No pain, no gain

Since public electronic marketplaces hit the scene two years ago, the behind-the-scenes integration work, bickering among industry rivals-turned-partners and other logistical headaches have illustrated how these electronic bazaars have been hard-pressed to emerge.

Even Pat Wildenburg, Delta Air Lines' president of business-to-business e-commerce, describes the company's push into the public marketplace arena as "painful and expensive."

The Cordiem LLC marketplace that Delta has been trying to build with other airlines and aircraft companies will ultimately require a massive shift in corporate business practices along with a hefty amount of systems integration work for IT departments.

Yet Wildenburg offers up a third word to describe the marketplace initiative: worthwhile. He estimates that by 2005, the Cordiem marketplace will save Delta US$40 million to $50 million per year, making these early growing pains a distant memory.

"I think people just totally underestimated the amount of effort, the amount of energy and the amount of investment required to build these exchanges," Wildenburg says. "These are serious businesses we're trying to build, and you can't do this sort of thing halfheartedly."

Perhaps more than anything, Wildenburg's statement sums up what went wrong with the online exchange concept. The business-to-business gospel as it was preached in the late '90s was that easily accessible Web marketplaces would drive cost and complexity out of corporate supply chains. But the reality is that the corporate landscape is dotted with a mishmash of technologies that make cost and complexity central components of any major new initiative.

That reality has been killing marketplaces off like flies in recent months. News that an electronic exchange has folded barely counts as news anymore. Yet Delta and many other corporations still believe enough in the ultimate payoff of the concept to suffer the extra time and work.

Michael Moriarty, an e-commerce consultant at A.T. Kearney Inc. in Chicago and co-author of Power Play: The Beginning of the Endgame in Net Markets (John Wiley & Sons, 2001), says early online marketplace efforts largely underestimated the amount of data they needed to push in order to alter corporate supply chain practices. He adds that companies didn't bother to figure scalability and fault tolerance into their business plans, never factoring in the IT complexity of how to handle thousands of concurrent users performing detailed transaction, engineering and product discovery work.

"You had these creative guys thinking up creative stuff that was way too creative for anybody to use," Moriarty says. "But a lot of them didn't have the bandwidth to handle the huge volumes they needed to stay in business."

Shrinkage

Big Five consultancy Booz Allen & Hamilton Inc. in Chicago estimated that there were 1,734 online marketplaces in 2000. After a brutal shakeout period, that number is expected to drop to 407 by 2004. With the economy in steep decline after Sept. 11, the pace of attrition has picked up considerably.

"Most marketplaces were put up by entrepreneurs who thought all they had to do was match up buyers and suppliers," says consultant Brian Long, who has been coordinating the Booz Allen work. "Yet standard products and services in a generic exchange are not what companies need. They're going to want customized solutions."

To that end, Booz Allen's study found that 55 percent of technology users customize the products they buy.

"Vanilla offerings will not survive; there has to be some type of value-added service if a marketplace wants to make itself attractive to the business community," Long says.

In general, auctions have been the first service offered in online marketplaces. Though it's hardly a business-transforming capability, an online auction is easy enough to set up and, if the marketplace has been founded by a consortium, the investors get a quick return for their money in the form of lower unit costs on the items they buy.

Wildenburg says Delta has experienced 8 percent to 12 percent savings on its line item costs using Washington-based Cordiem's auction tools and has even found new buyers when it auctions off older aircraft.

In order to standardize the use of those auctions, Delta will implement software from Rockville, Md.-based B2e Markets Inc., which will set business rules governing the way employees search for and negotiate with business partners in cyberspace.

"As you get more internal adoption for the marketplace, you have to formalize the ways your company uses those tools," Wildenburg says. For example, "maverick" purchases made by employees working outside a formal structure can undo the savings realized within it, he notes.

Kevin Cronin, global e-business director at engineered plastics manufacturer Ticona in Summit, N.J., a subsidiary of Celanese AG, says one of the trickiest things about marketplace ventures is that customers don't really know what they want, meaning that the companies trying to form marketplaces find themselves building amidst uncertainty.

Ticona joined with other plastics industry heavyweights to form Atlanta-based Omnexus, and Cronin says he sees the biggest value for the exchange as being a way to perform electronic transactions with smaller customers who never joined the electronic data interchange world.

According to Cronin, 98 percent of Ticona's orders are customized, and the transactions are much smaller than in the bulk materials world. Add 750 U.S. customers, 750 European customers and 3,000 SKUs and you've got a mammoth operation on your hands.

"And we're the little guys in the Omnexus consortium," he says. "So you can see why we're not really sure what to expect once everybody and their customers begin to operate in the marketplace."

One thing analysts agree on is that it will be the consortium-led exchanges that survive the economic hardships ahead and define marketplaces for the future. Yet big money and industry titans on your board of directors don't guarantee success.

Backed by Chevron Corp. and Texaco Inc., petroleum industry exchange PetroCosm Corp. in Houston gave up the ghost in September. Long says that PetroCosm spread itself too thin too fast while failing to provide a quick return for its investors.

Gale Daikoku, an analyst at Stamford, Conn.-based GartnerG2, says marketplaces need to act as industry clearinghouses, a virtual Switzerland where the superpowers of a given industry can meet. Electronic trading standards in particular strike her as a natural arena for an industry consortium to lead the charge. "Plus, if you're not developing standards then you're leaving the door open to competition," she says.

Moriarty agrees, saying those who set standards will be six to 12 months ahead of their competition. Yet he doesn't believe any group will be able to get much past data and invoicing standards. "When it comes to business process standards, you'll get a lot of people who forgot to come to the meeting and who won't support the standards even if they get adopted," he says. "There's just too many companies that view process as a competitive advantage."

Analysts believe the next year will be little more than a feeling-out period. Some marketplaces will gain momentum, but corporate users likely won't commit to big-dollar spending.

Regardless, major players still hold high expectations for public marketplaces. Wildenburg says maintenance is one area where Delta might see a boost in use on Cordiem. The airline is installing an SAP enterprise resource planning module that will allow its worldwide maintenance operations to leverage a single buying tool like Cordiem.

Cronin says he hopes that in the future, Omnexus can provide a forum where Ticona engineers can work with customers online.

To Moriarty, many exchanges are proving they can do things "exceptionally cheaply" and now must prove they can also do things "exceptionally well."

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