Enabling Sell-Side E-Commerce through Internet Exchanges

An exchange is successful only if buyers choose to buy and sellers choose to sell. One-sided offerings will not achieve significant liquidity. Nate Lentz, Steven Wolin, Tim Byrne, Business 2.0 The single greatest key to survival is liquidity, or volume of business. This means exchanges will be aggressive in how they attract members. Lisa Williams, The Yankee Group The startups wonder how they can get liquidity on their site, while the industry incumbents wonder how they can convert liquidity into a successful Web venture. Stefan Burgstaller, Schroder Salomon Smith Barney Comergent delivers liquidity to Internet marketplaces. Paul Melchiorre, Ariba Inc. Comergent Technologies, Inc. 2

Table of Contents Table of Contents... 3 Executive Summary... 4 The Internet Introduces New Business Models... 5 Buyers Participate in Marketplaces... 5 Sellers/Suppliers Participate in Marketplaces... 5 The Liquidity Challenge... 6 Comergent Enables Sell-Side E-Commerce to Drive Liquidity... 8 Conclusion... 10 Who We Are... 11 Comergent Technologies, Inc. 3

Executive Summary The Internet is rapidly changing traditional business practices and creating new business models. One of the most popular new business models to emerge is the Internet marketplace. To date, these marketplaces have been focused on providing benefits to buyers. Sellers, however, have different business goals and challenges they must address when adopting this business model. The key measure of success with marketplaces is liquidity. Liquidity begins with the number of buyers and sellers that participate in a marketplace. However, the number of participants is not enough. Real liquidity is created through transaction volume: the size and number of transactions going through the marketplace, as well as the number of repeat customers. Some marketplaces have achieved this transactional liquidity, but most are still struggling to reach this mark. Why? The marketplaces have been challenged to create complete liquidity because suppliers have faced the dilemma of how to fulfill orders without building a new distribution model or creating channel conflict. The Comergent Distributed E-Business System provides a rich solution that solves this dilemma and delivers full liquidity to Internet marketplaces. This creates benefits for all members of the value chain as measured by increased top-line revenue, improved profitability, and enhanced customer satisfaction. Comergent Technologies, Inc. 4

The Internet Introduces New Business Models Internet marketplaces are one of the most popular new business models to emerge in the New Economy. There are as many names for these marketplaces as there are different business models and ownership structures for them. They are referred to as: net markets, vertical portals, procurement portals, digital marketplaces, dynamic trading hubs, and industry exchanges, to name a few. Some will have different ownership structures, pricing mechanisms, and business models, but they are all virtual marketplaces (i.e. places on the Internet) that bring buyers and sellers together to complete transactions. Buyers Participate in Marketplaces In order to build liquidity you need both buyers and sellers. It is relatively easy to get buyers to participate in marketplaces. This is because, to date, the majority of Internet marketplaces have been focused on offering benefits to buyers. Sites like CheMatch.com, MetalSpectrum, and most of the industry exchanges that exist today are primarily focused on helping companies procure products at lower costs. The benefits that buyers receive from marketplaces are: Aggregation of suppliers Rationalization of supplier information for easy comparison Increased price competition among suppliers Marketplaces are well matched to the overarching goal of buyers, which is to procure items at the lowest possible price in the most efficient manner. This makes it easy to attract buyers to marketplaces. Sellers/Suppliers Participate in Marketplaces On the other hand, it is more difficult to attract sellers/suppliers to marketplaces. Sellers must balance a number of goals, regardless of whether they are participating in physical or virtual marketplaces. Sellers want to participate in Internet marketplaces in order to: Take advantage of e-commerce Gain access to new buyers Sell products at a reduced cost of sale However, at the same time Sellers have some dilemmas regarding their participation in Internet marketplaces. Those include: Channel conflict Logistics How to provide after sales services Comergent Technologies, Inc. 5

In the physical world sellers/suppliers generally handle these issues via their distribution channels. To maximize profitability, they must book revenues at the most efficient costs for production, sales and distribution. Indirect channel partners play an important role in achieving this objective. Channel partners specialize in providing value-added services to end-customers, including inventory and logistics management, installation, training and support. Manufacturers, in turn, can focus on their core competencies of product development and production. Since manufacturers have invested significant time and resources in developing their distribution channels, they are reluctant to lose sales or alienate their partners by circumventing the channel to sell directly to customers. Internet marketplaces can conflict with this business model. The Liquidity Challenge With seemingly opposed goals, how do marketplaces attract both buyers and sellers? What determines which marketplaces will survive and thrive, consolidate, or be eliminated? For marketplaces to survive as viable business models, they must generate real liquidity. There are several stages or dimensions of liquidity to consider in assessing the success of a marketplace: 1. In the simplest definition, liquidity is the number of buyers and sellers that participate in the marketplace. 2. Full liquidity extends beyond the universe of potential buyers and sellers to quantify the size and number of transactions going through the exchange, as well as the number of repeat customers. 3. Full liquidity is enabled when sellers seamlessly involve their distribution channels to efficiently fulfill orders to buyers. Sellers have several incentives to participate in Internet marketplaces. However, they will only be able to generate true liquidity through a marketplace if their distribution channel is e-enabled to fulfill for the marketplace. Without having their distribution channels e-enabled, sellers/suppliers will not have the desire (due to channel conflict) or ability (due to logistics problems and the difficulty of providing after sale service) to participate in Internet marketplaces. Many marketplaces have aggressively attracted members, but according to AMR Research, many are finding it difficult to drive business. In fact, most marketplaces have not processed their first transaction and many are only generating revenue through advertising. The fundamental challenge for marketplaces is in demonstrating transactional liquidity sufficient revenues to ensure their success as financially viable, sustainable commerce vehicles. Although the number of buying and selling members in the exchange is a factor for liquidity, there are other key factors to consider in the equation, such as the size and number of transactions going through the exchange, as well as the number of repeat customers. These factors are most easily achieved by e-enabling sellers distribution channels. Let s examine the liquidity of a sample marketplace transaction. Comergent Technologies, Inc. 6

Consider a buyer for a physician s office or small hospital who visits a global healthcare exchange. He places an order with a major medical products manufacturer to buy three cases of cotton swabs. (Figure 1) The buyer is initially happy; through a very efficient buying process, he has secured the product he needed at a very competitive price. Or has he? Let s look behind the scenes. The cotton swabs were listed as an available item in the marketplace. The buyer may have looked at several suppliers and prices before electing to make his purchase of this particular manufacturer s cotton swabs. The buyer submitted his order and the transaction was booked. But only when the order is actually shipped, and the buyer is satisfied, is the exchange complete. Thus, Internet marketplaces are incomplete without considering the seller s process. The medical products manufacturer is pleased to generate this incremental revenue at a reduced cost of sale, but is ill equipped to efficiently fulfill the order. The reason? The manufacturer, as the supplier, sells and ships products by the pallet or truckload, not the case, to their customers. But these customers are the manufacturer s distribution channel partners. It is these partners that fulfill orders of all sizes, even orders in unit sizes as small as a single unit, for the manufacturer s true end-customers. Manufacturers and their channel partners must embrace Collaborative Commerce through partner marketplaces to ensure order fulfillment through Internet marketplaces. Otherwise, they must face the only alternative to completing the sale and making the customer happy: send an employee down to the loading dock to collect products from a pallet to assemble and ship the order manually. In addition to the obvious inefficiencies of filling orders themselves, the manufacturer will be reluctant to introduce channel conflict by participating in this model. The existing distribution channel fulfills orders efficiently and provides value-added services to end-customers. Thus, the manufacturer should involve their partners in a collaborative marketplace to sell and fulfill product orders. Comergent Technologies, Inc. 7

Comergent Enables Sell-Side E-Commerce to Drive Liquidity When manufacturers can seamlessly extend or transfer orders to their partners for fulfillment, they will be more willing to participate in marketplaces. This will drive liquidity in the marketplaces, by increasing the number and size of transactions, as well as business with repeat customers. Another trend in the market is the development of sell-side Internet marketplaces, which can be either third party-owned or manufacturer-owned marketplaces, which operate in industries with existing distribution channels. The benefits offered to manufacturers by these sell-side marketplaces are: Control over the customer s buying experience Delivery of the most up-to-date product information Ability to determine who will be allowed to participate in the marketplace Opportunities for branding and product differentiation Visibility into customer s buying patterns Tools to analyze the effectiveness of the participants These benefits make the marketplace much more appealing to the manufacturers. Comergent enables sell-side marketplaces by providing the following functionality: Maintain profiles of buyers and suppliers List the products sold in the marketplace Configure complex products Query partners for pricing and availability Analyze commerce activity in the market Let s now re-examine the cotton swab transaction in a Comergent-enabled marketplace, where the manufacturer s existing distribution channel is utilized for pricing, availability and fulfillment. The numbered steps illustrate the transaction flow through the marketplace and involve the following capabilities (Figure2): Comergent Technologies, Inc. 8

Transaction flow steps: 1. A hospital buyer comes to the marketplace to purchase products. This customer signs in and is identified by the marketplace as a member. 2. The customer browses items, such as cotton swabs, aspirin, and tongue depressors. He browses for products via the marketplace's product catalog, which has content that was downloaded from the Comergent Commerce Catalog at the manufacturer's site. 3. The customer configures some complex products, such as pre-packed medication carts, to add to his shopping list. He utilizes a web-based product configurator, such as the Comergent Commerce Configurator. 4. The customer completes his shopping list and queries either the hospital supply stores or the manufacturer for pricing and availability. From the marketplace site, a query is sent to hospital supply companies or the manufacturer for pricing and availability. The Comergent Distributed Commerce Manager is used to initiate the query. 5. The customer purchases supplies from the marketplace site. 6. The marketplace site takes his order and sends it to the selected hospital supply store for fulfillment. The Comergent Distributed Commerce Manager initiates the order to the store. 7. The hospital supply store fulfills the order to the customer. 8. The manufacturer's site owner analyzes the commerce activity. The site owner determines what products customers are buying, which stores are most frequently selected, and what brands sell the best, using the Comergent Marketplace Analyzer. The key challenge impeding liquidity within Internet marketplaces today is that buyers place orders, but the current marketplace models have not been able to seamlessly connect transactions from sellers through their distribution channels to deliver products to buyers. Comergent Technologies, Inc. solves this problem and enables manufacturers to seamlessly connect to a marketplace to sell and fulfill product orders through their channel partners. Through a Comergent-enabled marketplace, all parties are served: Buyers efficiently obtain supplies at competitive prices. Manufacturers efficiently sell and fulfill orders. Channel partners provide their value-added services in delivering products. Marketplaces are enabled to deliver liquidity. Furthermore, with the final step taken by the manufacturer to analyze commerce activity, manufacturers can gain insight into customer buying patterns and preferences. Armed with this information, manufacturers can design marketing promotions to generate incremental business. Liquidity is achieved by successfully fulfilling all orders. Comergent Technologies, Inc. 9

Conclusion Two types of companies on the leading edge of e-commerce will look to Comergent when building marketplaces. Internet marketplaces, such as Buzzsaw.com, will build liquidity by engaging Comergent to e-enable their suppliers distribution channels. And manufacturers who want to use Internet marketplaces as another distribution channel have chosen Comergent to enable the fulfillment process. Manufacturers may choose to leverage Internet marketplaces through third-party sites or through their own branded marketplaces. With the Comergent solution, manufacturers can fulfill orders and bring liquidity to all marketplaces, which will prompt them to sell through this new business model. Manufacturers will be able to ensure that the quality of their brand is consistently extended throughout the customer s purchase and fulfillment experience. The major issue facing Internet marketplaces is building liquidity, i.e. transaction volume. By e-enabling manufacturers to connect their distribution channels to marketplaces, manufacturers are able to participate in this business model and Comergent solves the liquidity challenge. Comergent Technologies, Inc. 10

Who We Are Founded in 1998, Comergent Technologies, Inc. is a leading provider of collaborative commerce software solutions that enable enterprises to engage in sell-side business-to-business e- commerce, fully leveraging all their sales channels. We re an innovative company with Global 2000 customers, a seasoned management team and strong financial backing. Comergent has assembled a knowledgeable and experienced customer advocacy group to deliver unparalleled support, training and implementation assistance to ensure each customer s success. In addition, enterprises can expedite the launch of their channel partners by leveraging our Comergent Partner Network, a worldwide network of Comergent-ready channel partners able to engage in commerce and communication with manufacturers. Comergent is dedicated to continually pushing the envelope of business-to-business e-commerce and collaborative partner marketplaces. While many ERP and CRM vendors are struggling to move their legacy client/server applications to the Internet, Comergent started fresh with multitiered distribution and Internet business models in mind. The result is the most sophisticated and comprehensive sell-side business-to-business e-commerce solution ever constructed. Comergent Technologies, Inc. 11

About the Author Jean Kovacs President and CEO Comergent Technologies, Inc. Ms. Kovacs has over 25 years experience directing technology companies. Prior to co-founding Comergent, she was co-founder and Executive Vice-President of Qualix Group. In this position, she was responsible for managing and directing the Engineering, Marketing, Services, and Telesales departments, and was closely involved in the company's IPO. Prior to joining Qualix, Ms. Kovacs held positions in sales, marketing, and support at Frame Technology, Sun Microsystems, and Compugraphic Corporation. Ms. Kovacs holds a B.S. in Finance from Northeastern University and an MBA from Harvard University. Comergent Technologies, Inc. 1201 Radio Road Redwood City, California 94065 t: 650.232.6000 f: 650.232.6010 http://www.comergent.com Please recycle 2000 Comergent Technologies, Inc. Printed in the United States of America. All rights reserved. This product and related documentation is protected by copyright and distributed under licenses restricting its use, copying and distribution. No part of this product or related documentation may be reproduced in any form by any means without prior written authorization of Comergent Technologies, Inc. The products described in this manual may be protected by one or more U.S. patents, foreign patents, or pending applications. Comergent Technologies, Inc. 12