by Robert L. Segal

A rising tide may float all boats, but a falling stock market sinks most online marketplaces (OLMs). Even well-designed, well-managed OLMs such as SourceAlliance.com are on the ropes. With too few buyers and sellers and an absolute drought of venture capital/IPO funding, OLMs are closing shop, rewriting business plans or seeking safety in niches.

To be fair, most OLMs, including MRO OLMs, are still in business. A handful may even survive the NASDAQ nuclear winter and emerge as potent forces on the MRO scene.

To understand the past, present, and future of MRO OLMs, lets look at what went wrong and the potential sources of OLM salvation.

What went wrong?
MRO OLMs came onto the industrial scene in 1998-1999. More than 800 business-to-business (B2B) OLMs emerged, including 10 to 15 that concentrated on the MRO market. Depending on your definition of an MRO OLM, the list included 44Degrees.com, EqualFooting.com, Eventory, Excara (formerly PurchasingCenter.com), FacilityPro.com, iProcure, MRO.com, MROLink, Sorcity.com, supplyFORCE, TotalMRO.com, TPNRegister, and Works.com (including OrderZone.com).

The MRO market looked ripe for a new method of transacting business. The industrial maintenance, repair and operating supplies arena is huge, fragmented and inefficient. In a U.S. market with more than 10 million SKUs representing $300 billion in purchases, buyers MRO procurement costs can amount to more than 50 percent of the purchase price. The inefficiencies consist of time wasted searching for products, obtaining approvals, changing or tracking orders, returning products, etc.

On the selling side, 100,000 distributors representing 40,000 manufacturers chase more than 57,000 industrial plants. Midsize to small industrial plants (less than 500 employees) account for 50 percent of the business, and small distributors (less than $10 million) account for 85 percent of the throughput. The process of finding buyers, expediting small orders, correcting order processing errors, etc., mirrors the inefficiencies on the buyer side.

Distribution roll-ups and integrated supply distributors were the industries that first attempted to deal with these inefficiencies. Now, MRO OLMs have jumped into the fray.

Backed initially by $20 million-plus in venture capital or corporate funds, each MRO OLM claimed it would build an easily searchable, comprehensive database of MRO products. Using an equally impressive array of business tools, the MRO OLM would automate order entry, delivery status, credit authorization and payment, even sales and negotiations.

So, again, what went wrong?
First, MRO OLMs overestimated the difficulty of changing ingrained buyer and seller behavior. The industrial market is conservative. Rather than viewing OLM transaction fees as investments in efficiency, many sellers just saw them as an additional cost. This was not surprising since MRO OLMs did a poor job of documenting specific efficiencies.

Second, MRO OLMs were unaware of the low quality of distributors product data. Even after patching gaps and inaccuracies, many distributors catalogs do not provide enough information for rich, parametric searching. One OLM cited the red box problem. In the product description field for a particular SKU, one distributor typed in thing in red box.

The really good data exists in the manufacturers printed
catalogs. But, obtaining rights to and converting this data is a daunting undertaking.

Third, while many questioned the growing Internet bubble, few people, and certainly no MRO OLMs, foresaw the absolute evaporation of outside funding or the rapid decline of the overall economy.

Fourth, there were (are) simply too many MRO OLMs. OLMs are built on the concepts of liquidity and efficiency. MRO OLMs promised that buyers and sellers could find each other in one place, the OLMs site. The resulting efficiency would simultaneously lower buyers prices yet raise sellers margins. With 15-plus OLMs going after the MRO market, buyers may just as well keep buying through their usual mix of distributors.

Where are we now?
Eventory is out of business. Excara no longer operates its OLM, focusing on software and services instead. Sorcity.com and 44Degrees.com never achieved any critical mass. MROLink, while promising, seems to be focusing on the catalog business. TotalMRO.com lost its president. MRO.com is wisely folding its marketplace into its strong Maximo software offering. SourceAlliance.com is looking for a buyer, or else. EqualFooting.com and FacilityPro.com look good by focusing on defensible niches: the small business and commercial/real estate markets, respectively.

MRO OLMs are licking their wounds and asking what went wrong. In their search for answers, they are finding new survival and even growth strategies.

Today, MRO OLMs are switching or diversifying their revenue sources. Transaction fees, as noted earlier, are a hard sell if you dont yet have a convincing return on investment (ROI) story. Instead, many of the MRO OLMs, with Excara as a prime example, are taking the underlying software they developed for their marketplace and helping individual buyers or sellers automate their respective procurement or logistics networks. To customize their software solutions, the MRO OLMs lather on a heavy dose of consulting services.

MRO OLMs that still operate a marketplace are looking for lower-cost routes to achieving their original efficiency goals. At the same time, they are seeking to reach critical mass through partnerships that offer a lower-cost sales method. By partnering with vertical OLMs in industries like steel or chemicals or procurement systems like Ariba or CommerceOne, MRO OLMs hope to find the early adopters already buying and selling online elsewhere.

With all the bad news surrounding MRO OLMs, you would expect traditional buyers and sellers to say, I told you so! However, as they say in Hollywood, there is no such thing as bad PR.

While the first round of the e-business war went to the naysayers, the silent majority of the MRO marketplace is even more aware of the inefficiencies that exist.

What's next for MRO OLMs?
Frank Lynn & Associates talks about the market life cycle and its test and evaluation dip. The dip is the six- to 18-month time frame after a new process/technology/methodology grabs the attention of the early adopters but before a proved ROI can drag in the more skeptical mass market. The early adopters move ahead on faith, testing, evaluating, refining, and ultimately proving the underlying rationale and ROI of the new model. In the computer industry, Geoff Moore (perhaps more eloquently) called this timeframe The Chasm.

Right now, we are in the dip or the chasm for OLMs.

Some MRO OLMs will manage through the dip and, ultimately, become major players in the MRO market. Why?

" Large inefficiencies still exist in the MRO market. The poor track record of OLMs aside, small orders, high search costs and paperwork delays still add tremendous costs to MRO transactions. Why search through multiple product catalogs or call multiple distributors when millions of SKUs and related information are available at one site?

" MRO OLMs investment in comprehensive product catalogs will eventually pay off. OLMs have created some impressive databases and sorting technologies. Someone, whether the current crop of OLMs or their successors, will ultimately provide buyers with impressive databases to locate, track and support MRO purchases.

" New players will emerge to learn from the mistakes of the initial MRO OLMs and/or acquire them. Prophet 21, a leading provider of business management software for industrial distributors, recently launched Trading Partner Connect, a series of OLM-like software products to link manufacturers, distributors and end-users.

" The cost of Internet development, integration and tools continues to fall. MRO OLMs will be able to lower their transaction fees and deliver a faster ROI to both buyers and sellers. Lower prices and more obvious returns are the first steps to moving out of the dip. Some of the early OLM buyers and sellers will soon become better case studies to document the potential savings.

" The economy will likely improve within one to two quarters, freeing up capital for any MRO OLM that survived acquisition or the economic downturn.

Looking at the MRO OLM landscape today, pessimists will no doubt conclude that its always darkest before it gets really black. However, the underlying inefficiencies in the MRO market will ultimately drive many buyers and sellers into some form of online marketplace to conduct business.

Whether the ultimate format looks like the first generation of MRO OLMs remains to be seen. However, buyers and sellers, especially distributors, need to plan accordingly.

By tapping into the unfolding OLM model, open-minded distributors can discover ways to cement customer relationships through dramatically lower costs and new forms of added value.

Robert L. Segal is a principal with the Chicago-based consulting firm of Frank Lynn & Associates. He can be reached at or .

This article originally appeared in the March/April 2001 issue of Progressive Distributor. Copyright 2001.

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