To: E-Business 1 Class

From: Ransom James

RE: B2B Exchanges, The Killer Application in the Business-to-Business Revolution

Arthur Sculley and William Woods co-authored this book at the end of 1999, before the April technology stock meltdown and prior to most venture capitalists’ movement away from B2B marketplaces as investment opportunities. However, it is still an excellent (and quick) read on the basics of establishing a B2B exchange. Sculley was a Managing Director at JP Morgan for almost 25 years and is currently Chairman of Catex, CreditTrade and Techex, all B2B exchanges. Woods was a securities lawyer for 15 years, and is currently the CEO of the Bermuda stock exchange. They solicited help/advice from the following: Goldman Sachs research analysts, Volpe Brown Whelan investment bankers, Forrester Research, IDC Research, and drew on their own extensive securities exchange backgrounds as a means of comparison to B2B exchanges.

The authors do not quibble with Goldman’s total B2B estimate of $1.5 trillion in gross volume by 2004, of which between $400 and $600 billion will pass through B2B exchanges. They suggest that if B2B exchanges are successful in obtaining just .5% of that range, they could achieve close to $3 billion in total revenues. To do this, they list several keys to success as listed and discussed below:

§ Stay focused and pick one vertical: This will avoid the all-for-one problems that plague B2C companies like Value America. It will also gain credibility will potential investors that like to see industry expertise (i.e. good management team) focusing on only what they do best. Last, pick a large vertical, somewhere in the $50 billion and up range.

§ Play to win: The authors advocate a market share over profits strategy in the early stage. This “plant-the-flag” thought is that larger numbers of suppliers lead to larger numbers of buyers and vice versa, such that the network effect leads to market domination. First in wins in their book

§ Maintain neutrality: This is difficult to do in an industry where buy-in from a few large firms is necessary for success, but the emphasis must be placed on neutrality. One way to achieve this is to structure an independent advisory board with representatives from the buyers, sellers, brokers, intermediaries, IT, and logistics sectors, such that everyone’s interests are protected.

§ Ensure transparency and integrity: The authors site Metalsite’s “Selling and Auction Rules” as a good benchmark to create a set of standards for any site, as buyers and sellers like to know the rules of the game they’re playing before they get involved; a set of standards helps establish the rules.

§ Add value by building a virtual community: Because industries that are good candidates for B2B exchanges are, by their nature, fragmented, there is little communication between different parts of the supply chain. Creating community through ideas like an industry Rolodex, news feeds, job postings, discussion forums, etc. helps create stickiness to the site.

§ Make the right strategic partnerships: Potential partners include deep-pocketed investors, buyers, sellers, IT vendors, existing broker intermediaries, and trading systems software developers. Just remember to keep the neutrality of the site intact.

§ Operate as a virtual organization: Focus on core competency, that is to say, what your vertical industry focuses on. Outsource everything else.