Yesterday, we reported that First Index, a sourcing marketplace for industrial parts and former consulting firm, had closed its doors earlier this week. My tip on the situation came from AJ Sweatt, a colleague and friend who serves as community and blog master for MFG.com Mojo. AJ's employer is a competitor to First Index so there was some obvious gloating in his tone, but I'm appreciative for the tip and also his connection to colleague David Landsman, another MFG.com employee, who had previously worked for First Index and shared a number of details and thoughts with me about their history.
According to David, First Index's final decline was very sudden. What's more interesting than how it ended is how it began--and what made First Index different. First Index hosted an online site where it facilitated the exchange of supplier information to buyers, but the primary core of the business remained offline, where groups of employees would cold call buying organizations to drum up RFQs which they could then provide to their active suppliers, in effect "making the market," just as a trader does on the floor of an exchange. Using this model as a foundation, First Index's core revenue generation came from selling subscription services to suppliers (for anywhere from $3,500 to over $10K per year), and in turn gave them access to buyer RFQs. The primary categories they focused on were a near carbon copy of the early target areas FreeMarkets (not Ariba) tackled from a strategic sourcing perspective as well: machinings, stamping, fabrications, electronics, plastic injection molded parts, etc.
Two of the early leaders of the business, including Russ White, came out of the publishing business. This makes sense, because in many ways, just as MFG.com is doing, marketplace business models take supplier advertising revenue away from media and directory sources and more closely tie it to leads generated. In essence, it is really just a new form of publishing, whether such a model was carried out manually, like First Index, or in an automated manner like MFG.com. Owing in part to the slow growth of this core publishing/marketplace business in the nineties, First Index later branched out into offering sourcing and direct material supply chain consulting services.
First Index's growth in consulting was relatively rapid. They were able to sign up big names such as Parker Hannifin and Halliburton--not to mention a number of large automotive companies--by offering an "all you can eat" sourcing model. In other words, they would charge flat or tiered fees based on the overall relationship rather than based on specific volume commitments. First Index had to grow their staff to meet their new consulting client demands with expensive sourcing/supply chain manager professional services types. They could not predict ideal utilization levels for their large customers because they were not engaged on a project basis. Moreover, First Index had a challenging time predicting how often companies would use their services. Some abused the privilege, treating them like an outsourced buying arm; others barely used them at all. Still, "team members worked a huge amount of hours for not a particularly large amount of money," especially compared with companies like Accenture, Deloitte, and FreeMarkets.
By the time they had 100 employees and approximately $13 million in revenue at their peak, First Index was a formidable, if not niche player in the direct materials sourcing arena. I remember coming up against them when I was working for FreeMarkets, and we couldn't even begin to compete with their low price points (at least on a cost basis). Still, the move to consulting ultimately proved to be their undoing, as it took them away from their core business in an unprofitable manner. By the time First Index shed their consulting business, it was too late. At the end, First Index "probably had less than 300 suppliers," subscribing to their own original publishing/lead generation/matching model when they shut their doors yesterday.
It's my belief that the manufacturing and overall economic downturn most likely hastened the decline of a business model that was too manual to prove scalable and effective. The service First Index provided to suppliers most certainly made some of them quite successful in their marketplace, but the evolution of sites like MFG.com (which use a largely automated matching process and leveraged limited sourcing expertise on top of that) as the exception versus the rule, certainly played a role in their downfall as much as the overall economy did. Call it manufacturing or marketplace Darwinism, but regardless, let's just hope too many suppliers weren't left having paid for a service they will no longer receive.
- Jason Busch