Private exchanges pick up where the e-marketplace leaves off

The idea behind the public e-marketplace was to create a huge electronic meeting place where buyers and sellers could conduct business; vendors could find new customers; buyers could find bargains; and the enviable middleman takes a fee or a small percentage for every transaction. Although this did work to some degree and plenty of public marketplaces still populate the Internet, the initial vision and the eventual reality never quite matched up. In hindsight, the reasons seem obvious now.

Such an e-marketplace has a certain amount of anonymity inherent in it, which in many industries is not a good thing. Grif Palmer, Senior Vice President of Business Development at SourceXL, describes the scenario: "You're not interested in an anonymous universe of hundreds of vendors coming to sell to you. You can't do business with them anyway. You have to qualify them, you have to qualify their credit, their delivery, their time in business."

Obviously, this sort of due diligence isn't possible in the free-for-all envisioned by early proponents of public e-marketplaces. Also, the e-marketplace exhibits benefits in the context of a private exchange, but "there's typically pretty large upfront consulting fees and large licensed software fees, and deployment that can take three to 12 months," said Palmer. "In this economic environment, a lot of companies want to use a rapidly deployable solution like we're offering, and see immediate ROI and a hard dollar benefit." The private exchange still holds the promise of automation, cost-savings, and much more, but it often comes with high costs and complexity.

Palmer is, however, a strong advocate of private e-marketplaces and a provider of the technology to make them happen. Operating as an ASP, SourceXL provides a vertical private exchange solution that can be up and running in three to five days. Fortunately, the cost no longer has to be a major factor. "People know that reverse and forward auction is probably something they should be doing, but they're not sold into it to the tune of up to a $2 million investment. It's easy for them to come in with our business model, and try the technology for a few months and see what kind of results they derive." According to Palmer, every company that has signed to date has returned enough in the first 60 days to pay for their first full year of service. Because it's an ASP, users of SourceXL's private exchange technology don't have to worry about integration, there's no hardware or software to install and maintain, and training requirements are minimal.

Besides making the CIO happy by not wanting to spend a million dollars, the offering is also likely to make the IT department happy. "A lot of IT managers aren't crazy about giving a universe of user names and passwords to get behind their firewalls," said Palmer. "This is one of the applications that fits well outside the firewall. The users can go out, make the event happen, let everything happen on our system, then gather the data for the event and put it on their system." Being a hosted application removes the need to worry about participants getting behind the firewall.

Many of the larger corporations have already embraced private exchanges (most notably, in the automotive industry). The ASP model and quick ROI provided by companies like SourceXL will be the driving force that makes the private marketplace model more accessible to any enterprise.

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