b2b e-marketplaces rise and fall by steve keifer

©2009 GXS, Inc.

Rise and Fall of the B2B e-

Marketplaces

A Look Back 10 Years Later

©2009 GXS, Inc.

Some call it the Golden Age of B2B e-Commerce. Others call it the height

of insanity.

Regardless of your perspective, it is difficult to argue that there will ever be another time like it in the world of

B2B e-commerce.

©2009 GXS, Inc.

The marketplace era witnessed an unparalleled infusion of capital and

an unparalleled appetite for risk.

Entrepreneurs around the world engaged in widespread supply chain

innovation and experimentation.

©2009 GXS, Inc.

Who Cares about the Marketplaces?

B2B e-Marketplaces formed a long time ago and they failed

So why bother revisiting the issues

and challenges?

©2009 GXS, Inc.

“Those who cannot learn from history are doomed to repeat it”

George Santayana

©2009 GXS, Inc.

A Look Back at the Dot Com Era

©2009 GXS, Inc.

The Field of Dreams

In the 1989 movie Field of Dreams, Kevin Costner builds a baseball field in

the middle of an Iowa cornfield.

The field would be used by Shoeless Joe Jackson

and 7 members of the 1919 Chicago Black Sox

team who were banned for life for throwing games.

©2009 GXS, Inc.

If You Build It…They Will Come

Ten years later this movie quotation became the Motto for Dot Com Entrepreneurs

©2009 GXS, Inc.

“Hockey Stick” Revenue Growth

…As they will be followed by a

Hockey Stick sloped period of rapid

growth

Rev

enue

Time

Investors should overlook periods of low revenues and profitability after

startup…

©2009 GXS, Inc.

The Land Grab Strategy

Buy as much property as you can on the

assumption that you will realize long term

revenue streams from collecting rent (on-

going services)

Monopoly Strategies Prevailed

©2009 GXS, Inc.

A B2B e-Marketplace

Facilitates the real-time transfer of information, money

and goods

©2009 GXS, Inc.

B2B e-Marketplaces were going to Revolutionize

Supply Chains

©2009 GXS, Inc.

Forward Auction

Multiple buyers compete to

obtain goods or services

Bidding drives higher prices until a winner

prevails

©2009 GXS, Inc.

Reverse Auctions

Supplier competes for the right to win

business.

Lowest bid wins the auction.

Opposite Dynamics$100,000

$90,000

$80,000

$75,000

$70,000

©2009 GXS, Inc.

Traditional Supplier Selection Process

Face-to-Face Negotiation between

Buyer and Seller

RFX to group of Known Suppliers

E-Marketplaces attempted to use the Internet to introduce

new buyer-seller relationships

©2009 GXS, Inc.

Matching Buyers & Suppliers Online

BUYER SUPPLIER

©2009 GXS, Inc.

E-Procurement

Employee Compliance with

Purchasing Policies

• All preferred supplier catalogs at single corporate site

• Easy to use tools such as wizards to guide buyers through requisitioning process

• Automating approval process for purchases

©2009 GXS, Inc.

E-ProcurementSavings of $10-$20 per

Purchase Order

©2009 GXS, Inc.

E-Procurement

Automation of Requisition & PO Process

• Avoid keying of information on paper requisitions

• Reducing purchasing errors and rework

• Costs of mailing paper POs from satellite offices to Headquarters

©2009 GXS, Inc.

Excess Inventory

Over $100B in Excess Inventory is Produced

Every Year

Excess Inventory in the Apparel Sector represents 7% of

Annual Sales

©2009 GXS, Inc.

Excess Inventory Liquidation

Overstocked merchandise is sold, often at a significant price reduction, to discount retailers.

E-Marketplaces provide services to place excess inventory with buyers around the world.

Online auctions increased price transparency through expanded information flow amongst buyers and sellers.

©2009 GXS, Inc.

Like an Overstock.com for B2B

©2009 GXS, Inc.

B2B e-Marketplaces –They Were Built…but

Will they Come?

©2009 GXS, Inc.

New Investment Strategies

Anyone with sufficient capital and risk appetite

could build a e-marketplace

And they did…• Venture Capitalists• Technology Entrepreneurs• Auto Manufacturers• Grocery Retailers• Electronics Manufacturers• Logistics Providers• Metals & Mining Companies

©2009 GXS, Inc.

Three Models for Exchanges

Independent(Public) Trading

Exchanges

ConsortiaTrading

Exchanges

PrivateTrading

Exchanges

First WaveFunded by Venture Capitalists and Entrepreneurs

Second WaveFunded by Groups of Buyers & Suppliers

Third WaveManaged as IT projects by single company

©2009 GXS, Inc.

Independent Exchanges

ConsortiaExchange

Buyer Buyer Buyer Buyer

Supplier Supplier Supplier Supplier

Owner

Owner

Advantages

• Independent from Legacy systems

• Neutral – No ownership by buyer or supplier

• Governance model allowed innovation and agility

Disadvantages

• No default participation from equity owners

• Got to market too early before demand fully developed

©2009 GXS, Inc.

Consortia Exchanges

ConsortiaExchange



Advantages

• Well-funded by customer/equity owners

• Deep knowledge of industry processes

• Established base of customers

Disadvantages

• Questionable neutrality• Governance challenges

– owners are customers• Security – possible

sharing of trade secrets

©2009 GXS, Inc.

Private Exchanges

Private Exchange(Owner)



Advantages

• High participation levels from captive base of suppliers and buyers

• Built upon ERP & EDI systems with high levels of usage

• Driven by ROI from hub-owner versus investor goals

Disadvantages

• Functionality and access different for each hub

• Buyers & suppliers forced to use many different exchanges

©2009 GXS, Inc.

The Exchanges were Built…

At the Peak of the Dot Com Era there were over 2500 B2B

e-Marketplaces

©2009 GXS, Inc.

Rise & Fall of the B2B E-Marketplaces

Source: Shakeouts in Digital Markets: Lessons from B2B Exchanges - California Management Review Vol 45, No. 2 – Winter 2003

0

200

400

600

800

1000

1200

1400

1600

93 94 95 96 97 98 99 00 01 02 03 04

Num

ber o

f Onl

ine

Mar

ketp

lace

s Venture Capitalists froze investments in

April 2000

Peak in B2B market was

February 2000

©2009 GXS, Inc.

But they didn’t come…

By 2004 there were fewer than 200 B2B e-

Marketplaces

©2009 GXS, Inc.

NASDAQ through Dot Com Era

Over $5 Trillion in Market Value was lost

in the Tech Sector

©2009 GXS, Inc.

“A Period of Irrational Exuberance”Alan Greenspan

©2009 GXS, Inc.

The Most Popular Dummies Book…

Realizing the Flawed Assumptions about B2B e-Marketplace Growth Potential -

Investors Fled

But Most were Too Late to Sell their

Positions in Marketplaces

©2009 GXS, Inc.

Why the Marketplaces

Failed

©2009 GXS, Inc.

Supplier Resistance

Suppliers viewed reverse auctions as a mechanism simply for

reducing price.

Auctions did not provide sufficient

weighting to quality, capacity, service,

performance.

©2009 GXS, Inc.

Lack of Liquidity

Consequently, many suppliers did not

participate in marketplace auctions.

The result was a lack of liquidity for buyers and

a lack of transaction fees for exchanges.

©2009 GXS, Inc.

Not Popular with Suppliers

Suppliers viewed reverse auctions as a mechanism simply for reducing price.

Suppliers believed that auctions did not provide sufficient weighting to

quality, capacity, service, performance.

Consequently, many did not participate in auctions

Supplier’s Reaction to Reverse Auctions

©2009 GXS, Inc.

Good for Pencils, but Not Engine Parts

• Liquidation of excess merchandise• Hard to find electrical components• Indirect procurement of MRO goods

• Based on more than price• Quality, service, capacity,

performance• Requiring more extensive

analysis

Marketplaces worked for:

But most Purchasing was:

©2009 GXS, Inc.

Consortia Lacked Neutrality

• Gain participation of non-equity members

• New trading communities

• Sharing sensitive pricing and product information on competitor owned platform

• Paying transaction fees that flowed back to competitors

Growth Depended Upon:

Non-Equity Members feared

©2009 GXS, Inc.

Lack of Integration

Marketplaces had no links to• Product Catalogs• Order Fulfillment• Transportation Management• Invoice Processing• Clearing & Settlement

Lack of Integration to Fulfillment, Clearing

and Settlement Systems Lowered ROI

©2009 GXS, Inc.

Culture & Relationships

• Long-standing personal relationships, which were difficult to disrupt

• Threatened to disintermediatebrokers, distributors, wholesalers with power

• Middle aged buyers and suppliers must switch from phone to electronic approaches

E-Marketplace Vendors Under-Estimated

©2009 GXS, Inc.

Perhaps they Succeeded….

There remains a general level of disappointment and

remorse with the e-marketplaces…

…But we should remember that these organizations

were catalysts for a number of high value supply chain

technologies still in use today.

Minnesota Pension Fund Manager whose portfolio lost millions in e-Marketplaces

©2009 GXS, Inc.

Powering Today’s Supply Chains

Buy Side E-Procurement

Sell Side Order Management

Excess Inventory Liquidation

ReverseAuctions

Product Catalog

Collaborative Demand Planning

LogisticsManagement

Supplier Portals

©2009 GXS, Inc.

E-Procurement Market

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2004 2005 2006 2007 2008 2009

US

Dol

lars

(Mill

ions

)

Source: Forrester Research - September 2008 “Holistic View: The e-Purchasing Software Market”

Steady Double Digit Growth

©2009 GXS, Inc.

E-Sourcing Market

$0

$200

$400

$600

$800

$1,000

$1,200

2004 2005 2006 2007 2008 2009

US

Dol

lars

(Mill

ions

)

Source: Forrester Research - September 2008 “Holistic View: The e-Purchasing Software Market”

Steady Double Digit Growth

©2009 GXS, Inc.

A handful of the consortia have been successful by:

Loyalty from customer-ownersMerging with other exchanges

Expanding into new product lines

©2009 GXS, Inc.

Covisint – Planning $1B IPO

“Compuware Corp. hopes to raise at least $1 billion in an initial public offering of its Compuware Covisint subsidiary

and has hired Morgan Stanley, the New York-based investment banker, to study the IPO’s feasibility.”

http://www.crainsdetroit.com/article/20071029/SUB/310290010#

October 29, 2007

http://www.crainsdetroit.com/article/20071029/SUB/310290010

©2009 GXS, Inc.

Covisint hires former Detroit Mayer

http://www.crainsdetroit.com/article/20090212/FREE/902129972

February 12, 2009

Kwame “Kilpatrick is going to work as an account executive

for Compuware Covisint, a subsidiary of Detroit-based

software company Compuware Corp., concentrating on the

health care industry, the Detroit Free Press reported, citing a

company memo.”

http://www.crainsdetroit.com/article/20090212/FREE/902129972

©2009 GXS, Inc.

e2open – Record Growth in 2009

http://www.e2open.com/news/article/e2open-experiences-35-percent-growth-in-first-half-of-fiscal-year-2010/

http://www.e2open.com/news/article/e2open-experiences-35-percent-growth-in-first-half-of-fiscal-year-2010/

©2009 GXS, Inc.

Learn More

On the Edge Podcast Recording

Ten Years after the B2B e-Marketplaces

Ten Reasons why the Marketplaces Failed

http://blogs.gxs.com/keifers/2009/11/ten-reasons-the-b2b-e-marketplaces-failed.html

http://blogs.gxs.com/keifers/2009/10/b2b-e-marketplaces-a-look-back-ten-years-later.html

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