The e-Marketplace Revolution:Creating and Capturing the Value in B2B e-Commerce, Study notes of Foreign Trade

Download The e-Marketplace Revolution:Creating and Capturing the Value in B2B e-Commerce and more Study notes Foreign Trade in PDF only on Docsity! BOOZ-ALLEN & HAMILTON The e-Marketplace Revolution: LOK TATLaZ TOC M Ort LOTU TTA NTS Value in B2B e-Commerce Viewpoint Executive Summary As significant as the B2B e-commerce opportunity is across industries, many of the e-market- places that exist today will fail in the next 12 months because they will chase share at the expense of profitability or fail to gain sufficient market liquidity. Companies looking to form an e-marketplace should ask themselves three key questions: 1) How can we create value with our B2B e-marketplace and, over time, defend its value propo- sition against competitors? 2) How can we capture a fair share of the value created to ensure profitable and sustainable growth? 3) How can we implement a viable e-marketplace concept? Booz-Allen has identified four primary strategies that companies can pursue to CREATE and sustain significant value through e-marketplaces: Scale and Spend Market and Value Chain Transaction Disintermediation Aggregation Transparency ‘Automation « @ @ akg V DEFINITION — © Bundling of purchasing Creating visibility along © Facilitation and © Use of e-marketplace to volume to benefit from and between previously streamlining of existing eliminate elements of the ‘economies of scale in: disconnected value chains transaction processes existing value chain = Sourcing = Logistics = Supply chain management BENEFITS FOR « Increased leverage in ¢ Increased market © Transaction cost Reduction of sales and PARTICIPANTS negotiations efficiency resulting in reduction procurement costs for + Lower material costs bale supplier-buyer * Reduced inventories involved parties «Lower transaction costs Matches Increased speed and quality * Access to new markets ‘Source: Booe-Allen & Hamilton Most of the e-marketplaces following these strategies will create value; the trick is to CAPTURE that value for market owners and participants and to ensure that — at every stage in the marketplace’s evolution — those contributing to the value of the exchange are fairly rewarded for their contributions. To achieve this objective and ensure ongoing liquidity, participants should structure e-marketplaces with the following guidelines in mind: * Identify the right pricing methodology * Maintain market neutrality * Actively pursue partnering opportunities The challenge that companies need to confront in IMPLEMENTATION is balancing the trade- offs between required speed-to-market and their cash burn rate in building a core set of capabilities: marketing/branding; technology; human resources/organization; and operations/processes. Booz-Allen’s approach to this implementation challenge is outlined in this Viewpoint. ©2001 Booz-Allen & Hamilton Ine, were predicting there would be as many as 10,000 B2B e-market sites operating today. As it turns out, there are fewer than 1,500 — and that number is falling.” While the opportunities in B2B e-commerce may be huge, the building of a viable e-market- place is not for the faint of heart ... or the weak of strategy. The current B2B shakeout reflects a larger trend that has swept the global capital markets as realism and business fundamentals have returned to the fore. The oppor- tunistic land grab that character- ized the first wave of e-business building is now behind us, and both investors and customers are more rigorous in their asse' ment of potential e-busi models. Economic performance, value-based strategy, and focused execution have reasserted them- selves as the hallmarks of suc- cess in all marketplaces — both physical and electronic. Coming up with a good idea is no longer sufficient to capture value; a company needs a differentiated approach, deep industry expertise, good relation- ships with potential market par- ticipants, and a dynamic business model that enables it to build and sustain sufficient market liquidity. It’s little wonder that private exchanges funded by industry heavyweights (e.g., leading cus- tomers) have gained the edge in this more exacting environment. e-Marketplaces: A Primer B2B e-marketplace is an Internet-based plat- form that enables large, medium, and small corporations to exchange goods, services, and information in a far more effi- cient and effective way than was previously possible (see Exhibit 1). Historically, only large industry players could afford the benefits of direct electronic linkages through technology such as EDI (Electronic Data Interchange). Now all parti pants potentially have access to current market information on supply and demand. Small and medium-sized players have effectively been brought to the table by Internet technology. e-Marketplaces run the gamut, from private exchanges set up by one large buying organization to increase the effi- ciency of its spend (e.g., Cisco replenishes inventory through its own electronic network with sup- pliers) to industry-wide public sites serving multiple buyers and sellers. While many of the insights we offer in the following pages pertain to both types of exchanges, this Viewpoint will Exhibit 1. The Impact of the Internet on B2B Commerce Software Interface ‘Source: Booz-Allen & Hamitton aL L4:) Ce UEC ray aae}ajU] aeMyos Businesses BUYERS SUPPLIERS ' Historically, ELECTRONIC DATA INTERCHANGE ' EDI Was Limited | to Only Large Expansion to All Businesses ? Jason Anders. “B2B: Yesterday's Darling,” The Wall Street Journal, October 23, 2000 focus specifically on the larger B2B market sites spanning hori- zontal and/or vertical markets. For a number of com- pelling reasons, most e-market- places start with the procurement process and expand their func- tionality from there. e-Procure- ment typically produces early wins with a payback period that can be measured in months, not years, helping the fledgling effort gain management's full buy-in. Standard technology exists that requires little customization and can be implemented in short order (e.g., a pilot up and run- ning within 10 weeks, on aver- age). Finally, one can leverage the community established through e-procurement to extend the e-marketplace into other key areas, including e-supply chain management, customer care, online design collaboration, and internal transaction processing (see Exhibit 2). e-Marketplaces generally organize around a vertical or hor- izontal opportunity. Vertical mar- ketplaces focus strictly on one specific industry or even a sub- segment of that industry and extend their scope step-by-step along the value chain. Examples include Covisint in the auto industry and CheMatch in the bulk chemical industry. Hori- zontal marketplaces, on the other hand, offer a product or service (e.g., telecommunica- tions, travel) across industries and increase their sca attracting new us parts) and NewMediary (e-busi- ness services). Still a nascent idea only a short while ago, B2B market sites have proliferated rapidly; industry consortia announced new initiatives nearly every month in 2000. Certainly the most widely publicized of these was Ford, GM, and Daimler- Chrysler’s decision in March 2000 to consolidate their respec- tive e-marketplace efforts and form one massive automotive parts exchange called Covisint. This breakthrough development has spawned a rash of similar “coopetitive” efforts in industries Exhibit 2. e-Marketplace Applications * Improve efficiency by automating purchasing processes (¢.9., RFQs) * Reduce material costs by using aggregate buying and online auctions, especially for commodity items and maintenance, repair, and operating (MRO) items care claims ‘Source: Booz-Alen & Hamilton Cag uC EL MURS Ta Sy * Streamline transaction processing costs (i.¢., overhead) with self-serve employee tools such as 401(k) allocation and health * Build internal Web savvy and culture Eee ie TTD TST i) PEL TLE tL © Speed product development and improve product launch by sharing product information more widely inside and outside the organization + Reduce product costs by accessing shelf technology and common designs © Reduce product development costs by institutionalizing best practices Pa cy Management * Gain visibility into production forecasts, schedules, and material releases throughout ‘supply chain © Use added visibility to better: — Coordinate engineering changes ~ Reduce forecast errors ~ Reduce safety stock and premium freight costs ~ Simplify planning and ‘scheduling PTS Ta eT * Create a customer portal tailored to customer profiles * Create a market for aftermarket goods and services * Implement customer care programs (e.g., technical assistance, product information) BOOZ-ALLEN & HAMILTON The e-Marketplace Revolution: LOK TATLaZ TOC M Ort LOTU TTA NTS Value in B2B e-Commerce Viewpoint Executive Summary As significant as the B2B e-commerce opportunity is across industries, many of the e-market- places that exist today will fail in the next 12 months because they will chase share at the expense of profitability or fail to gain sufficient market liquidity. Companies looking to form an e-marketplace should ask themselves three key questions: 1) How can we create value with our B2B e-marketplace and, over time, defend its value propo- sition against competitors? 2) How can we capture a fair share of the value created to ensure profitable and sustainable growth? 3) How can we implement a viable e-marketplace concept? Booz-Allen has identified four primary strategies that companies can pursue to CREATE and sustain significant value through e-marketplaces: Scale and Spend Market and Value Chain Transaction Disintermediation Aggregation Transparency ‘Automation « @ @ akg V DEFINITION — © Bundling of purchasing Creating visibility along © Facilitation and © Use of e-marketplace to volume to benefit from and between previously streamlining of existing eliminate elements of the ‘economies of scale in: disconnected value chains transaction processes existing value chain = Sourcing = Logistics = Supply chain management BENEFITS FOR « Increased leverage in ¢ Increased market © Transaction cost Reduction of sales and PARTICIPANTS negotiations efficiency resulting in reduction procurement costs for + Lower material costs bale supplier-buyer * Reduced inventories involved parties «Lower transaction costs Matches Increased speed and quality * Access to new markets ‘Source: Booe-Allen & Hamilton Most of the e-marketplaces following these strategies will create value; the trick is to CAPTURE that value for market owners and participants and to ensure that — at every stage in the marketplace’s evolution — those contributing to the value of the exchange are fairly rewarded for their contributions. To achieve this objective and ensure ongoing liquidity, participants should structure e-marketplaces with the following guidelines in mind: * Identify the right pricing methodology * Maintain market neutrality * Actively pursue partnering opportunities The challenge that companies need to confront in IMPLEMENTATION is balancing the trade- offs between required speed-to-market and their cash burn rate in building a core set of capabilities: marketing/branding; technology; human resources/organization; and operations/processes. Booz-Allen’s approach to this implementation challenge is outlined in this Viewpoint. ©2001 Booz-Allen & Hamilton Ine, were predicting there would be as many as 10,000 B2B e-market sites operating today. As it turns out, there are fewer than 1,500 — and that number is falling.” While the opportunities in B2B e-commerce may be huge, the building of a viable e-market- place is not for the faint of heart ... or the weak of strategy. The current B2B shakeout reflects a larger trend that has swept the global capital markets as realism and business fundamentals have returned to the fore. The oppor- tunistic land grab that character- ized the first wave of e-business building is now behind us, and both investors and customers are more rigorous in their asse' ment of potential e-busi models. Economic performance, value-based strategy, and focused execution have reasserted them- selves as the hallmarks of suc- cess in all marketplaces — both physical and electronic. Coming up with a good idea is no longer sufficient to capture value; a company needs a differentiated approach, deep industry expertise, good relation- ships with potential market par- ticipants, and a dynamic business model that enables it to build and sustain sufficient market liquidity. It’s little wonder that private exchanges funded by industry heavyweights (e.g., leading cus- tomers) have gained the edge in this more exacting environment. e-Marketplaces: A Primer B2B e-marketplace is an Internet-based plat- form that enables large, medium, and small corporations to exchange goods, services, and information in a far more effi- cient and effective way than was previously possible (see Exhibit 1). Historically, only large industry players could afford the benefits of direct electronic linkages through technology such as EDI (Electronic Data Interchange). Now all parti pants potentially have access to current market information on supply and demand. Small and medium-sized players have effectively been brought to the table by Internet technology. e-Marketplaces run the gamut, from private exchanges set up by one large buying organization to increase the effi- ciency of its spend (e.g., Cisco replenishes inventory through its own electronic network with sup- pliers) to industry-wide public sites serving multiple buyers and sellers. While many of the insights we offer in the following pages pertain to both types of exchanges, this Viewpoint will Exhibit 1. The Impact of the Internet on B2B Commerce Software Interface ‘Source: Booz-Allen & Hamitton aL L4:) Ce UEC ray aae}ajU] aeMyos Businesses BUYERS SUPPLIERS ' Historically, ELECTRONIC DATA INTERCHANGE ' EDI Was Limited | to Only Large Expansion to All Businesses ? Jason Anders. “B2B: Yesterday's Darling,” The Wall Street Journal, October 23, 2000 focus specifically on the larger B2B market sites spanning hori- zontal and/or vertical markets. For a number of com- pelling reasons, most e-market- places start with the procurement process and expand their func- tionality from there. e-Procure- ment typically produces early wins with a payback period that can be measured in months, not years, helping the fledgling effort gain management's full buy-in. Standard technology exists that requires little customization and can be implemented in short order (e.g., a pilot up and run- ning within 10 weeks, on aver- age). Finally, one can leverage the community established through e-procurement to extend the e-marketplace into other key areas, including e-supply chain management, customer care, online design collaboration, and internal transaction processing (see Exhibit 2). e-Marketplaces generally organize around a vertical or hor- izontal opportunity. Vertical mar- ketplaces focus strictly on one specific industry or even a sub- segment of that industry and extend their scope step-by-step along the value chain. Examples include Covisint in the auto industry and CheMatch in the bulk chemical industry. Hori- zontal marketplaces, on the other hand, offer a product or service (e.g., telecommunica- tions, travel) across industries and increase their sca attracting new us parts) and NewMediary (e-busi- ness services). Still a nascent idea only a short while ago, B2B market sites have proliferated rapidly; industry consortia announced new initiatives nearly every month in 2000. Certainly the most widely publicized of these was Ford, GM, and Daimler- Chrysler’s decision in March 2000 to consolidate their respec- tive e-marketplace efforts and form one massive automotive parts exchange called Covisint. This breakthrough development has spawned a rash of similar “coopetitive” efforts in industries Exhibit 2. e-Marketplace Applications * Improve efficiency by automating purchasing processes (¢.9., RFQs) * Reduce material costs by using aggregate buying and online auctions, especially for commodity items and maintenance, repair, and operating (MRO) items care claims ‘Source: Booz-Alen & Hamilton Cag uC EL MURS Ta Sy * Streamline transaction processing costs (i.¢., overhead) with self-serve employee tools such as 401(k) allocation and health * Build internal Web savvy and culture Eee ie TTD TST i) PEL TLE tL © Speed product development and improve product launch by sharing product information more widely inside and outside the organization + Reduce product costs by accessing shelf technology and common designs © Reduce product development costs by institutionalizing best practices Pa cy Management * Gain visibility into production forecasts, schedules, and material releases throughout ‘supply chain © Use added visibility to better: — Coordinate engineering changes ~ Reduce forecast errors ~ Reduce safety stock and premium freight costs ~ Simplify planning and ‘scheduling PTS Ta eT * Create a customer portal tailored to customer profiles * Create a market for aftermarket goods and services * Implement customer care programs (e.g., technical assistance, product information) ranging from aerospace to hotels to mining. Rather than taking on the liquidity risk alone, compa- nies are partnering with their competitors to create industry- wide, market-making sites such as Transora in the consumer goods market and GHX (Global Healthcare Exchange) in the health care arena. Although start-ups gener- ated many of the early wins in B2B e-commerce, brick-and- mortar incumbents stand to reap the greater long-term gain. They enjoy a number of natural advan- tages in forming e-marketplaces. First, they are not as dependent on realizing external revenues, since internal cost savings from. e-enablement typically more than pay for the investment. Second, they have the industry expertise, the long-term relationships with suppliers, customers, and com- petitors, and the deep pockets to structure a marketplace that delivers true value. Our work with BPAmoco highlights these points. This oil and gas giant has already devel- oped and implemented a pan- European supply portal that pro- vides daily forecasts of inventory positions, dynamic product cost, and price/performance informa- tion. This system is being rolled out globally to auction product to customers at primary locations. Moreover, the company h cessfully launched market-facing e-marketplaces. These include OceanConnect.com, an online uc global shipping hub with a Electronic Component Market Sites: What Constitutes Success? © Both Digital Exchange (Digital Market, Inc.) and Virtual Chip Exchange have sought to corner the e-marketplace for electronic com- ponents, but only one has been successful. Although start-up Digital Exchange was built around a promising architecture — an Internet- based supply chain optimization solution — its business model failed to take into account prevailing industry dynamics. Virtual Chip Exchange, on the other hand, was founded by the industry's leading players and developed a model that more easily accommodated existing supply arrangements. Digital Market assumed it could take its leading-edge software and Create a pure e-marketplace by aggregating product from multiple suppliers and making it searchable. However, it did not tailor its solution to address industry pricing needs, competitive dynamics, or current practices for large-volume purchases (@.g., prenegotiated quantity discounts). Furthermore, it did not furnish bidders with anonymity. Therefore, large participants and those anxious to keep their discount pricing under wraps stayed away. Those large-volume deals that did make it onto the Digital Exchange were bogged down in long negotia- tions with lawyers rather than expedited by electronic technology. Virtual Chip Exchange avoided many of these pitfalls by providing greater perceived value to its members. Founded by Consumer Electronic AG (Europe's leading chip-trading company) and Arrow Electronics (one of the world’s largest distributors of electronics) in partnership with B2B e-commerce vendor Mediagrif Technologies, this e-marketplace has ensured liquidity by securing industry backing, focusing on the excess parts market, and vouching for the quality of its member products. The 3,800 members of Virtual Chip Exchange span the globe and are prequalified. Virtual Chip Exchange does not use an auction model but instead uses software to find buyers for posted excess inventory. As part of its offering, it provides a “watch” service that alerts members when a desired component becomes available. Moreover, the exchange guaran- tees payments for parts by taking possession of the parts and inspecting them for quality. Virtual Chip Exchange provides relevant and breaking worldwide news, market prices, delivery lead times, and technical information. Buyers pay a negotiated commission. In short, involving the early participation of the industry's leading players and accommodating their existing purchasing and pricing practices to the greatest extent possible can help position an e-marketplace for success. organization. This sort of win- lose situation occurs when the supplier market is fiercely competitive. e-Marketplaces that focus solely on margin redistribution, however, are not sustainable in the long run. Indeed, several have already failed. Others have had to shift their emphasis to one of the other value creation opportunities. Successful scale and spend aggregators create a win-win (see MARKET AND VALUE CHAIN TRANSPARENCY e-Marketplaces can also serve to increase the transparency along value chains and between previ- ously disconnected value chains, creating additional business opportunities and enabling par- ticipants to leverage best-practice innovations and technologies more readily. By “transparency” we refer not only to price trans- parency and access to real-time Case Study: Forest Express). The market information but also to higher transaction volumes pay off for both buyer and seller through reduced logisti production costs and increased utilization. The value created the ability of heretofore unrelated buyers and sellers to “see” each s and other because of reduced search costs and greater visibility across borders. The end result is is shared by all parties: buyer, reduced industry inventories, seller, and marketplace operator. Case Study: Forest Express (Scale and Spend Aggregation) Formed in July 2000 by three major buyers and suppliers in the pulp and paper industry — Georgia-Pacific, International Paper, and Weyerhaeuser — Forest Express has since attracted the interest of addi- tional partners, namely The Mead Corporation, Boise Cascade, and Willamette. The exchange is an independent entity based in Atlanta that strives to be a neutral marketplace for forest, pulp, and paper products — an aim that is furthered by the fact that the founding partners represent both the buy and sell sides of potential transactions. Forest Express will structure a market for each product (¢.g., building materials, printing, and writing papers) that best suits the participants’ needs, whether it be an exchange, auction, or catalog. The e-marketplace will feature some content on products and may partner with a news provider for industry-specific news. By aggregating scale and spend within the pulp and paper markets, Forest Express seeks to streamline transaction processes, improve infor- mation flows, and increase delivery speeds, which should lead to reduced transaction and supply chain costs and increased capital efficiency. increased liquidity (ie., more interactions between an expanded universe of buyers and sellers), and even the creation of whole new market opportunities (see Case Study: EnviroXchange). At their extreme, these e-marketplaces can transform industries. Take reinsurance as an example. An electronic B2B exchange called CATEX has allowed insurers and large com- panies to trade — all manner of “risk” (e.g., health, property damage, politi- cal) on a global, 24/7 basis. hence reduce Indicators of e-Marketplace Potential + Highly fragmented value chains with little transparency and many information asym- metries + High degree of operational interdependence among players in a multistep value chain (c.g., automotive industry, construction industry) Benefits for Participants The benefits of this type of e-marketplace are many. Increased transparency along and among value chains results in increased market efficiency and better buyer-supplier matches, not to mention new, previously untapped market opportunities. All participants gain a better understanding of who is cost- advantaged and who has excess capacity, and hence they make better strategic decisions. By cre- ating a digital forum for transac- tions, these e-marketplaces reduce search costs, enhance buyer choice and supplier oppor- tunity, and furnish a host of rich business development leads by acting as a repository of market information. TRANSACTION AUTOMATION ALONG THE VALUE CHAIN As mentioned earlier, e-market- places have expanded beyond e-procurement exchanges and started to facilitate and stream- line other transaction processes along the value chain, including online design collaboration, sup- ply chain management, and cus- tomer care. Transaction processes that can be automated and conducted online include everything from prequalification through ship- ping. The most basic and com- mon automation process in an e-marketplace is purchase order creation and delivery. Removing the human ele- ment in these processes helps ensure anonymity, which can be important to part e-marketplace. Large players want to avoid being price gouged by suppliers anxious to exploit deep pockets. Premium brands looking to sell substandard inven- tory also seek anonymity. Since the e-marketplace provides a si gle point of contact with multiple market participants, its transac- tion automation efficiencies can be extended across the entire sys- tem. Citibank, for example, can leverage its scale and expertise in accounts receivable and payable and provide them as electronic shared services to its exchange ants in an in- to pay for it! Case Study: EnviroXchange (Market Transparency) e By enhancing market transparency, newly launched EnviroXchange strives to transform the environmental operations of diverse industries by allowing companies to se// their waste and excess materials. Companies can post materials wanted and available and choose whether they would like the material handled by a professional waste broker or consultant. As listings are added, the Web site matches sellers with potential buyers and alerts the posting company. If the selling company decides the match is valid, it can use the site to send an anonymous. message to the buying company. Then, if both firms agree, the system furnishes contact information so that negotiations may begin. If there is no current match, the system will flag the posting and alert the posting company via e-mail when a match occurs. The market reach and transparency of EnviroXchange have created a market where none previously existed. As an example, one biotech company facing a $300,000 price tag for disposing of one of its industrial waste by-products used the exchange and found a Canadian firm willing to take it off its hands for free — and another firm willing customers, reducing the cus- tomers’ cash management and working capital needs. Transaction automation can encompass a broad range of activities. Some marketplaces (e.g., NTE, Ferrous Exchange) have automated or semiauto- mated the matching process on their exchanges rather than hav- ing buyers use a search engine to find opportunities. Others, such as eConnections and fob (for- merly fobchemicals), have moved beyond the idea of a pro- curement auction or exchange altogether and have started to automate and optimize their industry’s entire supply chain. Indicators of e-Marketplace Potential * Process cost is high relative to value added * Complex processes that can be significantly streamlined and facilitated by an e-marketplace offering * High need for communication between relevant parties and impediments to such communi- cation through existing channels * Benefits available for all par- ties through dynamic pricing opportunities Benefits for Participants All participants along the newly automated value chain experi- ence transaction cost reductions and other operational improve- ments, including: * Better use of capacity * Inventory reduction and enhanced management * More rapid new product intro- duction Faster cycle times + Improved design and engineer- ing coordination * Anticipation and early correc- tion of production, delivery, and logistical problems * Speedier transactions * Reduced information transfer costs * More efficient new product testing for “virtual” products As e-marketplaces such as ChemConnect have illustrated, trade times for some products can be reduced dramatically from weeks to hours, enabling real-time reactions. And the new product introduction process for nonphysical products can be col- lapsed, a benefit that many industry consortia are actively exploring (see Case Study: Noosh). DISINTERMEDIATION OF PARTS OF THE VALUE CHAIN Some e-marketplaces create value by removing an existing step in the value chain altogether, typically by replacing a tradi- tional sales channel. These ven- tures are an extreme form of the preceding strategy — transaction automation — but in these cases, the role of a market participant is not just streamlined but is auto- mated out of existence. The nature of the interface between manufacturer and end customer is completely redesigned. New pricing mecha- nisms are implemented. New physical distribution methods are introduced and incentive schemes are overhauled. The greatest challenge in implementing this type of e-mar- ketplace is transitioning from the old market structures to the new. Ironically, the marketplaces that are most successful are those launched by the very sales chan- nel being disintermediated. They effectively pre-empt similar ini- Case Study: Noosh (Transaction Automation) © Noosh streamlines transactions in the printing industry by automating links in the value chain from design through procurement, production, and logistics. First a buyer creates a job specification, including job type, size, quantity, paper, ink type, binding type, packaging fequirements, prepress requirements, and shipping requirements. Once a specification is created, the buyer sends out RFEs (requests for estimates) to selected suppliers from Noosh's preferred list. Suppliers can access all the informa- tion necessary for an estimate and can provide prices for any or all of the requested quantities. Once the estimate has been created, the supplier sends a note to the buyer on the buyer's print page and via e-mail. If the buyer selects that printer, the buyer chooses the desired quantity, inputs the payment method, and lets the printer know when and where the printer can get the files. Noosh partners with companies that offer file transfer and file management services to manage very large files. For each job a set of tasks is created, based on job status and activity, which can be personalized by the supplier. All job team members can upload, view, comment on, and modify text files, graphic files, and proofs at any stage of the process. Noosh also provides services that support collaboration, reporting, and strategic sourcing (allowing buyers to objectively evaluate performance). Once the job has been shipped, the buyer can track delivery and shipment details on Noosh. Buyers can also access inventory management, warehousing, and fulfillment services through partnerships. Noosh estimates that its services reduce the costs associated with managing and procuring enterprise communica- tions by as much as 15 to 20 percent. Buyers are charged a subscription fee of 0.1 percent of estimated annual usage (transaction volume) with a minimum of $300,000 per year. Suppliers are charged a transaction fee of 2 percent for each completed job. Noosh also charges professional services fees and training fees. e-marketplace should approxi- mate the internal c i generated by its participants a result of exchange efficiencies such as reduced headcount, greater productivity, and quicker time-to-market. MAINTAIN MARKET NEUTRALITY An e-marketplace must produce wins for all involved parties or its liquidity will soon dry up. If an exchange is seen to favor one participant over another, key players will depart. That’s why marketplaces that focus on squeezing the supplier or that misuse confidential or propri- etary information lose momen- tum quickly. The Covisint launch high- lights the importance of market neutrality. Announced with great fanfare in March 2000, this mas- sive e-marketplace immediately encountered resistance from sup- pliers who perceived it as a vehi- cle to force their prices down. Many expressed their reluctance to join unless they were given an equity stake. Although those demands were ultimately rebuffed, Covisint did come up with concessions in the form of a profit ng scheme for about 40 critical suppliers to solicit their participation? Unless buyers and sellers perceive an appropriate level of neutrality in the operation of the exchange (i.e., transparent value creation and fair benefit sharing), they will simply not participate. This dilemma raises significant issues in terms of exchange own- ership and how that is allocated 3 Autonews.com Exhibit 6. e-Marketplace Pricing REVENUE SOURCE EXAMPLE Percentage Transaction Fees on Completed Trades Cattlesale charges a commission of 1.5 to3 percent, depending on the type of cattle. Flat Transaction Fee for Running the Auction Crediffrade facilitates trading in credit derivatives for a flat fee. Subscription Fee NewMediary charges a $25/month subscription fee. Referral Fee Online Asset Exchange provides access to third-party service providers with whom it has a revenue-sharing agreement. Fee for Service ecFood charges extra fees for professional services such as recruiting and qualifying vendors. Private Label Services MuniAuction creates “powered by MuniAuction” sites for financial institutions and municipalities. Advertising Revenues PartsBase.com sells advertising on the site. Related Premium Content Farms.com provides commentaries on the leading agricultural commodities as well as periodic strategic research reports. ‘Source: Booe-Allen & Hamilton over time. Already dynamic own- ership models are being tested that reapportion equity stakes as the e-marketplace moves through three key stages: 1) Launch and the creation of initial liquidity 2) Expansion of scale and scope 3) Maintenance of volume at maturity The overall goal is to insti- tutionalize incentives for contin- ued participation in the exchange by matching ownership at any given point in time to the value each participant is contributing. ACTIVELY PURSUE PARTNERING OPPORTUNITIES Obviously, to capture any value one must create enough value to cover the costs of establishing the e-marketplace. That is far from ensured, given the high fixed costs involved in develop- ing the technology, brand, and operations infrastructure. Therefore, it is imperative that these virtual exchanges establish a commanding market share as quickly as possible. To get an attractive and convincing service offering up and running fast, e-marketplaces need to leverage partnerships both within their target industry Exhibit 7. e-Marketplace Partnership Network Shared Services Financing and Credit Housing and Infrastructure Recruiting Parlnership Technolo: wy Web-Hosting Partnership WAP/GSM Partnership Invoicing Partnership Logistics Partnership Fulfillment ‘Source: Boo2- Alen & Hamitton “ax, Legal, Aucit Partnership Technology Development Partnership Collection Services Partnership Corporate Strategy Business Consulting Partnership Venture Capital Ce ec E ca Ee PR/Advertising Industry Organizations Launch Marketplace Partnership Partners hip Call Center Partnership 828 Complementary Partnerships Industry Experts Alliance Gredit Scoring) (Publishersfindusty Tpovranee tESS (Procurement card > Partnership Partnership Loyally Program Sales and Marketing Telemarketing B28 Portal mySAP) B28 Alliances ISP Partnership Business Development and beyond (see Exhibit 7). By building on a foundation of part- ner modules (e.g., financing modules from Citigroup, logistics modules from FedEx), an exchange can avoid the delays and expense involved in reinvent- ing the wheel and devote full focus to new, breakthrough services. e-Marketplaces need to recruit participants vigorously. They need to pitch their target industry’s major players from day one with an offer too attractive to ignore — and incent them to spread the word. They need to invest in branding and marketing, bundle services in new and com- pelling ways, and quantify the efficiency gains to be realized. In certain situations it will make sense for one e-market- place to merge with another exchange or complementary community. In so doing, the merged entity can bundle users, transactions, and market clout. Potential candidates include both vertical and horizontal market- places as well as trade associa- tions, chambers of commerce, and community sites that aggre- gate target customers. The most frequently men- tioned challenge among the com- panies we've worked with and interviewed is adoption — get- ting users on board, Even in industries fluent in technology (e.g., electronic components), e-marketplaces have faced slower-than-expected take-up (see Case Study: Industrial- Vortex.com). Getting users to change their way of doing things is laborious, so those designing e-exchanges need to leverage partnership opportunities and try to make the technology support, to the greatest extent possible, the existing, tried-and-true meth- ods of doing things. An e-market- place needs to accommodate habit to the greatest extent possible. To facilitate this goal, some marketplaces are even sup- plying training and change man- agement services. Implementing a Viable e-Marketplace Concept ven when a company cor- rectly identifies the value creation potential in an e-marketplace and builds appro- priate mechanisms for capturing that value, it can still fail in the implementation phase. An exchange is simply a catalyst or tool for unlocking the value in information-intensive processes (ie., gathering, managing, and disseminating data). To actually liberate and capture that value, companies must implement effectively. They must change their organizations, people, skills, and processes to unleash an exchange’s effectiveness and efficiency — particularly inter- nally, where much of the value is trapped. Implementation failures can generally be attributed to one of two factors: slow speed-to-market and/or liquidity problems. Competitors with a similar busi- ness idea may get there quicker and establish first-mover advan- S! tage. An e-marketplace may fail to evolve beyond, say, e-procure- ment and may stagnate as others seize the field. Exchange owners may underestimate the invest- ment required to build key func- tionality or may simply misallo- cate funds to the wrong ideas. The challenge that compa- nies need to confront is balancing the trade-offs between required speed-to-market and their cash burn rate in building a core set of capabilities (see Exhibit 8): marketing/branding, technology, human resources/organization, and operations/processes. MARKETING/BRANDING Focus Marketing Dollars on Highly Targeted Customer Acquisition Rather than throwing money at brand advertising, emerging e-marketplaces should focus their marketing resources on attracting the participation of key cus- tomers who will be critical in ing and maintaining liquidity. To evaluate which cus- tomers to target, companies will need to carefully assess the long- term value of each potential cus- tomer as well as its willingness to join the exchange. Case Study: IndustrialVortex.com (Failing to Capture the Value) The first B2B exchange in the industrial automation market, IndustrialVortex.com, went live in March 2000. By mid- July 2000 it was out of business. IndustrialVortex provided aggregated catalog and e-commerce site purchasing, auctions, hot-buys, product show- cases, and an open RFQ (request for quote) marketplace, charging transaction fees to suppliers based on the orders they filled. Services to buyers were free. Designed to enable suppliers to sell more goods, the site managed to sign up more than 100 industrial equipment suppliers, including Honeywell, Toshiba, Emerson Electric, Nematron, and Omron Electronics. Unfortunately, the exchange failed to sign up enough buyers to generate sufficient liquidity. IndustrialVortex chose to target industrial engineers rather than purchasing managers within the buying community. Yet the company could not create enough content, tools, and technology to attract engineers. Meanwhile, AssetTrade, BigEquip.com, Big Machines, Esprocket, IronPlanet, and Wiznet entered the market. IndustrialVortex quickly burned through its $1.6 million initial funding and its $2 million in incremental venture Capital funding. It was unable to secure additional funding, leading to its demise on July 18, 2000. HUMAN RESOURCES/ ORGANIZATION Create an Independent and Separate Organization that Dynamically Rewards Customers with Ownership Given that the liquidity of an exchange hinges on customer transaction volume, it stands to reason that customer ownership fast emerging as a critical suc- cess factor in the organization of e-marketplaces. And with cus- tomers as owners, it is little sur- prise that the most effective e-marketplaces have an inde- pendent management team that cannot be controlled easily by any one customer owner. Even if an e-marketplace is a private exchange operating for the benefit of one customer, it is best to separate the venture from the rest of the organization, cre- ating a separate subsidiary with its own culture and compensation scheme. Get Creative in Sourcing Talent Even with the recent rash of dot.com failures, the market for Internet-savvy talent remains fierce. The demand for tech- savvy senior management, in particular, far outstrips the sup- ply. In the interests of launching an e-marketplace while the con- cept is still hot, companies may have to put in place an interim management team. Many venture capital firms and incubators have “executives residence” who are specifically trained to step in and serve until a permanent suc- cessor can be named. Using this approach, companies do not have to compromise on required skills and can borrow time to look for the right fit. OPERATIONS/PROCESSES Adopt a Measured, Modular Approach to e-Marketplace Development Now that the first e-busin wave has pass through the debris and refine initial assumptions. Although speed-to-market remains critical, cost efficiency has also risen to the fore, as the capital markets recognize that restructuring rough-draft operatio1 expensive endeavor. Moreover, it’s clear that 'd, we can sort “covering the waterfront” at launch is not necessary, nor is it cost-effective. Instead, a modular approach is recommended. Introduce core elements to a service offering first and gain buy-in. Collect as much customer input as possible through user groups or satisfaction surveys to refine and enhance existing products and services. Early wins not only boost morale internally but also instill confidence exter- nally among customers and investors. Then the next stage of development can commence. Focus on Early Profitability This approach argues for a cost- leadership perspective in the early going. Rather than deliver- ing at any price, e-marketplace operators need to invest in build- ing lean processes that ensure profitability within the first one to two years after going live. That means outsourcing noncore operations (e.g., logistics, fulfill- ment), developing scaleable oper- ations, and soliciting expert from outside process special Build Flexibility into Systems and Processes The challenges of organizing and managing e-marketplac be underestimated, particularly because they are largely unprece- dented. The notion of arch-com- s cannot petitors allying to jointly build a shared infrastructure to allow their industry to operate more efficiently is a brave new idea. The business models and processes that are crafted to sup- port these e-marketplaces will have to be robust and dynamic enough to accommodate the inevitable shifts and reversals that are in store. The Booz-Allen Approach © help companies create and capture the value from B2B e-marketplaces, Booz-Allen has developed a 10-step approach (see Exhibit 10). Tested over the course of numerous client engagements, this iterative framework delivers results on a highly expedited timetable. Exhibit 10. The Booz-Allen Approach to e-Marketplace Development PHASE Ill: Grow! re "- Market Shai (1-2 Years) PHASE Il: Implementation (2-8 Months) Capture the Value Integrate into the Industry Finalize the Deal Define Governance and Structure} PHASE I: Building the Business Case (8-12 Weeks) Add Partners Select the Technology Build the Business Model Clarify the Objectives * Crafting a statement of understanding Establish Initial Liquidity Block * Creating the basic business case * Selecting the right partners * Negotiating for a win-win-win * Timing the announcement ‘Source: Booe-Allen & Hamilton PHASE I The first phase, which can be collapsed into eight to 12 weeks, involves building the basic busi- ness case for the e-marketplace and soliciting participation. During this phase, “parents” establish their objectives and ownership, structure the business model and control mechanisms, and reach out to strategic and equity partners. A letter of intent is developed that maps out the scope of the exchange and the methods for capturing its value. Finally, an announcement is crafted and timed to optimize investor interest and minimize competitive response. PHASE II Phase II focuses on implementa- tion and draws on the expert resources of Booz:-Allen sub- sidiary AESTIX. AESTIX, which specializes in e-marketplace development, has, together with our consultants, created an online collaboration platform from which clients can tap expertise and best practic assess progress against a com- prehensive checklist of steps that need to be completed before the site can go live. With our experi- ence, expertise, and technology, we can take an e-marketplace from concept to launch in two to eight months. s needed and PHASE II During the third phase, we help clients install their e-marketplace solution as the industry standard by helping them grow market share, integrate back-office sys- tems, and manage expectations. We assist clients in tracking progress against operational and financial milestones and help them develop constructive exit strategies. Then we start the clients develop the business case for the next round of service offerings to enhance the sticki- ness of the e-marketplace for customers. Throughout this iterative process, we incorporate lessons leamed and continue to modify the approach, recognizing that liquidity, the overriding objec- tive, is fleeting in nature. The Road Ahead f course, before imple- menting this approach or participating in an existing e-marketplace, compa- nies need to consider from a broader, strategic perspective what they hope to accomplish both immediately and long term. Many senior managers are now asking the question, “How will e-marketplaces evolve?” The more relevant and pressing ques- tion is “How can we evolve with e-marketplaces?” Toward that end, companies need to consider a range of issues as they develop Exhibit 11. Developing an e-Marketplace Strategy: Issues to Consider ISSUE aaa 4) STRATEGY Te) ass Oa aU aes * What is the best redesign of our organization, people strategy, and processes to get the most out of e-marketplaces? * How do we build a successful migration plan from pre-B2B to post-B2B? © What side effects can we expect and how do we manage the change? ‘Source: Boo2- Alen & Hamitton KEY QUESTIONS * How do B2B plays fit with our company’s overall strategy? * How aggressive/passive should we be in approaching this new space? © What are we trying to build or what problem are we solving with e-marketplaces? * How do we keep up with or pre-empt competition through B2B plays? © What information-intensive components of our business might benefit from an e-marketplace solution? + How do we establish a vision that lets these operations evolve with the e-marketplace? How do we build the basic business case and structure? Nn * How do we ensure proper implementation? * How do we integrate the e-marketplace into our organization? * What method should we use to continually evaluate new e-marketplace opportunities? + How do we ensure we are getting the most out of the e-marketplace? * How do we pick the winners and know when to drop the losers? * How do we prioritize our resources for best focus? an e-marketplace strategy (see Exhibit 11). B2B e-marketplaces repre- sent an enormous opportunity for industry leaders who get ahead of the curve and establish a win- ning value proposition for all participants. Critical to success. are a clear set of objectives, a compelling business idea, and a fair division of the spoils ... but s is inherently ephemeral in this game. Balancing speed with accuracy, maintaining mar- ket neutrality, and making sure the exchange dynamically com- pensates those contributing to its value will remain ongoing chal- lenges. succt 20 What Booz-Allen Brings ooz-Allen & Hamilton is a global management and technology consult- ing firm. In more than 100 coun- tries, our team of 10,000 profes- sionals serves the world’s lead- ing industrial, service, and gov- emmental organizations. Each member of our multinational team has a single common goal — to help every client we serve achieve and maintain success. As world markets mature, and competition on an interna- tional scale quickens, we are hamessing the strengths of our entire firm to address the needs of our clients. Specifically, by combining the deep functional and industry knowledge of our Worldwide Commercial Business with the technology expertise of our Worldwide Technology Business, we are uniquely posi- tioned to solve the most chal- lenging e-business problems. We as oping their e-strategy and agenda, launching and implementing specific e-opportunities (e.g., new businesses, customer man- st clients in devel- agement, portal/Web site strategy, e-sourcing, value chain restruc- turing, innovation), and devel- oping and implementing Web sites through our AESTIX sub- iary. In addition, we support venture capital firms and private equity fund managers to increase si