Building From The Middle Out

An online exchange model that engages intermediaries is the first step to long-term liquidity

By Don Nachtwey & Ed Shields

Continued from Page 1

The MSP Model

For example, exchanges could be built by a market service provider (MSP) in an MSP environment. (See Figure 1). An MSP owns all the critical applications on both the buy- and sell-side of a transaction; it only charges for services used. This feature is extremely important - after all, software-licensing agreements can run into the seven figures, and the average broker generates less than $30 million in annual revenue.

In addition, the MSP manages the transaction and provides services for back-end integration with legacy systems. A complete MSP solution also includes professional services such as training and consulting. The ability to select the desired services lets participants adopt at a manageable pace.

Buy-side applications include tools for procurement, pricing, customer relationship management (CRM), and business intelligence. Sell-side applications include tools for auctioning, cataloging, and reporting. Because sourcing represents such a large portion of the brokers' resources, our product investigation focused on the procurement tools that cover the needs of the buyer and can be plugged into an MSP environment.

Product Offerings Today

Reverse-auction technologies can create a 5 to 20 percent reduction in price for buyers. Online auctions - such as FreeMarkets - for industrial parts, raw materials, commodities, and services let suppliers compete in real time for the purchase orders of large buying organizations by lowering their prices until the auction is closes. As prices approach their "true" market value, trading partners then compete on factors such as quality, reliability, and value-added services.

Price-only negotiations fail to provide an effective mechanism for supporting the sourcing of complex, multiattribute products and services, which represent a large portion of B2B purchases. In addition, these negotiations do not support the development of long-term, buyer- seller partnerships required for creating an efficient and responsive supply network. Focusing solely on price also reduces the buyer's ability to benefit from the knowledge and experience from one sourcing event to another.

Fortunately, the evolution of dynamic commerce to negotiated commerce has created new, powerful solutions for corporations and independent market makers to engage in multistage, online negotiations in which complex terms can be settled upon at different points in the negotiation process.

These solutions are available from companies such as Moai Technologies Inc. and Webango Inc. Moai's LiveExchange solution provides tools for negotiated commerce as part of a buyer's strategic sourcing. (See the sidebar, "Rules for Negotiation,") Strategic sourcing is a process in which buyers look at the total cost of a contract rather than individual line items. Negotiated commerce lets a buyer define parameters in an online, multiattribute request for proposal (RFP) that can score and compare across all sellers. (See Figure 2.)

Webango Network is a Web-based sourcing solution that lets buyers select the best suppliers for complex commodities and services, negotiate and manage contracts, and develop long-term supply partnerships. (See the sidebar, "Getting the Goods.") Webango's sensitivity-analysis features validate the shortlist selection of suppliers. (See Figure 3.) As you can see, compiling scores and communicating them to your team members and suppliers is easy.

Measuring the Benefits

Strategically sourcing a commodity can yield 10 to 30 percent savings relative to the price you paid buying on an ad hoc basis. The effect on efficiency will be significant because the time previously dedicated to processing faxes can be invested in knowledge-based efforts such as product consolidation, seller and buyer collaboration, and CRM. Intermediaries can spend more time putting together packaged solutions rather than sourcing individual parts.

Yet another important benefit that can't be discounted is the transaction history that lets you learn more about the buyers and sellers connected through the exchange site. Creating transaction histories will enable brokers to identify demand cycles, develop more effective pricing strategies, and isolate bottlenecks in sourcing and clearing a transaction. Capturing visitor information and monitoring visitor behavior will let brokers attract the right players when market-making events occur.

Getting to Liquidity

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Getting to liquidity in the world of online exchanges is a "chicken-and-egg" problem. Do the sellers come first or do the buyers? Brokers and other intermediaries have made this problem their business. Therefore, exchanges that build from the middle will find the fastest path to sustained liquidity.

Don Nachtwey (don.nachtwey@keybridge corp.com) is a product manager for KeyBridge Corp., a managed service provider in Reston, Va.

Ed Shields (eshields@zrexchange.com) is cofounder of Zero Resistance Inc., an e-business consulting group in Washington, D.C.