The "logistics exchange" was originally envisioned as a kind of freight dating service—a portal that would bring together shippers with cargo to move and carriers that could haul it. Given the vast volume of freight business transacted in the United States each year, the concept proved to be an attractive business model to venture capitalists. Accordingly, logistics exchanges have popped up by the dozen in the last two years.

But business plans don't always pan out. Most of these Web-based transportation marketplaces have failed to attract the numbers of participants they had expected. And analysts are expecting a big shakeout among public logistics exchanges this year.

To survive, many exchanges are already starting to change business strategies, shifting from public auction-type exchanges to private exchanges run exclusively for a specific shipper and its core carriers. Others are transforming themselves into application service providers (ASPs) that rent software solutions online. Despite those adaptations, the question remains whether exchanges can attract enough customers to ensure their survival.

The history of the freight exchange starts with the NTE—formerly known as the National Transportation Exchange—in Downers Grove, Ill., which is generally credited with being the first logistics exchange. Founded in 1994, NTE was set up as an online auction site where shippers could find carriers for their spot-market truckload freight. Today, the portal has 650 members, two-thirds of which are carriers, says NTE spokesman Steve Ford. Although it does not disclose the revenues it earns from transaction fees on the deals struck on its Web site, NTE claims to have recorded a 35-percent increase in revenues last year.

NTE didn't have cyberspace to call its own for very long, however. Within the past few years, an estimated 50 logistics and transportation exchanges have sprung up. These exchanges come in various iterations. A number of them, for example, cater to specific segments: Go-Cargo.com in New York City concentrates on ocean container shipping. UrgentFreight.com in Uniontown, Ohio, which is backed by FedEx Custom Critical, focuses on expedited transportation. Transplace.com, which was formed by six major truckload carriers, and Transportation.com, which is backed by Yellow Freight, serve the highway market.

Despite the proliferation of exchanges, most analysts believe that these portals are seeing little traffic—or at least much less activity than the founders and financiers envisioned. "The adoption rate has been slower than anyone expected," says John Fontanella, an analyst with AMR Research in Boston. "They're getting nowhere near the revenue they thought they would [get] for providing these services."

Many industry veterans question the business model itself: a virtual auction that pits hungry carriers against one another for available freight. "I don't see the eBay of freight out there," says Richard Hallal, president of the consulting firm Logistics Development Corp. in Cleveland, Ohio.

Carriers, for their part, are leery of the concept. They fear that their razor-thin freight margins will be further shaved in the price-cutting frenzy of the virtual auction pit. "Carriers don't want to cooperate with these things because of the price issue," says Robert Delaney, a vice president of Cass Information Systems in St. Louis and a consultant to ProLogis in Denver.

Shippers, too, tend to be reluctant to use the spot market for all but a few stray loads. In an era of inventory cutbacks, shippers have come to value their long-term relationships with a select group of core carriers that provide a high level of service. "If I have freight that's not mission critical and I'm more concerned about cost, I might go onto an exchange for a backhaul," notes Robin Roberts, a research analyst with Stephens Inc., an investment banking firm in Little Rock, Ark. "For mission-critical freight, however, I would use my contracted carriers to ensure the quality of service and on-time delivery."

Consultant Roger Urban agrees. "Everybody is more and more dependent on reliable transportation and the savings from [eliminating] inventory are four to five times larger than any savings from transportation," says Urban, who is president of the marketing consulting firm Urban, Wallace and Associates in Lexington, Mass. "[The exchange owners] got an idea that's powered by technology." The unrecognized assumption is that the efficiencies of technology will be more important than the business relationship, he adds, but that hasn't proven true.

With investors souring on Internet businesses in a slowing economy, many analysts expect that a number of exchanges will go out of business this year. In fact, one exchange, Freightwise.com of Fort Worth, Texas, recently suspended operations. The ocean portal eRateRequest has closed its doors as well. When announcing the exchange's shutdown late last year, the portal's owner, applications vendor NeoModal of Charlotte, N.C., said that eRateRequest's spot-marketplace approach did not support the collaborative direction being sought by shippers, ocean carriers, and their customers.

If exchanges are going to survive, then, they will have to follow a new direction, using a different business model from that of the auction. And several have already begun the transformation process. Some portals like FreightQuote.com Inc. in Lenexa, Kan., now market themselves as "digital brokers," offering a menu of service options to shippers who can simply click online for a selection. "We're like a travel agent," says Julie Cirlincuina, FreightQuote's marketing manager. "There's no delay in waiting for a quote. We show you all the options. You [the shipper] get to pick the carrier based on transit time and cost."

The majority of portals, however, are following one of two different paths as they move away from the online freight marketplace business model. Some are becoming ASPs. Others are retooling their operations to become private network platform providers.

ASPs earn revenues by renting their software applications online. This has the advantage of allowing shippers to obtain access to an application such as transportation management software with a Web browser, eliminating the need to go through the lengthy, costly process of installing the package on a corporate server. Celarix.com in Cambridge, Mass., for one, started its life as an exchange for ocean and international shipments. Today, it offers its tools for monitoring carrier performance on an ASP basis.

Others are looking to transform themselves from public exchanges that are open to all comers into private exchanges that provide a platform for a specific company and its trading partners to collaborate on the Internet. "If you look at these exchanges, a lot of them are migrating to collaborative logistics networks," notes Adrian Gonzalez, a senior analyst with ARC Advisory Group in Dedham, Mass. "The focus is moving away from a spot exchange to providing the infrastructure for companies to collaborate with their existing transportation partners."

One example of a collaborative network provider is the recently launched Elogex of Charlotte, N.C. It sets up collaborative networks, providing shippers with transportation management software and arranging to make shipments visible while in transit. Elogex charges shippers on a per-transaction basis for its services.

Nistevo of Eden Prairie, Minn., also provides the technology that allows shippers to set up a private exchange with their carriers. Nistevo representative Audra Wendt reports that to date, the company has signed up 17 customers, including such well-known corporations as General Mills, Pillsbury, and Coca Cola Enterprises.

Nistevo's private exchange enables clients to automate their load tendering with a core group of carriers, thus eliminating paperwork. In addition, shippers and carriers participating in the Nistevo network can work together to find backhaul opportunities. "Shippers justify this by filling backhauls," says Wendt. "If you're shipping [a load] one way, the carrier has to cover the return-trip costs. If you can set up a dedicated tour [roundtrip for the carrier] by using our network, the shipper gets a [price] break from the carrier because it increases asset utilization."

Nistevo earns its revenue by charging an annual user fee of $3,500 a seat for shippers and $1,000 a seat for carriers. Carriers don't object to the fee, Wendt says, because they realize it's a necessary price to pay to do business with a big shipper. In one case, she adds, a major shipper has decided to pay its carriers' subscription fees.

Although launched by a group of carriers, Transplace.com also focuses on providing a portal through which shippers can tender truckload, LTL, and parcel shipments to carriers under contract. About 1,540 carriers work with Transplace.com. The portal, which reported $700 million in revenue last year, charges shippers for services such as freight booking and transportation.

Interestingly, the first exchange, NTE, late last year announced that it too would begin providing support for private collaborative networks. "We are talking to Fortune 500 companies about replicating for them what we do in the public exchange arena," says NTE spokesman Ford. "We've got the flexibility to set up a private trading community, which would be defined by the shipper or shippers."

At least one exchange is hedging its bets, moving along both evolutionary paths. Logistics.com of Burlington, Mass., is offering software tools online while also providing the infrastructure for private networks. Last year, for instance, Logistics.com announced a deal to provide Compaq Computer Corp. with the technology to manage its global freight transportation network.

Despite the exchanges' efforts to reinvent themselves, many industry experts question whether they can all gain enough customers to support these fledgling cyber ventures. If these exchanges can't bring in adequate revenue from a solid customer base, most analysts predict, 2001 will witness a shakeout. "Exchanges are starting to demonstrate that they can create value," says Fontanella, "but they can't figure out how to get paid for it. We'll see mergers or a lot more companies going out of business."

Fontanella's AMR colleague Chris Newton considers the modal exchanges to be at particular risk. "The modal exchanges ... will consolidate into multimodal exchanges," he contends. "There are far too many exchanges. The exchanges will begin gobbling each other up."