by

Brandon Hayes

The explosive growth of the Internet, particularly Business-to-Business (B2B) commerce, is having a dramatic effect on how businesses interact with one another on a daily basis. Today, more and more companies are moving business functions to the Internet. In the area of inter-company trade, Wall Street analysts expect e-commerce grow from $43 billion in 1999 to $1.4 trillion by 2004. In their book, B2B Exchanges: The Killer Application in the Business-to-Business Internet Revolution, Arthur Sculley and William Woods discuss the relatively new creation of the “B2B Exchange”, a creation they believe will be the killer application behind the e-business revolution. In addition the authors offer some basic advice on how to start and run your own B2B exchange.

Despite the authors’ impressive backgrounds – both were instrumental in the establishment of the Bermuda Stock Exchange – their book suffers from a very myopic view of e-commerce. They envision B2B exchanges operating in much the same way as traditional stock or commodity exchanges such as the NYSE or Chicago Mercantile Exchange. Their number one recommendation to any newly forming exchange is to scale quickly and build liquidity in the items that are traded. They see a market that enables dynamic pricing through a balancing of supply and demand rather than a fixed pricing structure that most businesses employ. Although it is important for exchanges to quickly establish dominance in a particular vertical or industry, liquidity should not be the overriding goal. What the authors have failed to acknowledge is that there are distinct differences between how pure commodity or stock markets should operate and how e-business marketplaces should function. They argue that the central-limit order book, as employed by the Bermuda Stock Exchange, should be the way to buy and sell goods through an exchange. I would argue that there are too many other factors, beside price, that are the hallmarks of effective B2B commerce. The authors make little mention of the important issues of quality, delivery, strategic sourcing, volume discounts, or collaborative design. All of these issues cannot be dealt with through a strictly price driven exchange, but must be handled via a one-to-one negotiation process. Additionally, no supplier wants to see his goods and services treated as a commodity and therefore will make every effort to avoid situations were price is the only deciding factor. Because of these differences most B2B exchanges are focusing on the richness of their content as well as the number of buyers and sellers that they can attract into the marketplace. Exchanges like Paperexchange.com and e-Steel are attempting to build virtual industry communities by offering a variety services that are tailored directly to the needs of the industry. They allow buyers and sellers to find each other on-line then privately negotiate the terms of the contract based on issues like delivery, customization, quality, or quantity discounts. Some are even offer financial settlement or supply chain management functions.

On the positive side, the authors do give a good broad overview of issues to consider when starting a B2B exchange, particularly the issues of neutrality and industry knowledge. Both neutrality and industry knowledge help to build confidence that the exchange is focused on creating value for all parties involved and is not merely there to serve a small group of suppliers or buyers. This is the biggest issue with Covasint, the marketplace created by the Big-3 automakers.