Modern day snake oil

Sunday 1st April 2001

Surviving e-market mania

If you're smugly proud that you missed the dot-com madness, take a deep breath and get ready for the next round - the electronic marketplace boom is coming to an industry near you. Getting through this one unscathed will take real vigilance and courage.

Electronic markets aim to connect buyers and sellers on the internet, promising reduced costs and new revenue opportunities. They often take their lead from one or more large players in an industry. The granddaddy of them is airline reservation system Sabre. Started in the pre-internet 60s by American Airlines, Sabre now accounts for 40% of all reservations through travel agents. It's turned out to be a lucrative sideline for American's parent, AMR, which last year spun off Sabre as a separate public company that's now worth more than the airline itself.

Locally, there are 19 existing or proposed e-marketplaces. It is estimated they could account for $550 million-worth of B2B expenditure by 2004. New companies have been set up, using the internet to help build these markets. Among the global leaders are Ariba, Commerce One, SAP and Oracle. Many of the world's largest corporations have figured they might like a piece of this new business; they've jumped in to set up markets using their own purchasing clout as the catalyst.

E-market promoters often let fear and greed trample over good business sense, stirring in a good dose of PR-driven smoke and mirrors to boost pressure to join. Fear leads many companies to jump in, believing they'll be locked out of their biggest accounts if they don't. And greed drives many e-market promoters who hope one day to clip the ticket on vast numbers of transactions, including their competitors'.

But greed and fear are a bad foundation for good business. And too many of these e-markets are proving to be plain bad business for their participants.

Beware when the snake-oil salesman calls to sell his path to riches and power, or your biggest customer drops by to "suggest" you sign up to their e-market so you can continue doing business. Chances are you should just say no.

The problem is that too many players are taking the "big bang" approach - doing too much, too soon. Like other big, complex technology projects, they have a high chance of failing completely. Typically, they focus too tightly on automating transactions. It's tough enough forcing automated or rule-based systems onto your own staff, who will frequently rebel or side-step them. It becomes mind-numbingly complex as the tentacles spread to more and more outside companies. And companies, like consumers, often want more than one channel to buy through.

But without wide usage, large buyers typically can't get the returns they've been promised. They're looking to reduce staff and win savings from the tighter control these systems bring. This won't happen unless most staff, suppliers and customers sign on. Even if they do, the benefits can be marginal - it's common to overestimate the savings and underestimate the cost and difficulty of the project.

The experience of Dell and General Electric is sobering. Dell, no internet slug, shuttered its Ariba-powered e-market after one year citing "the reluctance of customers to participate". And GE, admired as one of the world's best-run corporations, is under fire for failing to deliver the massive gains promised by chief executive Jack Welch. Welch boasted GE would save $US10 billion over two years, by using e-markets and on-line procurement. So far, savings are negligible. Inflated claims like this drive much of the current over-investment.

Ironically, most of the benefit from e-markets will come simply from better information access among customers and suppliers. This is a more manageable goal, with early payback for everyone - better information makes markets more efficient, and most of the cost and risk in purchasing comes from researching, evaluating and negotiating. But to big-ticket e-market providers, this pre-purchase activity is too often seen as a minor add-on. You don't need their fancy systems to do this stuff.

When e-markets are built on the solid foundation of information exchange, and they get a critical mass of suppliers and customers using them, the rest will follow over time as key technologies mature.

Don't get me wrong, electronic marketplaces have an important place in our future. I'm not saying, don't do it. I'm saying, don't overdo it. Success needs modest goals and time frames, staged roll-outs and a level of investment based on realistic, not inflated, returns. Unfortunately, it's not the approach that many corporations around the world are taking. Maybe New Zealand business can resist overseas and parent company pressures and lead the way sensibly.

Martin Taylor

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