Inc. : What's the choice for suppliers?
Meakem: The choice is between being a high-quality, low-cost producer, in which case the market will reward you, or operating inefficiently, in which case you'll lose. In a world where information is more available and people aren't getting business based on sales schmooze, the best, most efficient companies are going to be in tall cotton. The companies that aren't very efficient had better get into their factories and improve because they are not going to be able to hide behind relationships any longer.
Inc. : It sounds as though FreeMarkets--and the information-saturated electronic marketplace in general--is mostly a threat to incumbent suppliers.
Meakem: It is if you're an incumbent supplier that's living the life of Riley, making big margins without your customers' knowing it. Once they have access to all the available information, you may retain the business, but you're going to take a haircut on pricing. What I tell my buying clients is that if incumbent suppliers squeak, it probably means they're scared, and that probably means they're not very good.
On the other hand, if an incumbent supplier is very good, it has a chance to consolidate business. The buyer uses this very analytical, market-based approach and finds out, "Gee, they really are very good compared with the competition. Instead of giving them just $1 million worth of business, let's consolidate $10 million worth of business with them." We've seen many examples where that's happened--and others where the incumbents have lost the business.
Inc. : What's the benefit to suppliers seeking new business?
Meakem: The benefit to new suppliers obviously is that they have access to new business they wouldn't have had access to before, and their cost of sales is something like 5% to 15% lower. That doesn't change, even when you recognize that the process is driven by buyers.
Inc. : You worked briefly on a precursor of GE's Trading Process Network, which also used a "reverse-auction" scenario, in which sellers do the bidding. What's the difference between FreeMarkets and TPN?
Meakem: I learned two things at McKinsey that I brought with me to GE. First, companies save money by putting a real focus on purchasing decisions. Second, companies make money by having superior information. I drew on both those ideas when we were creating the GE Electronic Marketplace, which later became TPN. We did a series of bids with GE suppliers in late 1994, and I realized, "Hey, the technology is great. You can manage and transmit large amounts of data. You can have real-time interactivity across a network so people can bid back and forth. You can really create a market." The problem was that without the right group of people in that market--without the suppliers capable of delivering--the market fails. And if the buyer hasn't done a good enough job defining the specifications he's bidding out, the market fails. So it seemed to me that the thing you had to do to create a successful on-line market in industrial areas is to provide both the technology and the market-making capabilities.
I wanted to do that within GE, but GE had a technology-only vision. Also, GE is so huge that it's a good place to take what's already successful and grow it, but it's difficult to create real start-ups that are doing completely new things. My idea was a completely different animal.
Inc. : You've said that the electronic-commerce community's focus on the transaction process, rather than on the decision-making process, is misplaced, but isn't automating the transaction piece a proven way to save money?
Meakem: Yes, but you can save more by focusing on decision making. The questions most companies ask when they think about electronic commerce are, How do I get my payments back and forth faster electronically? Can we reduce the cost of processing a purchase order by doing it through electronic data interchange? There's a lot of benefit in that. But if I'm buying $5 million worth of machine parts from a given supplier and I discover by doing a lot of good sourcing work that I'm dealing with a guy who's not the most efficient producer of those parts, then I can switch and work with the people that are the most efficient. And by doing that I save 25% a year. Suddenly, I've put $1.25 million on the bottom line. If I'd focused only on transactions, then I would have put a few hundred dollars on the bottom line.
Inc. : Many people say that Nets Inc. stumbled, in part, because its offerings were too broad. Are there things corporate clients buy that you wouldn't sell?
Meakem: Well, first of all, there were a number of reasons Nets failed. One was that it was too broad. Another was that it tried to be a "supplier-push" on-line marketplace in an industry that is "buyer-pull." As far as MRO [maintenance, repair, and operations] goes, there are a number of companies, ranging from a start-up called Ariba Technologies to IBM, that offer excellent buyer-driven on-line catalogs. MRO supplies is not one of our targets.
We are moving aggressively into vertical commodity markets. Of course, the Holy Grail of the on-line market industry is to be the Web site where all the buyers and sellers in a particular industry come to do business. To me, the victory is when you own 70% of the decisions in a given market. With the possible exception of the SABRE system for airline reservations, no one anywhere on the globe has accomplished that yet.
The good news is that the opportunity is as big as the economy itself. For every industry there's an opportunity to create one of those businesses. The game right now is to identify those markets and then go out there and claim them.
