Covisint's Deal to Sell e-Sourcing Business: The Broader Implications

Analysts see potential boost for FreeMarkets; Procuri chief sees plus for e-sourcing solution providers

Analysts see potential boost for FreeMarkets; Procuri chief sees plus for e-sourcing solution providers

Mesa, AZ — January 9, 2004 — Earlier this week Supply & Demand Chain Executive reported that e-sourcing specialist FreeMarkets is set to buy the online auction business of Covisint, the automotive industry-sponsored trading exchange. (See previous story.)

The deal provides FreeMarkets with some clear benefits, including three years' worth of committed revenues from Detroit's Big Three automakers: Ford, GM and DaimlerChrysler.

But what are the broader implications for FreeMarkets and the e-sourcing and e-marketplace spaces in general?

In the short run, Pierre Mitchell and Kevin Mixer, analysts with technology consultancy AMR Research, believe that the addition of Covisint's sourcing professionals could give FreeMarkets a leg up in the competition to win business with auto industry original equipment manufacturers (OEMs) outside the Big Three.

"This domain expertise will be critical in helping FreeMarkets gain traction with the OEMs, which may view Covisint/FreeMarkets as merely a sunk cost and FreeMarkets as just another vendor selling to them (especially since they need to migrate to FreeMarkets' technology)," the two analysts wrote in a January 7 research note.

But as is implicit in the title of the AMR research note — "FreeMarkets Captures Covisint Auction Services, but Value Beyond Reverse Auctions Is TBD" — the analysts believe that ultimately FreeMarkets will have to prove that it can offer the OEMs and their suppliers more than just online reverse auctions.

"FreeMarkets will not be measured by a temporary inheritance of a contract for reverse auctions, but rather whether it can do what Covisint could not: capture the next level of value by supporting a win-win collaborative supply management process across the tiers rather than serving up piecemeal, win-lose-oriented bidding tools," Mitchell and Mixer write.

Mark F. Morel, Sr., president and CEO of e-sourcing solutions provider Procuri, sees the FreeMarkets-Covisint deal as symptomatic of the broader trend in the e-marketplaces and exchanges space. "What we see taking place is a continued consolidation of the marketplaces and exchanges," he says, noting that with few exceptions the substantial investments in the industry-backed marketplaces — AMR estimates that the auto industry has put some half-a-billion dollars in Covisint alone — have yet to yield the returns that companies initially expected.

Morel believes that the industry exchanges have been unable to gain the broad-based buy-in necessary to make them work in part because of the unwillingness of participating companies to share proprietary data. "The original premise was that they could combine their spend categories and leverage that spend with suppliers," he says. "But most of the exchanges had customers that were inherently competitors in the marketplace, so it was really tough to get them to agree how that [sharing] would take place."

In addition, the Procuri chief asserts that the exchanges were unable to respond flexibly to the evolving and growing needs of their customers because, from Day One, they were set up as large enterprises with many masters — their founders — and were not necessarily imbued with an entrepreneurial spirit that would drive them to adapt to changes in the marketplace.

Morel further sees the current trend in the e-marketplace space as an opportunity for companies like FreeMarkets and Procuri to pull in new customers from faltering exchanges. "We believe that this [consolidation] will continue and that those customers will be up for grabs," he says, adding that Procuri is looking to benefit from that trend by drawing in customers once tied to one exchange or another.

Meanwhile, AMR's Mitchell and Mixer feel that the FreeMarkets-Covisint deal could be a plus for the auto industry exchange: by removing itself from the potentially contentious sourcing process, Covisint may be able to better gain the trust of all parties in the industry and therefore drive greater adoption among automotive companies.

"Suppliers have been slow to get on board with Covisint given the low levels of trust from past management approaches in building adoption," the analysts write. "Shedding the auction services is a logical step in transitioning Covisint into an exchange leveraged by the Tier 'N' and increases the use of its industry operating system."