Integrating E-Commerce into Exchanges: Risks and Rewards
Clearly, the growth of all types of exchanges in the last 12–15 months is hastening many mid-market and Global 2,500 companies to question the value of these e-marketplaces, and to question which exchanges they should be involved with. (For purposes of this article, the terms exchange and e-marketplace will be used interchangeably.) There's an increasing focus on private trading exchanges (PTX) because the metrics of these—most notably gross margin—can quickly communicate the value of this type of e-marketplace. With the early lead that public and consortia-based exchanges had during the last 18 months, many companies today are questioning the sustainable value of using e-marketplaces if the returns are not more immediate, and (at the very least) measurable. That's why private trading exchanges have such a strong future—the benefit of using them can be quantified over time.
With the focus being on exchanges and their evolution, it's important to realize the progression this marketplace has experienced in an accelerated timeframe. First, with the public exchanges, then to the consortia-based exchanges (CTX), and now with the advent of the private trading exchanges (PTX), there is a progression to profitability with each business model in this area. Increasingly, companies are using several exchanges from a variety of business models to meet their needs. It's entirely common, for example, to find one of the Global 2,500 having relationships with several consortia exchanges, in addition to building their own private trading exchange strategy. It's clear that exchanges are here to stay. The lessons learned from public exchanges in particular can assist you in selecting which consortia exchanges to participate in, and help you decide which companies make the most sense to partner with when you create your own private trading exchange.
There are several reasons why the much-heralded public exchanges have not accumulated customers and been the catalysts of business that everyone expected. The following factors explain why public exchanges have not been able to attain greater buy-in from prospective participants:
Processes Defined Weren't in Touch with Target Customers
Prior to the April, 2000 market correction, any venture capitalist would tell you that a business plan based on the progression of disintermediation in a given industry, in conjunction with a large marketing spend, would have the potential of attracting industry leaders. This was because the focus was squarely on making sure that one's own company didn't miss out on the rush to the Web. Yet, in retrospect, exchanges, including Chemdex, were in effect telling the Global 2,500 that the exchanges had a better idea of how to run their online businesses than they did. The result was a huge infusion of cash—to Ventro, for example. After digging a little deeper into the processes defined, however, it was clear that although the initial concept of a public exchange made sense, the lack of replication and value-add back to the companies already in these businesses was noticeable.
Clarity of Business Model
Just when do the metrics of traffic and visits turn into a revenue stream? For several of the public exchanges, these two metrics never met, mainly due to a lack of focus on profitability in the business models. It's true that advertising models from Yahoo! and others did generate initial returns, the sustainability of a business model based purely on visits that do not entice the occasional visitor to purchase did not deliver the levels of revenue necessary to attain growth. The alluring aspect of the private trading exchange model is the focus on profitability and more precise measures of velocity of transactions and inventory turns.
Where's the Margin?
Public and consortia-based exchanges have an indirect effect on gross margin and velocity in a supply chain because these types of exchanges often act as information and even transaction aggregators. Yet the private trading exchanges have the potential of making an even greater impact on financial and supply chain metrics because they can be tailored to the specific needs of the organization(s) involved. The final metric that matters for implementing a private trading exchange is margin.
That Big S Word: Scalability
The fact that many of the public trading exchanges didn't scale well for companies as they grew both in performance and process also made them more susceptible to shorter product life cycles. The need for creating a platform that can scale quickly as a company grows and the focus on greater control on the responsiveness of how transactions are completed have made private trading exchanges a more attractive technology.
A Vertical Market Focus Didn't Guarantee Success
Although there are many different variations of vertical market business models, the mere fact that an exchange has a vertical focus does not ensure success. VerticalNet and Chemdex are both examples of companies that have strong vertical market orientations, yet have not been able to get sufficient traction in their respective markets because these exchanges tried to change the existing processes in industries. Clearly, developing exchanges that can increase the velocities of transactions are the ones that are growing today. The key point of private trading exchanges (PTX) is that the velocities of transactions can be much more easily accomplished when an exchange is developed specifically to accomplish the goals of an enterprise. The consortia and public trading exchanges do provide for companies to connect with each other. The private trading exchanges being used by Proctor & Gamble, Dell, and others are all managed to financial- and customer-responsiveness metrics.