Global eXchange Services stands to become the largest player in an industry some predicted would continue to falter and eventually die out altogether. Instead, today’s value-added network service providers are mulling a comeback as increasingly complex business integration efforts have companies looking to outside providers for help.
Global eXchange Services stands to become the largest player in an industry some predicted would continue to falter and eventually die out altogether. Instead, today’s value-added network service providers are mulling a comeback as increasingly complex business integration efforts have companies looking to outside providers for help.
Technology investment company Francisco Partners – which is the majority owner of GXS – recently announced plans to buy IBM’s Electronic Data Interchange (EDI) and Business Exchange Services units for an undisclosed sum.
The two lines of business serve companies that need to exchange documents electronically with customers, suppliers and business partners. IBM’s EDI business includes its traditional EDI VAN contracts, while its Business Exchange Services unit includes more modern, Internet-based EDI services that let users send and receive EDI data via the Web.
EDI VANs “have been much more resistant than almost anybody thought they would be,” says Ken Vollmer, principal analyst at Forrester Research. One reason is their reliability. Another is that VAN providers have lowered prices to allow more favorable ROIs, he says.
After the completion of the deal, Francisco Partners plans to merge the two IBM units into GXS. The combination of these rival businesses will make GXS the industry’s largest EDI player, boasting more than 40,000 direct and indirect customers, says Bobby Patrick, senior vice president of marketing at GXS.
IBM’s strength in the financial services sector and its operations in Latin America and Japan are particularly important to GXS, Patrick says. GXS will continue to operate IBM’s proprietary VAN platform as part of a long-term outsourcing arrangement with Big Blue, he says.
In selling its EDI businesses, IBM appears to have made a decision to focus its business-to-business integration efforts within its WebSphere Business Integration unit, Vollmer says. “IBM’s EDI group has not been a high priority within IBM for some time. It makes sense to spin it out to someone who could focus on it.”
Meanwhile, the challenge for GXS is to get customers interested in its growing application services portfolio, while at the same time continue to bolster its more open, Internet-based EDI network business.
Like rival Sterling Commerce, GXS gradually has reduced customers’ dependence on legacy EDI VANs that require proprietary software, in favor of Internet-based EDI services. The emergence of standards such as Applicability Statement 2 – which describes how to create a connection and securely transport an EDI file over the Internet – have spurred Internet EDI adoption.
Additionally, GXS has been working to diversify its business to include not only network services but also industry-specific application services. For example, it offers data synchronization services for its retail customers. GXS also closed its $30 million acquisition of product information management vendor Haht Commerce earlier this year – a deal that adds packaged applications to its lineup.
That’s the direction the industry needs to go, Gartner says. The research firm predicts that at least 35% of all new VAN revenue will be from bundled network and application hosting services by 2005, up from less than 10% last year.
This diversification could help stem the industry’s recent revenue loss. Gartner estimates that overall VAN revenue has declined 5% to 20% for the past several years. It will fall by another 5% this year before flattening in 2005, Gartner predicts. Looking ahead, revenue is expected to grow at least 5% annually in 2006 and 2007.
Nonetheless, the competition for handling business transactions is tight. GXS competes with Internet VANs such as bTrade, Internet Commerce Corp. and iSoft. In addition, it runs up against integration service providers such as Grand Central Communications and industry-specific business integration providers such as The Descartes Systems Group and E2open.
