Exchanges must retool

As companies continue to pass over public exchanges in favor of private marketplaces, exchanges must evolve into service providers offering tailored, value-added services to survive in the business-to-business domain, according to analysts.

Dell Computer Corp.'s public exchange, based in Round Rock, Texas, last week became the latest casualty in a long line of exchange failures. Such ventures are discovering that potential participants are not willing to support them solely as transaction intermediaries.

As a result, many exchanges are beginning to mould themselves into software providers; those that do survive intact must focus on supporting new product development, supply-chain planning, and other value-added services.

John Fontanella, an analyst at AMR Research Inc. in Boston, compares public b-to-b trading exchanges to foot soldiers in a war against brick-and-mortar armies.

"They attacked the fortress of brick-and-mortars but were soundly defeated," Fontanella said. "They're starting to take on a lot of the attributes of best-of-breed software vendors. A lot of these exchanges had pretty cool technology. I see brick-and-mortars in some cases buying exchanges for the technology."

As the hype surrounding public exchanges has faded, so has the interest of potential enterprise customers now opting to deploy private marketplaces. Ariba Inc., based in Mountain View, Calif., announced this week an updated version of its sourcing product which is geared to meet the rapidly growing market of companies deploying private marketplaces for direct and indirect buys.

FreeMarkets Inc., the Pittsburgh, Pennslyvania-based company that has carved out a successful niche with its global b-to-b marketplace for online auctions, will announce this week a new self-service solution that will allow companies to launch their own private marketplaces.

In addition, the company announced last week that it plans to purchase Adexa, a Los Angeles-based collaborative supply-chain commerce company, whereby FreeMarkets hopes to extend its sourcing offering into supply-chain collaboration and optimization. The goal is to provide an end-to-end e-commerce solution for direct materials procurement, company officials said.

"A private marketplace is a very effective way to give them what they want and to combine [solutions] where it makes sense, while not forcing them all to act the same way," said Chris Gormley, FreeMarkets' director of product management.

If public exchanges are to survive, they must offer services to support all participants, said Philipp Jung, principal at AT Kearney, a Chicago-based consultancy that completed a study last month on high-tech exchanges.

For example, exchanges targeting larger suppliers and OEMs should offer supply-chain planning and product design services, whereas those targeting smaller OEMs should offer value-added services such as inventory stocking credit and financing, Jung said. The successful public exchanges must also offer services, such as privacy from competitors, that have traditionally been found only in private exchanges, he added.

"Having private exchange capabilities is something that is being valued," Jung said. "Think about it like [America Online] chat rooms. Exchange participants are coming together, but they have the opportunity to go into a private chat room with other participants."

Dwight Klappich, an analyst at Meta Group Inc., based in Stamford, Conn., said successful public exchanges will offer highly specialized services such as global trade management. An exchange could, for example, maintain a database with updated regulatory information that would affect import or export operations, Klappich said. "It's really [offering] access to information that would be hard for other people to get," he said.

Exchanges could also develop other capabilities, such as combining shipping services with aggregated buyer demand to meet the challenge of multiple shipping contracts, Klappich said.

Less than a year after its ambitious launch, Dell Marketplace, the cutting edge business-to-business e-commerce community from Dell Computer, has been shut down, according to Ken Bissell, a spokesman for Dell.

"What we've done is take a directional change," Bissell explained. "We changed the direction to be more of a facilitator and provider of technology to enable companies" to create their own e-commerce operations. Dell will continue to offer servers bundled with the technology that made the Dell Marketplace possible.

Customers using Dell Marketplace had been able to buy or authorize other buyers to procure commodities, such as office supplies and computer peripherals, from third-party vendors.

Customers had access to the entire catalogue of merchandise from Mountain View, Calif.-based Ariba. At a later date, Dell had intended to ramp up the service level of the Marketplace, giving suppliers the option to create their own virtual showrooms of goods and services using technology from Austin, Texas-based Exterprise.

The Dell Marketplace also used technology from Lante, an Atlanta-based Internet consulting firm that specializes in the creation of e-markets.

Most of these core technology components of the marketplace will remain available from Dell, but will now ship with the company's Microsoft-based servers.

Kneko Burney, the manager of market and opportunity studies at Cahners In-Stat Group, a Scottsdale, Ariz.-based industry think tank, said that for now, services such as the Dell Marketplace may be relegated to private, b-to-b relationships. "This model will work if a company like Ford says to its suppliers, 'Look, you have to use this' " Burney said.

In order to survive, b-to-b exchanges must move fast to provide the value-added services users demand.

* Product-design services

* Supply-chain planning features such as demand forecasting* Exclusive trading information* Logistics* Transportation* "Partitioning" capabilities that allow separate interactions while on an exchange

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