An interview with Tom Barry

Q. The United States has seen an absolute explosion of new online trading exchanges. How would you characterize the growth of exchanges in Europe relative to the growth in the United States?

A. In general, e-commerce activity in Europe is running a couple of years behind that of the United States, but the gap seems to be closing rapidly. Europe is comprised of more than 30 countries of widely diverse industrial and technological strengths and needs. The total number of exchanges in Europe could very well be greater than the number in the United States, primarily because European exchanges aim to serve national markets. And with e-commerce now focusing on mobile commerce, Europe—with the leadership of Nokia and Ericsson—is well positioned to lead this segment of the market.

Q. Which industries in Europe are the furthest ahead in creating and using online exchanges?

A. Financial services companies have been moving aggressively to create and support online exchanges. Such companies are looking to entangle their customer base by providing more and more value-added services; online exchanges allow them to do that. Retail industries are also particularly attracted to exchanges. And on a global basis, the automotive, aerospace, and high-tech electronics industries are active trading entities, due primarily to their high level of spending for direct goods and services. I believe that the industries poised to reap the greatest benefits from online trading exchanges are those where profitability is largely a function of how cost-efficiently they are able to buy goods and services. Companies traditionally at a high level of spending for goods and services are prime candidates for participating in and benefiting from online trading exchanges.

Q. What opportunities and challenges are unique to Europe-based exchanges?

A.The greatest opportunity is to provide a truly pan-European exchange that caters to the super-set of European countries. Nothing like this exists at the moment, but larger industries that have global operations and infrastructures, such as automotive and aerospace, are candidates. The greatest challenge is overcoming the different requirements of different European countries—be it language, currency, legal issues such as customs laws, or the validity of fully electronic trading.

The euro is beginning to have a positive effect on facilitating online exchanges, and exchanges are helping Europe to establish common denominator pricing—a huge issue in the U.K., where people pay premium prices for automobiles, PCs, electronic equipment, capital goods, and food. The exchange model should eventually lead to equitable, fair-value pricing throughout the European marketplace through common denominator pricing.

Q. What are the defining characteristics of a successful exchange in Europe?

A. Success in Europe is no different from success in the rest of the world. Exchanges have to demonstrate the ability to drive down the cost of goods and services. To do so, they've got to have the buying expertise that really does deliver lower cost. Scale and accumulation of buying doesn't always convert into lower prices. This is typical of large decentralized organizations that, despite all their scale and volume, can't really get a handle on their spending or develop good metrics to measure improvements.

In addition, to get buyers and sellers in place, exchanges will have to do a great job of selling themselves. It's not easy to get a company to hand over its expenditure. Suppliers want direct relationships with their customers and, to some degree, customers want those relationships as well. Many won't want to sign onto exchanges if their relationships are going to be diluted.

Two characteristics, however, are peculiar to Europe: the ability to trade irrespective of boundary (language, currency, legal issue, cultural, etc.) and a low technical barrier to entry because European suppliers and customers tend not to be as Internet-enabled as their U.S. counterparts.

Q. Have many multinational companies been able to leverage the power of online purchasing and trading across their global operations?

A. A number of industries have practiced the principles of the online exchange concept for many years. In the oil industry, cooperative purchasing groups achieve substantial benefits of scale in purchasing, distribution, and supply. In this and similar industries, the transition to an e-commerce marketplace is a natural and readily accepted extension of proven buy/sell techniques.

Q. What advice do you give to executives looking to begin leveraging the power of exchanges?

A. First, understand the business model behind the exchange. Ask yourself the following questions: Do buyers or sellers lead the exchange? Does it make money by aggregating spending power and driving volume reductions? Does it provide value-added services? How does it charge for these services? How many suppliers have joined the exchange? What are the barriers to entry? How easy is it to integrate with the exchange's underlying technology? Can you link to other exchanges? Are you locked in? What assets do you have that you could sell to the exchange? Why will this exchange be successful?

Second, ensure that you know where the value is. Are you joining the exchange to get access to better deals (contracts), to take advantage of better customer service (than offered by the internal service provider), to get better compliance for existing deals, or to reduce the internal cost of service? One of these goals will be primary: choose your exchange service provider based on this characteristic.

Tom Barry is managing partner of Andersen Consulting's Electronics and High Tech Industry practice in Europe and Latin America. He directs all activities related to supply chain management within this practice.