B-to-B Exchanges: Know Your Domain

I'm running a workshop this week for a client on the future of domain-specific B2B marketplaces.

So I had to dig out this oldie but goodie from 17 July 2000 (yes, we really wrote this back then!)

Co-written with my better half, Lisa Reisman , (we were dating then), the piece nearly got her fired from Andersen Consulting (as a Senior Manager) because the firm was making so much money building marketplaces for clients.

I recall one partner (whose practice was entirely based on building marketplaces, which a reasonable person knew would never work at scale given technology limitations at the time) declaring "misinformation" or something similar when reading this.

But were we right?

And how little do things change over nearly 25 years?

:-)

B2B Exchanges: Know Your Domain

Vertical b-to-b exchanges that offer little more than the opportunity to make simple purchases won't create lasting value for their customers or for their shareholders. 

Over the past year, we've seen an explosion of business-to-business trade platforms and exchanges. But few marketplaces have emerged with any deep, industry-specific knowledge or specialized, industry-specific supply-chain capabilities. Thus far, most b-to-b applications and exchanges have focused on saving their customers money by automating simple transactions. Though these automated processes are significantly more efficient than the offline ones they replace, the streamlined processes attack only relatively simple problems - maverick purchasing, for example - with limited potential returns. 

In many cases, the impulse to create exchanges has been misguided. The rush to piece together first-generation exchanges simply to cash in on the dot-com hype has contributed to the relatively low business value most of these marketplaces will generate. 

We expect that the largest return on investment will come from applications and exchanges that attack the hard stuff -- pre-production design and collaboration, parts rationalization, order fulfillment and inventory reduction. Successful b-to-b marketplaces will translate deep industry knowledge into specific offerings and services within each industry sector. 

And marketplaces that understand the customer-buy scenario (which may also include the life cycle of a product), and then build or customize trading and supply-chain solutions to address these issues, will make themselves truly valuable. 

To be successful, marketplaces will require real-time supply-chain visibility and tools for making strategic decisions across the entire procurement process. Currently, there are few competitors in this realm. Many leading marketplaces still fail to capture or aggregate commerce volume and data, let alone analyze and optimize supply flow. In fact, some of the best-known business-to-business marketplaces don't capture commerce at all; the buyer is led off the exchange and to the online storefronts of selected manufacturers or suppliers, which often are run by different trade platforms not integrated with the original site. 

Dig deeper into many exchanges and you'll find that few have the legal and contracting infrastructure to enable decision support and supply-chain flow across the sourcing process. Many, however, have fallen into the trap of thinking that a customized catalog or trade infrastructure can support contracting issues for large indirect, direct and commodity spot purchases. But you can't rely on this catalog-exchange infrastructure to support complex purchases such as printed circuit boards and metal stampings over the Internet, let alone take into account the individual contracting needs of the horizontal industries within each vertical marketplace. 

Now more than ever, domain knowledge and information on global-supply markets are key. Only marketplaces that can codify and automate their customers' individualized supply-chain and decision-support requirements will create lasting value. Exchanges that simply focus on signing up partners and licensing technology to cash in on capital markets without developing a comprehensive supply-chain strategy will be left holding the bag - one filled only with paper clips and other simple goodies their trade infrastructure supports. 

Jason Busch is manager of strategy and business development at FreeMarkets, and Lisa Reisman is a manager in Arthur Andersen's eBusiness Strategy practice.