InformationWeek
Defining The Business Value Of Technology
May 10, 1999
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Trading Edge Inc., a fixed-income securities dealer, last month launched BondLink, a virtual exchange that brings together buyers and sellers of corporate bonds. The company developed the technology in-house for BondLink. Institutional investors seeking to buy or sell bonds access the Trading Edge servers and post a bid to buy or an offer to sell a particular security, which is immediately transmitted to all other traders on the system. The company says about 250 workstations at 120 institutions access the system securely with digital certificates using technology from RSA Data Security Inc. BondLink will be extended to 500 workstations by the end of this month.
LimiTrader, a similar service developed by LimiTrader Securities Inc., will begin trading next month. Bond traders post bids and offers on the system; when a potential match is made between buyer and seller, the two go into a private online chat room, using LimiTrader's proprietary chat technology, to close the deal.
Whether one marketplace will dominate or several systems will win converts isn't clear, but online exchanges will play an increasingly important role in E-commerce in the financial-services industry. There's "very strong potential" for using the Internet to conduct business among financial institutions, says Mel Taub, CIO of Salomon Smith Barney, which is one of several securities firms using TradeWeb, a system for trading U.S Treasury bonds launched last year. His biggest concerns about trading securities over the Web are slow response times due to bottlenecks and the reliability of the network.
Providing links to online markets such as TradeWeb isn't difficult because they all use the same IP infrastructure. "You manage your infrastructure as one challenge," Taub says. "You use the same type of hardware and software and connectivity. The differences among marketplaces come in the applications themselves."
Bid For Change
Procurement marketplaces have made the purchasing processes more efficient, but they haven't fundamentally changed the business equation yet because they have essentially transferred existing contractual relationships to the Web. "If you look around today, what you see is that traditional business practices dominate," says Forrester Research analyst Varda Lief, adding that distribution channels and pricing mechanisms remain the same. But that could soon change as online marketplaces proliferate and more of them add facilities for auctions.
Analysts say auctions will radically transform purchasing, effectively putting the power to set prices in the hands of the buyer. Forrester predicts Internet business-to-business auctions will surge from $3 billion in 1997 to $52 billion in 2002. The research firm also says that because of lower operating costs, Internet auctions result in price markups of less than 20%, compared with the standard 50% to 70% tacked on to prices of goods sold through conventional sales channels.
Don Bielinski, group president of W. W. Grainger, says OrderZone.com will eventually introduce auctions. The auctions will likely be implemented first where there's excess capacity in the market or a transition to next-generation products. By liquidating products and dynamically setting prices, he says "auctions are going to benefit the sellers and buyers simultaneously." Office Depot's Luechtefeld says her company will eventually use auctions to close out certain product lines, but "we don't have a specific site planned."
VerticalNet Inc., a leader in online auctions, started earlier this year as a bulletin board for companies to exchange information, such as requests for proposals and product specifications. It runs more than 30 Web sites for vertical industries and has introduced online auctions on 15 of those, including sites for the food-processing and biotech industries.
VerticalNet CEO Mark Walsh says 350,000 individuals have registered to post information on its various sites and several hundred have signed up to participate in its various auctions. The company, which uses software from OpenSite Technologies Inc. to power its auctions, will charge up to 15% of the sale price for items sold through one of its 15 auctions, with the rate decreasing for more expensive items.
Like many operators of marketplaces venturing into online auctions, Walsh admits he doesn't know precisely how companies are going to use them. Hanson of Imprint Technologies is evaluating auctioning his hard hat on VerticalNet, but says he's still working out the model.
Marshall Industries CEO Rodin says his company may sell through several marketplaces, but he's already looking beyond auctions and the ability to compare products and prices. Before long, software agents will comb the Web for product and price information, so the sites that will succeed will be those that add value, Rodin says. Engineers, for instance, might prefer to shop at a Web site that not only offers prices and specifications, but also lets them view videos on how to use a specific industrial part.
"Ultimately, there will be some new agent technologies that will begin to change the value stream of online marketplaces," Rodin predicts. "Transactions alone won't be the compelling foundation for the successful sites moving forward."
--with additional reporting by Clinton Wilder
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Illustration by Celia Johnson
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