Future of Work : CBI Journal 6 : Reinventing the Marketplace
Perspectives on Business Innovation Issue 6: Reinventing the Marketplace
Published 2001- reprinted here by permission.
We print below the "big idea" article from the Journal ( Exchanges in the New Economy: Transforming the World of Work ), the table of contents of the Journal, and also Christopher Meyer's Introduction to the Journal, setting out this issue's themes.
You can download the full Journal in Adobe Acrobat format ( 1.5MB )
EXCHANGES IN THE NEW ECONOMY: TRANSFORMING THE WORLD OF WORK
About the Author :
Pravesh Mehra is a senior vice president at Cap Gemini Ernst & Young. As the leader of CGEY’s B2B Digital Marketplaces group, he is responsible for the sales and delivery of end-to-end solutions in all industries in the emerging area of e-commerce. Prior to this role, Pravesh led CGEY’s High Technology Industry sector where he built a large practice providing strategy, process, and technology solutions.
Few places stir the capitalist imagination in quite the same way as the 200-year-old New York Stock Exchange, with its images of frenetic traders shouting above pandemonium to make the best deal for both buyer and seller. It’s little wonder that its great-great-grandchild in cyberspace, dubbed the business-to-business ( B2B ) exchange, is creating such a stir in the new economy.
In reality, true B2B exchanges resemble their physical counterparts in the so-called real world only superficially. Some early exchanges provided facilities for selling or buying some sort of good or service, much like a stock or commodity exchange. Consider the six or so vertical marketplaces run by operator Ventro, one of the first companies to focus on creating and managing B2B exchanges-and to actually pull off an initial public stock offering in the process. Its ventures include Promedix, which handles medical supplies; Broadlane, focused on healthcare commodities; Industria, which trades in pipes and related components; and MarketMile, an exchange for office supplies and services.
But plenty of commodity exchanges will arise where collaboration is not the name of the game, where the players need to understand the exact source of their competitive advantage if they are to survive. Such exchanges will require each participating entity to know its cost structure -that is, the economics of futures and options, etc. Collaboration is not always the best strategy for exchanges. It depends on the circumstances of the operating companies.
Right now, these exchanges focus mainly on supporting basic transactions associated with their particular industry, a phenomenon otherwise described as e-procurement. Members of these exchanges can place orders and bid on contracts via the Internet rather than in person, speeding up the process and therefore cutting costs along the way. But in the future, some B2B exchanges will have as much to do with intellectual assets and business processes as they will with physical goods.
To get a sense of what that means, imagine you are a manufacturer preparing to build an entirely new product line. Not only that, you’re starting from scratch. You haven’t decided where you’ll be sourcing components, you haven’t found the best facility to produce the finished goods, and you haven’t settled on who will help distribute them. Maybe you haven’t even finalized the product design. In theory, a B2B exchange could let your company compose a request for the appropriate components and materials or a proposal for distributors to handle logistics and dissemination of the finished goods. This information could then be posted online on the exchange, enabling would-be suppliers and partners to bid on the project. Meanwhile, this same company could collaborate online with manufacturing partners, refining development ideas and manufacturing processes along the way.
In the real world, pulling together the production and distribution plan to support a new product launch could take months of hit-or-miss sales visits, telephone calls, or faxes to orchestrate. In theory, the online forum provided through a B2B exchange like the one described above would give your company access to a broader variety of potential partners and allow you to negotiate contracts more quickly -in a matter of weeks -not months.
Admittedly, this is for the most part a futuristic scenario. As we have already mentioned, most B2B exchanges today offer limited facilities for negotiation, forums for auctioning off goods or components, archives of research and information, and a place for members to share ideas. The payoff still isn’t entirely clear. Consider the example of 3M, which began selling products via a VerticalNet exchange in December 1999. By August 2000, after spending $500,000 to jump into the game, it had sold less than $50,000 online.1 Nonetheless, we believe B2B exchanges promise to reshape every industry imaginable over the next five years -not just those based on tangible commodities or physical goods. And they are particularly compelling in fragmented markets, where literally hundreds of smaller dealers and suppliers need to communicate and interact with one another and a handful of major industry players.
Start Your Engines
What can you expect from a B2B exchange today ? Consider the example of network equipment giant Cisco, which put its distributors and other product assembly partners online approximately three years ago. By adopting this model, the high-tech vendor was able to move to a business model in which it did not stock any finished goods -all Cisco products are constructed as ordered. Over time, Cisco was able to cut product lead time from approximately four-to-six weeks to two-to-three weeks through the efforts of this online marketplace. The company reportedly cut an estimated $1.5 billion in costs during the first three years of using this model.
But Cisco is just one company. Covisint, the joint venture created by the Big Three automakers - DaimlerChrysler, Ford Motor, and General Motors - is probably the most widely cited example of a B2B exchange even though it isn’t yet up and running. With it, the car companies hope to bring together parts suppliers in a forum for electronic negotiations and component auctions. Eventually, the automakers believe Covisint will help facilitate more efficient collaborative product design, but that functionality won’t be up and running until sometime in 2004. Some day, the exchange’s big backers believe Covisint could handle up to $240 billion in ecommerce annually.
Market research figures predicting the impact of other B2B exchanges are no less optimistic. Depending on which research company you believe, anywhere from $1.2 trillion to $3 trillion in revenue could flow through online marketplaces by 2004.3 Even more telling are usage plans as tracked through a recent survey of 50 large companies involved in e-business activities. Slightly more than 30 percent of respondents reported they already conduct at least 10 percent to 30 percent of business through an online marketplace.4 Meanwhile, actual revenue from e-marketplaces last year reached nearly $500 million, up from $183 million in 1998. Among companies completing the most sales via B2B exchanges in 1999 were brick-and-mortar companies looking to extend their operational model to the Internet. Computer products distribution giants Ingram Micro, Tech Data, Arrow Electronics, and Avnet factor prominently. But newer companies formed on the back of the B2B exchange phenomenon, including VerticalNet and FreeMarkets, also generated respectable growth.
B2B exchanges can thank legacy companies ( think Covisint ) as well as new economy startups à la Ventro or VerticalNet for their notoriety. It makes for great press, and each side appears to have its advantages: the legacy players boast established relationships that can be migrated online while the startups hold a clean slate on which business rules can be completely written. At this stage, however, the legacy companies appear to have the upper hand when it comes to actual revenue. Of the $500 million cited above, more than two-thirds was generated by early B2B exchanges created by the established companies.
This mix doubtless will change over the next five years, and forward-thinking chief information officers believe virtually every industry will be transformed by the B2B exchange phenomenon. No wonder examples of emerging B2B exchanges run rampant. There’s even one called B2Bwine.com created last year by two exwine industry executives looking for a way to expose small wineries from more than 20 countries to merchants in the United States and Europe. “Our offerings are that we have deep content, very detailed product catalogs, and commerce functionality that allows buyers, wholesalers, and distributors to request product samples,” says Matthew Cole, CEO and founder of the company. The 500-member exchange counts on transaction commissions as well as fees paid by wineries in order to make its living. It plans to debut technology that lets members conduct contract and distribution negotiations via the Web in January 2001.
But certain sectors truly are ripe for B2B exchanges, and the race to be first to flip the switch in those sectors has begun at a furious pace. Watch closely for activity among chemicals companies ( Chematch and ChemConnect ); the construction sector ( Cephren and Bidcom ); healthcare ( empactHealth.com ); food and beverage players ( Electronic Food Service Network ); and natural resources ( ForestExpress.com ). Aerospace also has gotten into the act, bringing together Boeing, Lockheed Martin, Raytheon, and BAE Systems. Combined, the four purchase an estimated $71 billion in goods and services each year. Eventually, these aviation giants hope to bring together more than 37,000 suppliers and hundreds of airlines and governments worldwide.
Where Are We Going ?
As previously mentioned, today’s exchanges focus mainly on automating the procurement process across a particular supply chain. But there are all sorts of reasons why those constructing B2B exchanges must think far beyond providing just auction or dynamic pricing capabilities.
First, there’s the simple fact that transaction revenue alone won’t a viable business model make. “There is a reason that the New York Stock Exchange, the mother of all trading exchanges established in 1792, supports $7.3 trillion in trading volume but only generates $101 million in income annually,” reports Morgan Stanley Dean Witter in its B2B Internet Report.6 All sorts of fee-for-services ideas are cropping up, such as content syndication offerings, charges pertaining to marketing services, or even commissions based on the amount of money a member company has saved by joining the exchange in the first place. The options are many. That’s why strategy should be the top priority of any company that thinks it may want to start or join a B2B exchange.
Looking within, planning for a B2B exchange will require tête-à-têtes between the various departments affected by its creation. This includes ( but isn’t limited to ) logistics operations, sales and marketing, and accounting. Companies will need an internal champion to guarantee a meeting of the minds in a matter of weeks, not months. Perhaps even more intimidating, any company hoping to participate in a B2B exchange must assess the scope of its technological resources. For one thing, how much will it have to invest in internal computer systems ? What is the relationship between existing internal applications ? In other words, does the e-commerce site link into inventory and accounting ? If the answer is “No,”lots of upfront work might be needed before it can dive into an exchange venture. The simple fact is integrating internal systems is not for the faint of heart, and linking them to external systems doesn’t exactly make the task any easier.
Looking outside, companies that may have been competing fiercely for decades now find themselves in the unfamiliar position of having to cooperate with rivals. That means revealing price lists, discount policies, historical selling information, and all sorts of other data that most companies are not exactly eager to share -information they have been encouraged to keep secret for decades. Depending on the industry -and the size of the players planning the exchange -the effort could also face government scrutiny. The Federal Trade Commission took a close look at the automakers’ Covisint effort before giving the group the green light in mid-September 2000. The close scrutiny is no surprise given the magnitude of the project and the implications for copycat exchanges in other industries like aerospace. Two sources of information on this topic include Guidelines for Collaborations Among Competitors, published by the U.S. Department of Justice and the FTC in April 2000, and The Evolution of B2B Marketplaces released by the FTC’s director of policy planning in June 2000.
Exchanges also need to strike the right balance between services for buyers and sellers, or no one will be interested in joining in the first place. Consider the example of RetailersMarketXchange, a service that lets convenience store retailers turn to one central location to buy merchandise and arrange for delivery. On the flip side, suppliers can view aggregate retailer demand while maintaining better individual communications with specific store locations. The company began life in March 2000 as a project inside Chevron aimed at supporting retailers at Chevron gas stations. It took just four months for Chevron and the exchange’s other backers, Oracle and Wal-Mart subsidiary McLane -the largest convenience store distributor in the United States -to take the business independent. Nancy Reyda, president and COO of the operation, says the move was necessary to encourage independent convenience store operators as well as other brand-name suppliers to join the effort.
Into the Fast Lane
Strictly speaking, it’s possible to get the bare bones of technology for an exchange up and running within an aggressive 30 days -that is, if all the right relationships are in place and expectations are reasonably low. An exchange at this stage is little more than brochureware, featuring marketing information about key investors and participants, offering simple community functions like e-mail or providing links to external sites where business can be conducted. We believe there are three clear stages in the evolution of B2B exchanges: Commerce, Operational Execution, and Collaboration. Not all exchanges will necessarily include the functionality associated with all three.
In the Commerce phase of exchange building, the emphasis often is on cost reduction. Research indicates that it costs $125 to $175 to process a purchase order manually. By comparison, online procurement may cost as little as $10 to $15 per order.7 Examples of services provided by an exchange in the e-commerce phase include catalog and content management, contract negotiation, electronic bill presentment and payment, and other features related to processing transactions.
Beyond the commerce phase, some exchanges are aimed at changing overall operational execution. The goal of any B2B exchange with aspirations in this area is to change existing processes and policies among its member companies or participants to make the most of electronic relationships. At this stage, the B2B exchange should be integrated into the backend systems of its major backers and participants -providing a view to inventory and manufacturing information across the various members. In theory, the basic technology needed to offer these services could be constructed within 90 days but it could take at least that amount of time to outline the processes and plan the links needed.
What makes this lap of the B2B exchange race feel different from the previous one is its ability to make possible negotiations or transactions that previously were almost impossible to support efficiently in the real world. Consider the example of GoCargo.com, an exchange for the container shipping industry -a business that basically couldn’t exist without the Internet. The marketplace links shipping companies ( concerned with making sure every bit of space on their trucks or freight boats is filled to the brim ) with those looking to transport goods in the most costeffective manner. Today, the exchange offers a facility that lets shippers bid on space that would otherwise go empty. Another example of a B2B exchange focused on operations and not commerce is Envera, a venture backed by eight midsize chemical companies. What makes Envera different is that it does not offer spot buying facilities, concentrating its services on supporting the negotiation and fulfillment process between partners that already have existing contracts but just want to make life a little easier.
An exchange hoping to help members convert to an e-operations mindset can profit by offering members services such as ways to schedule transportation management, facilities for international trade processing, or methods for disposing of scrap materials. It could provide facilities to help participants automate a task most e-commerce sites handle miserably today: processing returns or dealing with damaged merchandise. It could follow the example of RetailersMarketExchange, which planned to launch in January 2001 a replenishment service for retail members that collects point-of-purchase information from retailers and reorders short-in-stock items as needed. A B2B exchange also could play the role of arbiter, setting rules and resolving disputes between trading partners that arise during the course of day-to-day business. Exchanges may also provide vertical-market software applications particular to the industry they serve, applications that aren’t offered in off-the-shelf today. Some may include community services that help facilitate dialogue between members. As an example, telecommunications giant Qwest recently established Q.Marketplace, a forum where its service provisioning partners and telecommunications equipment distributors can find allies to help them close deals or fill gaps in their own product or service portfolios.
The list of options goes on, but it’s unrealistic for a B2B exchange to think of developing all these services. For this reason, exchanges will explore the idea of alliances that bring the services of other exchanges to their members. Why should Covisint build a service that lets its participants procure office supplies when it can align with an exchange that focuses solely on that function ? B2B exchanges may also find it valuable to create links between their services and those serving related markets. The simple fact is most companies will probably need to join more than one exchange. Take the example of a stereo equipment manufacturer. This vendor is faced not only with joining a marketplace for its own industry, electronics, where it can share ideas with those that help it create and build its products. It also must invest in marketplaces into which it sells its finished products, such as those serving automobile manufacturers or suppliers of aviation equipment. In other words, a company’s customers as well as suppliers need to be considered.
Ultimately, some exchanges promise nothing short of seamless links among participants, supporting services such as product development collaboration. Such an effort might bring together the engineering resources of different companies across a particular industry segment to create sort of a super design team. An exchange could provide access to technical documents, visual materials, and project schedules in a secure environment. Celestica, a $5 billion contract manufacturer in Toronto that provides electronics manufacturing services for computer makers and other high-tech companies, believes collaborative product development could help vendors shorten a typical product delivery cycle by as much as 25 percent. And faster time-to-market means faster time to profit. Celestica believes profit margins will be boosted by anywhere from 6 percent to 8 percent over the lifetime of a typical product. Executives for J.D. Edwards, an enterprise software developer that works closely with Celestica, are big proponents of the collaboration idea for the simple reason that no one company can possible hire all the design talent that exists in a particular industry. “No one vendor out there has the imagination or resources to build everything that a company might need,” said Andrew Moore, director of collaborative solutions for the software developer.
Collaboration also applies when it comes to marketing and merchandising programs. RetailersMarketXchange, as an example, hopes to provide exchange members with a council of experts from across the branded product and retail distribution community that will analyze retailers’ point-of-purchase programs. These brand experts will be called upon to assemble customized programs that could be used by store operators. Some of the richest B2B exchange offerings will rely on the exchange of ideas as value-added services.
In fact, you can expect to see some B2B exchanges emerge that focus on nothing but the exchange of intellectual or human capital rather than any kind of hard goods or materials. Early examples are Ajunto, an online B2B exchange devoted to helping buyers of information technology find service providers or consultants that can handle the task for them, or perhaps even FreeAgent.com, which provides a venue for contract workers to sell their services or find partners to aid in their own projects.
The Finish Line
In 1999, approximately 30 B2B exchanges began to rev their engines. By spring 2000, that number had mushroomed to more than 400 trading communities, and now there were as many as 2,000 online B2B marketplaces clamoring for would-be members’ attention by the end of 2000. This is despite the stock market correction this past April that had many venture capitalists reassessing their investment strategies. “Don’t let the severe thrashing [B2B] stocks have taken fool you into thinking B2B exchanges have been over-hyped. B2B remains profoundly important, will expand in scope, and will transform business models in every industry,” author Don Tapscott told The Wall Street Journal earlier this year. Tapscott wrote The Digital Economy, a book that outlines many of the different business models that have arisen along with the explosion of the Internet.8
But don’t be lulled into thinking every exchange has enough fuel to finish the race for leadership. History has shown that in mature market sectors, three competitors typically account for more than 70 percent of marketshare. This is especially true in high-tech. Think of all the start-up PC makers that existed in the early ’80s that ran out of gas before the decade turned. Many B2B exchanges will fail, simply because they are unable to attract the right members. And in industries where more than one group is trying to define the standard for B2B exchange activity, there is likely to be consolidation -another factor that may convince some companies to bide their time before investing in their own exchange investment.
There’s also no guarantee that the big names behind some B2B marketplaces will be able to set aside their cultural differences. Consortia efforts involving technology don’t exactly have a great track record. Consider the number of organizations devoted to developing a standard version of Unix during the late 1980s. Most were quietly scrapped before the turn of the decade.
But one thing is certain: every single company will be impacted by the rise of these new economy business communities. You have to be in the race to win. Would you rather be a driver or a passenger ?
1 “Promises, Promises,” by Michelle Grappa, Business 2.0, Oct. 24, 2000.
2 “The Man Who Hones Cisco’s Cutting Edge,” by Andy Reinhardt, Business Week, Sept. 13, 1999.
3 Forecasts for $1.2 trillion comes from report published by International Data Corp. in May 2000; $3 trillion figure comes from B2B Commerce Forecast, published by AMR Research in April 2000.
4 Forrester Research, eMarketplaces Boost B2B Trade.
5 GartnerGroup, August 2000.
6 Morgan Stanley Dean Witter, The B2B Internet Report.
8 The Wall Street Journal, April 14, 2000.
4 WELCOME TO THE CONVERSATION
THE BIG IDEA
7 EXCHANGES IN THE NEW ECONOMY: TRANSFORMING THE WORLD OF WORK
Online exchanges hold the promise of revolutionizing business-but this unexplored territory is challenging for any company. Pravesh Mehra describes the landscape and provides some guidelines for navigating.
16 UNLEASHING THE IDEA VIRUS: A CONVERSATION WITH SETH GODIN
In an economy where consumers often resist marketing, ideas are best spread in an environment where consumers market to one another -and word is spread like a virus.
INNOVATION IN ACTION
B2B exchanges are not just changing the way products move through the supply chain; they are revolutionizing the way companies work together, changing the competitive landscape, and creating a new way of interacting with customers. The following three articles illustrate the kind of innovation that occurs in the B2B exchange environment.
24 A NEW E-LEASE ON LIFE
30 ANATOMY OF A LAUNCH: TAKING A B2B EXCHANGE TO THE MARKETPLACE
37 LEVERAGING THE VALUE OF 21ST-CENTURY EXCHANGES
A BLUEPRINT FOR CHANGE
43 GLOBAL CONSORTIA: THE NEW INTERNET IMPERATIVE
Companies-both buyers and sellers-in B2B exchanges must learn from one another’s best practices if they are to optimize their online processes. Cap Gemini Ernst & Young explains the fundamentals of participating in a global consortia.
51 TAKING UP SERPENTS: HOW ASPS ARE CHANGING THE FACE OF CONSULTING
The emergence of Application Service Providers has changed the way the software industry operates and, consequently, the way many consulting firms strategize. Here’s how we see it shaking out.
ON THE HORIZON
56 BEYOND BUYING AND SELLING ONLINE: FINANCIAL SOLUTIONS IN THE B2B MARKETPLACE
While today’s B2B landscape has little to show in the way of financial solutions for buying and selling online, the future will bring new capabilities for completely automated transactions.
61 SCANNING THE FUTURE: THE 24-MONTH FORECAST
Eight trends are shaping the future of business. Here is a description of the trends and the business opportunities they present.
The purpose of Perspectives on Business Innovation is to promote a Shared Conversation among business practitioners and observers. On the topic of exchanges, we’ve heard a variety of perspectives. Here are some examples . . .
69 SAMEER GANDHI ON INVESTING IN EXCHANGES
76 JOHN JORDAN AND JAMIE TAYLOR ON NETWORKED INNOVATION
81 TECHNOLOGY WATCH
The future of procurement and supply chain management is in e-marketplaces and internal trading hubs. Here’s how the technology works and one automated market tool to watch out for.
86 WELL-READ MANAGER
A review of Leading the Revolution by Gary Hamel and other recommended reading on the topic of B2B exchanges.
A listing of upcoming events not to be missed.
91 RESEARCH ROUNDUP
Updates, works in progress, and other news from Cap Gemini Ernst & Young-sponsored research initiatives.
97 IN CONCLUSION
When your refrigerator begins ordering groceries and your DVD rejects the latest film release, where do you turn ? Adrian Murdoch tells a cautionary tale of smart products.
Christopher Meyer was the director of the Cap Gemini Ernst & Young Center for Business Innovation in Boston. The Center was charged with identifying the issues that will be challenging business in the future, and defining responses to them. His own current research interests include the development of a New Theory of the Firm, the implications for management of new discoveries in complexity and self-organizing systems and the development of the "connected economy."
Chris established the BIOS Group, Cap Gemini Ernst & Young"s initiative to develop complexity-based solutions for management. He has more than 20 years of general management and economic consulting experience. With Stan Davis he co-wrote "BLUR: The Speed of Change in the Connected Economy" ( Addison-Wesley, 1998 ), "Future Wealth" ( Harvard Business School Press, 2000 ), and "It’s Alive: The Coming Convergence of Information, Biology, and Business" ( Crown Business, 2003 ).
Chris can be reached at Chris.Meyer@gotnerve.com.
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reprinted by permission