After the Hype
April 1 2002 by Jane Hodges
CEOs once leapt at the chance to join business-to-business exchanges, fearing they would lose competitive advantage to early adopter rivals if they didn’t move quickly. Lured by promises about the dollar volume that would change hands online and headlines about the latest technology that could help their ebusiness strategies, corporate America signed up.
But those days are over. CEOs who have evaluated exchanges in recent months are taking a more conservative approach, asking more questions, weighing the strategic pros and cons not only of joining an exchange but also of evaluating which type of model-public, private or consortium-they should join. They have seen large corporations, like Wal-Mart, sit out the game even as rivals like Kroger and Carrefour banded together to work with retail exchange GNX. They have also seen blue-chip players put money into exchanges that failed or got acquired in waves of consolidation. Tim Laseter, a vice president at Booz-Allen Hamilton, estimates that at least 400 of the 2,200 exchanges announced between 1996 and 2001 didn’t even launch.
To be fair, exchanges had potential on paper, so the hoopla is arguably founded. As an electronic marketplace that unites businesses on a common technology platform, a B2B exchange can reduce or eliminate the numerous steps involved in bidding and procurement, speed up communication between the multiple parties involved in a transaction and help streamline supply-chain costs. According to market research cited by food industry exchange EFS, for instance, the $411 billion food service industry alone wastes $14 billion on supply-chain inefficiencies.
But as was the case with a lot of hyped technology, when exchanges were all the rage, CEOs from all industries and companies were pressured to buy in, whether they needed exchanges or not. Dan Grinberg, CEO of Foodhandler, a $50 million company in Waterbury, N.Y., that markets food safety equipment and latex kitchen gloves to hospitality firms, remembers hearing pitches from startups, many of whom told him he wouldn’t survive if he didn’t move fast. “A year and a half ago, we had gurus in here telling us our company’s business model was going to disappear,” he says. In many cases, the gurus’ exchanges disappeared.
Which is why, this past December, when Grinberg was considering joining fledgling food industry exchange EFS Network, he had to think hard about it. He realized his growing company had reached a fork in the road, and he could either use an exchange to help him scale business faster, or move slowly, as the family-founded company had for years. In the latter case, he would wait for EFS to prove itself among founding food service giants like Sysco and Tyson Foods.
What ultimately sold Grinberg on EFS wasn’t the threat of getting left behind. It was the fact that the exchange could help him reach the new customers he’d need to grow his company while also adding efficiency to his distribution process, which involves overseas manufacturers and a broad sales organization. Since EFS works as a public exchange-a broad network that unites a variety of players within one industry-it makes sense for a growing firm like Foodhandler. Public exchanges tend to offer a broad range of participants and lower costs of entry, making them good places to find new business.
Three Flavors of Exchange
Rick Leander, CEO of Avantrust, which helps companies assess ecommerce risk, and other executives outlined the business pros and cons of different B2B exchange models.
Definition: While often designed to serve a vertical market, pure-plays are founded as independent companies rather than spun out of any one corporation or group within an industry. Their services are developed by the founders-who choose the best set of technologies for a particular industry-rather than by customers’ consensus.
Benefits: These exchanges can reduce customer acquisition costs; technology integration can be simpler or cheaper than other exchanges.
Drawbacks: For buyers and sellers of highly specialized or customized products, the breadth of such an exchange may be unnecessary or no more useful than database or direct marketing to a niche list of companies. Rival pure-plays in one industry can create liquidity problems. Suppliers often feel more comfortable in private exchanges.
Key questions: Is the exchange specialized enough to provide what a buyer or seller really needs? Are there rival pure-plays within the industry, and are there clear points of differentiation among them-or will one ultimately acquire the other(s)?
Examples: Intel, Dell Computer’s e-Marketplace, Volkswagen
Definition: A private exchange is a virtual private network between a large corporation and its customers or partners. Once partners are wired into the corporate infrastructure, the exchange typically offers bonus technologies or value-added services to maintain their loyalty.
Benefits: Private exchanges can help companies with an existing network of customers and suppliers for whom doing paper-based or EDI-based business slows down processes. Converting all or part of the process to a private exchange can lower transaction costs. These exchanges improve existing relationships between companies, shortening transaction time and improving data.
Drawbacks: Private exchanges are less useful for companies seeking new business. To work most effectively, those managing a private exchange must convince distributors, suppliers and customers to use the platform-a tough sell in some industries.
Consortium or Industry-
Examples: Transora (packaged goods), Covisint (automotive), GNX (retail), Pantellos (utilities)
Definition: Companies within specific vertical industries collaborate to create the consortia. While founding companies can’t aggregate purchasing for legal reasons, they can combine forces to choose industry-standard technology-a bonus for supplier relationships, since suppliers who do business with all the founding companies often had to use separate platforms for each in the past.
Benefits: While some critics claim consortia are slow-moving, supporters believe they can develop truly useful services that will assure the consortium’s success and liquidity. Distributors, suppliers and manufacturers see benefits. Small firms can also collaborate in industries dominated by one or two market leaders.
Drawbacks: Consortia run into trouble if they don’t reach complete consensus on industry technology standards, but doing so is time-consuming. Consortia that sign too many strategic investors may wind up with “me-too” investors that aren’t committed to actually using the exchange, or that use it as a default ebusiness strategy.
Key questions: What percentage of purchasing dollars or transaction traffic do founding customers transmit over the exchange? If small, is this due to the exchange’s nascent capabilities (and when will these capabilities expand?) or due to customers’ lack of a stake in the exchange?
Backpedaling to reality
During the Internet boom, when public exchanges and outsourced technology flourished, many of these networks promised more than they could deliver, signed customer “investors” who had to wait and wait for the service to launch or sold their service based on its potential rather than its short-term actualities. Some exchanges tried to launch too many services at once, rather than focusing on customers’ first priorities. Typically, exchanges offer a combination of six types of services, which include auction-style buying, logistics services, data exchanges, digital catalogs, supply-chain services, and manufacturing/design collaboration, according to Laseter.
In many cases, too much breadth caused trouble for exchanges. Even those expected to survive beyond the current downturn, such as automotive exchange Covisint-a consortium founded by DaimlerChrysler, Ford Motor and General Motors-had to refocus their vision around more manageable promises. Covisint CEO Kevin English, who joined the exchange in 2001 from a post as ecommerce CEO at Credit Suisse First Boston, admits his company has had to work hard to rein in its founders’ broad ambitions. Covisint critics cited, for example, its trying to build too much proprietary technology, and launching more services than it could handle.
“When I came to Covisint we were trying to do too many things…and we were spending too much to do it,” he says. “We’ve taken our cost structure down two times.” Fortunately, auto customers at Covisint are amenable to the exchange’s offerings. GM used Covisint to buy $96 billion in parts and products during 2001, and Ford reportedly saved millions that year through it. “We want our products to provide return on investment quickly,” English says, defining “quickly” as a 30-to-90 day period. “If it’s a two-year ROI the automotive industry is just not interested.”
As exchanges themselves have grown more realistic about what they can provide their customers, savvy B2B CEOs have also come to expect more realistic results. Harvey Seegers, CEO of GE Global eXchange Services in Gaithersburg, Md., which provides technology for exchanges, says CEOs should view using an exchange as a part of business process reengineering, rather than a technology purchasing issue. “Many executives have focused too much on technology,” he says. “The better question is this: Is participating in a public or private exchange right for my company?”
In fact, more CEOs are choosing an incremental approach-trying one exchange technology at a time, or working on one business process at a time-rather than buying all the technology at once and only seeing partial results. “They’re proceeding deliberately, and with more patience,” Seegers says. Exchanges, too, are closely monitoring how customers use the service so as to get the best returns. Covisint’s English reports that his company once even discouraged a company from trying certain types of auction transactions.
“The view right now,” says Hank Lambert, CEO of EFS Network, “is that exchanges like ours are focused on solving very specific problems at specific places along the supply chain.” Indeed, that reflects how EFS is rolling out services, perfecting one at a time so customers can kick the tires. EFS launched an order management system in December and will add new complementary services later. The system should appeal largely to distributors, as many don’t automate orders and rely on faxes and phone calls.
Seegers says companies can still realize major savings through an incremental approach or by just using a few of an exchange’s services. For instance, GE in January launched a technology it will license to exchanges that shortens the time required for payment reconciliation between buyers and suppliers. Many suppliers, Seegers explains, offer discounts of about 2 percent for prompt payment, or within 10 to 15 days. However, bureaucracies at corporate accounting offices mean that matching purchase orders, invoices and shipment receipts-through faxes, phone calls and emails-can delay payment up to 60 days. Suppliers don’t enjoy the wait. And while it would seem that buyers benefit, Seegers argues that speedy payment, which leads to discounts, would outweigh the upside of paying later. “Most companies leave tens of millions of dollars on the table due to this dynamic,” he says.
That said, the keys to a positive relationship between corporation and exchange seem to hinge on three factors. First, CEOs need to consider what strategic aims they require an exchange to fulfill-rather than considering buying an exchange’s solutions to corporate problems they may, or may not, need solved. Foodhandler’s Grinberg, for instance, decided that outsourcing parts of his supply chain will help him move faster toward his revenue goals (of 20 to 30 percent annual growth) and his management plan to turn headquarters into a sales, customer service and marketing organization.
Secondly, businesses need to better evaluate the time and expense required for technology integration with an exchange. EFS’s Lambert says that installing the technology can take as little as three or four weeks for distributors already using software from IDS, which is common in the industry. But it can also take as long as three months for a company running a patchwork of technologies or ERP programs.
Lastly, they need to discuss realistic periods of time within which to expect some return on investment, in the form of savings, revenues or efficiency. After factoring in integration issues, Seegers suggests that electronic auctions and supplier-payment reconciliation should provide returns within three to six months, while uploading and configuring an electronic purchasing catalog should show returns within 12 to 18 months.
Often the rewards of working with an exchange seem subtle, but they can pack a big impact over time, proponents say. “Right now if someone calls and says, €˜What’s the status of my order?’ a lot of phone calls have to happen,” says Grinberg, adding that EFS Network can help lower those costs. Still, Grinberg knows it’s hard to weigh the benefits of investing to automate versus hiring more staff to cover the phones. “We’re taking a leap of faith,” he says. “But we feel like we’ll learn through the process.”