Shakeout will Benefit Buyers and Suppliers

SAN MATEO (06/05/2000) - In the last year or so more than 600 new trading (or digital) exchanges have sprung up. This huge number of exchange start-ups will undoubtedly lead to some shrinkage in the coming year, as there are now too many players in the marketplace.

There will most certainly be a large number of bankruptcies and mergers and acquisitions in the exchange sector. A recent report by AMR Research Inc.

( highlights some of the issues surrounding this changing marketplace.

It is an especially difficult time for business leaders who may be evaluating one or more of these exchanges as a more efficient method of handling distribution or procurement processes. How do you know that your selected exchange will be around tomorrow? The conclusions discussed in AMR's report provide some sage advice for those examining exchanges, and I agree with the outcomes described in the report.

One real eye-opening differentiator can be found by examining the level of integration supported by the exchange. Are they merely supporting data-or file-level exchange?

In order to gain a cost advantage, you'll need to integrate distribution and procurement processes at the application layer. Exchanges need to support application-layer integration with ERP (enterprise resource planning), CRM (customer relationship management), and supply-chain management systems. Many exchanges are jumping on the enterprise application integration bandwagon, but those that aren't should be avoided.

Despite all the recent hype, exchanges are having a difficult time making money. In fact, many have not made any revenue at all from transactions and instead rely on revenue from advertisements. If you weren't convinced before, the lack of revenue will certainly lead to the consolidation of exchanges.

Changing market conditions for exchanges also bring the element of new partnerships that may or may not benefit your company. Exchanges are finding it increasingly necessary to offer exclusive arrangements to certain suppliers or special deals for buyers who use only their services. But these may limit your choices and potential cost savings.

Suppliers in particular have a bone to pick with exchanges. The fees needed to support exchange transactions have often shifted to the suppliers. The exchanges have provided good sales and marketing opportunities for suppliers at a reduced price, but the suppliers still have to manage all other aspects of the transaction. Thus, this year you should expect to see a large number of suppliers start exchanges of their own.

Finally, expect some compression among exchange start-ups and established brick-and-mortar distributors. The exchanges have the technology to improve distribution processes, while the distributors have the execution of the processes well in hand. The two groups will naturally align.

The AMR report concludes that buyers should demand strong process support and application-level integration. Additional recommendations include bargaining hard for pricing, start-up costs, and integrations fees; getting the details on who is financially backing the exchange and how they handle third-party service integration; and being careful to protect existing supplier relationships.

AMR's recommendations for suppliers include bargaining hard on transaction and service fees, contract terms, and margins. Moreover, suppliers need to develop a content strategy, which can be adopted by multiple exchanges. Finally, talk to your customers about their exchange plans and don't get locked into limiting partnerships.

If you're already wedded to an exchange, this is a good time to evaluate it in light of these changing market dynamics. Analyzing exchanges in your sector and identifying those that will likely remain after the shakeout could leave you well-positioned to renegotiate (or terminate) your existing contracts to strike a balance more in your favor.

If you have not yet jumped in to exchange-land, this is a good time to tread cautiously. It may not be advisable to wait on choosing an exchange, but careful, detailed analysis using the tips supplied by AMR Research and others could save you a lot of grief later on.

Which exchanges do you think will remain one year from now? Write to me at

Maggie Biggs is director of the InfoWorld Test Center.

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