If At First You Don't Succeed

Are you confused and lost amid the clutter of dead dot-coms and failed e-marketplaces? Some companies made embarrassing, costly mistakes in this arena, but that doesn't mean that your company has to, as well. Learn from their mistakes and model your company's strategies after the winners in the indirect materials purchasing space.

Here's the story: Buying office supplies used to be pretty simple. One day, e-marketplaces came along and promised they could make the exercise even simpler. Eventually, though, dot-coms became not-coms. The end.

This tragic tale resonates fiercely for many supply chain executives. The crash and burn spectacle on the Internet superhighway features a demolition derby of battered indirect materials e-marketplaces. Unfortunately, the failure of these online marketplaces hasn't received the press attention that the more fantastic flops in the direct materials arena were accorded. Several of these ballyhooed exchanges, like Chemdex, MetalSite and MetalSpectrum, recently either breathed their last breath or morphed into a new business model, a la Broadlane, an e-commerce procurement exchange in the health care industry that now bills itself as a provider of integrated expense management solutions. And well-tested companies didn't fare much better when they tossed their lots in with the marketplaces. Burlington Northern Santa Fe Railroad, the country's second largest railway, had to put the brakes on FreightWise, its online exchange for freight shippers and carriers, when it failed to deliver the necessary profits, as did Chevron with its 6-month-old online marketplace aimed at buyers and suppliers of petroleum lubricants and fuels.

The demise of the e-procurement sites for indirect materials, among them Dell Computer Co.'s ill-fated DellMarketplace.com and the now-out-of-pep PepMarket.com, doesn't seem nearly as devastating, simply because they sold such stuff as fax paper, cleaning goods and paper clips. It's not devastating unless, of course, you're a purchasing manager who lobbied persuasively to senior management to join a new e-marketplace only to now sit glumly, eyes averted and chagrined.

While many public and private e-marketplaces for indirect materials continue to offer impressive cost reductions from discounted goods and more efficient buying processes, the recent failures give added pause for the buyers and sellers sitting on the sidelines mulling over the idea of participation. The problem is not the model, it is in the selection, explains David Hope-Ross, senior analyst at technology research firm Gartner in Stamford, Conn.

The intent, when all these e-marketplaces were announced, was to build this huge exchange in the sky through which every nickel of trade in the universe would flow, allowing the founding members to retire to the Cayman Islands with other glamorous people, he says. Unfortunately, they had a very ill-defined proposition of what these new companies would do.

Out of Supplies

Take the case of DellMarketplace.com. Dell, an Austin, Texas-based computer manufacturer and direct retailer, launched the e-marketplace for office supplies in November, trumpeting a promise of terrific savings to small business buyers. The e-marketplace was built off Dell's own internal office supply procurement system, which had helped the company lower transaction costs and reap process efficiencies. Since the purchasing infrastructure and technology was already in place, Dell figured it could build a separate business off it, offering the same lower costs and process efficiencies to others for a fee. With encouragement from its larger commercial customers like Pitney Bowes and 3M (which would both sell their products on the site), DellMarketplace.com was born.

But four months after its big splash debut, DellMarketplace.com drowned. What does Dell know about hawking office supplies? asks Matthew Sanders, an analyst on the eBusiness trade team at Forrester Research. They're a computer maker -- that's their core competency. It doesn't make sense for them to be an indirect materials supporter. They chased after something that was not within their expertise.

PepMarket.com experienced a similar fate. The e-marketplace was funded by the Washington D.C.-area utility Potomac Energy Power Co., known as Pepco by its customers. Like Dell, Pepco had constructed a Web-enabled procurement system to buy office supplies internally and later broadened it into a separate business strategy. The company stated that it wanted to leverage its investment in procurement technology through the creation of an additional revenue stream. Instead of making money, however, the e-marketplace lost it -- $1.4 million worth in the fourth quarter of 2000 alone. So, seven months after introducing PepMarket.com to its commercial power customers, Pepco pulled the plug.

Like Dell, Pepco ventured outside its core expertise. Neither company was extending their current business. Instead, both set up a new business and failed to realize the difference, says Kevin Costello, global managing partner for Andersen Consulting's market solutions division in Atlanta. A new business requires that you go out and sell, and what does a utility know about selling? That's a business where customers call them for service.

Both companies also suffered from a lack of brand identification. It's a branding issue -- people just don't associate Dell with being an office supply supplier, says Jerry Maginnis, national director of the digital marketplace practice at KPMG LLP in Philadelphia. Just because you build an e-marketplace doesn't mean [customers] will come, even if they are your own customers for your regular goods and services.

Conceptually and technologically, Maginnis says, Dell and Pepco had a good idea, but they encountered the seeming reluctance of many buyers to engage the new e-marketplace paradigm. There are still these nagging fundamental trust issues when it comes to buying from an e-marketplace, he explains. These new systems basically disrupt long-held ways of conducting business. It's a behavioral issue that will take time to change. Had they hung in there, they might have made it, but companies are driven to make money in a quarterly timeframe. Patience is hard.

While buyers and suppliers work through these behavioral changes, the publicity created by e-marketplace missteps will only deepen resistance to the buying strategy, which is a mistake, the consultants argue. Economically and intellectually the whole concept of e-marketplaces makes sense, despite the failures, Costello says. Whether they're public or private, horizontal or vertical, for indirect or direct materials, e-marketplaces make sense. They are undoubtedly the next wave of business change. But no one says the trek will be easy.

But the thought of keeping current manual purchase systems intact is highly undesirable, and e-marketplaces offer too many benefits for companies to simply ignore them -- benefits such as gracious savings by electronically connecting buyers with dozens of suppliers that are willing to compete for their business. There is also the benefit of centralized spend, despite decentralized operations in wide geographies; and, through the use of authorized spending limits and other controls, the ability to reign in rogue purchasing. As Sanders says, e-Marketplaces definitely squeeze waste out of corporate purchasing systems.

What's Going On?

Obviously, there are lessons imbedded in the e-marketplace blow-ups from which other companies can learn. For example, Wells Fargo & Co., the San Francisco-based financial services company, also unveiled an e-marketplace for indirect materials that, at deadline, was shuttered. The reason, the company says, was the financial failure of its technology partner, PointSpeed Inc., this past March. PointSpeed built the infrastructure for the e-marketplace and hosted it for Wells Fargo's commercial customers. Says Mark Baumli, Wells Fargo senior vice president in business Internet services, We want to be in this business. We're working to find a replacement [for PointSpeed] and hope to bring this back online within the next 60 days.

Costello says Wells Fargo's experience is not unique. A lot of e-marketplaces focused very heavily on the technology, he explains. It was perceived to be a substantial technological challenge to get these things to operate. The thought was '"All we need to do is get this technology going and people will flock to the site.' But you have to sell it. And this is not easy, since it involves changing the way your customers traditionally procure supplies.

Grainger Corp. had a different dilemma. Since the 74-year-old company is actually in the MRO (maintenance, repair and operation) supply business, the launching of its e-marketplaces was certainly an extension of its core expertise. It dissolved TotalMRO.com and OrderZone.com for another reason, however: money. We sought independent backing for the e-marketplaces to spin them off in an IPO, says a company spokesperson. I guess our timing wasn't right.

Neither was the timing of Metiom Inc., a software company that offered e-marketplace solutions to companies that wanted to build their own internal e-procurement systems and B2B exchanges for buying office supplies and other wares. The company has since filed for bankruptcy, leaving customers that used its technology, a virtual Who's Who list that included J.P. Morgan Chase, Hasbro and Texas Instruments, in a potential lurch if problems arise. When asked how it will weather the storm, a spokesperson at Chase, which also invested in Metiom, says, We're not commenting. Analysts say there is one, sweeping reason for the collapse of these and other e-marketplaces: hubris. There was an amazing herd mentality, an exuberance that went beyond reason, says Sanders. Companies chased these opportunities, not because the business models made sense for them, but because it was perceived as an opportunity. Other companies were seemingly making millions in the gold rush and they wanted to, as well, figuring that what they had to offer was just as good. However, they soon learned that they didn't have much at all.

Believe in e-Commerce

When system providers perish, customers are threatened not just with the loss of their investments but also the need to switch to a new e-procurement system, an effort that requires additional employee training and significant process changes. The key to avoiding this duplicative cost is to carefully select providers and models.

How do you pick a winner so you won't end up a whiner? Consultants say there is one model in the indirect materials space that presents the least amount of risk -- a bona fide office supply and MRO e-tailer, like Staples.com or OfficeDepot.com. The objective when buying indirect materials is really the convenience of getting the goods when you need them without having to pay a premium, says Sanders. e-Marketplaces like Staples.com present a brand that represents this convenience and low price. They have the distribution capabilities, aggregation of supply, consolidation of contracts and relationships that are already built up and worked through. For other companies to try to recreate this whole distribution infrastructure seems to be an uphill battle.

We've already negotiated great deals with suppliers and have the technology that companies can use to be more efficient purchasers, says Anne-Marie Keane, vice president of B2B commerce at the Framingham, Mass.-based office supply company Staples Inc., which had $120.7 billion in 2000 revenues ($512 million online). Buyers want control over their suppliers, as opposed to hiring outsourced purchasing companies. They want control of product selection and pricing and don't want something negotiated on their behalf.

Staples' purchasing technology includes workflow approval processes, as well as a purchasing card for reporting and collecting data to analyze an organization's total spend. Staples.com also offers online returns, a feature many outsourced procurement companies lack. But don't think that it isn't in the outsourcing game: Many outsourcing companies like IBM and WorldCrest have chosen us to be their preferred office supplier on their systems, she notes.

The value proposition offered by a Staples.com or similar companies is hard to beat, says Cindy Cronin, vice president of product strategy at Ability Corp., an Atlanta-based provider of supply chain management solutions to the distribution industry. Brick-and-mortar companies that have extended their core competencies to the Internet will be the survivors, she says bluntly. The other survivors will be private communities that are not open to the general public, but involve a community of businesses with like interests.

FacilityPro Inc. fits that description. The Atlanta-based electronic sourcing solution company focuses specifically on the real estate industry and its MRO needs, selling things like HVAC filters, electrical and janitorial products and lighting equipment. Large real estate companies haven't taken advantage of their buying power,  says Jerry Goldstein, FacilityPro's vice president of marketing.

For example, one of our new customers, Cushman & Wakefield [a large property management company], procured products from 2,400 suppliers all over the country, Goldstein notes. They hadn't gone through the process of rationalizing their supply base and aggregating the spend with a smaller group of strategic suppliers. We now provide the platform to direct that spend from local property managers to about 25 suppliers, while also streamlining the way they procure and pay for products. In addition, we integrate the purchases into their back-end accounting systems. Overall, the system improves visibility to the spend, product, location and employee.

Why just real estate companies? To succeed, we believe you need to own a leadership position in a target-given vertical, says Goldstein. That's our complete focus. FacilityPro's early-mover presence serving the real estate industry helped it raise $45 million in two venture capital rounds last year.

Another successful e-marketplace in the indirect materials space is Action Office Supplies Inc. The Lakewood, N.J.-based office supplies distributor ventured onto the Internet in 1994 when it found its first customer at, of all places, a NATO terminal in Iceland. That day, I knew this was the future, says Sonny Arora, president of the privately held company.

Action Office Supplies is basically Staples without the brick-and-mortar. And although the prospect of going head-to-head with other indirect materials giants was daunting, Arora distinguished his company and the result was success. Since we got into this space pretty early, I was able to build an established company, he adds. We don't have a retail store. This is what we do.

Much of Action's business is B2B-oriented with commercial clients that want to contain their purchasing expenses. We offer each customer an administrator who will control the exchange and ask things like how many locations the company has, how many people in each department are authorized to make purchases, and how much they are authorized to spend. We can even help them develop and assign budgets, says Aurora. Since we aggressively price all our products up front anyway, as opposed to offering teasers on just a few products, the savings are considerable.

Unlike Dell, Action has always been in the office supply industry, starting out in the mail-order business. We're just extending our core competency into a different distribution channel, says Arora. The company leases space in 48 distribution warehouses around the country and United Parcel Service provides order fulfillment. Action's business model has had such a successful reception that Arora has formed another company, an application service provider, that will play host to other office supply dealers on the Internet. They wanted us to get them in there without spending tons of money on infrastructure and technology, Arora says.

Picks and Pans

Companies, tired of the mundane in purchasing and eager to reap the advantages of e-marketplaces, should not venture blindly. The first thing I'd recommend, says Cronin, is to understand the business model and the expertise of the organization behind it. Determine the model's return on investment and make absolutely sure there are savings in product costs and process efficiencies.

Costello says process efficiency is even more important than lower price. In some e-marketplaces the revenue model calls for two or three price reductions and that's as low as it goes, he explains. Once the site hits a bottom price, what's to prevent buyers from doing off-marketplace transactions? The key for the e-marketplace, then, is to keep participants buying and you do that by driving down as far as you can into theirs' and the suppliers' supply chains. In that way you have a tight and long relationship.

Maginnis advises that companies find out who is using an e-marketplace, not necessarily names of companies as much as number of companies. These strategies have a slow adoption rate, so you want to make sure there are real, live customers, he says. Cronin agrees, suggesting that companies consider a pilot program with an e-marketplace before jumping in with both feet. Run a test in a particular product line or two to see how it works and if you're gaining efficiencies and then make an assessment to expand it into other products, she says.

This is a smart idea for another reason. You never know if the e-marketplace is going to be around in six months, Cronin laughs. This way, if it goes bust, you haven't invested the store. Costello, who advises a portfolio approach to e-marketplaces, also cited this risk. We recommend that our clients do an analysis of what they need to buy from e-marketplaces before they pick a combination of them to do business with, he says.

Despite the risk, companies that don't scrutinize e-marketplaces as the forum in which to buy products are missing out. Says Maginnis, There is no question in my mind that purchasing practices and supply chains will be fundamentally altered by the Internet over the next decade. We went through a period of excitement and hype, with forecasts promising that the world and markets would react with fervor. Then the gloom set in, which is understandable given the hard work in connecting enterprises. The wind has come out of the sails, but it will be back.