InformationWeek

August 21, 2000

Printer ready

Banking On B-To-B

continued...page 3 of 3

More on Morgan Stanley:

Phillips: Morgan Stanley's Man In The Know

Send Us Your Feedback

"Morgan Stanley, in examining these businesses, saw a huge opportunity to digitize this commodity market," he says. "At the same time, Goldman Sachs was going through the same analysis internally."

In January, Sprecher approached commodity traders at the two investment banks to discuss a commodity exchange. Goldman Sachs and Morgan Stanley investment bankers then put Sprecher in touch with top executives at energy and chemical companies. By the end of February, they had the framework of an agreement for an exchange, and by March, a letter of intent was signed.

Morgan Stanley bought an equity stake in the exchange alongside such industry heavyweights as BP Amoco, Royal Dutch Shell, and Totalfina Elf. "Having Goldman Sachs and Morgan Stanley as the two anchor tenants offered tremendous credibility around the world," Sprecher says.

The B-to-B exchange push illustrates how Morgan Stanley wants to do more for its clients than raise capital and do merger deals. Mamdani calls it redefining what the company does, expanding elements such as offering strategic advice, identifying technology partners, and introducing industry partners to its classic capital-raising activities.

Mahmoud Mamdani Photo by Chriss Wade He points to technology as a prime example. The firm needs extensive IT product and industry knowledge to serve IT providers directly--for instance, taking companies public, such as Ariba or Vignette Corp. But Morgan Stanley also wants to market that knowledge to industrial clients that can apply it to their supply chains to do business differently. "That lets us do a lot of business in the technology sector, but if properly applied lets us help companies not in the technology sector successfully navigate all of the opportunities and challenges of E-commerce," says Mamdani.

How far can Morgan Stanley go with its strategic consulting role? It aspires to provide what it calls "transformation services," tapping people across its organization to help companies craft strategy, sort through technology choices, and create the incentives and financing to change how they do business. But there's a limit to the depth of consulting that Morgan Stanley can deliver.

Graham Collins, the chief operating officer of Pantellos, the domestic utility marketplace, says Phillips and others from Morgan Stanley helped the founders validate financial assumptions in their forecasting model, and they relied on the analysts' unmatched access inside exchanges. Only Goldman Sachs was close to Morgan Stanley in relevant exposure, he says.

"We were looking at Morgan Stanley based on their experience with other exchanges to validate some of our assumptions," he says. "Any level of experience is desirable, given how much ground is being carved out."

Pantellos, which includes 15 utilities such as Consolidated Edison, PG&E, and TXU, has also retained Morgan Stanley as its banker for when the exchange goes public. Yet Collins doesn't plan to turn to the firm for deeper strategy consulting. He knows its role with other exchanges has blurred the line between banking and management consulting, and he knows the firm has inside experience on many exchanges. But exchanges ultimately center on supply-chain dynamics, and Collins--a former PricewaterhouseCoopers strategy consultant--has more faith in traditional management-consulting firms. Morgan Stanley "doesn't have sufficient supply-chain content depth," Collins says. "Guys like Chuck Phillips have a degree of insight, but it's more from the technology standpoint."

One thing is certain: Morgan Stanley expects to hold onto its insider status among industry-led exchanges. For one thing, it has anchored itself as a shareholder in some of the new ventures, either by buying in or accepting equity in lieu of fees. Morgan Stanley executives decline to say whether they plan to partner with a consulting firm, as Goldman Sachs has, to expand the firm's business-to-business capabilities. But clearly it plans to continue pushing its B-to-B consulting-type services as part of a broader relationship with clients.

Yet more important than Morgan's role is whether the idea that it's backing--industry-led marketplaces--lives up to its hype. If these exchanges wind up as mere online stores or tools to gang up on suppliers or buyers, they will have fallen short of the vision.

"You see how far this is from putting together a system to beat up your suppliers," Mamdani says. "Collaborative commerce is really the point of these exchanges."

That dream still faces obstacles. The exchanges are still building their technology platforms. Industry leaders have to show they can continue working together. And participants have to believe in the value enough to risk new relationships capable of changing how business is done. If Morgan Stanley can help that happen, the company will have earned its paycheck.