B2B Exchanges: The Killer Application in the Business-to-Business Internet Revolution by Arthur B. Sculley and W. William A. Woods

Review by Chris Smythe

If you need proof that the Internet really has speeded up the business cycle, read this book. Only in today’s “new” economy could a book published in 1999 be almost out of date one year later. While that is a slight exaggeration, parts of this book do seem so . . . yesterday. For example, in the opening chapter, the authors introduce the reader to the “quiet revolution” of business-to-business transactions on the Internet, with B2B exchanges destined to become the “killer application” of this revolution. Obviously, business-to-business exchanges are not a secret of the Internet any more.

B2B Exchanges is a very organized, step-by-step guide to understanding the business-to-business marketplace and the various “exchange” models that have developed and will continue to develop in this space. The book is structured in much the same way as an educational textbook or, for that matter, a term paper: an overview of the business-to-business market space; a discussion of the various versions of B2B exchanges, including the different revenue, trading and ownership models; the “seven secrets” for a successful B2B exchange; and a discussion of the future of this type of business. Anyone with even a slight familiarity with the Internet will likely find the early chapters to be too basic and patronizing. An additional criticism is that the authors’ background is with the transformation of the Bermuda Stock Exchange. Thus, the book is filled with references to stock exchanges and ECNs – not the best examples for truly understanding the economics of a B2B exchange.

The book, however, does have its redeeming features. In addition to being an excellent source for gaining a solid understanding of the business-to-business market (especially for those with no Internet background), the “Seven Secrets” for the success of a B2B exchange gives some solid advice with sound supporting logic. While many of these so-called “secrets” may seem obvious, they are all backed with ample real world examples and logical business underpinnings. The “secrets” or insights that I found most useful were the following:

1. A successful B2B exchange will focus on one vertical market (e-Steel v. VerticalNet);
2. A successful B2B exchange will seek to gain buyers and sellers as quickly as possible in order to create a “virtuous vortex,” leading to much-needed market liquidity in the exchange. (Liquidity v. early profitability);
3. A successful B2B exchange will align itself early on with strategic partners to enable it to scale quickly and build a community on the site. (Outsource v. internal creation); and, most importantly,
4. The key distinction of the B2B exchange is the ability for dynamic pricing of goods through auction-style mechanisms (i.e., eBay). It is this feature that sets a B2B exchange apart from simply a traditional business model moved to the Internet and adds value for all the parties.

The clear implication of this final theme is that the B2B exchanges with the best chance of success are those that allow for such dynamic pricing in industries that do not have that ability in the real world. Right now, B2B exchanges are out of favor with investors and Wall Street. Only time will tell if the authors are correct in their belief that these business models are the killer application of the new economy.