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December 4, 2000

Out Of The Box:
The Truth About E-Marketplaces

The recent wave of dot-com failures is about to be replicated with a wave of E-marketplace failures

By Michael Hammer

Michael Hammer e witnessed an extraordinary demonstration of simplistic thinking during the recent Age of the Dot-Coms. Hordes of innocents made a naive extrapolation from the success of Amazon .com: If Amazon can sell books and CDs to consumers over the Internet, then we can sell them furniture or cars or jewelry. Amazingly, these enthusiasts didn't consider the unique characteristics that made electronic bookselling a practical idea: Books can be sampled online; they can be shipped inexpensively; they require no installation or maintenance. Few other product categories share these features, and those who over-generalized Amazon's experience lived to regret it.

The same naiveté now pervades much of the discussion of E-marketplaces. Hundreds have been formed, many based on the idea of enabling buyers to use "price discovery" to locate low-price suppliers; "demand aggregation" to combine their purchases for further advantage; and "dynamic pricing" (e.g., reverse auctions) to push prices even lower. Many suppliers have expressed an understandable reluctance to participate in a system designed to drive them to the edge of bankruptcy and then charge them a fee for the privilege of selling products to their existing customers. Reports are already filtering in of buyers and sellers finding each other on an E-marketplace and then resorting to that old standby, the telephone, to close the deal--thereby avoiding the transaction fee. A number of ambitious E-marketplace implementations have come to a screeching halt because many suppliers didn't have the electronic catalogs needed to make the whole enterprise fly, and those that did had them in incompatible formats.

Ensuring security has also been more difficult than expected. Competitors discovered that trying to work together in designing and operating a marketplace isn't so easy; indeed, many have transferred their competitive instincts to the E-marketplace scene by setting up competing marketplaces, none of which is likely to have the scale needed to survive. As a result, few of the 1,500 or so E-marketplaces that have been announced are actually operating--and fewer still are successful. The recent wave of dot-com failures is about to be replicated with a wave of E-marketplace failures.

However, it would be a shame if we threw out the E-marketplace baby with the dot-com bathwater. E-marketplaces, properly designed and deployed, can deliver enormous payoffs for all participants and even transform whole industries. To succeed, developers of E-marketplaces need to follow a set of principles grounded in reality rather than fantasy:

o E-marketplaces are about much more than E-commerce. Enabling the buying and selling transactions is only a small part of what an E-marketplace should do. An E-marketplace should offer a context for broad collaboration among all participants. For instance, buyers and sellers should be able to engage in integrated supply-chain management, including collaborative planning and forecasting.

o Everyone has to win. A system in which some participants win at the expense of others won't survive in the long run. Indeed, the idea of transaction fee-based E-marketplaces may no longer be viable; the E-marketplace needs to be created and operated as a service to its participants rather than as a profit-making enterprise.

o Plan and develop for the long term. The idea of quickly cobbling together an E-marketplace and making a killing with an initial public offering is an idea whose time is long past.

o Walk before you run. Increasingly, we're seeing large companies turn to private E-marketplaces, in which they do business with their suppliers and/or their customers. This environment allows companies to get their feet wet with E-marketplaces in a benign context. Participation in public versions can follow.

o Pay attention to standards before it's too late. Incompatible data formats designed in a rush will require lengthy and painful integration down the road. The time to get these standards right is before the systems are put in place.

Given the consequences of simplistic thinking in the business-to-consumer space, it's not such a bad thing that the reality of E-marketplaces is turning out to be much more complex and much less glamorous than the original vision. It's also likely to be much more important.

Michael Hammer is president of Hammer and Co. in Cambridge, Mass. Find out about its E-marketplaces Conference at www.hammerandco.com.

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