HP, Compaq Form New Exchange Model

A version of this article first appeared in Computers & Finance, a magazine published 10 times a year in London by TBC Research. Through its comprehensive portfolio of magazines, events and research, TBC Research is dedicated to helping senior business professionals make more informed technology decisions.

In early May 2000, IT giants Hewlett Packard (HP) and Compaq announced an initiative designed to link hi-tech component suppliers with users in a new style of independent trading exchange. As the two have already tried working together in an initiative led by i2, the HighTech TradeMatrix.com, this latest move casts doubt on the efficacy of the collaborative trading exchange model.

HP and Compaq were anchor partners in i2's initiative, which attempted--but apparently failed--to establish a buy-side market, where i2 provided the technology and management. According to i2, plans to float it as a separate entity have been shelved. Rumours suggest players were disgruntled at the prospect of paying i2 transaction fees and were unwilling to wait to see how HighTech TradeMatrix panned out.

The new Net market breaks the mould of independent trading exchanges for a number of reasons. In a surprise move, the two hardware manufacturers announced that the venture hopes to raise $100 million from 20 founding members. At the press conference, ten partners had already joined. Participants also said they would share technology that each has been independently developing, and would be ready to go to market within 90 days.

Unusually, none of the technology vendors normally associated with trading exchanges were involved, and the consortium made no formal technology announcements. Nor does it plan to launch an IPO. Carly Fiorina, CEO of HP, said: "While we should never say never, at this stage there is no intention to do an IPO."

Instead, the consortium is focused on improving supply chain efficiency. Michael Capellas, CEO of Compaq, said the main deliverables will be "catalogue, store front and supply and demand matching, with collaborative design further down the line."

Fiorina claimed the IT industry's buying power will reach $600 billion by 2004, of which the consortium expects to win 30 per cent. Hardware manufacturers are under pressure to maintain margins or move back into profitability. In a market where everyone is feeling the pinch this initiative has come at the right time.

IBM quickly sent out a press release saying it plans to make a major announcement in 30 days. Steve Ward, general manager of IBM's industrial sector, claimed it is further advanced than today's participants, arguing that IBM has made its technology selection. He declined to say who the partners were but hinted that current partners Ariba or i2 could provide the infrastructure for an IBM-driven exchange.

The HP/Compaq announcement opens up a new avenue and revenue model for trading exchanges, but also poses intriguing questions. Fiorina said the exchange will be open to anyone, but that is unlikely in reality. Where a market comes together in the name of efficiency, non-participants often become squeezed, or buyer-seller relationships become polarised. An alternative is the prospect of IBM and the consortium merging to form a super exchange, of the kind that GM, Ford and DaimlerChrysler concocted earlier in the year.

An investment of $5 million each will also require justification. Current trading exchange models demand a revenue stream. But in this model, each participant can be said to be acting in the interests of the whole, as they are paying themselves through transaction fees.

In addition, supply chain efficiency will be hard to achieve. The goals espoused by the partners are very ambitious, given the hurdles that each member must overcome. AMR Research senior analyst Bob Ferrari questioned whether the companies can overcome significant cultural differences, citing trust as an obstacle that will require top management application.

He added that each company will have a specific take on supply chain issues. "They will have to figure out things like what it means to do collaborative demand forecasting across multiple geographies." Ferrari said history shows that collaborations only work when done in incremental pilot steps. This implies that it will be far harder to obtain agreement and benefit further down the track.

Technically, the companies have an edge in the sense that they have both been using i2's technology in an effort to improve demand planning and forecasting. Bringing the catalogues together is feasible, but the question is the extent to which they are compatible. Fiorina said that HP has 28,000 products and over 100,000 suppliers. But HP's product range extends far beyond PCs and servers. It includes a vast array of medical equipment and a huge printer business that Compaq doesn't touch.

In all of this, the software vendors are nowhere to be seen, which indicates that the participants have placed a high value on independence. How this will affect i2 and Ariba, both of which have previously made announcements with one or other of the senior participants, remains to be seen.