Out of the valley: They're wanted for procurement

If you've been reading business magazines or listening to analysts over the past year, you might think electronic marketplaces are a flop.

If you've been reading business magazines or listening to analysts over the past year, you might think electronic marketplaces are a flop. Designed to slash the cost of procurement by automating time-consuming purchasing processes over the internet, public exchanges were once hailed as a breakthrough in business-to-business technology. But as the difficulties of developing them sank in, the fortunes of many of their protagonists declined.

Ventro, the pioneering developer of an exchange for the life sciences industry, seemed to sum up the industry's problems last December when it shut down its high-profile Chemdex operation. Its subsequent full-year results, a $618m (£432m) loss, suggested this was not an area with much potential for shareholder value.

Apparently, though, this impression is wide of the mark. Or at least it is if you listen to Mark Hoffman, chief executive of marketplace developer CommerceOne. He told analysts last week that B2B public marketplaces are starting to deliver results. Working closely with equity partner SAP, the German software giant, CommerceOne is behind several internet exchanges where costs are being driven down. Boeing, for example, cut its procurement costs by 10 per cent through a recent reverse auction over the internet, and has slashed its purchasing process from weeks to hours. DaimlerChrysler recently conducted $3bn of trades over four days through Covisint, an exchange run in partnership with General Motors and Ford. And earlier this month, Ford said it had reaped procurement savings of $70m through Covisint in 2000.

The point is that even though these exchanges are out of fashion, they can deliver rapid cost reductions in a relatively short time. That's an important argument as the industry shifts its attention from public marketplaces such as Covisint to private exchanges run on behalf of individual companies and their suppliers. One of the problems with public exchanges is liquidity: unless the big players in an industry drive the process, it's not easy to get enough buyers and sellers on board. But in a private exchange you're selling the concept to a board of directors and that company's partners. From both a technical and cultural point of view, you're operating in a controlled environment. CommerceOne, which expects up to 80 per cent of its future business to come from these internal marketplaces, has gathered evidence to support its sales story. Deutsche Telekom, it says, cut its purchasing costs by 67 per cent in seven months.

The real test, though, will come further down the line. Logically, automating inefficient procurement processes must save money, but just as logically, there's a finite amount of costs that can be cut. The real value comes as organisations begin to leverage private marketplaces for more sophisticated activities, such as collaborating with suppliers to streamline production or develop products. That's where exchanges will really add the long-term value they promise – and at present, no one's got hard figures to demonstrate what that value really is.

Keith Rodgers is a technology writer based in Silicon Valley