Net Prophet

SAN MATEO (06/05/2000) - Business-to-business hype hit a decibel level high enough to inflict an earbleed on a 16-year-old Limp Bizkit fan. Then, the bad old stock market threw some cold water on the party. B-to-b poster children, such as Ariba Inc. and Commerce One Inc., are down from their Mount Olympus heights to mere mortal levels. Now, make no mistake: B-to-b potential is huge.

B-to-b in general, and digital exchanges specifically, will create a business revolution. It will just be tricky to overcome the obstacles to digital exchange success.

That's the thing about revolutions: They tend to leave a lot of corpses lying on the ground.

Many b-to-b digital exchanges are outgrowths of corporations' procurement processes. For example, Ford Motor Co., General Motors Corp., and DaimlerChrysler AG buy a hell of a lot of windshield wipers and bolts -- it's natural that they want to wring the inefficiencies out of that process.

At least that's the theory.

There's undoubtedly a lot of inefficient transactions in the auto parts industry. You don't have to be a tree hugger to want to eliminate paper transactions -- Rush Limbaugh could get behind the cost savings.

But how many companies see digital exchanges as a chance to put their suppliers in a half nelson and drive prices down as far as possible?

There's a careful balancing act at work. Fundamentally, Internet technologies promote highly competitive pricing. That's a good thing.

But, at a certain point, "driving down costs" becomes code for "applying the thumbscrews to your suppliers." Especially in a situation such as the Big Three Auto Exchange, where these three hold an enormous amount of power compared to their individual suppliers.

For exchanges to work, everybody has to feel like they're getting something out of the deal. Everybody needs an incentive to play.

In a true exchange model, a key incentive is access to new markets. Every participant represents a potential market for any given seller.

But is that enough? There's a host of conceivable incentive programs. For example, offering a finder's fee for new customers. Or, if a company can save you 5 percent on purchasing costs, why not throw back a percentage or two? It's thinking long-term relationship vs. short-term profit motive.

Companies are getting accustomed to long-term relationships with their customers, as opposed to discrete transactions. You don't want to just sell a consumer a widget; you want to introduce them to the whole widget lifestyle.

Often that means forgoing short-term profit in favor of long-term gains.

The same thing applies to business relationships.

Twist your supplier's arm far enough and they'll cry uncle -- or, they'll revolt.

Besides all the other difficulties in creating an effective digital exchange, there's the prospect of essentially organizing all your supplier partners into a revolution against you. And you thought unions were a big pain.

Consider again Ford and GM. These companies recently issued warnings to their thousands of dealers: Mess with online auto dealers and we'll take you out at the ankles.

Part of the reason is Ford and GM want to control the customer relationship.

They don't want to lose control over the customer -- and their all-important data -- to a third-party intermediary.

But online dealers also have a predictable effect on pricing. The chief value of online car dealers is convenient and competitive pricing. That puts pricing pressure on the car dealers, which in turn puts pressure on the automakers.

Ironic, isn't it?

Ford, GM, and DaimlerChrysler are applying the screws to prevent their buyers from driving down costs, while in turn creating an exchange to drive down their suppliers' costs.

For digital exchanges to work, in whatever industry, everybody needs an incentive to participate. Everybody needs to feel like they're getting something out of the deal -- something other than bruises, that is.

Send e-mail to Dugan is a senior research editor at InfoWorld.

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