How Will E-Hubs Transform Your Business?

INTERNET EXCHANGES BRING buyers and sellers together, enabling companies to reduce costs and share knowledge. But will competitors be able to cooperate effectively?

In recent months, it has become clear that much of the payoff of electronic commerce will come not from online retailing, but from business-to-business trade. And as that reality has hit home, a great deal of discussion, prediction, and concern has centered on the rapidly emerging Internet exchanges that make it easy for companies to buy and sell online.

The basic exchange formula is compelling: Bring many buyers and sellers together, and use the tools of e-commerce to let them trade in a nearly frictionless manner. The goal: Reduce the costs of goods and transactions, put new trading partners in touch with one another, and, many observers say, draw on the resulting collective knowledge to continuously hone processes and practices for all participants.

Not surprisingly, exchanges are proliferating, and they can now be found in industries ranging from auto manufacturing to steel and chemicals. By 2005, we will see more than $6 trillion in online B2B trade, up from $336 billion today, according to Jupiter Communications. More than one-third of that commerce will be conducted through marketplaces that link many buyers and sellers, Jupiter notes.

But many questions remain: Which types of exchange will thrive--or even survive--in the coming months and years? How should companies approach the exchange world? Can competitors cooperate effectively online? And what will work and what won't work for a given company? As the discussion in this roundtable shows, CEOs are paying close attention to the search for answers.

Most observers agree that in time, such issues will be addressed--and that exchanges will fundamentally change the way companies communicate and interact. As Jupiter reports, such Net markets "can completely disrupt current channels and alter how companies and industries conduct business." The overarching questions for CEOs then, are when and how this revolution will take place--and what they can do to best take advantage of it.

The Emerging Landscape

Stephen Sprinkle (Deloitte Consulting): There are maybe 1,200 to 1,500 exchanges in existence right now; that might expand to 5,000, and our guess is it will then collapse to something under 1,000. Some exchanges are independent or supported by independent parties. Some are going to be run by consortiums of very powerful buyers. There are vertical exchanges that are industry-specific or commodity-specific and tend to focus on high volumes of basic raw material or components for somebody else's product. Horizontal exchanges are intended to be used for the procurement of all sorts of things that a corporation needs--PCs, copiers, paper, pens, pencils, janitorial services. Both types of exchanges are growing, and some may become dependent on another--a vertical exchange might outsource a service to a horizontal exchange to service its members.

You may look at all this and say to yourself, "Why go through the trouble of even dealing with it?" The answer is that there's no way to avoid it. This stuff has a lot of promise. It's one of these things that you will either get good at and increase market share and reduce your cost profile, or your competitors will. So sitting still is not an option.

Farooq Kathwari (Ethan Allen Interiors): When we look at the Internet, we ask ourselves, "How will it help us make our business simpler, both in terms of the selling side and the buying side?" Exchanges in our industry are still at a very, very immature level. So for us the Internet so far has been used more in simplifying our process of selling through our stores. On the buying side, we have been struggling. As time goes by, we'll get more experience. But the issue will still be, is it something that is going to make things simpler?

Jacques Leviant (ICD): We are in the chemical business, the metal business, the lumber business, and several commodity areas, and we are now just entering into the Internet world. We have had Web sites and things of that sort, but now we've organized and set up an Internet company where some of our suppliers and customers will come together. So I'm interested to find out more about what we can expect and how these things work.

Camm Morton (Konover Property Trust): It seems to me that the exchanges ultimately provide the opportunity for the small to midsize retailer to actually begin to compete with a Kmart because of aggregation and being able to find the supplier who needs another 10 percent to run at 100 percent. These are the things that will help the consumer ultimately get a cheaper price.

Doug McCracken [Deloitte Consulting]: This is an area that's changing very fast and will evolve very quickly, and we're right in the middle of it. The B2B purchasing cost savings are important, but I think the supply-chain efficiency and effectiveness impacts on global business will be profound. That's where the real value will be.

Debra Richman (Besthalf.com): One of Besthalf's equity partners is Service Corporation International, which is the world's largest funeral-services provider. It does business in 20 countries and has funeral homes and cemeteries. That whole industry is going online, and there is the emergence of "death dot-com" companies who probably knock on SCI's door several times a week. SCI clearly is the market leader, so the issue of whether SCI is better off doing its own exchange has come up.

Sprinkle: We have done surveys over the years on users' satisfaction with different kinds of computer applications, and it almost always turned out in prior generations of applications that the benefits achieved and the desirability of the application were somewhat less than the expectations set up front. But we just saw a change. In our survey data on electronic procurement, users' satisfaction actually exceeds what their expectations were before they got their hands on it. This is the first class of application where typical users actually have a better time using it than they expected.

Jeffrey Kaufman (Cirqit.com): The printing industry is a large, highly fragmented industry. What we have done in essence is set up private exchanges. This is not a portal. It's not public exchanges. The first thing the buying organizations have said to us is that they're not interested initially in being able to reach out to additional supply-chain providers. At this stage, they're interested in creating process improvement with the current supply chain providers. That's really the holy grail--creating an e-chain.

Michael Levin (e-STEEL): The original notion of an exchange was somebody putting something up for sale and somebody else buying it, and that was the end. The fact is, that type of transaction is not where the early traction in these sites comes from. My own expectation was that it would be, for example, some steel mill in Turkmenistan needing to find a customer in Ethiopia, and finding them via the Web. That doesn't seem to be happening. We find that the early adopters are precisely what you would not expect: U.S. Steel to Ford. Why would U.S. Steel need us to deal with Ford when it already knows Ford? The answer is that the whole value chain has a lot more waste in it than people suspect. So going on the exchange and saving $5 per ton on your steel purchase is not as important as taking 30 or 40 or 50 percent out of your costs in that value chain.

Thomas Rogers (PRIMEDIA): Exchanges have dominated the story of B2B Internet applications, but it seems to me that the number of people in any given company that actually touches the procurement process is a very small fraction of the number of people engaged in the overall enterprise.

Sprinkle: It depends what categories you're talking about. If you include all your indirect [purchases] it could be pretty broad. If you're doing just direct material, it will be pretty much the procurement professionals. But if you do all your indirects, it could include any place you have an office location, any place in the world, depending on what you let people buy.

Levin: Also, think of the guy at a steel company who's deciding how to schedule the mill. He now has a lot more information about what's going on. He can say, "Why don't we take another X amount of tons of that order because then it's a full heat size?" Everyone in the whole production process can go to the Web site and look at the virtual purchase order, and you can maximize production scheduling, inventory, and shipping. This touches many, many people.

Richard Ambrose (ASRC Aerospace): We have instituted what we call a private exchange across all of our subsidiaries to reduce infrastructure. Employees access it to find out vacation days, find out certain benefit changes, and do all their time-keeping. Testing has shown that we've reduced our infrastructure needs by upwards of 25 to 30 percent across all the companies.

Allen Mebane (Unifi): I have a couple of comments about the whole thing, being from a dinosaur industry. [Laughter] Time is money, and we don't have time in business any longer. The reason for e-commerce is really time, in my opinion. So my salesmen will no longer be selling a product--they will be presenting new ideas to people about how they can make money, rather than saying, "This is my product and this is my price." In our case were putting up our own e-trade system, rather than being with a group of people, simply because we have a 70 to 75 percent market share. We don't want to share that market share with everybody, and have them trying to pick it off.

J.P. Donlon (CE): Wouldn't you want to put your e-procurement on some sort of exchange basis?

Mebane: I would hope not. We have four primary suppliers in the U.S., and others around the world, and the volume that we buy gives us a preferred position with those suppliers.

Levin: When you look at a global environment in which people have to interconnect, even if it's only a small percentage of the time, you need a common platform for the savings and to get outside the enterprise. We do find people who want that platform, but, like Allen, they don't want to share their base. So where necessary, we're having what we calling an "E-Steel branded site." What we would do is have a general site, but also sell your company a branded site where you could link to the main site but allow your customers access only to you. It's a private branded site. But the important thing is that you don't want this to become an enterprise-by-enterprise approach, because then you get into a Betamax-VHS situation, which would be very bad.

Jeff Conklin (TradeAccess): We sell to both e-marketplaces and enterprises, and it really comes down to two dimensions of value. One is the process costs, which you can break into six types of activity: Searching for information, evaluating it, negotiating, documenting, tracking, and reporting. What we've seen so far in e-commerce technology, whether it's deployed at the enterprise level or in an e-marketplace, has been largely focused on those first two categories. So the cost-saving upside is really yet to be realized in most cases.

The second dimension is time. How long does it take to negotiate the master purchase agreement? We know today that that is three months. Or how long does it take to negotiate a letter of credit, which is four to six weeks on average in most industries?

So there's plenty of time savings that can be brought to bear. The choice of exchange or e-marketplace vs. an enterprise-based implementation comes down to which presents the better time savings and process-cost savings.

The Challenges

Sprinkle: AMR says that if you're a $500 million business, and if you do the right things with the right exchanges, you should be able to get an extra $16.5 million net income. Having said that, I'd also say exchanges aren't easy and they're nowhere near done. There's a lot of work to do. If you look at the whole broad reach of them, they probably have about 18 months of work to do on governance, process design, organizational development, technology integration, and marketing.

Levin: I think one of the things to emphasize is neutrality. You can have a buyer-focused model, a seller-focused model or a neutral inrermediary. I think it is very difficult for these bricks-and-mortar companies to actually fulfill their promise [in the exchange arena]. They have the governance issues on the sell side. They have the monopoly issues and competition issues on the buy side. And they have vastly different vested interests. Can you imagine companies like GM and Ford, where the very fabric of their being is to compete against each other and now they're going to be put on cooperative teams to develop joint solutions? It's very, very difficult.

Sprinkle: Some of you may know how hard it is to redesign your business process for performance improvement. Imagine how hard it would be when you're going to do it across multiple companies. In some of these exchanges, it actually requires the creation of a common vision among direct competitors across multiple companies. There are also chances for all sorts of business conflicts to come up between channel partners, competitors, and customers.

Donlon: It sounds like it's not just the technology; it's also things like trust. Kathy, was that ever an issue at Brandwise in terms of the apparent conflict between where the revenue was coming from and the neutrality in reviewing products?

Kathy Misunas (Brandwise): We didn't have a big issue with that for a few reasons. One is that we were very open about what our revenue streams were. And the second thing was that our testing was as done by an independent test lab; therefore, it was brand-neutral, manufacturer-neutral. One of our funders was Whirlpool, and one of our product categories was major appliances. So when we were trying to get information from Maytag and Amana and Fridgidaire, [they said] "Why would I give you information if you're just going to treat Whirlpool better?"

So it was up to us to explain that the testing had nothing to do with Whirlpool. Whirlpool knows that there's nothing that they can do from a governance standpoint to change the results. And as soon as the Web site came out and those other manufacturers saw that Whirlpool wasn't preferenced in any way, there was not another conversation about that.

Morton: It's easy to think that the first industrial revolution happened without its bumps and that we just kind of got here. Ultimately, the Internet will be just a part of the fabric of how we do business. We all have to figure out how to do business more efficiently. If you look at the textile and apparel supply chain for example, it's about a $200-billion-a-year business in this country, with about $64 billion lost in the supply chain--and that doesn't really include stuff that people might have bought if it was in the right place at the right time. About $40 billion winds up in big discounts from the original retail price because the inventory was in the wrong place at the wrong time.

Sprinkle: There's a critical piece of information that an exchange could theoretically provide. Most enterprises know what they sold. But they don't know what they've lost. Exchanges could provide much better information on the demand that existed that you failed to rake advantage of, which would be very useful.

Levin: Somebody said the other day the new new thing is the old old thing--you have to make profits with these exchanges. The idea of putting together a business plan and being guaranteed $10 million of funding--those days are finished. You have to have the right business model. You have to have the right management team. There are a number of dot-corn companies out there today that are dying as we talk. I think it's an implementation game, like a lot of real businesses. It's real work. We have to satisfy the customers every single day. We have to customize solutions. We have to find new ways to create value. We have to show people how it's going to really affect their bottom line.

Making the Move

Donlon: What kind of strategies should companies consider in dealing with the exchange world?

Misunas: There's so much information on the exchange that the constituents can learn from. [Exchanges] are gathering data--just by the act of being there. That data is important and valuable, whether for marketing efforts, future production efforts, or whatever is really critical to a company.

Arnie Pollard (CE): Yes, buying commodities in an exchange is probably a pretty good idea. But if you have a differentiated product, and most of us do, how do you design in that differentiation? You have to have customized design and work closely with your suppliers to make it work. Are exchanges the place to go for that kind of differentiating support?

Levin: Let me give you an example. We made our deal with Ford. We're expecting that it will be replicable over the other car companies, and that GM and Chrysler will sign up as well. So you might say, "Why would they do that?" The answer is this: Ford may decide that V-8 engines and two door cars and "vroom-vroom" [performance] are key to sales in the future. GM, on the other hand, may decide that it's an efficiency company or a customer satisfaction company, and that becomes their business strategy. What the exchange does is narrow the difference in the two companies' manufacturing costs. But the differences between those companies in terms of their faces to consumers is still going to be based on their business strategy.

McCracken: But if you're going to build a new engine with a new type of steel alloy or steel aluminum, would you want to purchase that through an exchange or would you want to work with a supplier discreetly?

Barry Perry (Engelhard): I've told our people that if you can express the product that you're selling by a standard spec, you had better either learn to use the Internet or change the product. I look at the decision about going to a site as being a tactical one. I think the strategy is embedded in what your channels to market are going to be, and one of those channels may very well be the Internet, another may be agents, another may be distributors, another direct. So our focus is not so much on that tactical value as much as it is on how we can use the Internet across the processes of the business--and I don't mean just the fulfillment process--to add value.

Clifford Boro (Internet Financial Network): What's the status of EDT in this whole new world?

Perry: We started there--I was dealing with EDI back when I was with GE selling to Kmart. But I think EDT is just slowing dying. There's so much more capability with the Internet.

Sprinkle: EDI's disadvantage is the proprietary protocols, which have tended to differ by industry segment, and the high cost for the amount of information you're transmitting. In theory, the great advantage is a high degree of security. The disadvantage compared to the Internet is less security because in theory somebody could break through, although I don't know of an instance of it happening yet in a B2B environment.

Conklin: I'll give you an analogy: SWIFT, the interbank funds transfer network, is 128-bit cryptic network. That means it has the same level of encryption as a 128-bit browser that you can download for free from Netscape or Microsoft. The Commerce Department, I believe it was about a year ago now, upped the standards for export of 128-bit encrypted browsers to financial institutions worldwide without an export license. So there may even be Swift-processed transactions [moving] off of that expensive network and onto the Internet because it's the same level of security at far lower cost.

Delivering on Promise

Donlon: Overall, do you believe that the B2B marketplace will fulfill its promise? And do you see yourselves being a significant beneficiary of all this?

Perry: The speed at which we realize that promise may be partially impeded by one of the problems we've seen. Our customers can order online. Often, they order and then phone to make sure the order's gone through the system--which means it's an added cost, not a cost reduction. But these people are all gray-haired and balding, as I am. [Laughter] I presume that at some point they're going to go into the sunset, and then people like my children will make those decisions and will get on with it.

Guy De Coninck (Schott): We are a manufacturer of special glass, and beside Web pages and e-mail we don't do a lot a with e-commerce. But we are pushed by most of our customers--like GE which is doing a lot of auctions--and we want to learn more about this vehicle and how to make the best use of it.

Conklin: If you look at economic activity in any developed economy, on average about 80 percent of commercial transactions are in the manufacturing and wholesale trade and direct goods or production goods categories. What we've seen happen so far has largely been limited to the other 20 percent, which is the desktop procurement stuff. So it's really only just beginning. We stand to benefit handsomely from what's coming and what's coming is going to be less expensive, faster, better, and cheaper than any prior technology solution that's been available.

Levin: I was at a B2B conference recently. They asked everybody to plot on a scale of zero to 10 where they thought their company was in terms of fulfilling its promise. No one in the room put himself ahead of 20 percent of the [potential] value. So I agree that this is very early. Take away the greed hype, get back down to where the performance is, and we're just at the beginning of something that's going to be exceptionally important.

Boro: We're in the business of curing the ills of information overload, and I think all of this is going to be another major stream of information that we process. So I'm bullish on this for the economy and for my company's chances of participating in it.

Misunas: I'm a believer. The Internet is a tool and just like any tool, it will be perfected over time. It will get better and better, whether it's B2B, B2C, or whatever.

Richman: I think that the Internet does not stand alone. As technology becomes more and more part of our lives and how we do business, we will wonder--maybe even in only 12 or 24 months--why we'd sit here and talk about the Internet as if it's a special phenomenon. It will just be part of how we do business.

Ambrose: We've already received net gain from the buyer perspective in exchanges, and as we migrate over to a commercial product side, I don't think that we're going to go backwards. It's going to be like the telephone system--it's just going to be there. And I believe that we're going to be relying on e-commerce to satisfy our long-term strategic plan.

Rogers: I think this is all going to move in a direction that is valuable for decision making well beyond procurement. We haven't really begun to see anything come onto the market yet that effectively captures how this medium can really take day-to-day decision making for all levels of employees, in finance, legal, marketing, etc., and turn the normal internal processes of the corporation into something that's far more efficient and productive. There are still many chapters of this to be written.

A Who's Who Of Roundtable Participants

Richard E. Ambrose is president and chief executive of Greenbelt, MD-based ASRC Aerospace a subsidiary of $888 million oil and gas services provider Arctic Slope Regional.

Clifford T. Boro is chairman and chief executive of NY-based Internet Financial Network, an Internet and online content provider.

Jeff Conklin is chief executive of Cambridge, MA-based TradeAccess, a provider of negotiation technology.

Guy P. De Coninck is vice chairman, president, and chief executive of Yonkers, NY-based Schott Corp., a $380 million maker and distributor of industrial and technical glass.

Farooq Kathwari is chairman, president, and chief executive of Danbury, CT-based Ethan Allen Interiors, a $762 million home furnishing products manufacturer and retailer.

Jeffrey Kaufman is president, chief executive, and founding partner of Whippany, NJ-based Cirquit.com, a dot-com focused on streamlining the enterprise business communications process over the Internet.

Jacques Leviant is chairman of NY-based ICD, a $300 million wholesale chemicals and plastics products manufacturer.

Michael Levin is chairman of NY-based e-STEEL, an online steel brokerage firm.

Douglas M. McCracken is chief executive of NY-based Deloitte Consulting, one of the world's leading e-business consulting firms, with revenues of $5.05 billion.

G. Allen Mebane is chairman of Greensboro, NC-based UNIFI. a $1.2 billion polyester and nylon yarn manufacturer.

Kathy Misunas is chief executive of the recently defunct NY-based Brandwise LLC, a provider of online comparison shopping.

C. Cammack Morton is president and chief executive of Cary, NC-based Konover Property Trust, a $500 million real estate investment trust company.

Barry W. Perry is president and COO of Iselin, NJ-based Engelhard Corporation, a $4 billion specialty chemical maker.

Debra Richman is president and chief executive of NY-based Besthalf.com, an Internet portal that focuses on the online senior market.

Thomas S. Rogers is chairman and chief executive of NY-based PRIMEDIA, a $1.7 billion consumer and trade magazine publisher.

Stephen Sprinkle is global director of strategy, innovation, and eminence of Deloitte Consulting, one of the worlds leading e-business consulting firms, with revenues of $5.05 billion.