To Market, To Market: An Analyst-eye View of Net Markets

When it comes to evaluating Net markets, there's a lot of hyperbolic dross among the utilitarian silver. Almost every day there's "groundbreaking" news about some alliance being formed or mutating overnight with a new "value proposition." It is crucial to determine how much is hype, and how much is hope.

[From iSource Business, February 2001] What if your company institutes a business plan around one marketplace, only to see it self-immolate a month later? To get some perspective on what's style and what's substance, iSource Business interviewed some of the leading B2B analysts. Lending their collective intelligence were Eric Upin of Robertson Stephens, Joanne Friedman of the META Group and Mark Withington of Aberdeen Group. To avoid reaching Michener-like length, we focused on three questions:

  1. What is your overall view of Net markets?

  2. How fast are companies embracing Net markets and e-procurement, in general?

  3. What do purchasers need to stay abreast of?
As could be expected, there were a few differences of opinion, to varying degrees, but one common thread could be traced through it all  love them or hate them, Net markets (or an iteration of them) are here to stay. They have and will continue to have an impact on procurement, and the smart purchaser will stay informed about them.

Joanne Friedman

If the Net market arena is flush with hype, Joanne Friedman might just provide the self-described "jaded" approach needed to kill the buzz. Friedman isn't bullish on the concept of Net markets themselves, just on some of the approaches and partnerships that have arisen so far. "In my view, the Net markets are still very nascent. They do not have the functionality to do end-to-end procurement, and probably won't for a long time. I view the Net markets as being matchmakers, and nothing more." What's her snapshot forecast? "I think that the hype of the Net markets is going to die down and the area that will rise significantly is the private trading exchange."

Friedman elaborates on her bearish assessment of Net markets: "First of all, no two companies operate the same way." (Which pretty much does away with any chances of someone developing a "universal" solution.) Going further, she explains, "A Net market will give you access to multiple suppliers, but it doesn't qualify them, it doesn't give you credit ratings, it doesn't tell you or guarantee any way that you can get delivery of your goods. A private trading exchange, on the other hand, leverages the same capabilities of Net markets in the sense of the facility to get you down through the supply chain, but without the risk."

Web Squared

Since Friedman is sold on private exchanges, what does she see them doing in the future? "I see the evolution of private trading exchanges talking to other private trading exchanges, essentially via a Net market model. So rather, a Web of webs." Friedman calls this E2E, or enterprise-to-enterprise, and gives the example of the alliance between e2open and PartMiner, explaining that PartMiner got a cash infusion and e2open got access to high-tech componentry  an arrangement that profited both parties.

Friedman calls this type of alliance an example of convergence, rather than consolidation. Whereas consolidation often results in a "Frankenmarket" with all sides losing some of their original functionality, convergence allows both parties to hold on to, and increase, their strengths. Friedman says, "This is truly where you have a vertical niche merging into what I would consider the private trading exchange, the horizontal market. The marriage between these two, I think, is a trend that we will start to see happen more and more."

There's No There, There

Friedman is blunt and to the point (and refreshingly free of that buzzwordese) when it comes to excising the hoopla around Net markets. "They [corporations] are not buying a lot using Net markets. They're not being quickly implemented for direct materials. They are being implemented for MRO. There's a significant portion of small- and medium-sized enterprises that are looking at MRO procurement, and they are the ones that go out and spend the big bucks buying Ariba, and then realize that they can't do anything else with it. And then you have the large enterprises that have been trying to do something like it, but they're much more focused on the actual transactions and trades, where it's a remote system call, a remote process call on your ERP system."

Eric Upin

Upin's take on Net markets encompasses many aspects of e-procurement. "We're arguing that we see B2B unfolding across three dimensions, or three stages. The first stage is just streamlining and automating the connections that you already have between your existing customers and suppliers," he says.

Upin continues: "Stage two is that we're starting to see the rise of private exchanges, and that's where we see the most amount of revenue starting to come into play." According to Upin, this stage is beginning to unfold because companies are more comfortable with their existing processes and are ready to add on under their own terms.

The final stage is private exchanges, which Upin believes may ultimately be the topology of commerce. "There will never be one exchange that has all things for all people. Even if you're Boeing, you may still need to go to the tire and rubber exchange if you're buying landing-gear rubber. So when we talk to i2, Commerce One and Ariba, they're all talking about the ability to build software that can allow you to check multiple exchanges. You're only going to one place, but you're actually sourcing and checking exchanges that could be all over the world. This is still concept in nature."

Hard Act to Follow

In his discourse, Upin states a fact of that's seemingly obvious but still elusive to grasp. "I think one of the things that's become very clear in B2B, and one of the reasons the stocks were catastrophically pulverized in March, is that this stuff is hard. ... We argue that there are 12 to 15 families of steps that amount to almost 50 different pieces of commerce, or 50 different processes, that occur through an e-commerce transaction. So one of the reasons we're so excited about e-procurement is that it's a huge problem where there are huge opportunities, and leveraging the Web will really save costs and ultimately give companies better service and more selection.

"I think the commitment by companies to start working in this area is extremely high. The realization is that this is very complicated, and procurement professionals have a really tough job and often are overwhelmed, and as a result of them being overwhelmed, not everything can go out to bid," he says. "Also, a lot of B2B e-commerce, in our opinion, almost has more of the characteristics of a barter economy than a market economy."

Upin expounds upon the differences between B2C and B2B: "Consumers, if you're going to buy a photocopier, you're only concerned about price, because you're relying on the brand. But if you're in a business environment, procurement professionals actually have many other things besides price to worry about. There is a lot more information that is going to need to be captured about the suppliers rather than just an Amazon-like 'Here are all the CDs that are available by Jethro Tull.'"

For Upin, connectivity will be the key to successful Net markets. "The commitment by management [to markets and e-procurement] is very firm. The recognition that procurement is really tough, with lots of opportunities, is also very strong. But the bigger picture is that companies need to connect more tightly with their customers and suppliers. Until we start building systems that start to automate and directly integrate to those customers and suppliers, it's going to be a very manual and slow process," he says.

Mark Withington

Withington's take on Net markets is fairly optimistic: "My overall opinion is that [Net markets] are absolutely going to take hold in one form or another. I think there's just a tremendous amount of benefit that Net markets will bring to the table. They're the logical extension of the investment that corporations have put into their internal ERP-type systems.

"I think there are in excess of 1,000 URLs that call themselves Net markets right now, but those won't all be here when the dust settles," Withington says. "I think some of the things that need to get hammered out are the adoption of standards for things like catalog content, and they also have to start to recognize or replicate business processes as it's being done today. I think the XML concept is definitely on the right track, but that in itself has still got a ways to go. XML is kind of like the alphabet and all we need to do is decide what language we'll speak with those letters."

As Fast as the Hype?

In his assessment of how quickly markets are really being incorporated into overall schemes, Withington echoes Friedman and Upin. "I think that it's not as fast as the hype is trying to make it seem, and that we can see by the NASDAQ [sell-off]. What's happening is that people are realizing this great idea still has a ways to go. I think the industries closest to the concept of compressing cycle time  industries like the high-tech industry where innovation is a way of life and those Net markets that serve those industries (the semiconductors, the e2opens)  will be the first to really execute. However, an awful lot of this has as much to do with human change as it does with technology. It's discontinuous in innovation, so we're asking the human element to radically change how they're doing business."

Withington elaborates on this "friction" that can prevent change. "The learning curve for the organizations that will be using these Net markets will be a substantial issue, hearkening back to the ERP experience of the 1980s and 1990s, and the pain organizations experienced as the ERP systems were deployed illustrates what's to be expected in the future. And that kind of change management was only within the walls of the enterprise. Now what we're trying to do is change the value systems that encompass multiple enterprises. They're not all motivated by the same thing nor are they accustomed to the kind of inter-enterprise communication that Net markets will bring. I think there is a huge human element that has to occur in order for these things to really get traction, along with the technology issues that I spoke of."

The Big Payoff

Now that you have this information, what do you do with it? With all the changes predicted, what should a smart purchaser keep his eye on? We're glad you asked.

Friedman imparts these career-enhancing pearls: "I would aim at multiple e-targets to get what I want. I would aim at the B2B transactions that affect my downstream supply chain; I would also aim at the confluence or capability of the Net market, and put those two things together. That way I get the best of both worlds. I get the supply base, as they build it in an Ariba or a Commerce One, to find new sources of supply; but I also get to keep my trusted trading partner supply chain. And, as a procurer, I would play that supply chain game called digital dominoes, which basically says, 'I've got two ways to go, guys. I can go through you, or I can go around you. And if I go around you that means that I can go to your downstream supply chain and then drop ship to you; ergo, you lose your profitability.'" Game, set and match, Ms. Friedman.

Upin gives this advice: "Purchasers should know what these companies do, and be aware of companies like Ariba, Commerce One, i2. There's a huge opportunity to understand their products and how they're going to connect to the existing systems, understand what those products are trying to do in terms of benefits, and understand the successful versus the unsuccessful. We're all learning this as we go along. I think the key is to see that it does seem that things are moving this way, and to understand what these things do. In the end, companies don't wake up in the morning and say they need software. They want to either have less time in filling an order, less inventory inside or better customer service  whatever it is to stay more competitive."

Withington combines the techno and human elements in his strategy: "One of the biggest things that has to start happening is not limited to just technology, but is a holistic view of how technology is going to affect the organization, the human element. ... The organization itself is going to have to evolve. We're going to see purchasing changing from an administrative portion of overseeing RFQs, to more of a strategic initiative, where they might be tied into a number of Net markets to keep the pulse on the prices in the market, anticipate shortages, and be able to expand their qualified supplier activities. So I think that anyone who could focus his or her efforts in those areas will see a great payoff.

"One of the things we're seeing is that companies have moved from vertically integrated manufacturing to horizontally distributed value systems. What's happened now is that the successful companies recognize they are a link in the value system, and they must learn how to form value systems quickly and efficiently. Part of that is in the strategic sourcing; vetting out suppliers who can provide the best product at the best price at the right time. Also I think that what we'll see with these Net markets is a whole portfolio of services that will facilitate that vetting process. Eventually they'll be able to go out to various supplier rating services in terms of delivery performance and financial performance and get that kind of information. Those are the areas the procurement professionals are going to be looking to move towards, and I think, ultimately, that's what they're going to be incentivized on  how quickly they can identify suppliers and how quickly they can form value systems."