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FoodUSA.com's experience highlights the most important issue of all--people. Complex technology and the fear of regulation aren't the only issues slowing the adoption of exchanges, analysts say. Equally important, if not more so, are the people issues. Suppliers worry that exchanges will erode their margins; buyers worry that suppliers may be unreliable and unable to fulfill commitments; and everyone worries that the cost of participating in an exchange and doing business on it may outweigh the benefits.

So the best criteria for evaluating an electronic exchange, says Bradley Hosmer, founder of the Beta Consulting Group, in Concord, N.H., is the same one used to judge an old-fashioned, real-world marketplace. "Identify the high-quality suppliers and customers in your industry and the exchange they do business on," he says, "and go from there." //

Anne Knowles is a freelance journalist based in San Francisco. She can be reached at aek326@att.net.

Private vs. Public Exchanges
Here's what you need to know before entering the marketplace.

Industry electronic commerce exchanges come in several shapes and sizes. The best known are the vertical, industry-backed exchanges that AMR Research Inc., a market researcher in Boston, calls consortium trading exchanges (CTEs). They include Covisint, the automotive industry exchange established and funded by General Motors Corp., Ford Motor Co., and DaimlerChrysler, and the Global Aerospace and Defense Exchange, founded by The Boeing Co. and Lockheed Martin Corp. for the aerospace industry.

Independent third parties that are neither buyers nor sellers are also creating digital marketplaces for vertical industries. They include FoodUSA.com, for the food industry, and a handful of vertical exchanges, including Chemdex for the life sciences industry and Promedix for the specialty medical products market, run by Ventro Corp., an exchange hosting provider in Mountain View, Calif.

Ventro also is about to launch a horizontal exchange called MarketMile. A joint venture between Ventro and American Express Co., MarketMile will provide a place for any kind of business to buy and sell general business products--a $1.4 trillion market, according to the exchange's partners. It's scheduled to launch in the first quarter 2001 and will initially target medium-sized businesses, with plans to serve large and small businesses as well.

Then there are so-called private exchanges, which are essentially extranets that extend a single company's supply chain to its trading partners. Any company can build one, although economies of scale suggest the larger the company, the greater the benefit. In addition, smaller suppliers don't drum up new business if they limit themselves to private exchanges.

"There are great benefits to the smaller supplier," says Dan Jankowski, a spokesperson for Covisint in Southfield, Mich. "There's more opportunity to purchase and design, not just with the OEMs [original equipment manufacturers] but with other suppliers. They can tap into Covisint and not take on the burden of building their own infrastructure. It will reduce the cost of doing business and drive a lot of waste, especially time, out of the their system."

"The future for exchanges is in small to medium-sized businesses," agrees David Hay, global product manager, marketplace solutions, at General Electric's GE Global eXchange Services, in Gaithersburg, Md., which, by the end of 2000 is set to launch a horizontal exchange called Express Marketplace. "The real economic benefit will be when that market trades with one another," he adds.

But the opportunity to target small to medium-sized businesses includes larger corporations, too, says Hay, which are eager to target the smaller business customer. "Many big corporations have stopped calling on the small to medium-sized customer because of the rising cost of sales." Exchanges, which strive to reduce the cost of doing business for everyone, large and small, provide a way for big fish to once again go after small fry, Hay says. --A.K.
Will CTEs Get Voted Off the Island?

Marketplaces built by industry giants like the automotive industry's Covisint or the aerospace industry's Global Aerospace and Defense Exchange may not survive, say analysts, if they continue to overplay their promises. Here are the top 10 pitfalls these exchanges need to avoid:

Functionality that is promised prematurely. Many CTEs are touting soup-to-nuts services before they even have the necessary technology in place. For the next few years, however, don't expect CTEs to deploy much more than auction, spot-buy, and excess inventory services.

Collaborative commerce apps that are years away. Advanced services exchanges are collaborative applications for design, forecasting, planning, and inventory management, but most of these applications aren't even off the drawing boards yet. Likewise, so-called marketplace-to-marketplace (M2M) integration, which promises to let companies move freely between exchanges, is a technology puzzle that will take years to solve.

Lack of consensus on where functionality should reside. Should applications reside publicly, in front of a firewall, or privately, behind a firewall? No one agrees, and the exchanges are going nowhere until they figure it out.

Costs of use. Companies may get turned off once they add up the costs of integrating ERP, customer relationship management, and supply chain management systems into the trading exchange.

Unrealistic budget forecasts. The total cost of developing one of these exchanges could reach as high as million. Members who fund them may run out of patience--and money--before the exchanges can show a return on investment.

Skeptical suppliers. Recruitment of suppliers will be tough since most don't trust that they'll profit as much as the big-name buyers. The problem is exacerbated by the initial emphasis on auctions and indirect goods, where the lowest price reigns.

Technology headaches. Best-of-breed software may not be the best solution. Most CTEs are being built using a procurement system from one software vendor, a content management system from another, and a logistics package from a third. This could lead to problems stemming from dissimilar user interfaces and never-ending software upgrade cycles.

Immature standards. Promising standards, such as eXtensible Markup Language (XML) and RosettaNet, are just that, promising. Both need work, and neither is used widely.

Political infighting. Remember, consortia members are also industry competitors, and each member company may struggle internally with a conflict between CTE supporters and those who believe a private exchange would better serve the corporation's needs.

Source: AMR Research Inc.

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