SAN MATEO (06/05/2000) - Since their start, business-to-business digital trading exchanges have been holding out the Holy Grails of better prices for buyers, more channels for suppliers, and the multiple efficiencies that are part and parcel of automation.
For the moment, though, the exchanges are focusing on going live, getting financial backers, gathering buyers and sellers, and making certain they offer ancillary services to keep those buyers and sellers happy. Those that are advancing to the stage of actually carrying out transactions are doing so with an eye toward the day when they will hit the high volumes that will make these risky ventures economically viable, industry analysts say.
It's a given that every industry will be hit with an exchange, and that if they have not arrived yet, they will. It is so well-accepted that "people are worried about being left out," says Lisa Williams, an analyst at The Yankee Group, a market research firm in Boston.
In many sectors, exchanges and their promises of Internet efficiencies are the first real signs that the New Economy has arrived. But there are important rules from the Old Economy that these exchanges and their participants will have to keep in mind.
The keys include the fundamentals of doing business and a federal government nervous about whether or not these exchanges are engaged in price-fixing and monopolistic behaviors. Underlying all of these concerns is a widely predicted consolidation via failures and mergers and acquisitions that some say may come in less than a year.
Wall Street investment and venture capitalist firms have begun shortening their reins on b-to-b exchanges, thanks to their counterpart pioneers in the business-to-consumer, e-commerce realm, says Randy Covill, an analyst at AMR Research Inc., in Boston.
The days of the open-ended capital influx are over, and although investors do not expect to see immediate profits, there will be expiration dates for funding and an expectation to see "signs of profitability," Covill says.
"I think [the shakeout] will happen in the next six to 12 months," Covill says.
But before they pull the plug, investors will require that exchanges combine efforts on a business plan to get numbers moving into the black, Covill says.
Letting exchanges drift "is doing no favor for them or the economy."
The investors will have their work cut out for them. Over the past 18 months, approximately 500 to 600 trading exchanges have emerged, according to AMR Research and The Yankee Group.
The single greatest key to survival is liquidity, or volume of business. This means exchanges will be aggressive in how they attract members. There will be the expected offerings of logistic and financial services, but exchanges have to remember the personal touch, says Lisa Williams, an analyst at The Yankee Group.
Certain "high-touch services" -- such as 800 numbers and access to experts on product, deal-making, and auctions -- plus a direct field sales force could yield higher transaction volumes and values for exchanges, according to Williams.
"Companies aren't necessarily ready to do production buying on the Internet without some safety net," Williams says.
The resulting hybrid of a pure play crossed with established services is what many involved in exchanges are calling "collaborative brick-and-mortars," or co-BAMs, -- another echo of the Old Economy.
Beyond providing front-end Web access and transaction platforms, exchange founders will have to provide assurances that buyers and sellers will not be out on their own. Safety nets are likely to include channel customer support and back-end integration, all of which means new alliances with established brick-and-mortar companies.
The direct involvement of such companies is intended to ease the fears of buyers and sellers and to make exchange transactions a part of their daily experience.
Marketplaces can be seen as part of a pyramid with the lower level consisting of Web sites with catalogs, Williams explained. The intermediary level consists of the high-touch, public marketplaces. At the very top are the power-player, channel-master marketplaces, which are unlikely to be hit hard by consolidation, she says. "Consolidation will happen from the bottom up of that pyramid," Williams says.
With many buyers and sellers hedging their bets by joining more than one exchange, there is a very high likelihood that some of those investments are not going to pan out, say analysts. Once the smoke clears, the only consolation is that there likely will be at least two competing exchanges per industry, according to analysts.
In spite of the varying levels of risk, all of the exchanges will have to provide avenues for auctioning, RFIs (requests for information) and RFPs (request for proposals), customer and channel management, and ways to analyze and assess participants' performance, say those in the industry.
The underlying technology has to be sound in its support for collaboration and must provide global visibility into offers and offerings as well as real-time and back-end integration.
One of the strongest predictors of success is likely to be the prior business relationships of participants.
"They [exchange participants] understand they have an asset, which is their relationship, and which they can now put into a marketplace," says Peter Graf, vice president of marketing at SAP AG Markets, a subsidiary of SAP, in Palo Alto, California.
Established relationships will be pivotal for many exchanges, says Owen Zidar, vice president of Freightwise Inc. (www.freightwise.com), an online exchange that come August will provide a hub for those companies needing and providing rail, steamship, and trucking transportation services.
"If you've already established a relationship, you're in an easier position," Zidar says.
Zidar and others also say that having heavy hitters from the buy-side and sell-side as founders is crucial to success.
Not so, says Karen Welsch, CTO of Houston-based WaterDesk.com, an online marketplace for maintenance, repair, and operations products and services for the water and wastewater industry. Neutral exchanges not only have their place but may be constitutionally better off.
"It has to be a true consortium effort [equally owned by buyers and sellers] to be a successful marketplace," Welsch says.
Exchanges that attract big names could attract the attention of the federal government, which is on the lookout for price-fixing and monopolies among the players.
Governmental agencies -- particularly the U.S. Department of Justice and the U.S. Federal Trade Commission -- may want to make an example of one of these exchanges, which makes it "an issue they all need to worry about," AMR's Covill says.
Although more exchanges are blossoming and beginning to move toward consolidation, there will be growing needs for private exchanges as well as "meta-exchanges," which are conduits for accessing multiple exchanges simultaneously, according to industry analysts and vendors.
As public exchanges grab the headlines, the private exchanges will be grabbing buyers and sellers to focus on specific parts of the supply chain, according to Covill. But the smaller, more contained exchanges are likely to be built around "channel masters," large buyers or suppliers who can establish the rules of engagement and invite the players.
As the exchange landscape becomes more complicated, the need for meta-exchanges will become clear. The result will be a network of markets where "information can be exchanged freely -- if those marketplaces agree to participate," SAP Markets' Graf says.
The meta-exchanges will allow greater visibility into other digital marketplaces, according to analysts. In addition, meta-exchanges may help exchange founders get around charges of collusion because they would serve as wormholes of sorts in and around these marketplaces that would prevent the users from being locked in to a single transactional environment.
And those creating transaction environments are "not the usual suspects" from the IT industry, The Yankee Group's Williams says. She is seeing people from brick-and-mortar companies who, while bringing their business savvy to bear, are also building "a truly astounding variety" of digital marketplaces.
So even though there are bumps ahead, these exchanges and businesses are on "a natural evolutionary path," Williams says. "I think it's time. Isn't this what we were always trying to get to?"
Send comments about this article to Eugene Grygo at firstname.lastname@example.org.