Health giants form e-business venture
Some big names in the health care industry are teaming to create an online trading exchange, aiming to reduce their expenses by streamline connections between suppliers and partners.
The participants in the joint venture, including industry giants Johnson & Johnson, GE Medical Systems, Baxter International, Abbott Laboratories and Medtronic, hope to entice their health care business partners, such as medical product manufacturers, health insurance providers and other industry partners to buy, sell and conduct business with each other via the Internet.
Software makers Ariba and i2 will work with computing giant IBM to develop the new exchange, and providing the software and consulting services needed to get the site up and running. This marks the first deal for Ariba, i2 and IBM since they formed a three-way agreement earlier this month targeting the business-to-business market.
The companies plan to appoint a management team to lead the project within the next several weeks. The exchange is expected to go online by the third quarter of this year. Financial terms of the deal were not disclosed.
Such business-to-business e-commerce exchanges are the rage among companies aiming to reduce their internal purchasing costs. Computing software and services firms are also attempting to cash in on a potentially lucrative market. A number of research firms have pegged the market to reach between $2.7 trillion and $7.3 trillion by 2004, from about $131 billion last year.
Erica Rugullies, an analyst at Giga Information Group, said that regardless of how much money the companies hope to save in trading exchanges, the success of the online marketplace will rely on how many participants sign up to use the exchange.
"One of the critical success factors for these exchanges is (achieving) critical mass," Rugullies said. "And that includes heavyweight industry players. Having this many big players give them significant advantages (over smaller health care exchanges), especially when they are the founding members."
In the near term, Rugullies said she believes most companies will follow in the footsteps of GM and Ford, which have announced exchanges, and combine their efforts into a single marketplace to achieve a mass of suppliers, partners and buyers.
Large companies in a number of industries have recently announced intentions to set up industrywide trading exchanges in an effort to pare expenses.
Yesterday, Boeing, Lockheed Martin, Raytheon and British Aerospace (known a BAE Systems) unveiled plans to develop a joint marketplace aimed at the aerospace and defense industry. GM, Ford and DaimlerChrysler also recently stepped into the ring, combining their efforts to tackle the auto industry by creating a trading exchange with software makers Oracle and Commerce One.
"This model will work if the companies can successfully negotiate the waters and find ways to work with their competitors," said Rugullies, who estimates there will be 10,000 marketplaces across all industries by the end of this year. "These companies are motivated to do this because of the trillion dollar (market) figures and because the savings are huge."
Other smaller, health care marketplaces have also recently sprouted. Last week, Neoforma.com partnered with Ariba to create an online marketplace aimed at the health care and medical equipment industry. Also recently, e-commerce company Chemdex teamed with Tenet Healthcare, an operator of hospitals, to build a trading exchange for the medical and related supplies market.
Johnson & Johnson and other founding members will contribute equal equity investments in the new company, which will be based in Chicago, they said in a statement. Transaction fees will not be charged to customers for products they buy from the exchange, but the companies said they will charge participating suppliers a transaction fee.