For the past couple of years business-to-business exchanges have been springing up everywhere. Giga Group reports that there are between 800 and 1,500 exchanges. A few short months ago, exchanges were predicted to upset the balance of power across various industries. Yet before the close of the year, we saw the first hints of the coming B2B exchange consolidation.

Many of today's exchanges represent but the first of several phases to come. While most of these phase-one exchanges have not yet had the opportunity to fulfill their promise, the early entrants are dying and restructuring. For instance, in late October 2000 Commerx (parent company of PlasticsNet and Metalclick) announced the resignation of its founder and CEO and withdrew its planned IPO. BuildNet, PaperExchange, and ChemConnect also withdrew planned IPOs. Less fortunate exchanges, such as Fleetscape.com, went out of business.

Two factors are causing this backpedaling. First, industry consortia are emerging. Although many major industry players have deep competitive animosity, they have allied to form industry-specific exchanges. Covisint, the exchange formed by General Motors, Ford, and DaimlerChrysler, was the first major industry consortia. Other industries, including aerospace and defense (Exostar), forest products (Forest Express), plastics (Omnexus), and high tech (ehitex), followed quickly. Accenture (formerly as Andersen Consulting) has tallied more than 60 industry consortia with more than 400 participants. Industrial giants want to control their industries, not have the terms of trade dictated by independent trading exchanges, and to participate in the phenomenal market valuations given to start-up exchanges. The founders of these industry consortia also guaranteed volume, which was expected to drive significant valuations.

Second, competitors to independent trading exchanges easily emerged. For instance, the chemicals industry has seen well over 30 exchanges, including ChemConnect, CheMatch, e-Chemicals, ChemB2B, Chemcross, ChemicalDesk, ChemRound, OneChem, and Ventro (formerly Chemdex). Clearly, the concept of an electronic marketplace for the chemicals industry was innovative. But, unfortunately for the founders of early exchanges, the barriers to entry are low. Many industries now have many exchanges, and more continue to emerge. In many cases, no single exchange has captured the volume necessary to provide liquidity and operating revenue.

Confronted with a soft and newly skeptical B2B equity market and a glut of exchanges, independent trading exchanges face an acute challenge. Accenture has identified five strategies that independent trading exchanges must draw on for long-term survival:

• Ally with consortia players.
• Merge with or acquire traditional businesses.
• Provide specialty capabilities.
• Serve niche markets.
• Merge with other independent trading exchanges.

The five Accenture strategies recognize that the barriers to entry have been relatively nominal and that, for any industry of significant size, an industry consortium has either formed or is likely to form.

Since mid 2000, Accenture has been warning independent trading exchanges that industry consortia threatened their futures. While many independent trading exchanges may have had the head start in identifying the value proposition, defining capabilities, and building out capabilities, they lacked liquidity. Conversely, industry consortia lagged in capability definition and build out but had enormous potential liquidity. Accenture saw this as creating opportunities for marriages of opposites.

Since Accenture began advocating this strategy, independent exchanges and consortia have begun to form alliances. For example, some industry consortia are designating smaller independent trading exchanges as key strategic partners. The food and consumer package goods industry consortium, Transora, has partnered with ingredient marketplaces Novopoint and Foodtrader.com. In the airline industry, the industry consortium AirNewco and supplier exchange MyAircraft.com are merging their marketplaces. The industry consortia SeafoodAlliance.com has signed a letter of intent to work with independent trading exchange Gofish.com, using Gofish as its eCommerce and marketplace engine. More than 30 exchanges in various industries have allied with competitors.

Some linkages are quite extensive. For example, Transora will provide links to other exchanges that connect suppliers, customers, and service vendors to consumer product manufacturers. The links will cover the inbound supply chain including direct materials (chemicals, packaging, food ingredients) and indirect materials (office supplies, equipment, and office services). Transora CEO Judy Sprieser expects the alliances to accelerate the adoption of exchanges and lead to faster realization of economic benefits.

For many independent trading exchanges, these alliances are one of the few remaining roads to survival. As industry consortia form and recognize the challenges in starting an eMarket, opportunities for alliances between independent trading exchanges and industry consortia will remain. But as industry consortia build out capabilities, they will have less need for the exchanges' capabilities and expertise.

Accenture sees an opportunity for independent trading exchanges to survive by merging or acquiring traditional businesses. This strategy addresses two fundamental challenges in the marketplace: the inability of independent trading exchanges to capture sufficient trading volume and the inability of many traditional companies to cloak their businesses in online capabilities or to rapidly build out eMarket capabilities.

Some early eMarket movers are beginning to employ this strategy. In October 2000, ChemConnect acquired Universal Chemical Brokerage, a brick and mortar brokerage business that trades seven petrochemicals. Eventually, ChemConnect will migrate Universal Chemical Brokerage clients online. Phil Ringo, president and COO of ChemConnect, observed that liquidity is critical. As a result of the acquisition, approximately $1 billion in petrochemicals trading volume will pass through ChemConnect. While ChemConnect is working with large chemicals consortia such as Elemica and Envera to create technology standards for the industry, the acquisition secures volume for ChemConnect.

Accenture believes that independent trading exchanges have numerous opportunities to acquire a traditional business in their industry or to merge with a major player needing eMarket capabilities. While it is important to selectively identify potential acquisition targets, Accenture expects such business activity to increase.

In one area, independent trading exchanges potentially have a significant advantage over industry consortia competitors: speed to capability. Accenture recommends that independent trading exchanges in crowded markets identify a value-added specialty and quickly develop that capability. In some cases, this strategy may be a radical departure from the original business plan, but it exploits the strength of the independent trading exchange governance and decision-making processes.

For example, BuildNet provides unique business solutions to the home-building industry. The BuildNet exchange provides not only basic exchange capabilities (content, community, commerce) but also deep functionality for industry-specific processes (for example, job-lot scheduling and materials planning). Ultimately, BuildNet intends to provide a value-added service to all stages of the value chain for the home-building industry, including the end consumer.

A number of early exchanges are now exploring another value-added capability: to host exchanges rather than to operate the exchange itself. While exchanges often move toward this strategy in reaction to their inability to attract liquidity to the original offering, these value-added services may become a sustainable business model in themselves. Commerx is currently undergoing such a radical transformation. Once a marketplace builder, Commerx is now an application service provider (ASP) that sells private trading.

A derivative of this strategy is an eMarket alliance with traditional technology vendors to provide new technology solutions. In October 2000, Hewlett-Packard and VerticalNet announced the development of next-generation business solutions based on technology from both companies. HP will integrate its e-speak programming structure with VerticalNet's digital market technology, Open Services Marketplace. The solution aims to enhance flexibility and interoperability for eMarkets, increase the eMarket's ability to integrate new trading partners, and foster the creation of new business processes.

The development and rapid leveraging of specialty capabilities remains a viable alternative for many independent trading exchanges. This strategy is particularly potent when combined with the industry consortia alliance.

Traditionally, a niche industry is viewed as a small, isolated industry below the radar screen of major vendors. Independent trading exchanges that identify a niche will likely be successful because this strategy addresses the threat of additional competitors and industry consortia plays.

Although niche markets do not offer massive volume, there is considerably less competition. Thus, independent trading exchanges that move to build out capabilities first often will discover that the market is only capable of supporting a single exchange, and there is not sufficient additional volume to attract competitors. This scenario enables an exchange to focus on serving customers and increasing efficiency.

Likewise, a narrow market will probably not be large enough to support an industry consortium. Industry CEOs are not under the same pressure from Wall Street and may not have the resources to fund and support a consortium. For instance, it appears that both the office security installation and building maintenance markets are sufficiently narrow to have avoided the attention of large industry consortia and major exchanges. Nevertheless, their relatively complex product and service offerings would enable an exchange to increase efficiency in the industry.

Existing exchanges may partially or tangentially address some narrow segments. But an independent exchange often has an opportunity to function as a one-stop shop for a given industry or segment. For example, LawCommerce has positioned itself to provide all products and services needed by the legal profession.

Many independent trading exchanges will survive by identifying and thriving in small yet profitable niche markets.

In June 2000, Accenture began predicting that independent trading exchanges would be required to align with industry consortia. We also suggested another alternative for independent trading exchanges: to merge with competitive or complementary independent trading exchanges.

The merger strategy has four important results:

1. It reduces competition.
2. It combines customer bases.
3. It minimizes costs through rationalized operations.
4. It provides more capabilities than a singular exchange.

More than 30 such mergers have occurred. For instance, in October 2000, Cephren and Bidcom, two leading exchanges in the construction industry, agreed to merge. Both Bidcom and Cephren offered hosted project-management applications that help owners, developers, general contractors, architects, and subcontractors keep track of projects via the Internet. The new company, Citadon, hopes its combined size and resources will enable it to achieve sustainable volume and set it apart from hundreds of other players. Citadon will have a portfolio of 1,200 projects and 30,000 subscribers. Although there are more than 200 construction-industry ventures, this is a tough market because the construction business is localized, fragmented, and not highly automated.

Accenture anticipates considerably more merger activity as the market matures. For many independent trading exchanges, merger is not a desirable option because of the loss of autonomy. For others, however, merger is the only likely path to survival.

The rewards for successful trading exchanges are high. But the enormous economic payoff has drawn too many competitors. Inevitably, the field will thin. The market is now entering the survival phase, with independent trading exchanges facing major strategic choices.

For any given independent exchange, the right strategy is likely to be a mix of the alternatives described here. Obviously, some combinations work better than others and many are industry dependent, but combined strategies can be successful. For example, Partminer has combined the specialty capabilities strategy with the industry consortia alliance strategy. Partminer has partnered with e2open, a move that guaranteed its survival and gave it access to a tremendous number of transactions. In the deal with e2open, Partminer traded its technology for the exclusive right to act as e2open's broker for difficult-to-procure parts. Partminer filed for an IPO and remains free to work with other exchanges, including e2open rival eHitex.

Regardless of which strategy or strategies an exchange selects, its ultimate success lies in a few key factors:

• The capabilities provided by the exchange must address a specific business need or inefficiency for the target industry.
• Use of the exchange must fit within the overall business strategy for potential users, that is, the exchange must provide a clear, demonstrable value proposition to users.
• The exchange must be integrated into the overall business processes and systems of its users.