SAN MATEO (03/02/2000) - At a time when most business leaders envisioned dollar signs as they watched the emergence of Internet-based, business-to-business trading exchanges, BASF AG's Karl Grupp saw an omen for his company's digital future instead.
"If we just go into marketplaces and into e-ventures through other companies, not investing by ourselves, the threat could be that in some years we'll be just a production company and nothing else," or even be acquired, says Grupp, senior vice president of IT applications at the BASF Group, a $29 billion global chemical products manufacturer in Ludwigshafen, Germany.
It's even likely, Grupp adds, that an e-venture start-up could "have such capitalization that one day they just ask, 'OK, why not buy BASF as a production company?' "Like many established companies of its size, BASF is discovering that it will have dual roles in the world of trading exchanges: It will become a major buyer in a chemical exchange and major sell-side supplier. For these reasons, BASF and companies similar to it are starting to take trading exchanges very seriously.
First movers in the business-to-business trading exchanges are finding that their baby steps have allowed them to gain control over "maverick," or spot-buying, of goods and services. The early embrace has also brought into clear focus the challenges of integrating front-end exchange systems with back-end ERP (enterprise resource planning) platforms to make it possible.
Just a year ago, there were about 30 such exchanges, but that has blossomed to estimates of 300 to 600 exchanges currently, according to industry analysts.
Several vertical industries are leading the way -- chemical, high technology, consumer electronics, aerospace, and automotive -- with many analysts forecasting that there will be between 5,000 and 10,000 exchanges in only five years' time.
Evolving buyer, supplier roles
The stampede toward exchanges is driven by the promise of supply-chain streamlining, particularly for the buy side, according to analysts at AMR Research, in Boston. AMR reports that buy-side participants can expect to see a 15 percent to 20 percent drop in maverick buying, $50 to $100 savings in costs per order, and 2.5 percent to 10 percent in price savings because of the give-and-take of negotiating over the Internet.
"The buyers will always benefit. It's the suppliers who will bear the brunt of it," says Scott Latham, an analyst at AMR. Suppliers want exchange vendors to provide Web-based front ends, front-to-back-end integration with an inventory view, and better logistics and CRM (customer relationship management) support.
"[Suppliers are] going to demand more than a product listing on a PC screen," Latham adds.
But sell-side suppliers can open their markets in direct, cost-effective ways, and buyers are beginning to feel the impact of these exchanges. To better control its fate, BASF decided to take action.
BASF invested in ChemConnect, an exchange for chemicals and plastics, in mid-February, and also designated ChemConnect's World Chemical Exchange as the preferred platform for buying raw materials and chemicals. At the same time, BASF inaugurated a MySAP.com-based exchange with other buy-side heavyweights.
To keep things from overlapping, the exchange will be used for buying technical materials -- everything that isn't chemical or plastic -- for the BASF plants and all other investments in the business. These purchases represent between $2 billion to $3 billion annually, Grupp says.
The other half of the BASF blueprint -- the new role of the sell-side supplier -- is still being sorted out.
"We are in the definition phase for our different business units," Grupp says.
BASF has 17 different product divisions and approximately 40 separate business units -- too many for a single solution. So with the help of Andersen Consulting, BASF is putting together new business models for its emerging sell-side efforts.
Like many of its compatriots, BASF's move into the realm of trading exchanges has been urged by the business side. For many companies, the pricing and procurement or sales and marketing divisions within the enterprise have been pioneering these efforts. However, this situation will be changing, Latham says. If corporate CTOs aren't active participants now, they will be in a matter of months.
"CTOs will play very prominent roles over the next six months," Latham explains. "It'll drift up the river. The CTO will be driving those initiatives."
The CTO will definitely be called on to shepherd the integration between front-end exchange applications and back-end ERP platforms, Latham says. And this ERP integration has become essential, adds Peter Dupre, CIO at W.B. Mason, an office products supplier in Brockton, Mass. W.B. Mason is linked to two exchanges: a vertical for the health care industry and a partnership with Ariba.
For W.B. Mason, ERP links are crucial for providing customers with updated views into the availability of products as well as order status, Dupre says.
Taming the technology beast
However difficult it is for users, the application integration problem is likely to be a boon for EAI (enterprise application integration) vendors, says Leah Knight, an analyst at the Gartner Group, in San Jose, Calif. For large firms, the back-end integration effort will be complicated by the diversity of hardware at some sites -- mainframes, VAX/VMS minicomputers, and Unix-based systems are all part of the mix, says AMR's Latham.
Externally, as performance demands on exchanges increase, the companies participating will need faster and more reliable Internet networking. Thus, many key networking vendors are pushing messaging and IP multicasting middleware into the networking hardware to provide a distributed EAI layer.
The easiest part in this equation is XML, which is proving to be the right language at the right time. Major EAI and trading platform vendors are tapping XML for data integration and documentation standards.
One such effort in particular is the RosettaNet consortium for XML-based supply-chain management. There has been speculation that its methodology could be cloned in other vertical markets, which would go a long way toward achieving integration, provided there is significant buy-in from major players.
When there isn't XML buy-in at a digital exchange, the participants feel it, especially when some revert to manual methods. One of the exchanges that W.B.
Mason works with takes an order and transmits it via fax or EDI (electronic data interchange).
"They're causing us to have to do a lot of work; we're not excited about that," Dupre says. "If someone is using XML, it's a three-day project."
Reinventing the wheel
Once the technical projects involved are over, the changes to the business itself will be far more lasting. For BASF, moving to the trading exchange model is going to lead to a major overhaul of its selling strategies.
"I expect on the sell-side it will lead to [more] dramatic changes in our processes and our business behavior than on the buyer side," BASF's Grupp says.
"[We are doing] a lot of our business -- especially for small customers -- by distributors or dealers, and we expect a lot of this business will change."
In BASF's 17 operating divisions, "between 30 percent to 50 percent [of sales] over the next two to three years will be done through e-marketplaces or portals," Grupp says.
This will require a massive change-management effort for BASF.
"We will have to convince middle and top management that the world will be changing within the next one to three years," Grupp says.
Eugene Grygo is an InfoWorld senior editor covering e-commerce and enterprise application trends.
PLUGGING IN TO A TRADING NETWORK
As mainframe computing in the 1960s changed internal aspects of business, the Internet is fundamentally changing the ways companies do business externally, both with customers and, more importantly, with one another.
The rapid evolution of Web technologies has generated increasingly sophisticated methods of exchanging data, which makes trading networks possible. Companies with partner relationships are building trading networks for electronic order fulfillment, billing for products delivered, and other business transactions.
Analysts estimate significant projected cost savings associated with trading networks, predicting that the impact of business-to-business e-commerce will significantly exceed the business-to-customer gains.
Web technologies provide the resources necessary for a trading network, which is built from a few key components: secure encrypted connectivity between the business partners; the capability of authenticating, repudiating, and auditing transactions; and the capability of converting the data between multiple, unique internal corporate systems. Using XML to translate from disparate data formats is the most recent Web development to enable business-to-business trading networks.
Unlike the traditional EDI (electronic data interchange) environment, in which companies exchange data on a one-to-one basis, trading networks are built around a hub configuration. The largest company, whether a service or product supplier, or purchaser, can establish and, to some degree, dictate methods for exchanging data with the smaller companies in the partnership. This allows several of the smaller companies to establish trading-partner relationships with one another using the larger company as a hub for their transactions. The larger companies can recover the cost of hosting these transactions by charging per transaction or by subscription fee.
Large companies that depend on smaller partners to warehouse and deliver products will benefit significantly by building systems that effectively link the internal business process of the separate individual companies together in a trading network.
As an alternative to building a trading network from scratch, service providers are beginning to offer similar services. The provider offers the hosting service on a subscription or per-transaction basis, as well as consulting services and development, installation, and maintenance of the trading network systems. Service providers will probably be the best means for most companies to engage in a trading network.
Trading networks and other business-to-business relationships are revolutionizing the way companies do business with one another and streamlining the costs of business. This will mean less overhead, faster order fulfillment, fewer mistakes, reduced costs, and, in the end, more satisfied customers.
COMPLETING THE EXCHANGE: I-MANY ADDS REAL-TIME CONTRACT NEGOTIATIONBusiness-to-business marketplaces tend to focus on the immediate needs of buyers and sellers. Most are designed to bring together buyers and sellers in a virtual world to exchange goods.
But the on-the-spot deals aren't how the bulk of purchasing is usually conducted. Usually the exchange of goods is preceded by the complicated process of thrashing out contracts and followed by the difficult process of managing those agreements, notes Glenn Wira, vice president of marketing at I-many.com, in Portland, Maine.
For instance, more than 80 percent of health-care purchasing is done under contract. "The day before a bypass, a surgeon is not going to go out to find a good deal on sutures," Wira says.
So I-many hopes to bring the heart, and in many respects the art, of the business-to-business deal (negotiating contracts) online and in real time. At the I-many exchange, which is slated to go live this month, buyers and sellers can find one another, negotiate contracts, and eventually manage those contractual arrangements. All they need is a standard Web browser and Internet access.
Through predefined templates, sellers on I-many can create Web pages describing their products and highlighting related information, such as safety sheets or studies. The information will reside in a database on the site and be dispatched electronically to prospective buyers. Buyers may direct one to many Electronic Requests For Contract Promotion to multiple manufacturers or simply exchange information with one particular partner via e-mail. At the end of the online exchange, the companies can produce binding contracts, Wira says.
I-many, which recently changed its name from Systems Consulting Company, has been selling its Contract Administration and Reporting System/Integrated System (CARS/IS), an automated contract management system for the health care industry, for several years. So initially the company will focus on health care. I-many.com invites health care organizations, such as hospitals and nursing homes, and their buying organizations to meet online with manufacturers of pharmaceuticals, medical and surgical suppliers, and distributors.
Later, I-many officials say, the company plans to offer services to other markets in which contract management is critical, including agriculture, food and beverages, building supplies, and chemicals.
As with other Web marketplaces, I-many's success will hinge on whether it can attract enough buyers to encourage sellers to sign on, and enough sellers to satisfy buyers. Still, even a small chunk of the target business is more than a handful of change. Health care organizations are expected to spend $300 billion on supplies secured by contract, according to a study cited by I-many.com from Meta Group, in Stamford, Conn.
"The [contract negotiation and management] process is so inefficient now. If you can improve the processes, you'll get tremendous cost savings on transaction costs and drug costs," says Scott Latham, an analyst at AMR Research, in Boston. "The purchasing organizations will have more power with manufacturers."
What's critical to understand about contracts, observers say, is that the wheeling and dealing is far from over when the agreement is reached.
Initially, I-many will focus on bringing buyers and sellers together online for negotiations. Eventually, Wira says, the company expects to leverage its expertise with CARS/IS to build more management features into the online offering.