year or two ago, many senior executives "were suddenly thrown into making big, sometimes life-changing or company-changing decisions," Francis says, without having the expertise or experience to know how it was going to work. "The questions that were being asked were more about, How should we structure this? Whom should we partner with? What should we make an investment in?" Companies were eager not to be "too late to the dance" she adds, "and I'm not sure enough thought went into, fundamentally, What is this tool and how is it going to add value?"

That's not a question CEOs should answer alone -- or even with key corporate strategy people. "It's a question that everyone from the lowest-level person in the company all the way up to the highest should be thinking about," Francis explains. And as with any long-term investment, "you should have your team create and work against a long-term strategy for how your business should utilize the Internet."

"I think the smart team," she says, "is the one that's out there scouring for great technologies and great people who maybe just didn't have a long enough runway or enough customer base yet when the tornado hit."

Value Propositions in E-markets

What good are e-marketplaces? Ask Michael Efting, and he'll lay it out for you in clear value propositions. Efting, who has been involved in the launch of three e-markets, is now CEO of Quadrem, an independent, neutral online marketplace for buyers and suppliers of both products and value-added services in the mining, minerals and metals industry. The benefits he cites for Quadrem are applicable to almost any e-market.

The key value proposition to buyers, he says, is a significant reduction in procurement costs. Automating and streamlining procurement generally leads to three results:

1 Slimmer search costs. Quadrem's powerful search tools and catalogue content from some 4,000 suppliers enable participant companies to locate suppliers, qualify them, and select goods and services in minutes or hours instead of weeks and months.

2 Robust price negotiation capabilities. Online request-for-quotation and reverse-auction functions help to automate the price negotiation. Reporting tools help buyers recognize and leverage their buying power, effectively aggregating their demands to get a lower price.

3 Fast, accurate fulfillment. Automating fulfillment streamlines every step of the delivery. Electronic systems confirm an order and move it rapidly through the system, specifying freight information and channeling it down the appropriate logistical path, speeding up the physical movement of goods ordered.

As for sellers, says Efting, e-markets must provide a value that the sellers believe is greater than the cost of their participation. Several value propositions are unique to the supply side:

1 Stronger customer relationships. Sellers now have a direct electronic link to their customers. They're on the radar screens of a lot more buyers, with a private, secure connection.

2 Global reach. Sellers gain direct electronic access to those responsible for an industry's global spend. In Quadrem's case, this means some $60 billion to $70 billion annually.

3 Slimmer cost of doing business. Direct, online transactions reduce inefficient paperwork and eliminate errors. "Fulfillment errors can be costly:' says Efting, "when you're talking about delivering a shipment of shovels down a dirt road in central Australia:' Fewer errors means faster payment, hence reduced receivables and smarter cash flow.

4 Reduced inventory. When a company more efficiently aggregates its spend and uses more sophisticated procurement tools, it results in better inventory management, not only for buyers, but also for sellers. Buyers are able to project needs more accurately, and sellers no longer have to stock "just-in-case" inventory.

Molly Rose Teuke

Running Exchanges: Not for Novices

In 1999, after 25 years with International Rectifier (IR), a supplier of semiconductors, Derek Lidow realized that something was wrong with the way supply matched demand.

"I talked to customers about it, and they were coming to the same realization," says Lidow, who was IR's CEO for four years. "The industry was run on management and business paradigms created 40 to 50 years ago that no longer applied. You can't have a supply chain that takes weeks or months to adjust supplying an industry that is this large."

Moreover, electronics exchange entrepreneurs looking for IR to sign on "didn't get it," Lidow says. "They didn't realize that it was a far bigger problem to get the parts to the assembly lines every day than it was to haggle over prices." But as the CEO of a major semiconductor company, "I wasn't in the right position to establish these new paradigms. It had to be done by a neutral third party that worked for the benefit of both the customers and the suppliers," he says.

Lidow left IR to create iSuppli. As an exchange, iSuppli provides far more than an opportunity for buyers and sellers to meet in cyberspace. Operating in an estimated $200 billion electronics parts marketplace, the company moves more than 25 million electronics parts every week -- everything from chips to circuit boards, switches to transformers. It also provides a range of services for both buyers and suppliers that promise to, among other things, cut costs and delivery times; reduce management expenses and inventories; increase supply chain predictability; function without any warehouse markups, transaction fees or cash floats; and expedite payment (in multiple currencies, if necessary).

"Our systems are sophisticated and capable, staffed by people who have demonstrated huge success in running a similar scale of operations," Lidow says. They work to balance supply and demand. Building an exchange "is not for novices," he adds. "This is not a training opportunity. Businesses are depending on us. They want to know, can I trust you?"

When seeking e-market opportunities, Lidow advises company leaders to ask direct questions: How are you going to deliver tangible value to me? Reduce costs? Reduce assets? Make me a better, more informed manager? Show me the data. CEOs should approach e-deals with skepticism, but also understand that they may provide great potential benefits. "Don't write it off," Lidow adds, "but take the time to investigate."

Hannele Rubin

The Wisdom of Sharing Services

At their core, e-markets are about shared services, a concept that resonates with Hugh Morgan, CEO of WMC, a Melbourne, Australia-based minerals company with business interests in 19 countries. Morgan is at the helm of an operation that is the world's third-largest nickel producer; owns 40 percent of the world's largest alumina producer (Alcoa World Alumina and Chemicals); and is a major producer of copper, uranium, gold, fertilizer and talc. He prizes flexibility and efficiency in a rapidly changing business environment.

Morgan's IT team has led many internal e-market initiatives -- services shared online across the company's five divisions, a completely electronic relationship with its major copper customer, several material-specific transaction sites -- and their success, Morgan says, led naturally to the concept of industrywide shared services.

"Once you have a culture of sharing across business boundaries, you see prospects for other sorts of things that might be developed," says Morgan. "We started talking with other companies, and discovered they were also talking with each other, and it was out of this discovery that Quadrem was developed." Based in Dallas, Quadrem is an independent, neutral online marketplace for the mining, minerals and meals industry.

But at the core of shared service, whether internal or external, says Morgan, is a need for reliable information. "People take information almost for granted," he says, "but it's probably the most important foundation block for running a successful business. It seems so obvious, but in most corporations, good information doesn't just happen -- and it didn't happen with us."

In 1996, Morgan instituted WMC's Integrity Information Program. "The emphasis," he explains," "was to inculcate into the culture that anything -- absolutely anything -- anyone recorded was something that anyone in the company could rely upon as accurate. It meant reviewing all base data and developing information and reporting standards across five divisions. This was not an easy task, particularly for a company that had been rather casual in its culture about these issues. But we felt we had no option. This was critical to survival, let alone success, in a very competitive environment."

Morgan's concern with data integrity predated WMC's online exchange initiatives by several years, and turns out to have been visionary. "With no concept in mind about e-commerce, Internet manipulation, B2B or even Quadrem, we embarked upon a process that provided an essential building block for enabling us to enter into an e-commerce era more readily than any of our competition' he says.

But if an edge over the competition is critical, why support an e-market like Quadrem, which will benefit not just WMC, but its competitors? Because, he explains, it's an important tool in WMC's larger e-commerce strategy, and because neither WMC nor its competitors does business in a vacuum.

"In the long run," says Morgan, "almost all of these companies are competing against substitution -- not only between themselves, but more importantly, between alternative products. So there is a common interest for the whole group to lower their cost structure in order to remain competitive -- not against alternative metals, but against alternative materials. This is the common cause, the wisdom of using a common entity."

Molly Rose Teuke