Surviving the E-Wars

Surviving the E-Wars

Will Net markets evolve into global monoliths after seasons of conflict followed by massive consolidation, or will they end up being regionally flavoured - at least for most industries and at least for the foreseeable future? What will separate the victors from the vanquished, and how can organisations best protect themselves from the inevitable carnage?

Nothing is certain and opinion is divided; however, it is clear those organisations best positioned to steal a march on the future will have the greatest chance of staying alive to tell the tale.

Forrester Research believes e-marketplaces will undergo massive consolidation over the next three years, leaving less than 200 survivors at the end. Senior analyst Steven Kafka predicts buyers will continue to move into Net markets, with purchasing executives planning to buy 64 per cent of their indirect materials in online markets by 2002. However, he believes even this level of growth can't support today's profusion of sites.

"The explosion of e-marketplace activity has created a crowded, confusing landscape within most industries," Kafka says. "Buyers and sellers alike are wrestling with selecting the right strategies. As trade through e-marketplaces takes off, participants will come to better understand their needs - driving a shakeout over the next three years that will affect both dotcoms and industry consortia."

As the dust from the shakeout settles, Forrester believes that four types of e-marketplaces will emerge, each with a distinct value proposition, business model and market structure: procurement malls hosting the catalogues of multiple indirect materials vendors and offering e-procurement services to all industries; commodity marts (cross-industry e-marketplaces) providing ready access to specific raw materials like electricity and chemicals; industrial facilitators tying transactions into critical workflow processes for indirect materials like machine pumps and lab supplies; and vertical hubs attacking narrow direct materials product segments. Forrester says the primary value of the vertical hubs will come from enabling supply chain efficiencies like lower inventory and better capacity utilisation.

According to Forrester's calculations, those four types will each have relatively few representatives. The analyst believes the US market will only support a total of 181 significant e-marketplaces in 2003.

Backing up the Forrester view is an e-view study from Deloitte Consulting: B2B Darwinism, How e-Marketplaces Survive (and Succeed). Deloitte is convinced there is only one possible conclusion to be drawn from its latest study: significant consolidation is just around the corner, with decline in e-market growth already evident in some industries. Head of Deloitte Consulting Australia's B2B practice Rod Gallagher estimates there are probably 70 e-marketplaces operating in Australia - 10 of them actually trading - but says after the shakeout there is likely to be "a number probably significantly less than that".

Globally the company predicts the next 18 to 24 months will be critical as many e-marketplaces fail; the reward for the winners of what Deloitte calls "this gruelling two-year sprint" will be access to the projected multi-trillion-dollar opportunities of the B2B market. Nevertheless, Gallagher says it is important to look beyond the "body count" predictions to tackle the more important question of what key factors drive the success and failure of e-marketplaces.

"Why are some [e-marketplaces] really starting to take off and provide value?" Gallagher asks. "What's the differentiator for them? Why are they the marketplaces that will have sustainable value to both buyers and sellers?

"What we're saying is lower product prices may be getting the attention at the moment, but that's not really where the value is. We think the ones that are going to survive will provide a value chain in extended services as part of the exchanges." By that reasoning, the industries that can vertically integrate their supply chain will derive most value out of the e-marketplace scenario, Gallagher says.

Horizontal exchanges will continue to exist and the large ones with significant volume passing through them may even thrive in Australia, Gallagher says, but the Australian market is not large compared to the entire global economy. "So, yes, there will be a place for horizontal exchanges in Australia, to some extent, but it will be very much a matter of volume or scale from that perspective. The real key is going to be integration. How do you get the information flowing from supplier to seller in a way that is seamless and where the costs are not prohibitive to instigate that integration? And how does that all fit together in a play that an organisation is currently undertaking?"

Gallagher says there will be risks for players who get it wrong.

Where indirect procurement spend is concerned, getting involved in the wrong e-marketplace is unlikely to matter, from the perspective that it's not core business. On the other hand, in a vertical exchange that's integrating the industry - where visibility of information and availability of that information up and down the supply chain is required - getting it wrong could have dramatic impact, especially on the manufacturing sector. That's because an exchange that is temporarily unavailable might have an adverse impact on the ability to deliver product just in time to the production line. Nor will people who are unaware of the availability and promise of goods attempt to buy.

Forrester and, to a lesser extent, Deloitte have looked at the inevitable e-marketplace shakeout from a global perspective. However, as Hong Kong-based AsiaCommerce CEO Peter Zapf points out, many of the marketplaces - especially the vertical hubs (construction, food and agriculture) - will be local. This is because some business practices are influenced by local regulatory, cultural or economic constraints (think construction, where relationships are important and goods are heavy to ship). As a result, Zapf refuses to believe any US-based marketplace can be a global winner in all industries. "This leaves plenty of opportunity for local players in local markets if those markets have enough scale or some other form of competitive advantage," Zapf says.

Ozecorp chief evangelist Mark White agrees it is unlikely Net markets will evolve into global monoliths and are more likely to be regionally flavoured for most industries. Therefore, he's convinced there are likely to be more survivors than Forrester predicts. "We see numbers rising until 2004 or 2005," White says, "with a consolidation period over two years or so, leaving around 2500 or so to battle it out in the verticals."

White believes verticals targeting a particular "pain point" in the value chain stand the best chance of early uptake and subsequent entrenchment in their industrial environment. With entrenchment will come a defensible position and an attractive exit strategy in five years or so as overseas players seek global expansion opportunities - or even a solid base for a push into larger markets. "The beauty of the Net is that the US does not have the monopoly on good ideas or business models," White says.

Private or Public

Where Forrester and Deloitte remain focused on "public marketplaces", Zapf points out that "private marketplaces", or what might be called "tightly integrated supply chains", will also have a fair number of participants. "Peer-to-peer transactions (EDI meets Gnutella?) will continue to make sense for a sizeable portion of transactions," Zapf predicts. "These will occur in addition to transactions that flow through central e-marketplaces."

As Zapf points out, the opportunity to use information technology to help companies improve their business processes extends far beyond e-marketplaces as they are normally conceived. Rather, the real overall opportunity is to provide products and services that improve supply chain operations. "E-marketplaces, a business space that has become crowded, don't necessarily address all dimensions of this opportunity," he says.

Other opportunities include infrastructure-related plays (XML, mobile access, high-bandwidth mobile, GPS tracking), new applications (collaboration, yield management and/or risk management solutions), and other as yet unknown or unexplored areas. These may (or may not) be integrated with e-marketplaces, he says.

"The key is to keep the overall opportunity in perspective," Zapf says. "E-marketplaces is one type of solution that leverages a new infrastructure - the Internet - and that has received a lot of media attention. As a result, many start-ups have rushed in to take a crack at generating economic wealth by building offerings leveraging this new technology. But it's Darwinian; there will be a shake-out, and there will be fewer players left standing in the e-marketplace space when it's all over than there were at the peak of interest."

In response, some potential marketplace participants are creating consortium marketplaces that are having the effect of delaying everybody's uptake, Zapf believes. He says consortium marketplaces move slowly while also making it difficult for independent marketplaces to attract participants. "Some consortium participants will get tired of waiting for the consortium to make progress and will instead form their own private marketplace or join a public marketplace," he says.

Nonetheless, he advises bricks-and-mortar participants to experiment with these new methods of doing business - even if the e-marketplaces will fail. Consider it R&D. "The ROI involves learning about e-commerce while taking on a risk that the e-marketplace may not exist long term," Zapf says. "In participating, companies should consider minimising their initial costs of participation in order to mitigate risk.

"As companies become more comfortable with participation, they can then increase the cost of participating (investing in tighter integration between back office and marketplace systems, for example), which should also increase the benefits," he says.

Skills Shortages

Some players also believe evolution in the e-market space will inevitably occur much slower than many have imagined.

"I hear Auto CoBaM Covisant have over 2500 suppliers waiting to have catalogues placed on the trading hub, but only three have been done so far," White says. "Last time I checked, corProcure had a 90 per cent job vacancy rate! Skills shortages will significantly delay many B2B initiatives for the next several years at least - unless new players like a Bowstreet or ObjectSpace can insert a new way of thinking about how e-business gets done."

He says it will be important for Australian market makers to position themselves correctly, with the leading players in adjacent verticals, taking the lead from organisations like Ozecorp. To White's knowledge, the PaperExchange deal Ozecorp has signed is the first example of international cooperation between independent, non-aligned trading hubs in adjacent verticals. "ICG-backed PaperExchange is one of the oldest hubs and is reasonably well established, though they are worried by a supplier marketplace recently announced," says White.

However, there is another warning for Australian market makers, this one from Streamlink founder and executive director Martin Fisk. He says exchanges that rely on transaction revenue will go the same way as consumer Web sites that tried to charge for content. Consumers soon realised that the Internet was open and largely free and refused to pay. "We believe the same will happen with B2B sites - open standards like ebXML [which will allow trading partners to easily trade directly over the Internet] will ensure the death of many a B2B exchange."

Fisk says the other issue confronting exchanges is the fact that they automate only a small component of the overall process: the lowest common denominators of catalogues and order transactions. A huge amount of work still needs to be performed by a buyer's e-procurement system and a supplier's CRM system, he warns. "These systems must be tailored to each organisation, not the ‘one size fits all' approach taken by most e-marketplaces."

Meanwhile, he says Streamlink customers have a fundamental problem with e-marketplaces: one of control. "As one chief executive told me: ‘We want to reduce the number of suppliers and products that we buy; in order to survive, e-marketplaces must increase them dramatically. This is why we need e-procurement, not e-marketplaces - we need the control'," Fisk says.

Old News

Meanwhile, Aseem Prakash, CEO of Interactive Knowledge On-line, remains unfazed by the prospect of any shakeout. Rationalisation is old news, Prakash says, and it matters little if the number of e-marketplaces goes down.

"Ten years ago, the world saw rationalisation among PC dealerships. For about three years, we have been witnessing the same in the ISP sector. More recently, B2C companies are in the same boat. Has the world stopped buying PCs? Have the choices for connecting to the Internet lessened or the number of B2C Web sites gone down to the point that Web-based shopping is a thing of the past? Of course not."

Prakash says every market has a way of rationalising and aligning itself with the best-of-breed practices and solutions, and e-marketplaces will be no exception. He also sees a fundamental flaw in assumptions of a bleak future for e-marketplaces - the assumption that anything can be predicted about this rapidly evolving area.

"While businesses are re-engineering processes behind static B2B c-commerce (conventional commerce), the e-business world is very dynamic," Prakash says. "Eighteen months ago, e-marketplaces were not on the horizon. In fact, the momentum picked up after the Ford-General-Motors-DaimlerChrysler announcement on February 25, 2000.

"While there are several views - and I have some too - it is still early and hard to predict what the future holds for e-marketplaces, B2B e-commerce and B2B c-commerce," he says.

While Prakash sees little cause for concern over predictions of the future of e-marketplaces, he says there is another, more pressing issue that should worry us all. That's the role, if any, Australia as a nation will play in the new economy and in B2B e-commerce via e-business trading hubs in Asia-Pacific.

"To deal with the grim reality, Australia should be aligning itself with Asia beyond c-commerce. I can tell you, since I am in the region at least once a month, Australia is not a part of the new electronic regional world - despite what politicians or government reports say," he says. "Australia, Canada and England (among Anglo-Saxon nations) face the same bleak future that New Zealand is grappling with: invisible and insignificant in the new economy."

It's a warning that serves to put debate about the future of e-marketplaces into grim perspective.

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