Casting the FreeMarkets Legacy in a New Light: Continuous Turnarounds, Not Triumph Alone

Earlier this week, I attended the FreeMarkets alumni event that took place outside of Pittsburgh. Close to 100 people had signed up for the reunion, and it felt like at least 75 people dropped by at various points for the festivities (in addition to some spouses). You would be right in guessing that the event was well orchestrated. One might say even choreographed. Indeed, many of the sessions were even videotaped for posterity’s sake.

At the event, I promised myself that I would avoid writing about individual sessions and comments. After all, I’m not only dangerously close to the subject matter, making it difficult to provide even moderately objective analysis; it also was clear that many folks would not want everything they said making its way out into the public domain. But afterwards on the flight back, I reflected on a few things I had heard and noted that I don’t think will violate any privacy. And they’re great lessons for all of us whether or not we worked at FreeMarkets in the advent of more strategic procurement.

Aside from the fact that founders Glen Meakem and Sam Kinney were able to create competitive markets for industrial parts and components (initially) through online negotiations, the first big lesson is that the essence of FreeMarkets was that of a successful turnaround. It was not a success from the start; in fact, when it grew into the stratosphere, it was as much a result of massive cash infusions from private investors and the capital markets as it was the playing out of the correct business model and operational structure.

From the start, FreeMarkets had the right academic business model (i.e., get suppliers to pay their share for winning business), but it had the wrong model in execution. Only after moving to a buyer-only paid model did the business really begin to scale. But this is but a small footnote – and HBS case study – in the firm’s history. Arguably, the more important and painful turnaround took place when the firm decided to become operationally efficient from a service delivery perspective. They brought in the production and manufacturing expert Kent Parker to run operations (Kent ended up running operations for Ariba before recently moving, in his words, into “semi-retirement”).

Prior to Kent, FreeMarkets carried out strategic sourcing – we called it market making – efforts on a small team basis with limited shared resources, aside from actual event hosting and management. It was the equivalent of piecework in a pre-industrial revolution manufacturing facility in which an individual or small team managed all the steps in the production process. The only way we were able to maintain quality control in this environment was either blind luck or talent. Fortunately, given the hiring standards of FreeMarkets, we were awash in good talent early on, so we were typically more successful than not in delivering the promised returns.

But that’s no way to scale a business. Post-Kent, FreeMarkets was essentially able to take an earlier concept and stamp it out in a new manner that was far more efficient, consistent, and ultimately, effective – at a far lower cost base owing to the fact lower cost resources could perform much of the activity that MBAs had previously done (and not always well). The roll-out of this new operations capability, which Kent reflected on during a talk at the event, was really the first large-scale successful turnaround in the business beyond shifting the revenue model early on.

But there was a continuous string of turnarounds to come as FreeMarkets teamed up with Ariba to take what were two shrinking – one could be more direct and say “failing” at that stage – businesses and combine them into a operationally efficient whole. I’ll pick up on this topic later today as the story of the continuous FreeMarkets turnaround continues.

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