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Find this article at: http://www.business2.com/content/magazine/ideas/2000/06/01/20738

Beyond the Exchange

Listen closely, the promising profit models for the next round of business-to-business are within earshot.
From the June 13, 2000 issue

Nate Lentz
Steven Wolin
Tim Byrne

In recent months, corporate America has been stampeding into the electronic business-to-business frontier. Many of the proliferating auctions and exchanges tend to use the classic eBay model, which emphasizes arm's-length transactions between buyers and sellers.

Bill Schwartz

Yet most of these initiatives are finding it difficult to gain traction. They suffer from sparse trading volume and little revenue. CheMatch.com's chemicals exchange, for instance, has grown considerably since its launch in early 1998, but, while the percentage of postings resulting in a trade has improved, as of Q3 1999 it was just 3.5 percent. Although online trucking exchanges are beginning to generate volume, revenues remain slim. Many companies, desperate not to be left behind, are throwing good money after bad business designs.

There are clear problems with this first-generation exchange model. First is that the "minimize the purchase price" premise may not be in the best economic interest of buyers on the exchange. Companies often find that value is defined well beyond price as they optimize the cost of the entire system. This has led them to forge strategic relationships with suppliers. The exchange that focuses simply on price flies in the face of all this work. Most B-to-B exchanges view the buyer as the key beneficiary. They don't treat sellers and other participants in the value chain as customers. In theory, exchanges offer sellers access to a broader set of buyers with only a modest increase in marketing cost. In practice, however, these exchanges tend to pit sellers against each other in a high-pressure bidding game. An exchange is successful only if buyers choose to buy and sellers choose to sell. One-sided offerings will not achieve significant liquidity.

Second, most of these exchanges take a cookie-cutter approach, using off-the-shelf technology platforms to implement a simple market mechanism within a couple of months. They haven't taken the trouble to develop a deep understanding of their customers' priorities or to map out how they will capture value from customers.

Moving into the next round of B-to-B ecommerce, the winning business designs will be those that create real value for customers as well as create profits and sustained growth in shareholder value. There are several promising business designs emerging:

Megamarketplaces Incumbent companies, recognizing the failure of numerous, fragmented pure-play exchanges, are banding together to create commonly owned sites. Megamarketplaces are emerging first in industries dominated by a few, large buyers or sellers. They generally take two forms: buyer-controlled sites, such as those announced by the Big Three automakers and by Sears, Carrefour, and Oracle; and supplier-controlled sites such as MetalSite, run by the major steel manufacturers. Cooperation results in sites that are larger and more liquid, and each player will own a slice of a much bigger pie. Solutions sites Transaction-oriented exchanges focused on product price. Solutions sites shift the focus to the broader economics of the customer businesses, using the Internet to bundle products with related information and services. Look for the solutions model to proliferate where the product itself represents a small portion of overall customer costs. Milacron's Website, Milpro.com, helps small machine shops with process troubleshooting. The Milpro Wizard guides the customer through a set of questions about a process and related problems — for example, chatter marks when grinding — much as an experienced sales representative would. Then it recommends a product. Milacron thus extends its reach among small machine shops, and those shops in turn have access to expertise they could not otherwise afford.

Supply-side sites Most B-to-B sites aim to facilitate a transaction between buyer and seller. They don't help sellers operate their businesses more effectively or develop relationships with other sellers. Sites that help coordinate activities across similar or complementary businesses can be valuable to smaller suppliers that lack a national reach, creating a more efficient supply base for buyers to tap.

Supply-side sites can be designed to maximize the use of assets — whether factories, trucks, or ship containers. Participants swap asset capacity, rather than compete on bids, so the system benefits all. Many segments of the trucking market are characterized by independents or by small firms that cannot individually optimize the movement of trucks and loads around the country. Transportal Network, for example, uses the Internet to schedule truck movement as one unit, allowing even the smallest players to gain the efficiencies of the largest trucking company.

Shared workspace sites Many industries involve a complex chain of players and events before the product or service is delivered to the end customer. Yet suppliers of different components often communicate poorly, so electronic hubs that foster better communication among relevant players can add enormous value. Unlike the vertical exchange, which provides value from finding and presenting information, this model provides value by creating and employing information. By knowing key information from suppliers, customers, and other participants in the supply chain — R&D findings, lab reports, delivery status, scheduled capacity utilization — each player can improve its own business processes and, ultimately, the entire industry's.

This model will become prevalent in industries with complex supply chains where coordination is critical. In the commercial construction industry, which involves complex scheduling of many contractors and suppliers, Bidcom.com is creating a comprehensive hub for project management. Each building project gets its own Website, where everyone involved can check blueprints and orders, change specifications, and agree on delivery dates. On the B-to-B frontier, the challenge is to avoid the pitfalls of the first-generation exchanges by creating value for buyers and sellers alike. The Internet does not revoke the principle of mutual advantage, and without the participation and insight of sellers, many of whom are powerful incumbents, most of the emerging B-to-B models won't click.

"What happened with telephones was that they allowed you to talk with other people. What is happening with the Internet is that it allows you to, among other things, download music, see pictures of naked people, and get free trial copies of that Columbine classic video game, Doom." -Neoconservative Robert Wright on ClickStart and other proposed federal hardware/software subsidies for the urban poor

"Until recent years we were very afraid of any kind of application which came close to our applications. In the future I think we have to be much more relaxed here. Why shouldn't the user have alternatives?" -Hasso Plattner , co-founder and CEO of German software giant SAP, on IBM's recent investments and partnerships with i2 Technologies and Ariba

"No brick-and-mortar store would think of opening their doors without installing locks, a few video cameras, and a security staff. Yet every day Internet companies do just that." -Lou Gerstner , chairman and CEO, IBM

"More than any other time in history, mankind faces a crossroad: One path leads to despair and hopelessness, and the other to total extinction. Let us pray we have the wisdom to choose correctly." -Woody Allen , filmmaker, professional neurotic

"My stockbroker, Dot-Commuppance, reminds me that the difference between Nascar and Nasdaq is that the former has brakes." -San Francisco Chronicle columnist Scott Ostler finds a difference between two worlds where whiplash and wipeouts are a way of life.

"Many of the dot-com CEOs lacked depth, experience, and common business sense."-Forrester Research CEO George Colony , commenting on a series of interviews he held with Internet company CEOs

"Day trading: As far as I'm concerned, it's a casino mentality that brings people to that." -Arthur Levitt , chairman, Securities and Exchange Commission

"The Internet seems to be largely amplifying the worst features of television's preoccupation with sex and violence."-James Billington , Librarian of Congress, on why the Library of Congress will not digitize books

Nate Lentz ([email-masked]) is a vice president at Mercer Management Consulting.
Steven Wolin ([email-masked]) is a principal at Mercer Management Consulting.
Tim Byrne ([email-masked]) is a vice president at Mercer Management Consulting.

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