InformationWeek: The Business Value of Technology

InformationWeek: The Business Value of Technology
InformationWeek - Our New iPad App
News

June 12, 2000

Printer ready
Printer ready
Another View

Ask The Tough Questions

Are E-exchanges Category killers or department stores?

By Vinnie Mirchandani

TechEncyclopedia
Need a definition of a technology term? Look it up here:


Send Us Your Feedback
It's a chaotic world on the Web these days, as companies mull the idea of procuring goods through E-procurement services while continuing one-to-one relationships with key suppliers. A challenge many companies face is whether to build a collaborative exchange with others in their markets, a la DaimlerChrysler, Ford, and General Motors in the auto industry; purchase goods through an independent exchange such as PlasticsNet; or buy from a supplier-distributor marketplace, such as Grainger.com.

Given all the confusion around online procurement and marketplaces, the impact on the business can be huge. These marketplaces are moving quickly, and not always for long-term sourcing advantage. Some companies want to mimic the big boys-"If Sears can collaborate with its competitor to build an exchange, we should, too." Others, fascinated by Wall Street valuations of business-to-business exchanges, want a piece of the independent exchange action.

The biggest influence IT and procurement executives can have on their companies is to ask some tough questions:

  • Can we truly collaborate on an exchange with our competitors? Look at the auto industry, where the most publicized corporate exchange-Covisint-is being implemented. Through the 1990s, Chrysler pointedly took advantage of GM's poor supplier relations. Have their procurement mentalities changed so dramatically, so soon? Even if cultures mesh, will the government let competitors work closely? Word out of Washington hints that procurement consortia are replacing Microsoft as the federal government's next big obsession. Where should these exchanges focus? Though together they buy a large percentage of catalytic converters, the major auto manufacturers spend less than 2% of the total IT market. Does it make sense to try to get behemoths to agree on standards on items with relatively low leverage?

  • Are we paving old cow paths? Most purchasing executives will say that items they are most uncomfortable procuring are complex capital projects, IT, and professional services. Yet most recent procurement investments have been for maintenance, repair, and operations items, and industry supplies. In the meantime, companies keep spending billions on IT consultants, with hardly any rigor in competitive sourcing.

  • Is price the prime driver? Exchanges such as FreeMarkets Inc. are fascinating and somewhat sadistic to watch, as their real-time reverse auctions make a mockery of incumbent prices. They're so brutally effective that the terms "exchanges" and "commoditization" are increasingly synonymous. But is price everything? I polled several CIOs about participating in an exchange based on IT projects. Team quality and results accountability were far more important to them than price. The procurement executive needs to focus user expectations of exchanges beyond just price pressure.

  • Are these E-exchanges category killers or department stores? Every business-to-business exchange executive I talk to invokes the name of Amazon.com, which initially began selling books, then compact discs, and, finally, the world. They also admire VerticalNet, which has a presence in more than 50 industries. Wall Street, of course, loves this risk diversification and capital cost leverage.

    But IT and procurement executives should also help their bosses understand the value that specialist marketplaces can bring. This will not be easy-during the last few years, companies have consolidated supplier bases and are faced with the task of sorting through two to three specialist exchanges for every standard industry code. There should be a structured process to evaluate whether the exchanges deliver the five Cs: content, context, community, commerce, and consequence.

  • Now that dot-com stock prices are more realistic, does it still make sense to ask for equity in vertical exchanges and marketplace software companies? Does it make sense to build captive exchanges and convince Wall Street you are E-savvy? Do the Net exchanges being evaluated have sustainable, long-term business models? Can we get back to seeking procurement efficiency and sourcing advantage? These are questions you must raise and help your company answer.

    The proliferation of marketplaces and E-procurement tools gives IT and procurement executives a huge profile in their companies. To make the right impact, you need to ask the really tough questions in a market filled with opportunistic temptations.

    Vinnie Mirchandani is president and co-founder of IQ4hire, a marketplace focused on customer-relationship management, E-business, enterprise resource planning, and other complex IT consulting projects. He can be reached at vinniem@iq4hire.com.

    Back to the Solution Series homepage
    Back to This Week's Issue
    Send Us Your Feedback
    Top of the Page

    Get InformationWeek Daily

    Don't miss each day's hottest technology news, sent directly to your inbox, including occasional breaking news alerts.

    Sign up for the InformationWeek Daily email newsletter

    *Required field

    Privacy Statement



    This Week's Issue

    This Week's Issue
    Back Issues

    Technology Whitepapers

    Featured Reports







    Video