e-Marketplaces 2.0

What went wrong, what went right, and what's the value that your company can get out of an e-marketplace right now

e-Marketplace. Now there's a word that you might not have heard for, oh, say, the last five years.

In the wake of the dot-com bust, when so many "New Economy" companies went belly up, it's easy to forget that as late as the year 2000 many tech industry analysts were still predicting that e-marketplaces would revolutionize, and come to dominate, B2B commerce. Trillions of dollars in transactions would run through the public e-marketplaces, which promised to connect buyers and suppliers in fragmented markets, streamline procurement processes and lower purchasing costs.

By the end of 2000, some 1,500 "independent" and industry-sponsored e-marketplaces had been announced. Today, just a handful of the public e-marketplaces survive, and even fewer actually still call themselves e-marketplaces. What went wrong? More importantly, what went right for those e-marketplaces that are still around? And most important, where can your company find value by turning to an e-marketplace right now? Let's take those questions in order. First...

What Went Wrong?

For starters, how about avarice? "Many of the e-marketplaces were not set up for the purpose of improving procurement or supply chain processes, they were just looking for an opportunity to make a quick buck," says Deborah Wilson, research director for procurement strategies and systems at technology consultancy Gartner. Wilson's colleague at Gartner, Benoit Lheureux, research director with the consultancy's Infrastructure and Architecture Group, agrees with that assessment: "In a lot of cases, these e-marketplaces were driven by sheer greed and a desire to have just outrageous capitalizations."

Indeed, back in the late 1990s heyday of e-marketplaces, a "build it and they will come" mentality seemed to prevail. Venture capitalists (VCs) couldn't pour money into the new e-marketplaces fast enough. And who could blame them? The math seemed so easy: If B2B commerce in a given segment totaled X billions of dollars, and an e-marketplace could capture Y percent of the total transactions in that segment and charge Z percent as a transaction fee, the payoff for investors would be huge.

But with the sudden appearance of a host of different e-marketplaces, frequently competing in the same industry verticals, buyers were left scratching their heads, trying to figure out which, if any, of the e-marketplaces made sense for their companies. Oftentimes buyers simply were reluctant to give up control over their strategic relationships with their suppliers, and suppliers were unwilling to pay a fee for the privilege of being "disintermediated" from their customers.

Ultimately, says Mitch Free, founder and CEO of MFG.com, an enduring e-marketplace targeted at buyers and suppliers of discrete manufacturing services and industrial components, many of the Net markets essentially mistook what their role needed to be in the market. "They thought they were technology companies," Free says. "But it's not about the technology, it's about community. A marketplace is really a community-aggregation business." Which brings us to...

What Went Right?

Responding to this question in separate interviews, a number of executives at several different e-marketplaces echoed Free's sentiment with regard to community. For example, Brandon Spear, senior vice president of operations at Quadrem International, a global e-marketplace founded in 2000 as an industry-sponsored consortium of the mining and metals industry, says that Quadrem spent it first four years very focused on trying to build scale in its supplier community. "Only after we had achieved a relative critical mass did we start to focus on delivering more solutions and services to that existing base of customers," Spear says.

Critical mass is important to the success of an e-marketplace because it helps to create a barrier to entry for potential competitors in a particular market segment, says Free, who points to online auction site eBay as an example. "Who's going to compete with eBay? Nobody. And it's not about the technology. Because with some amount of money, I could duplicate eBay's auction technology, but then I'd have MitchBay, and how am I going to move the herd of people to my site? It's too hard."

Critical mass also creates standing and legitimacy in a market segment, says Greg Johnsen, co-founder and vice president of marketing at GT Nexus, an on-demand global logistics portal that has sometimes been thought of as an e-marketplace for shippers and their carriers. Johnsen says that his company's early win with a group of a dozen major ocean carriers — representing nearly 50 percent of world ocean capacity — helped give GT Nexus credibility in the logistics community and created a "network effect" that drew additional customers to the portal. "Once people saw a critical mass of companies engaging with our platform, they were more willing to get onto the platform themselves," Johnsen says.

Diving Deeper and Adding Value

Having built a sufficiently large community, the successful e-marketplaces have taken two additional steps that have helped lock in their customer base and, in doing so, create additional value for their users. First, they have worked to extend more deeply into the internal processes of their member buyers and suppliers. For example, Enporion, which started out in 2000 as an industry-sponsored procurement exchange to serve North American utilities and their partners, has recently been working with several customers on the settlements side of their businesses, extending into its customers' financial supply chains. "When you start getting into the internal workings of the settlement of the transaction, you become a real value-add to the customer, and the customer also becomes pretty dependent on you," says George Gordon, chairman and CEO of Enporion.

Finding new value-adds is the other way that successful e-marketplaces have managed to continue building their relationships with existing customers and draw new users. One way they are doing this, says Gartner's Wilson, is by becoming specialists at "onboarding" large numbers of suppliers — that is, helping a buying organization to electronically enable their supply base so that offline, manual transactions can move to an online, automated environment. Quadrem, for example, has become expert at leveraging a variety of technologies to connect its mining and metals industry customers' remote operations with suppliers that often operate with little more than a fax machine.

The successful e-marketplaces also are offering unique services or solutions that target their particular niche. In this respect, Wilson points to SciQuest, a spend management and procurement automation specialist that started out its life as a builder and operator of private marketplaces and supply chain solutions for research enterprises and their suppliers. "SciQuest has come up with some fascinating applications for helping companies manage their chemical stocks," Wilson says. "That has value within a fairly narrow range of companies in specific sectors, but for those particular customers, it keeps them coming to SciQuest for other things, too."

Another example: Xign, which operates an electronic B2B payment network, has developed a set of analytics that it can apply to its customers' payment transactions through the network, allowing the customers to benchmark their settlements performance across more than a dozen key performance indicators. "We have more than $100 billion in transaction history that we can now use to benchmark your performance against," says Tom Glassanos, Xign's president and CEO. "We can tell you exactly where you are and how to better use that information."

Building Value for the Future

Moving forward, Gartner's Lheureux says that the successful e-marketplaces will be those that can continue to take on additional bits and pieces of IT functionality and business processes that it no longer makes sense for an organization to manage internally. "Undifferentiated application functionality is going to continue to shift outside the organization, so the key for the e-marketplaces is to identify and take on that functionality," Lheureux says. Free, for example, says that MFG.com is looking to do this by adding productivity tools for suppliers, becoming a sort of on-demand enterprise resource planning system for job shops. On the buy side, the e-marketplace wants to add tools to help buyers manage their bills of materials.

Where do we stand now in the development cycle of e-marketplaces? "It's a bit like Churchill's speech," says Spears, with Quadrem. "We're at the end of the beginning. We've just started to cross over into the early majority stage of market adoption of these types of services. The challenges for our business going forward are going to stem from being able to move to significantly bigger volumes."

Despite the challenges ahead, Spears, for one, remains enthusiastic about a market space that he believes is helping to build the fundamental infrastructure for how business will be conducted in the near future. "It's been an incredibly fun ride," he says. "I'm passionate about the business inasmuch as I really do believe that we're building the railroad track, the fiber optics for business-to-business communication. To be doing that is a real challenge but also a real privilege in many ways."


    An e-Marketplace Believer

    John Djurasaj, head of procurement at Redford, Mich.-based Die-Mation Engineering, has been hooked on e-marketplace MFG.com since he first tried the industrial e-marketplace back in February. On that first try, Djurasaj received 20 responses to a request for quote, 10 times the number that he got on another site he tried at the same time. Since then, he's put close to 500 RFQs through the MFG.com site, and he says that the results have included significant cost savings for his company, an automotive industry supplier that designs and builds tooling, gages and assembly automation machinery.

    "For example," Djurasaj says, "our general manager and I were both quoting the same work, tooling for conveyers. He used his conventional sources, and I used my MFG.com sources, and I came in almost $90,000 below his quotes. And the job has already been delivered, and it was delivered on time."

    As a result of Djurasaj's success on the site, everything that Die-Mation puts out to bid must go out to MFG.com in addition to the company's traditional suppliers. "Everything that I've quoted on MFG.com, somebody else is quoting the same part at my facility, and I've yet to see a quote go to a source outside MFG.com," says Djurasaj, who adds that he has only seen one supplier on the site that "probably shouldn't be on there."

    Djurasaj has tried other sites in the industrial space, including First Index and SourceAuthority.com, as well as sites like Alibaba.com, Made-in-China.com and ECTrade.com, but he says that he plans to stick with MFG.com. "If you're producing parts and building machines," he says, "if you're not using MFG.com, you're an idiot."

    What Was in a Name?

    In 2000, in an article in this magazine, the writer Anne Field produced a list of 13 different names for e-marketplaces, or what Field called "Net markets," based on information from the research organization Net Market Makers. Field's list:

    1. Infomediary

    2. Metamediary

    3. Electronic markets

    4. e-Markets

    5. Internet markets

    6. i-Markets

    7. Vertical hubs

    8. e-Hubs

    9. Butterfly markets

    10. Vortex businesses

    11. Digital exchanges

    12. Online exchanges

    13. Fat butterfly

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