B2B E-Marketplaces Rise And Fall By Steve Keifer

Some call it the Golden Age of B2B e- Commerce. Others call it the height of insanity. Regardless of your perspective, it is difficult to argue that there will ever be another time like it in the world of B2B e-commerce. Slide 2 ©2009 GXS, Inc.

The marketplace era witnessed an unparalleled infusion of capital and an unparalleled appetite for risk. Entrepreneurs around the world engaged in widespread supply chain innovation and experimentation. Slide 3 ©2009 GXS, Inc.

The Field of Dreams In the 1989 movie Field of Dreams, Kevin Costner builds a baseball field in the middle of an Iowa cornfield. The field would be used by Shoeless Joe Jackson and 7 members of the 1919 Chicago Black Sox team who were banned for life for throwing games. Slide 7 ©2009 GXS, Inc.

“Hockey Stick” Revenue Growth Investors should overlook periods of low revenues and profitability after startup… Revenue …As they will be followed by a Hockey Stick sloped period of rapid growth Time Slide 9 ©2009 GXS, Inc.

The Land Grab Strategy Monopoly Strategies Prevailed Buy as much property as you can on the assumption that you will realize long term revenue streams from collecting rent (on- going services) Slide 10 ©2009 GXS, Inc.

Traditional Supplier Selection Process Face-to-Face Negotiation between Buyer and Seller RFX to group of Known Suppliers E-Marketplaces attempted to use the Internet to introduce new buyer-seller relationships Slide 15 ©2009 GXS, Inc.

E-Procurement Employee Compliance with Purchasing Policies • All preferred supplier catalogs at single corporate site • Easy to use tools such as wizards to guide buyers through requisitioning process • Automating approval process for purchases Slide 17 ©2009 GXS, Inc.

E-Procurement • Avoid keying of information on paper requisitions • Reducing purchasing errors and rework • Costs of mailing paper POs from satellite offices to Headquarters Automation of Requisition & PO Process Slide 19 ©2009 GXS, Inc.

Excess Inventory Liquidation Overstocked merchandise is sold, often at a significant price reduction, to discount retailers. E-Marketplaces provide services to place excess inventory with buyers around the world. Online auctions increased price transparency through expanded information flow amongst buyers and sellers. Slide 21 ©2009 GXS, Inc.

New Investment Strategies Anyone with sufficient capital and risk appetite could build a e-marketplace And they did… • Venture Capitalists • Technology Entrepreneurs • Auto Manufacturers • Grocery Retailers • Electronics Manufacturers • Logistics Providers • Metals & Mining Companies Slide 24 ©2009 GXS, Inc.

Three Models for Exchanges Independent First Wave (Public) Trading Funded by Venture Capitalists and Exchanges Entrepreneurs Consortia Second Wave Trading Funded by Groups of Exchanges Buyers & Suppliers Private Third Wave Trading Managed as IT projects Exchanges by single company Slide 25 ©2009 GXS, Inc.

Independent Exchanges Buyer Buyer Buyer Buyer Advantages • Independent from Legacy systems • Neutral – No ownership by buyer or supplier • Governance model Owner allowed innovation and Consortia agility Exchange Owner Disadvantages • No default participation from equity owners • Got to market too early before demand fully developed Supplier Supplier Supplier Supplier Slide 26 ©2009 GXS, Inc.

Consortia Exchanges Buyer Buyer Buyer Buyer Advantages • Well-funded by customer/equity owners • Deep knowledge of industry processes • Established base of customers Consortia Exchange Disadvantages • Questionable neutrality • Governance challenges – owners are customers • Security – possible sharing of trade secrets Supplier Supplier Supplier Supplier Slide 27 ©2009 GXS, Inc.

Private Exchanges Buyer Buyer Buyer Buyer Advantages • High participation levels from captive base of suppliers and buyers • Built upon ERP & EDI systems with high levels of usage Private Exchange • Driven by ROI from hub- (Owner) owner versus investor goals Disadvantages • Functionality and access different for each hub • Buyers & suppliers forced to use many different exchanges Supplier Supplier Supplier Supplier Slide 28 ©2009 GXS, Inc.

Rise & Fall of the B2B E-Marketplaces 1600 Number of Online Marketplaces 1400 Venture Capitalists froze 1200 investments in April 2000 1000 800 Peak in B2B market was 600 February 2000 400 200 0 93 94 95 96 97 98 99 00 01 02 03 04 Source: Shakeouts in Digital Markets: Lessons from B2B Exchanges - California Management Review Vol 45, No. 2 – Winter 2003 Slide 30 ©2009 GXS, Inc.

The Most Popular Dummies Book… Realizing the Flawed Assumptions about B2B e-Marketplace Growth Potential - Investors Fled But Most were Too Late to Sell their Positions in Marketplaces Slide 34 ©2009 GXS, Inc.

Supplier Resistance Suppliers viewed reverse auctions as a mechanism simply for reducing price. Auctions did not provide sufficient weighting to quality, capacity, service, performance. Slide 36 ©2009 GXS, Inc.

Lack of Liquidity Consequently, many suppliers did not participate in marketplace auctions. The result was a lack of liquidity for buyers and a lack of transaction fees for exchanges. Slide 37 ©2009 GXS, Inc.

Not Popular with Suppliers Supplier’s Reaction to Reverse Suppliers viewed reverse Auctions auctions as a mechanism simply for reducing price. Suppliers believed that auctions did not provide sufficient weighting to quality, capacity, service, performance. Consequently, many did not participate in auctions Slide 38 ©2009 GXS, Inc.

Good for Pencils, but Not Engine Parts Marketplaces worked for: • Liquidation of excess merchandise • Hard to find electrical components • Indirect procurement of MRO goods But most Purchasing was: • Based on more than price • Quality, service, capacity, performance • Requiring more extensive analysis Slide 39 ©2009 GXS, Inc.

Consortia Lacked Neutrality Growth Depended Upon: • Gain participation of non- equity members • New trading communities Non-Equity Members feared • Sharing sensitive pricing and product information on competitor owned platform • Paying transaction fees that flowed back to competitors Slide 40 ©2009 GXS, Inc.

Lack of Integration Lack of Integration to Fulfillment, Clearing and Settlement Systems Lowered ROI Marketplaces had no links to • Product Catalogs • Order Fulfillment • Transportation Management • Invoice Processing • Clearing & Settlement Slide 41 ©2009 GXS, Inc.

Culture & Relationships E-Marketplace Vendors Under-Estimated • Long-standing personal relationships, which were difficult to disrupt • Threatened to disintermediate brokers, distributors, wholesalers with power • Middle aged buyers and suppliers must switch from phone to electronic approaches Slide 42 ©2009 GXS, Inc.

Perhaps they Succeeded…. There remains a general level of disappointment and remorse with the e- marketplaces… …But we should remember that these organizations were catalysts for a number of high value supply chain technologies still in use today. Minnesota Pension Fund Manager whose portfolio lost millions in e-Marketplaces Slide 44 ©2009 GXS, Inc.

Powering Today’s Supply Chains Product Catalog Collaborative Demand Planning Buy Side E- Procurement Supplier Portals Sell Side Order Management Logistics Management Excess Inventory Liquidation Reverse Auctions Slide 45 ©2009 GXS, Inc.

E-Procurement Market Steady Double $1,800 Digit Growth $1,600 $1,400 US Dollars (Millions) $1,200 $1,000 $800 $600 $400 $200 $0 2004 2005 2006 2007 2008 2009 Source: Forrester Research - September 2008 “Holistic View: The e-Purchasing Software Market” Slide 46 ©2009 GXS, Inc.

E-Sourcing Market Steady Double $1,200 Digit Growth $1,000 US Dollars (Millions) $800 $600 $400 $200 $0 2004 2005 2006 2007 2008 2009 Source: Forrester Research - September 2008 “Holistic View: The e-Purchasing Software Market” Slide 47 ©2009 GXS, Inc.

Covisint – Planning $1B IPO “Compuware Corp. hopes to raise at least $1 billion in an initial public offering of its Compuware Covisint subsidiary and has hired Morgan Stanley, the New York-based investment banker, to study the IPO’s feasibility.” October 29, 2007 http://www.crainsdetroit.com/article/20071029/SUB/310290010# Slide 51 ©2009 GXS, Inc.

Covisint hires former Detroit Mayer Kwame “Kilpatrick is going to work as an account executive for Compuware Covisint, a subsidiary of Detroit-based software company Compuware Corp., concentrating on the health care industry, the Detroit Free Press reported, citing a company memo.” February 12, 2009 http://www.crainsdetroit.com/article/20090212/FREE/902129972 Slide 52 ©2009 GXS, Inc.

Learn More Ten Years after the http://blogs.gxs.com/keifers/2009/10/b2b-e- B2B e-Marketplaces marketplaces-a-look-back-ten-years-later.html Ten Reasons why the http://blogs.gxs.com/keifers/2009/11/ten- Marketplaces Failed reasons-the-b2b-e-marketplaces-failed.html On the Edge http://www.gxs.com/tradinggridradio Podcast Recording Slide 54 ©2009 GXS, Inc.

B2B E-Marketplaces Rise And Fall By Steve Keifer

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