Launching Oct 00 10/24/00 11:50 AM Page 2

Opportunities for Action in Industrial Goods

Launching a Successful
Business-to-Business Consortium
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Launching a Successful
Business-to-Business Consortium

Titans of the Old Economy are busy reinventing

themselves as Internet competitors. Around the
globe, they are using the Internet not only to stream-
line their internal processes and forge tighter rela-
tionships with customers but also to enhance infor-
mation flows with their suppliers and distributors.
Online business-to-business marketplaces have been
proliferating to help companies conduct many trans-
actions with their trading partners faster and more
effectively. These transactions include both the pur-
chasing of goods and services, and collaborative activi-
ties such as supply chain management and joint
product development.

The high cost of launching online marketplaces (typi-

cally more than $100 million) and a considerable
overlap of trading partners among participants have
induced companies—even competitors—to join
forces in launching e-consortia. Examples include
Covisint, the marketplace being developed for the
auto industry by Ford, General Motors, Daimler-
Chrysler, and Renault/Nissan, and MetalSpectrum,
which is being formed by Alcoa, Thyssen, Allegheny
Technologies, and others in the metals industry.

By September 2000, nearly 1,500 business-to-business

marketplaces had been announced worldwide. Many
more are being developed. We believe that most of
them will ultimately fail—victims of a rush to make
press announcements in the absence of sound busi-
ness fundamentals. The Boston Consulting Group’s
experience working with many of the leading
business-to-business marketplaces suggests that
although these enterprises belong to the New
Economy, they are still subject to many of the old
Launching Oct 00 10/24/00 11:50 AM Page 5

rules of success. Three factors, in particular, can sub-

stantially increase a marketplace’s chances of success:
a sound business model, committed founding part-
ners, and a businesslike approach to managing the
enterprise.

Those principles seem obvious, but we have been

struck by how often they are ignored—particularly by
consortia of incumbents—with consequences ranging
from disappointing performance to outright failure.
Whether you are planning to launch a consortium or
are already in the implementation phase, the follow-
ing key elements can help you succeed.

A Sound Business Model

Like any new enterprise, a new business-to-business

consortium needs a sound business model and a com-
pelling value proposition. Every consortium must
make good business sense, both to attract and retain
top-notch people—not to mention investment fund-
ing—well before it’s launched and to survive and
thrive once it’s up and running. Furthermore, defin-
ing the business model and value proposition early on
can serve as an invaluable exercise to help ensure that
you are not only doing the right thing but doing it
with the right people and in the right way. To test the
validity of your business model and value proposition,
you should answer four questions as early as possible:
Why this? Why us? Why now? and What next?

Why this? Does this business make economic sense?

The days when new businesses could rely on the hype
of the Internet to attract staff and investors are gone.
To win, every consortium needs a business model that
will generate real revenues, real profits, and real value
for customers. Covisint, for example, focuses on creat-
ing value not only through procurement efficiencies
Launching Oct 00 10/24/00 11:50 AM Page 6

but also through supply chain integration and collab-

orative product development—areas in which sub-
stantial value remains locked up for all participants in
the auto industry. In contrast, several of the original
steel marketplaces have been slow to develop because
of weak initial value propositions, whereby they
offered excess or obsolete products through forward
auctions. That model made sense to big steel compa-
nies looking to improve their yields, but it offered
limited value to their customers. As a result, accep-
tance of these marketplaces has been relatively low.

Why us? Ask yourself whether you can offer signifi-

cant and sustainable advantages in this particular
business. Are you in an appropriate competitive
space? Do you have the credibility and the capability
to pursue this business? Can you point to the legacy
assets that will be critical to success? Legacy assets
might include industry knowledge, manufacturing
capabilities, market access, customer relationships,
distribution channels, scale, and liquidity. Can your
competitors easily duplicate those assets—or render
them irrelevant? Most important, are you willing to
expose your legacy assets in order to exploit them?
At the core of MetalSpectrum are more than 15
metals producers and distributors who have commit-
ted legacy assets—customer relationships, distribution
channels, and liquidity—to the venture. This commit-
ment separates the consortium from the more than
50 other sites pursuing this market.

Of course, the legacy assets that consortium members

bring to the venture must be complemented by world-
class technology. Whereas most of the independent
dot-coms that have failed have done so because they
lacked sufficient industry knowledge, relationships, or
resources, some consortia will fail because they do not
include partners that can contribute the necessary
technological skills. A recent BCG study of 69 failed
Launching Oct 00 10/24/00 11:50 AM Page 7

Internet start-ups showed that 61 were independents.

While this clearly demonstrates the importance of
legacy assets in successfully building such start-ups, it
also demonstrates that incumbents are not invincible.

Why now? How critical is it to pursue this business

today? Timing a launch is always a gamble: ideally,
you want to wait to exercise your options so that you
can collect as much information as possible about
markets, competitors, and other opportunities. But
your information will never be complete, and oppor-
tunity deferred often evaporates. The relative value of
speed versus information depends on the size of the
prize, how long it takes to assemble a critical mass of
participants, and what your competitors are up to. In
our experience, once you have clearly identified the
opportunity and answered the first two questions—
Why this? and Why us?—it’s probably time to move.

When you do move forward, recognize that lead

times will be longer than you might expect. Recent
experience at several consortia has shown that find-
ing a CEO—particularly from outside the industry—
can be an extended process. And, try as you might,
your consortium will have a hard time replicating the
speed and work ethic of a small Internet start-up.

What next? Beyond the initial product and service

offerings, what is the venture’s opportunity for
growth? To build an independent business, you will
need to attract talented people, who will want to
know the answer to that question. And, of course,
investors and analysts will also look for the growth
path. New business-to-business marketplaces are sub-
ject to the same rules of survival as traditional busi-
nesses: innovate continuously and grow, or perish at
the hands of more aggressive, more creative competi-
tors. For example, whereas MetalSpectrum may look
Launching Oct 00 10/24/00 11:50 AM Page 8

to transaction fees as an early source of revenues,

over the long term it will seek to participate in the
value it creates by making the entire supply chain
more efficient.

Committed Founding Partners

Every new business-to-business consortium must have

founding partners that are seriously committed to the
venture. Partners demonstrate their commitment pri-
marily by committing real money and real people.

Launching an e-consortium is very costly. A vertical

business-to-business consortium that goes beyond
procurement to include, for example, supply chain
integration typically costs at least $100 million to get
up and running. Final price tags vary widely, reflect-
ing each consortium’s functionality and technology.
For a consortium to succeed, its founding partners
must understand the magnitude of the required
investment, come up with the funds, and then step
back and act more like venture capitalists than line
managers in overseeing how that money is spent.

But the venture needs more than money. It needs

real people—that is, employees who are not part-
timers, “watchdogs,” or “free-timers.” The reason for
the rule against part-timers is obvious: participants
can’t be fully committed if they keep their day jobs
back at their original organizations. They also can’t
be fully committed if they are watchdogs—people
turned loose in the organization primarily to make
sure their companies’ interests are being served. And
they shouldn’t be free-timers—people from the mem-
ber organizations who happen to have a lot of time
on their hands—because they are probably not the
best people available.
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A Businesslike Approach

A new consortium must become more than a loose

coalition of organizations. It must be run like an inde-
pendent organization—like a business in its own
right. And it must be managed to ensure that it is
both nimble and robust.

Independence. The consortium should be a separate

legal entity with its own location, organizational struc-
ture, management team, strategy, and corporate iden-
tity—including its own name and logo. It should be
run not as an industry utility or a trade association but
as a business with a healthy bottom line. In addition,
to preclude possible perceptions of anticompetitive-
ness, the consortium should be neutral and open—
allowing participation on equal terms by any company
that can derive value from it. (An independent busi-
ness would not turn away a paying customer because
it happens to compete with shareholders’ businesses.)
To help ensure an independent business focus, the
consortium must see to it that employees have no
ongoing ties to the founding partners. Moreover, at
least one-quarter of the consortium’s board members
should have no past ties to the founding partners.

Nimbleness. For the typical consortium with a consen-

sual management style, achieving nimbleness can be
particularly challenging. If executives try to placate all
members of the consortium, they will likely sacrifice
speed in favor of harmony. However, a consortium
that operates at the speed of most trade associations is
doomed. In terms of nimbleness, the competitors to
keep an eye on are not traditional industry combat-
ants but the start-ups and other consortia that are
going after your space. Be prepared for a complicated
competitive environment. The breadth of offerings
will vary dramatically, from focused solutions that
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attack a small slice of your business to broad solutions

that overlap substantially with your offerings. The
goals are to figure out who your most relevant com-
petitors are (a moving target, to be sure) and how to
become as fast and nimble as they are.

For example, MetalSpectrum took less than two weeks

to interview, negotiate with, and bring on board its
CEO, once it had identified the candidate. To achieve
such speed, consortium employees must accept the
need to work with dot-com-like intensity and flexi-
bility, as well as the risk inherent in making decisions
on the basis of partial data. In some cases, high-
speed start-ups inspire employees to work hard and
fast by giving them twice as much equity as they would
receive at the typical incumbent-backed venture. New
consortia will find it instructive to observe how such
start-ups are organized, how they reward people, and
how they run their decision-making processes, which
are less engineered, more delegated, and very fast.

Robustness. Don’t let the consortium’s management

team and board consist entirely of people from the
member organizations. Both of these crucial teams
need diverse expertise and experience. To ensure that
the venture is as robust as possible, find people who
have been successful in various settings, including
high tech companies and start-ups. Venture capitalists
can recommend people to bring on board—and they
can also help provide the marketplace discipline that
drives fast decision-making.

* * *

There is still much to be played out in the business-to-

business arena as incumbents battle with start-ups.
Early experience in online retailing may prove
instructive. In that world, independent newcomers
Launching Oct 00 10/24/00 11:50 AM Page 11

seemed to capture the early lead. The responses

of bricks-and-mortar incumbents fell short as they
sought to protect their core business models and
failed to focus on their customers. In a relatively short
time, however, second- and third-generation “bricks-
and-clicks” retailers started to hone their business
models to meet the requirements of the New Econ-
omy. Recent devaluations of pure-play online re-
tailers point to the competitive advantages of in-
cumbents with legacy assets—once those assets are
properly deployed.

Similarly, in the business-to-business world, market-

places represent one important way to ensure that
legacy assets are deployed as efficiently and effectively
as possible. We believe that the competitive advan-
tages of incumbents’ legacy assets will be amplified as
the competition plays out. Considering the visibility
that many business-to-business consortia will bring to
their investors, and the relatively high cost of creating
a robust marketplace, the cost of failure will be high.
Yet for the few consortia likely to survive in each
industry, the payoff promises to be substantial.

Stuart Grief
Rob Lachenauer
Paul Fenaroli

Stuart Grief and Rob Lachenauer are vice presidents in the

Boston office of The Boston Consulting Group. Paul
Fenaroli is a manager in the firm’s Boston office.

You may contact the authors by e-mail at:

grief.stuart@bcg.com
lachenauer.rob@bcg.com
fenaroli.paul@bcg.com

© The Boston Consulting Group, Inc. 2000. All rights reserved.

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