Arthur B. Sculley
and W. William A. Woods
Reviewed By Brian
Fischbeck
This book provides a good overview of the basics of business-to-business exchanges and is a great book for someone who has little or no knowledge of the subject. The authors repeat key points numerous times so that it is very hard to read this book without finding the key takeaways. However, those who have kept current with how the internet is transforming business models and who have a basic understanding of how a stock exchange works, will likely not find the first hundred pages or so to be very enlightening. The most interesting aspect of the book for me was the second half in which the authors lay out their thoughts on the critical success factors in setting up a B2B exchange. It is these Seven “Secrets” For Success for B2B Exchanges that are main focus of the remainder of this review. In addition to laying out their roadmap for success, the authors also provide an extensive appendix that provides short case histories of many of today’s more prominent B2B exchanges. This is also worth a read to provide examples of ways different companies have approached establishing an exchange.
The following factors are cited by the authors as keys to establishing a successful B2B exchange.
1. Stay Focused on a Vertical
The keys to secret number one can be summarized as follows:
· Focus on an industry in which you have deep knowledge and expertise and begin by specializing in one vertical within that industry.
· Choose a large industry market that involves frequent trading (higher liquidity)
· Liquidity is king – focus on building liquidity as quickly as possible
Focusing your exchange on a vertical in which you have extensive knowledge is key to establishing credibility, establishing the right contacts and partnerships, and ensuring your business model is tailored to the distinct characteristics of your target market. Specializing on a single vertical provides the ability to scale up quickly and gain the mind share and liquidity that are so critical in the early stages of an exchange. Liquidity is key for any exchange – sellers will naturally gravitate to the place where there are the most buyers, and likewise buyers will seek the market with the greatest diversity of sellers. This creates a self-fulfilling “snowball effect” once some level of liquidity is established. After you have established yourself as a dominant player in one vertical, it may be possible to branch out into other verticals within that same industry.
2. Play to Win – Look to Quickly Dominate Your Chosen
Vertical
The keys to secret number two can be summarized as follows:
· Try to be one of the first to market in your chosen vertical
· Liquidity is everything – sacrifice profit initially if necessary to build market share and increase trading volume.
· Look to merge with competitors to become the dominant force in your vertical.
· Spend the majority of your resources on customer care and support in the early stages to attract and retain customers.
Success for an exchange is self-reinforcing and is driven by the dynamics of increasing returns (more sellers attracts more buyers, more buyers attracts more sellers, etc.). Increasing returns will lead to a concentration of buyers and sellers in one major exchange for each product creating a “winner takes most” environment. In doing this, a successful exchange that begins to dominate its market can create significant barriers to entry for new competitors as the cost to major players of switching exchanges can become very high. This is why it is better for the second and third place players to merge and dominate the vertical than for each to compete with the others and try to maintain their respective shares.
3. Maintain Commercial Neutrality
The keys to secret number three can be summarized as follows:
· A successful exchange must remain a neutral third party
· Maintain confidentiality of users’ data
· Establish an advisory board comprised of representatives of all user groups to ensure each group is represented in the decision making process for the exchange
Successful exchanges must be perceived by all stakeholders as fair and neutral third parties to remain credible and build trust. Over time an exchange will build up significant product and pricing data on the buyers and sellers participating in the exchange. Ensuring this data is secured such that a member’s competitors will not gain access is key to an exchange’s long-term viability.
4. Ensure Transparency and Integrity
The keys to secret number four can be summarized as follows:
· Set and enforce market rules that do not favor any one user or group of users
· Become a self-regulatory organization (SRO)
· Push for transparency and fairness in the transactions of the exchange
· Ensure pricing integrity
· Provide at least minimal screening of exchange participants
· Ensure system integrity through use of redundant systems and strong security measures
· Provide a mechanism for dispute resolution among members
B2B exchanges must adopt sound regulatory practices and vigorously enforce these regulations in order to avoid the government stepping in and imposing regulation on the exchange. In addition to self-regulating, the exchange must ensure integrity through screening exchange participants, implementing strong security measures, providing redundant systems to ensure uptime of critical systems, and disclose the rules governing the centralized pricing system so that all participants are comfortable with the workings of the exchange.
5. Add Value By Building a Virtual Community
The keys to secret number five can be summarized as follows:
· Provide value-added features that make the exchange “the one-stop shop” in your industry vertical
· In doing this you create an on-line community that will increase the lifetime value of existing customers and decrease the acquisition costs of new customers.
A successful exchange will move beyond simple commerce applications and allow its members to network effectively and access all the business information they require from a single source. As members experience these value-added services they become more locked into the exchange as part of their business. This means that as the exchange develops into a community, the lifetime value of each member increases as it becomes more likely that members will be “locked in.” At the same time, the cost of acquiring new customers falls substantially as the exchange becomes more of a community (since it has more attractive value-added services). This increase in customer lifetime value and decrease in customer acquisition costs leads to greater profit margins as the exchange becomes a community.
6. Form the Right Strategic Partnerships
The keys to secret number six can be summarized as follows:
· Choosing the right strategic partnerships can help you scale up quickly to dominate your vertical
· Work closely with the main users of the exchange to tailor it to their needs
Potential partners can come from a variety of sources including investors, large buyers or sellers, existing broker intermediaries, new infomediaries, content providers, IT vendors, or software developers. In some cases a “clicks and mortar” partnership with an existing brick and mortar company may be a way to gain dominance. If you do not have sufficient expertise in your chosen vertical, be sure to partner early with someone who does – vertical knowledge is key to success.
7. Operate As A Virtual Corporation
The keys to secret number seven can be summarized as follows:
· B2B exchange companies must be flexible and able to adapt quickly to market changes
· Focus on your core industry expertise and outsource all non-core functions, particularly the technology development
· Keep staff levels low
· Hire a strong Chief Technology Officer to manage the outsourced vendors
Overall, the book was good and worth reading. However, the authors repeated certain concepts and examples multiple times throughout the book to the point where the really interesting content probably could have been condensed to a book half this length without loosing anything. In my opinion, the true value in the book is in chapters 9 through 15 and the Appendix. There were scattered nuggets of good information in the earlier chapters, but much of it was a recasting or repositioning of ideas and concepts many of us have already learned about before.