Private Function or Public Invitation

As B2B e-commerce flourishes and online marketplaces continue to proliferate, professionals increasingly face the dilemma of whether to direct their spend through a private marketplace or a public exchange. The solution, analysts say, is probably "all of the above"

As B2B e-commerce flourishes and online marketplaces continue to proliferate, professionals increasingly face the dilemma of whether to direct their spend through a private marketplace or a public exchange. The solution, analysts say, is probably "all of the above"

Part of the purchaser's dilemma is sorting out the differences between private and public marketplaces. Private marketplaces typically center on a single, major player on either the buy or sell side that has built a system for connecting with clients or customers externally. "The private marketplace is really nothing more than a next-generation, e-commerce initiative driven by a major hub, whether it be a buy or a sell hub," says David Hay, global product manager at Gaithersburg, Md.-based GE Global eXchange Services. Hay has spent 22 years developing e-procurement tools that General Electric has used internally for its own purchasing and offered for sale to other companies.

A Private Matter
By Hay's definition, private marketplaces would include value-added networks (VANs) linking buyers and suppliers through electronic data interchange (EDI) and pure, Internet-based networks that also connect buyers directly to suppliers. The goal of the private marketplaces is to drive costs out of the procurement system — including costs associated with inventory and cycle times — even as companies extend the geographic reach of their sourcing. Hay explains: "If you go back 20 years, even within GE, the bulk of our sourcing was 100 miles away from our plants. Today, it's the other side of the world. The only way you can reduce inventory, cut order-to-delivery cycles, yet move your sourcing base from 50 [miles away] to 12,000 miles away is to have a really good electronic system behind it."

U.S. Bancorp Piper Jaffray analysts Jon Ekoniak and Tim Klein, agreed in their weekly electronic newsletter, The B2B Analyst, that integration between buyers and suppliers is what makes these networks private. "The marketplace provides the infrastructure to electronically connect all its trading partners," they write. "The trading partners are then strongly encouraged (sometimes forced) to do business via electronic means ... The private marketplace allows a way for all participants to collaborate and share information, with few concerns about privacy or cannibalization."

Going Public
By contrast, public marketplaces are third-party exchanges that lack any means to force participants to come to the table. They must, therefore, draw both buyers and sellers with an attractive "value proposition," such as lower price-related costs and more efficient procedures. They must essentially offer an incentive for users to shift current business processes to accommodate the new procedure for ordering through the exchange. The e-marketplaces must offer "an extremely compelling reason for moving tightly integrated business processes to a marketplace," says Carl Lenz, research director at the Stamford, Conn.-based technology consulting firm Gartner Group.

Another challenge for the public marketplaces is figuring out how to integrate with a variety of buyers and suppliers that frequently use different systems and standards. The integration challenge is "a huge hurdle" for the public marketplaces, Hays says, because "although they may have some back-end integration, they don't have total integration across the system." For this reason, larger corporations, with major investments in ERP and EDI systems, have been slow to begin using the public marketplaces. Gale Daikoku, senior research analyst at Gartner, says for many buying companies, the question has become "how do you take the effort and investment in your EDI [and] your extranet and extend that via a marketplace. Because you don't want three connections to your network, you want one source."

Larger corporations have also been reluctant to move their direct spend onto public marketplaces due to control and cost issues. Says Hay: "If you are a GE and manage a big cost advantage with raw materials that may be 50 percent of your cost of doing business, you may not want to give up that advantage to share it with others in the same industry."

The public marketplaces' openness does make them attractive for small- and medium-sized enterprises (SMEs), on both the buy and sell sides. SMEs can take advantage of e-marketplaces such as, and that can aggregate demand across many smaller buying organizations (or across a single company's dispersed divisions) and leverage the volume for discounted prices from suppliers. In addition, while private marketplaces require substantial, up-front investments, getting involved in a public marketplace involves little, if any, investment beyond an Internet-ready computer, again, making them attractive for smaller buying organizations.

Because the public marketplaces are more attractive to smaller buying companies, Hay believes larger companies will increase their presence in these marketplaces from the sell side, expanding their market share by going after the SMEs that would otherwise be too small for them to target. Once they are transacting on these exchanges, Hay expects large corporations may subsequently put portions of their spend for indirect materials through the public marketplaces.

Mixing and Matching
Armed with an understanding of the relative strengths and weaknesses of the different types of markets, purchasers can develop a strategy for using private and public marketplaces to best effect. A recent research brief from Forrester Research of Cambridge, Mass., provides some guidance in this respect.

The brief, entitled "E-marketplace, E-procurement or Extranet? Yes," advises companies to use e-procurement software to manage the purchasing process, while also establishing connections to supplier-run catalogs for maintenance, repair and operating (MRO) items and to e-marketplaces for noncatalog purchases.

eProcurement platforms from such suppliers as Ariba, Clarus, Commerce One and RightWorks allow purchasers to manage supplier catalog content and to control the requisitioning process by setting rules and approval routings, and establishing a private marketplace for the company. The software also allows purchasers to track and control spending and benchmark suppliers.

At the same time, requisitioners ideally would be able to access the catalogs of MRO suppliers such as Staples or Grainger directly from the company's e-procurement platform, as well as public marketplaces that offer noncatalog items, such as, iProcure or Again, this would afford purchasing a greater degree of control over the company's total spend.

The ideal of a "one-stop shopping" solution remains elusive for the moment. "Until all the [e-procurement platform] suppliers find some way to connect in real time, buyers won't have a one-stop shop, because all the suppliers have their own solutions and they are not working together," says Gartner's Daikoku. In the meantime, buyers should be prepared to use a mix of private and public marketplaces to meet their purchasing needs.