B2B EXCHANGES

The Killer Application in the Business-to-Business Internet Revolution

Book Review – 885B

“The more we analyzed these new business-to-business Exchanges, the more we realized that they are the ‘killer application’ of the business-to-business revolution.” Arthur Sculley and William Woods stated bluntly in their introduction to the book. Indeed, the book serves to be a survey of the fast-emerging B2B internet exchanges and, most importantly, offers in-depth analysis of ownership models, trading models, revenue models that B2B exchanges could possibly take, using the authors’ extensive experiences with world’s major securities exchanges.

The internet has created unprecedented opportunities for Industrial Age enterprises to streamline supply chain and achieve significant cost-savings. B2B exchange occupies a major spot within this revolution. Whilst firms rush to the net for marketing and sales promotion, many have ignored the potentials in B2B exchanges, particularly for commodity, or services/products with widely recognized standards. Before advent of internet, paper-based, or more recently “EDI” communications along the value chain prove to be highly inefficient and expensive. A B2B exchange, if implemented successfully, could reduce corporations’ procurement costs dramatically with minimal investments.

A B2B internet exchange could only work well when there are active trades between many buyers and sellers and neither party dominates the market place. Intense competition from either buyer or seller side would build high liquidity in the market and eliminate any barriers to price transparency that could otherwise exist in certain industries. However, this does not work well if the industry structure is already very concentrated as big players can exert their market power either way. Still, a well-managed B2B exchange could lead to cost-savings when invoicing, accounting and even delivery could be automated and handled by the exchange.

To be a fair market space, neutrality is a key quality of a B2B exchange. Otherwise, certain members along the chain would feel their interests are not honored and simply leave the exchange. This calls for an ownership model that includes buyers, sellers, brokers, and maybe even commercial investors.

A traditional on-line trading model is to simply aggregate fixed offering price onto the internet. There are several more trading models worth exploring. For products that are non-standard, require special quality, or on-time delivery, post and browse on-line may be viable for further one-to-one negotiations. For more standardized commodity-type products, a B2B exchange could use seller-driven, buyer-driven, or even fully automated matching to determine the final deal price. Under such a model, the whole value chain would become highly efficient in reaching a price that truly reflects market supply and demand situation.

Revenue models for B2B exchanges could be highly flexible depending on particular industry custom. However, in order to build up traffic initially under Metcalfe’s Law, price penetration would be an advisable stepstone.

To sum up, a B2B exchange does not apply to every business. However, if applied successfully, they could represent a real opportunity to re-shape the particular industry involved.