Research center has 10 warnings for Covisint

By Brian Milligan -- Purchasing, 10/19/2000

They made too many promises too early. The collaborative commerce they are depending on is still years to come. And their predicted cost of hooking up to the exchange may frighten off members.

Most of all, all the political infighting is taking its toll.

These are some of the warning flags being thrown up in front of Covisint and consortium trading exchanges like it. Covisint is the enormous online exchange predicted to save millions in online buying for the automotive/OEM industry.

But Kevin Prouty, director of automotive research for Massachusetts-based AMR Research, warns that Covisint and others like it need to pay attention to some of the land mines in the e-commerce arena. If they don't, he says they will be surpassed by the private exchanges that are popping up at an accelerated rate. In this scenario, he says AMR Research estimates that private exchanges could take more than 75% of the revenue in the next two years.

"If these exchanges don't act soon, the private exchanges being formed will take over as the standard means of trading, leaving CTEs without customers and without a prayer," says Prouty.

Prouty recently published his list of warnings. They were directed at consortium trading exchanges in general. But he used the story of Covisint as a case study for the situation.

He says Covisint is falling into virtually all of the traps.

Prouty says it's not too hard to see that big industry players out there still have serious reservations about Covisint and its ability to make good on its own expectations. One red flag is the fact that Toyota Motor Corp. still hasn't signed on to the exchange.

"They didn't join Covisint because they didn't see any value from a direct standpoint," says Prouty.

Representatives from Covisint say they are getting used to such negative "speculation" from the media. And while Prouty's list makes a lot of good points, they say the list is old news, and that Covisint has been mulling over many of its points since the beginning of the year.

"He makes good points in his list, but there is nothing there that we haven't discussed internally," says Dan Jankowski, a spokesman for Covisint. "Suffice it to say that there is a lot of speculation in the media about what we should accomplish.

"Once we go operational and deliver the product offerings we are creating with our customers, that will put these [speculations] to rest as they see what values and benefits our customers are getting."

Covisint was given the green light recently when the Federal Trade Commission gave it its stamp of approval. The massive online trading exchange was formed by Ford, General Motors and DaimlerChrysler.

The real challenge

But Prouty says federal approval will prove to be the easy part. Covisint, which hopes to set up an online buying arena with suppliers from tier one on down the line, must now get members to sign on.

Will they join?

Not easily, says Prouty.

Prouty says he came up with the list of 10 areas after accumulating information from nine different analysts. In their opinions, the concerns show that Covisint and like-minded exchanges are "spinning their wheels."

The concerns include:

• Functionality is promised too early-Prouty says the exchange has been too optimistic in predicting delivery dates for functionality.

• Collaborative commerce applications are years to come-Prouty argues that while Covisint is excited about new collaborative applications for design and forecasting, most of these applications are still in the design phase.

• Lack of consensus on where functionality should reside-Prouty says Covisint's participants still can't decide among themselves whether applications should stay proprietary or be public.

• The cost of hooking up to the exchange could frighten off some members.

Prouty also says the total cost of the exchange has not yet been budgeted, that suppliers are still skeptical about joining on, that competition among best-of-breed vendors remains a real threat, and that Covisint's standards are too immature. He also warns that the marketplace-to-marketplace integration that Covisint is depending upon is still a ways from coming to fruition. And perhaps most intriguing of all, he says the political infighting taking place at Covisint threatens to stall its plans.

The answers

Prouty isn't completely pessimistic. He says consortium trading exchanges like Covisint can pull themselves out of trouble by being realistic when they plan to use B2B technology to hook up suppliers and others. He says they can offer quick-win situations by proving how spot buys are useful and can easily be accomplished on their sites and aim for their members' profitability and liquidity.

And despite these 10 potentially devastating points, Prouty doesn't think he's being too hard on the budding trade exchange. Rather, he believes Covisint is simply taking on too much, too fast.

"I hate to be too negative," Prouty says. "The issue isn't so much that they are doing anything wrong. It's just that this undertaking is monstrous.

"They are trying to build a company from the ground up," he continues. "And to balance the needs of many competing investors, and develop an entirely collaborative supply chain company, this is just something that hasn't been done before. Any one of these things alone would kill a company."

Prouty says the problem with Covisint lies in its aggressive philosophy. Covisint was truly launched in February. It is now late October. In the past nine months, Covisint has made many a dramatic promise in many a press release. They were the sort of promises that raised a lot of hope.

Covisint has made predictions about when it would be up and running, only to have them falter and delay. It has made vast predictions about how much will be procured over its site. Now, AMR Research predicts that less than 15% of all procurement will be handled through the type of consortium trading exchanges that Covisint represents.

"The expectations they set, I don't think they can reach," Prouty says.

Prouty isn't the only analyst who was nonplused by the exchange's campaign promises. Neil De Koker, managing director of the Michigan-based Original Equipment Suppliers Association, says suppliers have been skeptical of these promises since day one.

"It appears that optimism here has continuously been higher than reality," says De Koker. "We see more hype with the press releases. But they need a reality check."

Reality check

De Koker says they have already gotten one, in the form of the FTC approval. He points out that Covisint was gung-ho to truly be up and running in the spring of this year, only to find out that the FTC wanted to be shown first how its members would act in compliance with antitrust laws.

And De Koker says Covisint shouldn't be too quick to believe the FTC's antitrust concerns are over.

"They still reserve the right to site them for violations as they move on," he says. "It is a loosey-goosey approval."

And Prouty says Covisint seems to exist in a kind of fearless vacuum. He believes it is assuming that it will be all powerful, with little or no competition. Au contraire, Prouty says. He says Covisint will learn in time that much of the competition is coming from within. All three of the automakers that started Covisint are holding onto private Web-based solutions of their own that would mimic the sort of online arena Covisint is trying to create.

"In reality, they have more competition than they can imagine," says Prouty. "Ford, DaimlerChrysler and GM all have private exchanges where they hope to offer the same sort of functionality that Covisint is offering. In a way, they are competing against their stepsisters."

But out of all of the potential problem areas, Prouty says the political one is the one that threatens to sink the operation the most.

Prouty says it is true that as Covisint proceeds, software alliances will break down and former partners will become competitors. But even more devastating, Prouty says Covisint should be aware that in a consortium trading exchange like this, fighting may take place if membership is decided at the CEO or board level without the involvement of those responsible for ensuring the success of the investment.

"This is the one that needs to be resolved," Prouty says. "Who are they going to choose as a CEO? What and how will they spin Covisint off?"

Voicing differences

Jankowski says it is true that Covisint representatives have voiced many differences as the exchange progressed during the past year. But he describes these differences as healthy discussions, not out-and-out war.

"Sure, there are things about direction being espoused by the people involved. But it is not combative or derisive," says Jankowski.

"It is the typical kind of smart and appropriate discussion that has to take place so that you have the right product and the right results for your business," Jankowski continues. "We are very pleased at the level of cooperation and unity that exists in Covisint. For so many disparate organizations to come together at the same time in such a cohesive manner is remarkable, to say the least."

That may be true. But Prouty warns that perhaps the most disconcerting problem facing Covisint is its cost. Prouty says Covisint's challenge here is typical of consortium trading exchanges. He says AMR Research predicts that the total cost of developing an exchange like this will be in the $250 million to $500 million range. Members may be expected to commit to a second or third round of funding.

But comparing the delivery schedule to the expected costs may inspire some to evaluate alternatives to the exchange, he says.

"I don't think the members expected this. I don't think anyone did," Prouty says. "This is going to come as a rude shock to investors that it cost this much to do."

Prouty likens this situation to the theory of "pouring good money after bad," or pouring more money into a complicated investment to keep from losing the money that has already been invested. It's not a feeling that the members will cherish, he says.

Jankowski balks at this. He says Covisint will soon show results.

"We have true commitment by the members," he says. "That commitment is to deliver a product offering that is going to bring the kind of results the automotive industry needs for it to move forward."

Ten concerns about Covisint