Building the Perfect Exchange

SAN MATEO (06/05/2000) - Success breeds imitation. The digital exchange, a business-to-business marketplace in which goods and services are traded, grew out of the heady fortunes reaped by consumer exchanges such as eBay Inc. and Priceline.com Inc. But as often happens when consumer technology is pressed into corporate service, early digital exchange players are finding that the eBay/priceline.com approach doesn't always scale well.

Integration is the fulcrum of the digital exchange. Yes, the prospect of giving business partners -- even potential competitors -- direct links to your back-end data can be terrifying. Yet without tight integration, businesses cannot hope to accelerate toward Internet time. Modern companies know that time spent shifting inventory from Company A's warehouse to Company B's warehouse is time wasted. Via a latticework of digital exchanges, inventory can be delivered straight to its terminus when needed and only in the quantity required. Through further partnerships, an exchange can even provide its members with instant financing, freight scheduling, reporting, and other needed services.

That's a dandy vision; one that would benefit everyone from raw materials suppliers to retail consumers. And the technology is already in place:

Databases, application servers, XML engines, transactions and messaging networks, and telecommunications circuits are all raring to go. The trouble is that many key players are taking this technology and speeding off in different directions. Instead of working toward ubiquitous integration, smaller groups are forming clique exchanges that exclude partners who could otherwise make important contributions, and individual companies are repackaging their catalogs with faux auction front ends bearing the undeserved "b-to-b exchange" label.

Even so, the grand concept behind the digital exchange is not necessarily doomed to failure. If you haven't yet joined or implemented an exchange, this Test Center Analysis could help you build a sound exchange strategy.

For the good of all

Whether you join a third-party exchange, outsource a new one, or construct your own, the watchword that should guide your actions is "open." If you're the first player in your segment with the means to build an exchange, don't hang back. Jump in and start forging partnerships. Welcome all players, competitors, and suppliers alike; even your fierce rivals. Large and small, early and late, deep-pocketed and broke, everyone deserves a place at the table.

That may sound like flower-child hogwash, but it's purely practical. If you don't build or take part in a completely inclusive exchange, your competitors may very well create an exclusive one. And your company may be the one left out in the cold or beholden to standards and fees set by companies that want to run you out of business.

Moreover, no company should be allowed to dominate or control an exchange.

Competing, noncooperative exchanges that share a market often make true integration impossible. These exchanges may lead to exclusive deals with suppliers and partners in an attempt to corner the exchange business for that market. That's a mistake: Manipulate the market and you kill open trade. If an exchange partner is bent on controlling the market, bow out and try to take honest partners with you.

Honesty pays off

The same principles that govern membership also apply to information disclosure: Be fair and think of the needs of the exchange as a whole. For a digital exchange to work like a real free market, key buyer requirements must be available, so include everything that would maintain your own interest if you were a buyer. True, outsourced and third-party exchanges may not be as adaptable as custom-made exchanges, but that's no excuse for your information not to be complete, accurate, and available to everyone in the exchange.

After all, if you sell on a b-to-b exchange, you're competing on more than price and availability. You're also competing for the buyer's trust. Be candid -- it doesn't pay to be coy in your exchange listings or tight-fisted with your shared data. An unanswered question hands a buyer to your competition (quite possibly a member of the same exchange). Nor do you want a disgruntled buyer bad-mouthing you to other exchange members.

Don't let any of your data get stale. Stay on top of market conditions and adjust your prices, inventory data, and lead-time information. If the freight line you use goes on strike, factor that into the lead times for your orders.

Use data from your suppliers in the exchange to construct realistic forecasts.

Of course, it's true that competitors will have access to all the data you post online, but you'll also have access to theirs, and among forward-thinking businesses, this free exchange of information breeds cooperation rather than contempt. For example, if you come up short on a customer order, a digital exchange can let you buy from your competitors at market prices. You'll occasionally sell products the same way. Members will eventually adapt their product lines to eliminate needless overlap. In the meantime, encourage every member company to keep its own data accurate and up-to-date.

See and be seen

A digital exchange should be a meeting place for players in a given market. If an open exchange is up and running, newcomers to that market will join up, and with each new member all the existing members will gain a potential customer.

That means making your products and services visible. Remember that technology offers huge advantages to sellers: A Yellow Pages ad may tell prospective buyers that you're in the widget business, but a listing on a digital exchange can tell buyers how many widgets you have (or can make), why they're better than competitors' widgets, and how much they cost. By doing so, you'll not only increase your selling opportunities but also be doing your part to build a better market.

What you want to avoid is the kind of exchange that merely reinforces existing business relationships. In these cases, the so-called exchange may be nothing more than an invisible EDI (electronic data interchange) link between back-end systems. But a private exchange that meets only your desire for increased visibility is no exchange at all; it's merely an online catalog. And a poor, half-baked excuse for an exchange may do your company's image more harm than good. Business-savvy buyers will see it as subterfuge and pass you by, perhaps forever.

Playing by the rules

An exchange is a community, and like any community, order is maintained by a system of laws. Some laws become business rules, encoded in software that protects each member's data. But there are still plenty of ways for things to go astray. Honest mistakes, such as minor stock miscounts or invalid pricing, should warrant only misdemeanor-level punishment, such as a publicly accessible "rap sheet" on all its members. On the other hand, dumping products below cost, interfering with other members' business, and price-fixing should all be considered felonies. Enforcement means vary, but in a worst case scenario, suspending or expelling a member is simply a matter of cutting off the offending party's shared data feed.

Business-to-business exchange users, even industrial buyers, also expect privacy. Thus, avoid the temptation to add buyers' contact information to your lead's database. An unsolicited post-transaction e-mail message or telemarketing call, which includes anything that's not related to a just-completed transaction, could cost you a buyer's trust and tarnish your reputation in the exchange. Remember that by participating in a busy exchange, you should reap more business than you would yield from direct marketing.

If it survives, the digital exchange holds great promise. But even if the market is not yet sufficiently evolved to build or sustain such a system, we shouldn't lament. Many great ideas appear before their time. Time eventually catches up.

Tom Yager is an InfoWorld senior analyst. You can reach him at tom_yager@infoworld.com.

THE BOTTOM LINE

Digital exchange

Business Case: A digital exchange can lower procurement costs by enabling just-in-time ordering, online tracking, and access to multiple sources of supply. Exchanges can also help you sell: Your products and services will be visible to a targeted community of buyers.

Technology Case: The success of your exchange depends on the speed of communication between servers, databases, XML engines, and transaction networks. Application servers can provide connections to a variety of client platforms, and secure EDI network links should link the exchange hub and members' back-end systems.

Pros:

+ Reduces inefficiencies in buying and selling+ Raises the visibility of all participants+ Adaptable to a wide range of products and servicesCons:

- Costly to implement

- Can be misused for market control, rather than for open trade.

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