E-business will bounce back.

Even before the tragic events of 11 September, e-marketplace giant Commerce One was struggling to cope with a shifting business model and the global downturn.

In the two weeks following the US terrorist attacks, the company sold nothing and downgraded revenue estimates. The future suddenly looked challenging.

Commerce One was among the founders of Covisint, the online marketplace backed by Ford, DaimlerChrysler and General Motors, where groups of companies bid for materials and services.

Six months ago, 80% of the company’s sales came from selling the software to build these sites, but things have changed dramatically. Commerce One is now predicting that in six months’ time 80% of sales will come from private marketplaces – bespoke sites set up for one company to deal with its supply chain. Chief executive Mark Hoffman spoke to Accountancy Age’s sister publication Computing about these changes and his predictions for the future.

What effect did the events of 11 September have on Commerce One and what is likely to be the long-term impact?

The analyst projections of earnings for the third quarter are lower than they were two weeks ago – down about 10% to 15%. The stock price has fallen more. Things may go back to an even more conservative level than the early 1990s.

I think we will see a recovery in the next few weeks or months. But if there is another disaster, it will be very destabilising. We were starting to see stability in the purchasing patterns in this quarter. But now I’m not sure. I don’t think people are cancelling the contracts or stopping looking at this stuff. The first reaction has been caution and to negotiate the price harder, or defer. People still believe in this sector, they believe you can save money and get market value. But people are still very cautious.

How has your business model changed over the last year?

We are seeing a shift towards more private marketplaces. Public marketplaces have been about 80% of our business, but now private marketplaces will be 80% of our business. It started probably six months ago. A private marketplace is somebody trying to tie together applications and automate certain transactions with outside partners.

Does this mean we are seeing the end of the public marketplaces?

No, not at all. I think they will be very complementary. I think private marketplaces will drive the liquidity in the public marketplaces eventually.

What you will see is that as these guys automate they begin to realise the value of marketplaces, and there’s value at the industry level.

But don’t you think people will be put off investing in public markets given the number of high-profile failures over the last year?

If you look at our marketplaces, we have seen a very low failure rate.

We have seen a lot of failures around the world, but down the line it has probably only been a couple of per cent with ours. I attribute that to a couple of things. All those marketplaces that failed built their infrastructure on a non-standard proprietary infrastructure. You can make it work, but it’s not going to tie together systems on a global basis.

Also a lot of those marketplaces were built on a model of: ‘Yeah, I’m going to build this marketplace and the world is going to come to me.’ That’s the opposite of the consortia-targeted model where you get people such as Ford, GM and Chrysler saying: ‘I’m going to use my spend to prime the pump, get the liquidity and then I am going to recruit new people and get additional liquidity.’

But how will the current investment in private markets benefit public sites?

As people begin to realise the benefits of private markets, it will begin to drive value through public marketplaces. You can see a little bit of that right now.

The Navy built a private marketplace, but it is running its transactions through the public marketplace Exostar because it feels it is more sophisticated in supply chain management.

Why are companies more interested in building private trading hubs?

I think a lot of these private e-marketplaces will provide connectivity to a lot of disparate applications.

Even within a single organisation you may have 60 or 70 different enterprise resource planning systems that need to be connected together. They will also collaborate within the organisation.

How do you tie divisions together to interoperate?

German enterprise resource planning vendor SAP is very interested in the private marketplaces. SAP’s sales guys sell a lot of different applications, and they don’t understand how to sell marketplaces or the power of marketplaces.

Do private marketplaces place an extra burden on suppliers?

Suppliers want something they connect once into their infrastructure and can service public and private exchanges. They will still come under pressure from automated purchasing, but benefit from more channels into the marketplace as these global networks eventually evolve.

Commerce One and SAP

Commerce One has always had a very close relationship with SAP. The two companies have a mutual selling strategy where Commerce One provides the software to build online marketplaces, and SAP sells the software to connect different business units together.

Rumours of a buyout have circulated for some time. In June, SAP upped its stake in the firm from four to 20%, just shy of the 23% that would effectively constitute an acquisition. This tentative approach probably has a lot to do with Commerce One’s recent results, which saw it post a net loss of $2bn, compared with a net loss of $43.1m for the same quarter in 2000.

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