Sculley and Woods maintain throughout the book that online exchange is

Transcription

1 B2B Exchanges: The Killer Application in the Businessto-Business Internet Revolution-A Review by Arthur Sculley and William Woods Reviewed by Narges Shahsavarani In B2B Exchanges, Arthur Sculley and William Woods analyze the feature of the revolution that is occurring in Business-to-Business (B2B) transactions as a result of the new acceptance of the Internet by corporations. The authors start their claim with the Internet changes every thing in B2B and most of corporations will have to change themselves over the next five years for remaining competitive in the new economy. They demystify some jargon of B2B and discuss the nature of business-to-business solutions on the Internet. Some people still believe that the Internet as some type of academic experiment or, a low security replacement for the telephone that allows individuals to send to each other. But in the recent years, the reliability and security issues associated with the initial use of the Internet have been largely solved and every business is now adapting the Internet in one form or another. Nowadays, some innovative new uses of the Internet by business are revolutionizing the way in which many goods and services are produced, price and distributed. The authors continue some benefit of B2B exchanges on Internet, describe anatomy of a model of B2B and common membership and ownership structures for exchanges and also four trading model for B2B exchanges. Finally they have a valuable part that is including Seven Secrets For Success for B2B Exchanges. They mention that the Internet revolution, or new economy, has created many new companies, produced thousands of new millionaires. That phenomena in the business word captured investors attention to the point where it seems that every New York taxi driver is a day trader with some on line brokerage service. Initially, investors attention was focused on companies that sell goods or services to the general public, what they are commonly called Business-to- Consumer, or B2C such as Amazon.com. Enabling consumers to sell goods or services to each other is a Consumer-to-Consumer, or C2C model like as ebay.com. Another new economic model is a Consumer-to-Business, or C2B, in which the consumer states the price for instance like Priceline.com. The quiet revolution that is developing in the world of B2B transactions will generate more profits and millions than anything the C2C, B2C, and C2B models can produce and will have a deep impact on the economy of each country. Sculley and Woods maintain throughout the book that online exchange is

2 where multiple buyers and multiple sellers come together in a virtual trading space. The potential value of a B2B exchange is n^n, where n is the number of users connected to that exchange. With Internet network buyers and sellers are online together from all over the world and thereby to create dynamic pricing, cost reduction and process improvements. Based on Oxford dictionary, Sculley and Woods define exchange as a building, office, institution, etc., used for the transaction of business or for monetary exchange. The unique feature of a B2B exchange is that it brings many buyers and sellers together in one central virtual market space and enables them to buy and sell from each other at a dynamic price according the rule of exchange.after that the book describe about ECNs (electronic communication networks), one form of electronic trading system that automatically match buy and sell orders at specified prices, the ECNs are exchanges but not strictly B2B exchanges and ECNs register with the SEC (U.S. security and exchange commission) as broker-dealers. Sculley and Woods discuss about currently use of the Internet, it has been working professional on B2B relationships. Many companies now consider the Internet for procurement of goods from suppliers, management of their supply chain, and product development. Advanced use of the Internet to contact customers and suppliers in the production process will enable customers to order products online such as customized car and then sit back, assured that the car will be built to their specification and delivered to their door within a few days and Internet has enabled online brokers to offer stock quotes and access to research data for a fixed commission per trade at rates lower than traditional broker. Also after explaining the role of Internet they speak about B2B exchanges creating new intermediary opportunities as a form of infomediary. At the end of first part they speak about why B2B exchanges are developing on the Internet and they explain the effect of B2B exchanges on traditional markets. The main effects are: Lower cost; Higher potential profits for manufactures with lower procurement costs; Increase extent and liquidity in a market; Lower inventory requirements;

3 Greater transparency and more orderly markets; Elimination of geographical barriers and time zone differences; Integration of purchasing system; Improve product design schedules through integration with suppliers; and Removal of distribution channel blockages, such as agents and brokers who have a lock on particular market, resulting in a potential loss of jobs or changes in the nature of the role of traditional intermediaries. In the next part B2B Exchanges describe the anatomy of a model of B2B, using particular examples throughout, which are drawn from existing successful Business-To-Business Exchanges. The authors believe the B2B exchanges will have some or all of the following user groups that they have different objectives or interests: Owners that is the shareholders; Sellers or suppliers; Buyers or procuring companies; Broker or other forms of intermediaries/informediaries; Listed companies (such as for stock exchange); Issuers of traded products (for example, securitized contracts); Data vendors and service providers; The general pubic and The government. Afterwards they discuss about four common membership and ownership structures for exchanges: Ownership by one group of users, with closed membership: An exchange may be owned and controlled by one group of users (for example the traders or brokers who act for buyers and sellers in the market). In this model, new trading members are required to buy an ownership stake, often referred to as a seat in the exchange. The advantage of this model is that the ownership group can design the market to their advantage and profit. In particular they can control membership by limiting who can buy a seat or limiting the number of seats available. The biggest problem is that all other user groups may be disadvantaged by the owners anticompetitive practices. Now broker owned stock exchanges like the NYSE want to go public because of competition from electronic markets like ECNs. Ownership by many user groups, with open membership: In this model, the application for membership, or ability to trade on the exchange, is not linked to an ownership stake and new memberships are on a nondiscriminatory basis. A member does not have to own a seat, but need a license to trade on the exchange and use its facilities. This license maybe transferable by a member or

4 the exchange may insist that new members join the exchange directly so that membership rights are non transferable. The advantage of this approach is the ability to balance the competing interest of each user group. The disadvantage is that it can take a long time to get all these potentially difference groups to work together. The example of the open membership model is the Bermuda Stock Exchange (BSX). Ownership by one or more commercial investors, with open membership: In this model the exchange is set up and operated by one benign investor or a group of investors and is run completely on a for-profit basis. Membership is the ability to trade on the exchange, is not linked to ownership, and new memberships are available to applicants on an open access, non discriminatory basis without the requirement to purchase a seat (For example PlasticNet). Ownership by government: When a B2B exchange is perceived as a providing the important public benefit, the government maybe tempted to assert its national interest during the development of such a market within their authority. An example of exchanges with government ownership is The Taiwan Stock Exchange. At the end of part two they describe four trading model for B2B exchanges include catalogue aggregators, post and browse, Auction markets, and continuous auto-execution systems. Catalogue aggregators: Must be neutral, independent sites that are operated by a third party if they are to bring many competing sellers together and earn buyers trust in the information on the site. Post and browse (one-on-one negotiation): Just like a private members room, a post and browse function creates a virtual community, a group of people interested in buying or selling a particular product that can make a connection through a web based bulletin board. Auction markets: The ability of multiple buyers and sellers to collectively set price for a wide range of people and services represents a radical departure from the older, fixed price model in industrial age and also they mention buyer and seller driven auctions will became increasingly popular, because of the scale, reach, interactive, and real time attributes afforded by the Internet. Continuous auto execution systems: work only for same standardize products with high liquidity.

5 After describe four trading model of B2B exchanges they explain how Off-line exchanges have established revenue models largely based on the structure of stock exchanges, but the B2B on-line space is creating new forms of revenue opportunities. B2B exchange can generate almost a dozen types of revenue, those are including: transaction fees, percentage of cost saving, posting fees, subscription (or membership) fees, listing (or hosting) fees, information selling fees, information licensing fees, advertising and permission marketing fees, revenue sharing, software licensing fees, private networks. Lastly they mention to scale up quickly, B2B exchanges must partner with key suppliers, commerce community, and information providers. In the third part of the book based on their combined total of 20 years experience with stock exchanges and 4 years of investing in B2B Exchanges, the authors analyze the key issues in building a successful, credible and effective B2B Exchange. Some of the secrets for having successful exchanges are as follow: Secret 1: Stay focused-specialized in a vertical The most important secret to success in the initial phases of developing a B2B exchanges is to target a specific industry in which you have strong expertise and then specialized in a vertical within that industry. Specializing on a single vertical provides the ability to scale up quickly and gain liquidity that are so important in the early stages of an exchange. This makes a self-fulfilling snowball effect once some level of liquidity is established. After you became a dominant in one vertical, it may be possible to branch out into other verticals within that same industry. Secret 2: play to win-the need to dominate Try to became dominate in market in your chosen vertical is very important for B2B exchanges, building a strong brand name spends the majority of your resources on building a strong customers care and support program in the early stage. Liquidity is everything, at first if necessary to build market share and increase trading volume, you should sacrifice profit. Secret 3: maintain commercial neutrality Successful exchanges must be stayed independent, protecting users information, 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 and user committees for this purpose, providing a neutral third

6 party for all other parties and also make credible and build trust. Secret 4: Ensure transparency and integrity We should make a self-regulatory organization (SRO). There is a critical need for transparency in pricing and the product and also B2B exchanges need to maintain the integrity of the pricing mechanism. Secret 5: Add value by building a virtual community The key of secret number 5 is to provide value-added features that make the exchange the one-stop shop in your industry vertical. Successful B2B exchanges will create powerful virtual communities that will increase the lifetime value of existing customers and decrease the acquisition costs of new customers. Secret 6: Make the right strategic partnerships Choosing the right strategic partners helps you scale up quickly toward domination. Potential partners for a B2B exchange can come from a variety of sources including: deep-pocket investors, buyers in the chosen market space, sellers, existing broker intermediaries, new informediaries, content providers, IT vendors, and trading system software developers. If you do not have enough expertise in your chosen vertical, be sure to partner early with someone who does vertical knowledge is key to success. Secret 7: Operate as a virtual corporation In this part they mention some key guidelines for virtual corporations such as B2B exchange companies must be flexible and able to adapt quickly to market changes, concentrate on your core industry expertise and outsource all non-core functions, particularly the technology development, keep staff levels low and finally hire a expert Chief Technology Officer to manage the outsourced vendors. The last part is about the future of B2B exchanges, Goldman Sachs Investment Research estimates the value of transactions conducted on-line between companies will reach $1.5 trillion by In B2B Exchanges the authors reveal that transactions on B2B Exchanges, in the US alone, could exceed $600 billion in annual value and generate annual revenue for the exchanges in $3 billion by 2004.

7 In my opinion the authors draw on their experience in the stock exchanges to advice on Internet exchanges and I suppose four insights highlighted by the authors are very valuable: "Think private, act public," "Liquidity is key for any exchange", "Only one exchange will dominate a vertical" due to increasing returns and "Pricing is going dynamic". The authors also provide an extensive appendix that provides short case histories of many of today s more perfect B2B exchanges. They provide good advice on the emerging B2B exchange phenomena. I strongly recommend this book and website ( as a very useful guide to starting B2B Exchanges.