Reality Check for E-Markets

BOSTON (06/05/2000) - Electronic markets, or business-to-business exchanges for selling goods and services online, have been exploding in number during the past several months. Hundreds have been launched to support players in the automotive, chemicals, retail and other industries, with an eye toward using their collective buying clout to get supplies more cheaply and quickly.

Suppliers, too, stand to save money via the streamlined, all-electronic procurement process.

But despite the promises e-markets offer, they face major obstacles before they can be branded successful.

Among the obstacles are having information technology staffs stuck in megaproject mode for e-market rollouts more akin to giant enterprise resource planning (ERP) system efforts, inducing suppliers to use the exchanges and working through big technology integration issues with all members of the exchange.

Then there are potentially big legal potholes - namely, antitrust violations - that experts say may be inherent in doing this sort of business online. The U.S. Federal Trade Commission (FTC) has scheduled a meeting June 29 in Washington to discuss concerns such as whether owners of major e-markets may be able to shut out smaller competing exchanges or if the electronic open-bid process may lead to illegal price signaling.

E-markets are generating more questions than transactions right now.

"We're definitely at the stage in this whole thing that people keep inventing as they move along. And some are better inventors than others," says Vernon Keenan, president of Keenan Vision Inc., a San Francisco-based researcher.

Obsolete approaches to IT are also stalling many e-markets, says Kevin Costello, managing partner of the digital markets practice at Arthur Andersen LLP in Atlanta. "Landing three busloads of consultants in a building and setting them up for two years is not a winning proposition," he says. "This isn't ERP." IT managers, he says, should instead plan short, intense project bursts of just a few months, tops.

That's the way it worked at FuelQuest Inc., a Houston-based petroleum exchange.

The company chose software - mainly from Oracle Corp. - and didn't look back, says Rich Cilento, president and CEO of FuelQuest, which is due to go live Aug.

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FuelQuest is aimed at marketers of gas and other fuels - companies that, for example, deliver to gas stations and such big commercial users as Dow Chemical Co. At FuelQuest, petroleum marketers will be able to order fuel, arrange delivery and take care of electronic invoicing and other logistics. Fifteen companies have signed up so far.

Before joining FuelQuest in Stamford, Connecticut, Cilento founded a company called The Bollard Group, which installed technology for investment bankers. He also did an IT management stint at Xerox Corp. and helped rebuild the mission control system at NASA.

That kind of heavy-duty technology background is something many e-market CEOs don't have but need, says Chris Silva, an analyst at International Data Corp. in Framingham, Massachusetts.

"A lot of the marketplaces out there now are leaning on the content side, but that won't get them far," Silva says.

For example, ManufacturingCentral.net, which is overseen by the National Association of Manufacturers, a trade group in Washington, doesn't conduct transactions yet; it's in the middle of installing the technology infrastructure to do so. Active buying and selling is expected late this year.

In the meantime, it provides industry news and community chat space.

Another problem for owners and operators of e-markets is muscling suppliers onto the exchange. Small and midsize suppliers, in particular, often don't have the IT infrastructure needed to participate in e-markets; some have almost no computer systems at all. Costello advises e-market owners to pay for any new gear that suppliers need. Owners should also pay for consultants - or lend their own IT people - to install it. This will help smooth political feathers and coax suppliers to participate, he says. Plus, it will help make the exchange successful, or more "liquid," with many buyers and sellers.

Meanwhile, exchange owners must overcome other political issues. Most critical, says Keenan, is explaining just how the new electronic process benefits suppliers. "If exchange ownership is dominated by buyers only, then this is merely a year 2000 update to the decades-old practice of squeezing the supply chain," he says.

For example, Covisint, the e-marketplace owned by the Big Three automakers, will have a tough time convincing suppliers to use the site, Keenan says. "If it's just a way to get competitors to reveal their pricing, there's not much value in it for suppliers," he says. Indeed, in a countermove, six major auto parts suppliers, including Delphi Automotive Systems Corp. and TRW Inc., recently announced their own e-market. It's expected to go live this year.

Vital to any exchange will be the cooperation of companies that are otherwise fierce rivals. For example, exchange owners will have to share proprietary pricing and other information that they have historically been reluctant to share with competitors.

Several experts suggest appointing alliance managers from both the business side and IT. Both should be well-versed in antitrust law, because the FTC and the U.S. Department of Justice are scrutinizing e-markets.

"Anytime there is some kind of purchasing joint venture among competitors, it has the potential to raise antitrust issues," says Susan DeSanti, director of policy planning at the FTC in Washington. In particular, the FTC will look for signs of illegal cooperation at exchanges created by companies that clearly dominate a given market, DeSanti says. "We will ask, ‘Is this an exercise of market power that will have an impact on competition?'"Perhaps the most critical question for IT is whether the technology itself will exacerbate antitrust problems.

Here's one scenario: Buyer A wants 2 tons of iron and posts a proposal at an online exchange. A supplier bids on the business. The supplier's competitors see the bid and undercut it. The process continues, with the price for the iron eventually settling at the lowest point the suppliers are willing to go. Buyer A buys. Buyer B, also in the market for iron, watches the action and now knows roughly how the bidding will go. So, too, do the suppliers.

Ultimately, the suppliers become cautious, not necessarily rushing to offer cut-to-the-bone pricing just to win business. They watch what everybody else does, taking advantage of this new electronic window into a process that used to be done more discreetly with paper, phones and personal meetings.

The suppliers can now interpret the bids and adjust theirs accordingly.

This sort of price signaling may seem like smart business, but it violates antitrust laws. And yet it may be a natural outgrowth of e-market technology.

"The same potential is there in all of these exchanges, where it's not explicit, but implicit, that you're cooperating," says Mark Plotkin, an antitrust lawyer at Covington & Burling in Washington.

Another potential problem is exchanges like Covisint that are formed by an industry's top players. By coming together in such ventures, these firms may seem to present an overaggressive, "do this or else" posture to their suppliers and stifle competition from less powerful rivals.

That's part of what the FTC wants to uncover. The agency is already investigating Covisint, which is due to launch late this year. "Because of the technological differences with these kinds of marketplaces, as opposed to physical marketplaces, they may raise some new [antitrust] questions we haven't thought of before," DeSanti says.

Ford Motor Co. CIO James Yost says he's trying to guard against breaking antitrust laws. For example, Covisint plans to ensure that no member owns a bigger share of the new company than any other member, he says. "The key," Yost says, "is creating [the marketplace] as its own entity. It can't be tied back to any of the owners."

Ducking the Feds

Now that mortal enemies are pledging to work together through Internet exchanges, the potential for them to act anticompetitively is ripe.

Yet popular vendors of e-market software, such as Oracle, Ariba Inc. and Commerce One Inc., haven't built any functions into their products to guard against antitrust problems, says Mark Plotkin, an antitrust lawyer at Covington & Burling.

"This wasn't on their radar screen when they developed the software," he says.

But IT managers can configure and customize exchange software to help avoid having federal enforcers swoop in.

To protect against unintentional cooperation in setting prices, Plotkin and other experts recommend generating code names or numbers to disguise members' identities during the bidding process. Also, don't forget to shield from public view other identifying data, such as location of the bidder or origin or destination of the product being bought.

For instance, if your big agricultural competitor is in Austin and you see that 1 million bushels of apples are coming from Austin after a request for proposal, the math is pretty easy to do.

To ensure that all exchange members get equal access to potential business, experts also suggest posting bids immediately to let other bidders react quickly. That way, they are less likely to claim they were shut out of a potential deal.

To avoid the appearance of collusion, chat rooms should be monitored. This is tough because even innocent conversation can spark antitrust trouble, Plotkin says. IT organizations for exchanges should also create and post automated reminders of what is acceptable chat and what isn't, he says.

Plotkin gives an example: "Imagine the Vermont dairy farmers. Someone posts, ‘I was the one who supplied milk to Ben and Jerry's, at 67 cents per gallon. I'm pretty sure we can get at least 75 cents if we all agree.' That's inappropriate," he says.

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