GXS Acquires HAHT Commerce for More Synchronized Retail B2B Data Part Three: Market Impact

Market Impact

On January 15, Global eXchange Services, Inc. (GXS, www.gxs.com), the large, privately-held business to business (B2B) e-commerce software, services, and solutions pioneer, which operates one of the largest B2B e-commerce networks in the world and manages one billion annual transactions for more than 100,000 trading partners, announced that it has signed a definitive agreement to acquire HAHT Commerce (www.haht.com).HAHT Commerce is based in Raleigh, North Carolina and is a privately-held provider of demand chain management applications (DCM) that strategically automate, integrate, and optimize order management, product information management (PIM), channel management, business intelligence (BI), and customer services functions between manufacturers, their channel partners and end customers.

Under terms of the agreement, GXS would acquire all the capital stock of HAHT Commerce through a merger for approximately $30 million (USD) in a combination of cash and shares of GXS Holdings, which is the parent company of GXS, headquartered in Gaithersburg, Maryland (US). The transaction was subject to the approval of HAHT Commerce's shareholders and other customary conditions, and the acquisition was completed in February. CIBC World Markets Corporation acted as exclusive financial advisor to HAHT Commerce with respect to the transaction.

Analyzing both GXS' and HAHT's geneses should help us discern both good and bad experiences with the Internet-based trading so far. The concept behind a business to business (B2B) exchange and marketplace—to bring together (aggregate) multiple buyers and sellers via the Internet to save money, expand markets, improve supply chain efficiency, and whatnot to all the parties—had seemed obviously straightforward and too good to be true. However, it has since turned out to be much more painful to achieve the grandiose promises which have far outweighed any of the actual benefits so far. Namely, creating the technology to operate such a marketplace has turned out to be far more difficult than originally envisioned, while suppliers remained hesitant if not even resentful to compete for business on-line and watch their profit margins erode within the cutthroat bidding process.

Namely, joining an Internet-based trading exchange requires integration not only between a company's own systems and applications, but between those of its trading partners and community members, and so far, this has largely made system integrators the only profit-making benefactors from B2B exchanges so far. Also, many early enthusiasts initially failed to realize the complexity of the above undertaking, which was perhaps affordable to a Fortune 500 company, but prohibitively expensive for small and midsize companies and their suppliers. On the other hand, the initial idea of saving buyers money by enabling them to aggregate their purchasing and select the least expensive supplier at a given moment has hardly impressed anyone—while suppliers hated to be hammered with heavy discounts expectations during their bidding races, buyers have also come to the conclusion that the phone or fax are still as good business enablers in these elusive exchanges, if not even better for their inexpensiveness.

For a detailed comparison of the differences between B2B exchanges and business-to-consumer (B2C) e-Commerce providers, see "Differences in Complexity Between B2C And B2B."

The real potential benefit from Internet exchanges only comes at the level where they provide collaborative facilities to help suppliers and buyers work closely to improve key supply chain processes (including inventory management, collaborative planning, forecasting and replenishment [CPFR], manufacturing capacity planning, transportation planning, etc.) or aspects of a product lifecycle management (PLM), such as design, creation, servicing, retirement, and so on. All the above require close relationships along the supply chain and which is different from only electronic connectivity. For that reason, private trading exchanges (PTX) have optimized buy- and sell-side activities among certain known groups of suppliers and customers. Consortium exchanges (such as Covisint, Pantellos or now defunct Chemdex), though additionally challenged by antitrust law and regulations in addition to technological hurdles including interfacing with legacy systems and protocols, have offered some domain-specific, value-added services to their respective industry, while only a small number of independent public exchanges have survived by owning and providing vertically or regionally specific content, applications, and services.

This is Part Three of a four-part note.

Parts One and Two detailed the event summary.

Part Four will cover challenges and make user recommendations.

GXS, Survivor and Pioneer

Thus, to say that GXS is a dot-com survivor would be a gross misnomer, given its longstanding pre-dot-com e-commerce expertise that makes it an electronic data interchange (EDI) pioneer. A former General Electric subsidiary and the successor to GE's information services unit GEIS (for more information, see GE Comes to Lunch. Want to Guess Who the Appetizer Will Be?), GXS has gained recognition as a network operator for B2B e-commerce via value-added networks (VAN). GEIS was a pioneer in creating trading exchanges based on the EDI standard, and has been a strong participant in extensible markup language (XML) standardization efforts, including CommerceNet's and Microsoft's. GEIS' Trading Process Network (TPN), which was launched early in 1996 and provides free software to let suppliers bid for GE contracts over the Internet, was an early e-procurement experiment. It was enriched in 2001 with TPN Register when GE bought it out from another co-founder Thomas Publishing. Consequently, GE has had the infrastructure, acumen, existing customer base, and financial strength to rapidly become a major player in the e-commerce space.

Thus, GXS, which was started thirty-five years ago, currently has 1,300 employees in twelve countries. More importantly, it claims to manage over 100,000 trading partners which accounts for one billion annual transactions over a variety of its networking technologies, including providing infrastructure and services to many Internet exchange ventures (see GE GXS: Part and Parcel of B2B Exchange). Some of its high-profile clients include J.C. Penney, Liz Claiborne, Tweeter, Woolworth's, Eastman Kodak, FedEx, and DaimlerChrysler.

For these aforementioned reasons, many ill-fated Internet upstarts will have had a rude awakening when they realize that B2B e-commerce is very complex and requires an enormous labor investment. The building of a trading community is a difficult and time-consuming process hung up on organizational, behavioral, and technical issues. The trouble with many now defunct exchanges lay in their aggressive over-hype that actually did not deliver. This, bundled with burning cash fast during the carefree "salad days" of the late 1990s on upfront marketing and unjustifiably expensive technology buys rather than on meticulous value proposition, trading community, and infrastructure building also contributed to their failure.

Conversely, GXS has tackled many tenets of Internet exchanges' success—scalable and secure infrastructure, integration capabilities, process management, and policies (inherited from stringent process competence practices at GE, such as Six Sigma, International Standards Organization [ISO], and NATO certification, and high levels of security), trading partner reach, experience, and financial viability. For example, as for the infrastructure provision, GXS boasts three major data centers around the world, which are sophisticated buildings that have backup power, computer equipment, and highly trained personnel to ensure twenty-four hours a day, seven days a week uptime. The company has staff trained in the applications, who can speak the local languages, and who can troubleshoot for customers at a moment's notice.

Further, GXS has several hundreds of people in its professional services organization that ramp up trading communities and implement these solutions. They are well versed with everything from connectivity protocols to C++ and Java programming. These are people who both understand legacy environments and have also been trained in contemporary technologies. Additionally, the company has a sales and marketing force that is globally deployed.

GXS Independence and Flexibility

Furthermore, by spinning-off from GE in mid-2002 to Francisco Partners, one of the world's largest technology investment company, has not only created the opportunity for GXS to become the largest independent trading network provider, but also to become a more flexible one that can address Internet-based messaging services and upcoming web services-oriented competition. Additionally, it has had the freedom to evolve product and service offerings to include non-EDI functions and services and GXS can have a particular focus on small to medium sized businesses (SMBs) and on a web services-based architecture.

Meanwhile, with a hands-off approach, Francisco Partners have allowed GXS to achieve a controlled diversification and increased visibility. Over the last thirty years, GXS has delivered B2B solutions through its three solution groups: 1) Interchange Services, which manages and processes B2B transactions leveraging EDI over VANs and the Internet; 2) Integration solutions, which provides licensed application integration broker software to facilitate B2B connectivity; and 3) Marketplace solutions, which are hosted applications that generate transactions for the source-to-pay process including RFQ functionality, demand requirements publishing by buyers, catalog purchasing, invoice tracking, and automated settlement. It is among these that GXS hopes to see an uptake in growth rates, especially as SMBs look for ways to outsource functionality. Finally, as mentioned earlier, in 2003 GXS began offering services for order life cycle visibility and data analysis tools, but that work is apparently still in progress.

Since the spin-off, there has also been a renewed interest from other surviving Internet exchange providers to provide GXS' trading services by leveraging its huge expertise and investment in a global infrastructure. In particular, GXS could cater for integration between the exchange and the enterprise systems of members, including diverse back-office and front-office systems, and integrate processing and routing of transactions between participants. The exchange and the transactions within it are typically XML based, and GXS can be responsible for mediating these transactions and for translating between XML and EDI for the companies that are still using that standard. GXS claims to also assist members of the exchange in migrating their internal systems from EDI to XML. The exchange might even use a dialect of XML defined specifically for it, but GXS says that it expects no difficulties in adopting any XML standards that may emerge because the company uses the same process for EDI-to-XML translation and for translation between XML dialects in other like projects.

This combination of GXS' transaction enabling infrastructure with a number of regional or industry-specific trading exchanges could reinvigorate the once unpopular vision of the "many-to-many" trading model. More transparency about pricing and availability may allow more spontaneous interaction between trading partners who may not have done business together before. Given GXS' long presence in electronic markets in many different vertical segments, it might be able to parlay its presence into a generic multi-protocol, multi-industry marketplace, which has been a hard job for industry consortia to drive liquidity with XML-only networks.

A sort of an irony here might be that since EDI has earned a reputation among trading partners as a complex, rigid, and expensive means of business document and data exchange, one would expect it to be relegated to a relic of a bygone era. In the computer business, where new technologies can come and go almost overnight, EDI should have long become an artifact, let alone a technology with a mid-life crisis, given the extinction of a number of younger technologies such as DOS or FORTRAN.

For a discussion of EDI versus XML see EDI vs XML —Working In Tandem Rather Than Competing. While at the surface there would be few economic or strategic reasons for organizations to persist with EDI, many seem reluctant to adopt the alternative at this stage. In fact, there has been almost negligible growth in the number of organizations replacing their EDI-based systems with XML. Furthermore, it even seems that sales of EDI-based products and services are growing, given some estimates that EDI transaction volumes increased almost 20 percent in 2003. To be fair, XML transactions volume almost doubled during the same period, but, coming from a miniscule install base, it still constitutes a single digit percentage of overall B2B transaction flows.

The natural question is how come EDI has sustained its popularity and what factors are inhibiting the take-up of XML in earnest. Well, it appears that there is no immediate incentive for enterprises to move away from EDI. The key reason for this is that the number of organizations using XML has not yet reached the "critical mass" of at least a double digits percentage of overall B2B data flow; meanwhile the estimated number of large and mid-sized organizations using EDI is estimated between 250,000 and 350,000 worldwide. For the time being, the wealth of businesses that have invested significant resources in EDI still use the technology for B2B communications, and many see EDI as the best choice for secure, reliable transactions, given it is a mature, standardized and trusted medium.

Despite high initial set-up and value added service costs, EDI implementations can actually be cost-effective. The advent of web-based EDI connectivity standards, software, and services has lowered barriers to entry for many companies that initially would not have considered it an option.

GXS is positioned to accommodate both of these worlds, given it has an excellent track record in enabling EDI, and can demonstrate its ability to take EDI users into the XML world. Whether through translation alone or through translation followed by retrofitting, it has captured the attention of the manufacturing world, which is largely EDI dependent. For example, GXS TradeWeb, an EDI solution offered by GXS, requires a low up-front investment consisting only of a PC, a standard Internet browser, and a modem. By simply selecting the appropriate pre-configured form from a library created by GXS, completing the information, and then sending it over the Internet through a web browser, GXS TradeWeb routes the information electronically to trading partners. When trading partners receive the information, the sender is notified via e-mail.

This concludes Part Three of a four-part note.

Parts One and Two detailed the event summary.

Part Four will cover challenges and make user recommendations.