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The Changes in Exchanges
Today's trading exchanges are set to change beyond recognition over the next five years as shifting economic models and the need to add value consign many to extinction.
Posted Feb 22, 2001
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Perhaps the biggest revelation at a recent breakfast hosted by TBC Research and procurement vendor Clarus, "Recipes for Successful B2B Trading Exchanges," was the general incomprehension at the fast growing trading exchange phenomenon. More questions continue to be raised around this new, beguiling concept, but with familiar suppliers signing on to exchanges and threatening to change the way business is transacted, customers need to grasp the reality of the situation now or risk getting left behind.

Despite widespread attention given to the WorldWide Retail Exchange and Covisint's recent first auctions, critics point out that online auctions are just bringing together buyers and suppliers without intermediaries. The real benefits will come in the next phase of development, and vendors like Oracle say they are already moving towards the next generation by giving value added services to help streamline a whole supply chain over the exchange.

Meanwhile, the term exchange has already widened to encompass a wide range of differing concepts. Is it an e-market or just a marketplace? Is it horizontal, vertical, private or consortia based? Should buyers join one or many? The risks associated with exchanges are also varied. Lock-in to one exchange might occur, legalities, technicalities, submergence into a larger marketplace and privacy of trade secrets will inevitably emerge as problems for members. With the market moving at such a frenetic pace, users need to be clear about all the issues before joining up. "We found confusing and had to spend a lot of time understanding what it was all about as well as learning the terminology," says Jim Whittaker, head of asset management at East Midlands Electricity, which conducted its first transaction over the Achilles network in July.

Forrester Research estimates that by 2003 only 181 US-based exchanges will remain of the current 10,000 available. It believes there will be a massive shakedown in the next three years, with a purging of the market forcing exchanges to make alliances and improve functionality. i2 Technologies has set aside $1 billion to develop its exchanges and expects to gain two-thirds of its revenue from its exchanges this year, despite B2B transactions accounting for only five per cent of business through exchanges, according to AMR Research.

From this it seems obvious that major changes will occur over the next three years, and of the four current types, consortia and private exchanges are expected to be the most successful. But private exchanges, such as Wal-Mart's internal supply chain exchange, could be victims of their own success if they remain dominated by one company and suppliers find it easier to trade elsewhere. Established players such as the chemical industry's Chemdex currently dominate the vertical space. But many more are joining the fray, and even software vendor SAP is keen to tap into exchanges after investing £2 million ($2.9 million) in the Achilles marketplace for the utilities buying community.

Consortia exchanges, such as the automotive exchange Covisint, the result of collaboration between Ford, General Motors and DaimlerChrysler, are looking for reductions in component costs by amalgamating their shared procurement functions. The three expect their joint annual procurement budget of $250 billion to eventually move to Covisint. However, Kevin Prouty, research director of automotive strategies at AMR Research, says: "People still don't really know if Covisint works, and no one knows the cost of doing business through Covisint. It has the opportunity to become... a central point, but it won't be the end to all things."

Covisint has already attracted interest from the US Federal Trade Commission and the German cartel authority Bundeskartellamt, as has myAircraft.com, the venture between US companies United Technologies Corporation and Honeywell International. Both were under investigation to ensure they would not be used in an anti-competitive fashion. Last month saw Covisint's first auction with ArvinMeritor, an automotive components supplier, transacting actual business over the exchange.

However, it should not be assumed that any of these giants will make it into 2003, according to a Forrester report, "eMarketplaces Boost B2B Trade." The report states that marketplaces thrive on liquidity whereas in many vertical industries saturation point will be reached as only a certain amount of volume is there to be transacted.

The advantages of joining an exchange generally center on procurement savings, but both vendors and analysts believe that focusing exchanges on dynamic pricing will not be enough to sustain marketplaces in the long term. Buying into an exchange isn't an easy process and a successful exchange has to show it has a well-planned business strategy and appropriate partners. According to AMR, companies should not change their business processes and should assess exchanges in much the same way as new technologies.

Certainly, a company with a large EDI (electronic data interchange) network can still afford to trial an exchange. But Prouty cautions that a successful exchange "must provide more value than being an intermediary." i2, whose TradeMatrix platform supports content management that incorporates its catalogue information plus decision support software, boasts of its superiority in this arena. "We already have a rich raft of services and can offer product design, content management, fulfilment and logistics, and have existing customers who can act as references," says Steve Weller, marketing director for Europe. The company hopes to offer $75 billion of value to its 200 global customers by 2005 by moving collaborative planning from a private to a public arena, says Weller.

Oracle, equally proud of its attributes in the exchange space, is partnering with other vendors to ensure it flexes all its muscles. "We know that B2B will move from purchasing to business process savings on all costs and we have just developed a product development exchange to start this process," says Jeremy Burton, senior vice-president of product and services marketing at Oracle. "If we can get partners around the world to collaborate and design a product online... the whole product can be built online with huge savings in time and money."

Oracle builds three types of exchanges, private, vertical and horizontal, with OracleExchange.com, which currently functions mainly as a showcase for Oracle's products, being its main horizontal exchange with about 1,500 members. "We don't see it as a lucrative business yet," admits Burton, "but it shows what we can do and proves we can build a marketplace."

Covisint has already announced that it is more than just a procurement exchange and is dedicating itself to conducting business across the whole supply chain. Even the Achilles Marketplace will eventually move from procurement to auctions to enhancing the supply chain, and Oracle will soon be announcing new collaborative functionality for the supply chain. But Prouty argues that vendors currently forming exchanges are just using this as a marketing tool to get their name associated with exchanges.

Value added services sound attractive to buyers and suppliers alike, but AMR predicts that it will be another three years before full exchange technology can be delivered. "It's a monumental amount of work getting two technology partners working together for a common goal," says Prouty. "You need to get your own infrastructure up and running and connect to all the different companies you want to work with."

As the plethora of both bricks and clicks moving into marketplaces eventually decreases from overcrowding and competition among exchanges, Forrester predicts the purge will eliminate all those which do not make the grade of value added services in their marketplaces. Once rational business practices set in and marketplaces become a more standard operation, the market can form complementary partnerships and users will more carefully select a few marketplaces.

By 2003 Forrester foresees four exchange models emerging: procurement malls which will host catalogs to all industries for e-procurement transactions; commodity marts which will give users access to specific raw materials; industrial facilitators which will tie transactions into workflow processes; and vertical hubs.

The prediction is that there will be fewer marketplaces, linking with each other to form a global market, and creating, Weller insists, the economic basis for perfect competition. "Suppliers will have access to information they have never had before across global marketplaces," he says. "Initially customers will drive down costs, and suppliers will then compete on customer service as the rules of competition change. The total customer life cycle will be treasured."

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