FREE MARKETS ONLINE, INC.

FreeMarkets Online is a unique online marketplace for custom industrial products and intermediate components. In this marketplace, buyers are direct material purchasers from Fortune 500 companies. Sellers manufacture or supply components and materials.

FreeMarkets OnLine was founded in Pittsburgh in 1995.

The co-founders – Glan Meakem & Sam Kinney.

The company was aimed at online- industrial market making.

Founders

Prior Picture

At that time industrial buyers faced tough challenges sorting through out the variety of suppliers available for any given purchase.

The entrepreneurs identified that the average skill level of buyers in a wide range of manufacturing companies is low and the informations available to help them make decisions was very limited.

Contd…

For a wide range of industrial input components and materials, identifying truly high quality suppliers while also establishing fair market prices was extremely difficult.

Supplier negotiations were conducted as “silent auctions”. But the logistical difficulties of bringing together all of the suppliers made these events difficult to replicate.

Need for the company

Many supply industries are very fragmented. In the industries the productivity difference

between suppliers in the top quartile and bottom quartile was huge in many cases.

Buyers in the market were left with much lesser information;ie, too many alternatives and no good way to sort them out.

The chances of misinterpretation of the supplier was also there.

These all together constituted the need for an electronic bidding company.

Technical Challenges

Creating the software necessary for bidding became the most time-consuming early challenge.

By mid-1995, the Internet was just beginning to be recognised as a powerful new medium.

Internet service providers were in the throes of upgrading to 28.8 modem speed.

Free markets wanted the system to be fast, allowing real time interaction.

The company wanted to create a truly interactive market to close not after days, but in only a few hours.

Software development

FreeMarkets tested its BidWareTM and BidServerTM software by October 1995.

Maiden voyage: the software conducted a live bid for about $3.2 million worth of injection-molded plastic appliance parts in November 1995.

Business Development

First CBE(Competitive Bidding Event) was quite successful

FreeMarkets entered into Request for quotations(RFQs)

New potential suppliers were recruited

Suppliers begin to participate from their place of business.

The Organisation

A very high speed software development team, a network operations group, senior level client sales, a laser targeted consulting ability, an information agency, and a back office all in one company.

They work in cross functional teams both to make markets and to develop and build software and information products.

PRESIDENTCEO(GLEN MEAKEM)

EXECUTIVE VICE PRESIDENT &

CEO(DAVID BECKER)

EXECUTIVE VICE PRESIDENT(SAM

KINNEY)

CLIENT DEVELOPMENT(BUY SIDE SALES)

INDUSTRIAL

MARKET MAKING GROUP

SUPPLY MARKET GROUP

PEOPLE DEVELOPEMENT

INFORMATIO

N TECHNOLOGY(

VP-VINCEN

T RAGO)

ACCOUNTING AND

FINANCE

SOFTWARE

DEVELOPEMENT

NETWORK OPERATIO

NS

The Sales Model

A direct sales model was built in the view that the message needed to reach senior executives and purchasing decision makers.

This direct model consisted of high bandwidth “client developers” networking into and establishing relationships with senior level Purchasing, Operations, and Finance executives at large targeted corporations.

The company’s core service was to provide Online Industrial Market Making services which culminated in real-time Competitive Bidding Events, also known as CBEs.

In these events, a single industrial buyer used the FreeMarkets BidWare software and a secure, private network to allow a number of potential suppliers to simultaneously submit price bids against one another, as they attempted to win a buyer’s purchase order.

The online auction process used by the company created a level of competitive intensity among suppliers that was more intense than sealed bidding or face-to-face negotiations.

The key enabling technology was FreeMarkets’s proprietary BidWare software for buyers and suppliers and the company’s proprietary BidServer software which ran CBEs from its server in Pittsburgh.

On either end of the network were user-friendly software applications which ran in the Microsoft Windows 95 and 97 environments.

BidWare for Suppliers contained the functionality that allowed suppliers to monitor market prices, submit bids, and print valuable market benchmarking reports.

BidWare for Buyers contained the functionality to monitor the bidding and print detailed results reports.

Framework in Market-Making Process

5 Steps in FreeMarket Online

IdentifySavings

Opportunity

PrepareTotal-cost

RFQ*

Identify Screen, Support

Suppliers

ConductOnLineCBEs

ProvidePost-BidSupport

Analysis expenditure and savings for

buyers

Defining all elements of Request for Quotations,requirements of drawings,

volume forecast, cost.Screening the potential suppliers with buyers and supporting RFQ

to suppliers

Training sessions to suppliers, submitting

real-time bids

Collecting cost breakdown, final supplier

analysis.

The Market – Making Process

Phase 1:Identify Savings

Opportunities

Phase 2:Prepare

Total-Cost RFQ

Phase 3:Identify,

Screen, and Support

Suppliers

Phase 4:Conduct On-

Line Competitive

Bidding Events

Phase 5:Provide Post-Bid

Analysis and Award Support

Phase 1: Identify Savings Opportunities

FreeMarkets worked directly with buyers, analyzing spending and applying FreeMarkets’s market - making experience to help buying organisations identify potential savings.

Phase 2: Prepare Total-Cost RFQ Since a detailed understanding of all

requirements including logistics and quality levels was required by all competing suppliers, RFQ preparation involved much more than just providing drawings

Phase 3: identify, Screen, and Support Suppliers

The Market – Making team

Working Style

An upfront research will be conducted on the buyer to find out which supplier he will prefer.

A supplier survey will be done which includes general company information,manufacturing,logistics,quality and administrative systems.

These works will be done by a cross-functional team known to be as “MARKET-MAKING STAFF”

Revenue Model A hybrid of service fees + sales

commissions Charged buyers a monthly service fee based

on the size of the market making team. Ex. Typical project with engineering work costs $75,000/month x 2.

Charged winning suppliers a commission fee varied by supply industry. Ex. General case is 2.5% of purchase price.

The business reached breakeven point within 3 years.