4/1/2001 | 7 MINUTE READ

What's in an Online Marketplace?

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Web-based trading exchanges are the e-hot e-spots for buyers and sellers to meet and conduct business, from simple catalog presentations to, in the future, fully integrated back-office transactions. Here's what those exchanges are going to look like.


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 "The B2B exchange market is in its early stages," a spokesperson from Dell Computer recently said in an announcement about Dell shutting down its 4-month-old Dellmarketplace.com online exchange for small businesses. "It's a paradigm shift for companies to buy and sell goods over e-marketplaces."

Indeed it is. Low customer adoption rates is one reason for that shutdown and the demise of dozens of other online marketplaces in the past year. Add to that too much competition (especially from conventional brick-and-mortar companies) and disappearing venture capital.

Yet amongst the e-wreckage are the foundations for future Web-based business-to-business (B2B) operations. Here is what that future might look like.

The evolution of e-business

The e-business evolution can be broken into three major phases. In the first phase, "way" back in 1998, business-related "dot-com" Web sites emerged all over the virtual world. Most of these were simple portals for Web surfers—customers and other interested parties—to view product specifications and ordering information. Soon after, basic procurement capabilities were added to these sites, particularly buyer-seller matching for indirect procurements that were both labor- and paper-intensive. (Maintenance repair operations, and travel and entertainment are two primary examples of indirect procurement.)

In the second phase, namely last year, Web-based technologies expanded. They began incorporating several core back-office processes, including order management, procurement, logistics, financial management, and supply chain planning. At the same time, online procurement systems began handling direct materials (those materials used in finished goods).

These activities proved the concept of electronic collaboration. The next step was to move the focus from the back office to the front office. Electronic collaboration in engineering and design became particularly attractive, given that these two business functions are themselves very much collaborative environments.

In the meantime, industry consortia and industry-based trading hubs started to develop. The goal of these hubs started out quite modestly: automate on-line (and mostly back-office) business operations by linking the information technology (IT) systems of trading participants to the IT systems of other customers and suppliers. This connectivity is becoming the Mother Of All Integrations, involving standards in Internet-based data communications: data definition and formatting; data routing both in the virtual universe and within corporate firewalls; data translation so legacy systems can "talk" to each other; data capture for reporting purposes, and more.

Now in Phase III, stand-alone trading exchanges are being connected together. This not only solidifies enterprise-to-enterprise collaboration, it also makes marketplace-to-marketplace interactions possible, depending on the business focus of the individual marketplaces. At a more detailed level, though, this interconnectedness links the back-office operations of individual businesses together. Some consultants and analysts are predicting that at some point trading exchanges will replicate enterprise resource planning (ERP) capabilities in virtual space. In fact, these exchanges will be the next-generation ERP systems, providing ERP across enterprises, across different industries, and across marketplaces. At this point, true back-end marketplace integration will be transparent.

The e-market continuum

"We are now in the throes of the third wave of electronic commerce," according to the Giga Information Group (Cambridge, MA) in a report printed a year ago entitled Market Overview: E-Markets—A Natural Evolution of E-Procurement. "The first wave was sell-side, the second wave was buy-side, and the third wave brings buy-side and sell-side together in online marketplaces."

Giga sees these six types of online exchanges operating in a virtual continuum from one-to-many to true many-to-many:

One-to-Many Marketplaces are typically private exchanges linking one seller to several buyers. That one seller, typically the owner of the marketplace, has sufficient market leverage to force the marketplace participants to do business the seller's way. Dell's now-defunct exchange for general business supplies along with Dell computers was to be a one-to-many marketplace, though apparently Dell's market clout wasn't enough leverage to keep the online marketplace going.

Aggregator Hubs, at minimum, display the content of several suppliers' catalogs to potential buyers. Some of these hubs display other content, such as contracts and authorizations.

Broker Hubs match multiple buyers and multiple sellers together based on product pricing. Broker hubs are best suited for commodities, typically sold in bulk, and for limited-supply products that are purchased through auctions or some type of bidding process. Requests for quotes and proposals, contracts, and other transactions between buyers and sellers are handled through e-mail versus an automated bidding processes, though real-time dynamic transactions are becoming more prevalent.

Collaboration Hubs have the software tools and virtual environments for multiple buyers and sellers to share information, as well as both correspond and collaborate around specific functionality. For industries with highly engineered products, such as automotive and aerospace, these hubs offer Web-based collaborative design/engineering software. mySAP.com Marketplace from SAP is a collaboration hub.

Translator Hubs are similar to collaboration hubs in that both offer buying, selling, and collaboration capabilities. However, translator hubs include massive dollops of enterprise application integration capabilities for the true system/data integration between the different and incompatible legacy environments of different trading partners. At minimum, these hubs provide some type of data translation for legacy systems to communicate, including electronic data interchange, e-mail, eXtensible Markup Language (XML), and fax. Ariba Network (from Ariba) and MarketSite (from CommerceOne) are examples of translator hubs.

True Many-To-Many Marketplaces are virtual, rule-defined software environments that let multiple purchasing systems interact directly with multiple ordering systems, thereby enabling truly unrestricted and dynamic e-commerce between buyers and sellers. "Rule-defined" means that workflow technology pushes relevant information from buyer IT systems to seller IT systems, and vice versa. Workflow automates much of the decision making and collaborative planning associated with customer ordering at the front end and logistics supply and demand at the back end. These exchanges go beyond the buyer/seller matchmaking that online exchanges first performed; they are now being designed to manage many of the processes typical in the extended, complex supply chains of today.

True megamarketplaces are just beginning to emerge as more and more tech standards are adopted both within and across industries. Granted, every vertical marketplace has its own standard, so crossing industry and marketplace lines will be a tough road to travel. This is why the Microsoft .NET initiative is so important; such XML-based plans will fuel much of the advancement in these types of marketplaces.

Public, private, and industry-sponsored

There's another way to look at the universe of online exchanges: public and private. Public exchanges support many-to-many relationships; private exchanges support one-to-many relationships, namely one company and its suppliers or customers, or both. According to C. Edwin Starr, a partner in Accenture's Supply Chain Practice, "Both exchanges improve the degree of integration and collaboration between companies. Both help participating companies become more efficient at anticipating the needs of buyers or sellers, and in operating their extended supply chain at a lower cost."

Add a streak of independence to these online marketplaces and their goals become quite different. Public independent marketplaces try to match new groups of buyers and sellers together so that all can benefit from price breaks. The private independent marketplaces, namely the industry-sponsored ones, continues Starr, "focus on integrating the increasing degree of collaboration between existing trading partners, which takes additional costs out of those collaborations."

Mind you, many companies unwilling to put their critical, proprietary supply chain processes out on the Web are maintaining their own (private) exchanges. However, industry-sponsored marketplaces have an advantage of dipping into the deep financial pockets of multiple, primary industry participants. Plus, the drive exists among these participants to create collaborative environments for themselves, their customers, and suppliers—and even to work with rivals to get these environments up and running. Witness the primary automakers behind Covisint. Private and industry-sponsored exchanges will complement, not replace, public exchanges.

Dynamic Trading Characteristics
The changing demands of manufacturing show a move toward real-time, customizable transactions.
CharacteristicTraditional ModelCurrent Internet ModelBid Trading Model
Value propositionProductInformationService
SpeedWeeksDaysReal Time
Service9AM-5PM weekdays24X7X36524X7X365
Consumer interactions100s10,000s1,000,000s
Marketing focusProduct positioningConsumer acquisitionCustomer retention
Consumer relationshipStandardTargetedCustomized
Strategic assetLocationVisibilityCustomer database
(Source: Forrester Research Inc.)


Read All About It

Here's a little something to keep in mind: "If you own, operate, or participate in any business, B2B e-commerce is gong to become very important to you in the next two years. Don't relax—we're talking two Internet years, or about fifty to sixty calendar days." So says Michael J. Cunningham inB2B: How to Build a Profitable E-commerce Strategy (Perseus Publishing). While some suppliers have told us that they are going to stand by, waiting until there is a better understanding of the way that Covisint is going to work, before they start their e-business, Cunningham's observation of the time-compressed and time-critical nature of the B2B landscape should make everyone start working on their deployment if not now, then yesterday.

B2B: How to Build a Profitable E-commerce Strategy

Even if you aren't personally responsible for your organization's B2B strategy, B2B is a useful book in that Cunningham provides clear, useful explanations of many of the terms that those who are well-versed in the subject apparently take for granted (i.e., many of the people who are deploying B2B in the auto industry come from other fields and they typically have an IT background; consequently, their lingua franca is something that isn't the normal automotive parlance).

Another useful text is From .com to .profit: Inventing Business Models that Deliver Value and Profits by Nick Earle and Peter Keen (Jossey-Bass). When the book came out last year, Earle was president of Hewlett-Packard's E-Services.Solutions (he still may be, but things do move fast), so he has a good understanding of some of the business implications germane to industrial firms.

But in the cases of both books, many of the examples are from the consumer space, because that is certainly where lots of the activity has been—so far. Note, however, that both books put "profit" in their titles, which is something that's critical to the automotive space.—GSV