InformationWeek

August 21, 2000

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Banking On B-To-B

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Unlike some other industries, Morgan Stanley didn't need to introduce the leaders of the close-knit aerospace industry, where senior executives attend a regular industry retreat called the "conquistadors." Instead, it played a role that straddled strategy consultant and investment banker, Bade says. Rick Swift, a Morgan Stanley banker with ties across the industry, organized a meeting in Chicago, where three or four people from each founding company, plus consultants from marketplace technology vendor Commerce One Inc. and the strategy firm McKinsey & Co., met to hear Meeker and Phillips give their views on what it takes for these exchanges to make money and create value.

"They played something of a consulting role in sharing what they were seeing in the other exchanges," Bade says. Later, as the founders worked to hammer out the definitive agreement, Morgan Stanley took up a more typical investment banker's role, helping companies with different agendas reach a deal.

Bade notes that all of the aerospace companies had been feverishly working on their own E-business initiatives late last year and early this year, and this spring brought the added wrinkle of working together. "This whole thing is a new frontier," Bade says. "You quickly realize you're way out front. Everyone is making this up as they go along."

To prepare its own troops for this new frontier, Morgan Stanley put its investment bankers through a crash training course in business-to-business strategies. It wanted its investment bankers--the ones meeting with company executives--to understand both the opportunities and the challenges of this new way of doing business.

Photo by Chriss Wade A few weeks after the Covisint announcement, Morgan Stanley produced a three-hour program involving specialists in mergers and technology that was presented live to Morgan Stanley bankers in New York and London offices, and via closed-circuit TV and videotape to others. "It was that symposium, and senior management focusing on the importance of doing this, that mobilized 2,000 bankers around the world," says Clark Spurrier, a principal in the technology practice who helped create the program.

The goal was to seed the strategic framework among the bankers' who could apply it to their industries. Phillips, who as an enterprise software analyst follows E-business platform companies such as Ariba, Commerce One, and Oracle, stresses that these companies offer only platforms for conducting business--these platforms can be used wisely or foolishly. Phillips has devised an E-marketplace technology architecture, but he says that it doesn't mean much without industry knowledge to apply it. "We have all these vertical industry bankers who have expertise, and that's a key part of it--to have someone who knows chemicals backwards and forwards, who knows energy backwards and forwards, who knows the division manager at Mobil who they can call," he says.

The largest mining and metals companies early this year were also racing to figure out how to put E-commerce to work for them. Several, including Rio Tinto and Anglo American--Morgan Stanley clients--came together to discuss combining their B-to-B efforts. "Morgan Stanley served as a catalyst for bringing the parties together," says Tracy Stevenson, interim CEO of what is now the 15-company Metals and Mining Exchange.

The goal is to create a platform where the majority of the industry's goods and services are bought, but daunting obstacles lie in Stevenson's path, including a maze of IT systems that have to be taken into account. For example, Stevenson's employer, Rio Tinto, has at least eight enterprise resource planning systems. Add to that the fact that mining operations are often in harsh, remote areas, and that the mining companies funding the marketplace are spread from South Africa to Australia to Canada.

"I can't invent this in southern California, then roll it out in North America, and slowly spread it globally," Stevenson says. He can't afford to anger any of his corporate shareholders by making them wait either, he adds.

Stevenson credits Morgan Stanley for helping keep a key strategic point in mind: The marketplace can't just be a useful tool for the founders--it has to offer services that create new value for companies all along the supply chain. He says that ultimately, even vertical industry B-to-B exchanges will compete with other, even more ambitious exchanges, as "super verticals" emerge that serve several industries.

Stevenson says Morgan Stanley advisers weren't alone last spring in identifying the potential in the industry-sponsored exchange. Rather, what it has done well is to help companies turn an idea that many people shared into a working concept. "Investment bankers do more promoting than inventing," he says. "They see ideas that others have, and they convert them to reality."

With the Intercontinental Exchange, a marketplace for petroleum and other commodities, Morgan Stanley played the role of matchmaker and investor. And it did so with two unlikely allies--rival investment bank Goldman Sachs, and an entrepreneur who had bought an online energy exchange in 1997.

The entrepreneur, Sprecher, had bought and expanded a technology platform for trading commodities--one that electricity utilities had used to balance their power grids until deregulation. Sprecher was convinced that the only way to build a successful E-marketplace was securing the volume of large commodity producers. The banks' commodity divisions had reached the same conclusion.