Who Can You Trust?

>> As competition builds, a growing number of online B2B marketplaces are scrambling to survive by adding services that reduce the risk of anonymity.

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Ask Tom Stephens, executive vice president at Paschall Truck Lines Inc., about doing business on Internet marketplaces, and he'll tell you about the Los Angeles-to-Florida-bound load that his firm never got paid for hauling.

The $132 million Murray, Ky.-based transport company "won" the new business on Netfreight.com, a now-defunct electronic marketplace whose Web site matched shippers with lowest-bid carriers.

"We picked up the load, delivered it and we billed the customer that Netfreight said to bill," Stephens recalls. "But the customer said the bill wasn't theirs."

To resolve the problem, Paschall went back to the marketplace, but Netfreight was out of business, and he was out several thousand dollars.

"It's a headache not knowing who the customer really is," Stephens says. Still, he adds, the Netfreight encounter hasn't soured him on online marketplaces.

"We'll do it again, but we'll become much more selective about who we deal with," he says.

Paschall's experience goes straight to the Achilles' heel of online marketplaces - the absence of trust.

It's true that electronic marketplaces provide a fast, inexpensive and relatively easy way to introduce buyers to a whole new universe of suppliers, and vice versa. But in most cases, there's no guarantee those newfound contacts will make for good business partners who will deliver quality goods or pay their bills on time.

That's one of the factors driving the proliferation of private digital exchanges, which electronically link a deliberately reduced number of key suppliers. Gartner Group Inc. in Stamford, Conn., estimates that some 30,000 private exchanges are in various stages of development, compared with some 600 public exchanges.

But several of Computerworld's Emerging Companies are introducing technology aimed at addressing security concerns and providing services to lure buyers to public marketplaces.

"To bring real value in an electronic marketplace, you have to offer more than just a place to shop," says Marty Gruhn, an analyst at Summit Strategies Inc. in Boston. "The future for marketplaces will be offering services customers will pay for - things like escrow services, currency translation, credit and logistics services. The marketplace business isn't a transactions business. It's a services business."

Sophisticated Services

Increasingly, public marketplaces seem to be heeding that message, adding services ranging from identity and credit verifications to field inspection of goods bought and sold sight unseen at electronic marketplaces.

Consider RetailExchange.com, a Boston-based electronic marketplace that links manufacturers and retailers. The exchange prequalifies buyers and sellers then matches them, but not via the traditional auction method. Instead, RetailExchange.com provides negotiation and channel management services that, among other things, establish up front the identity and creditworthiness of all parties.

For example, manufacturers can use the channel management service to stipulate which retailers to include in online negotiations for particular goods.

"The last thing a Tommy Hilfiger, which is selling their fall line through department stores, wants to see is the excess from the same line showing up two blocks away at a discount loft, so we have features to control their channels," explains Melissa Webster, vice president of strategic partnerships at RetailExchange.com. "It's critical to our value proposition - especially to sellers - to identify our members."

RetailExchange.com, which has 4,500 members and has traded about $20 million in goods since its launch in February, also offers credit protection to sellers through a partnership with New York-based CIT Commercial Services Group Inc. For an extra fee, CIT essentially buys a seller's accounts receivables, guaranteeing to pay the seller if an online buyer doesn't pay up.

Round Rock, Texas-based Dell Computer Corp.'s newly launched electronic marketplace, Dellmarketplace.com, goes a step beyond identifying buyers. It uses software embedded in the Dell marketplace to let suppliers differentiate how they market and sell their products to various buyers. The software is from Austin, Texas-based Exterprise Inc., an Emerging Companies winner.

For example, an electronics supplier selling projectors on the exchange might feature product benefits such as "lightweight" and "high image quality" for a less-sophisticated buyer but display all of the technical specifications for a buyer who identifies himself as an engineer.

In addition to the market segmentation service, Dell plans to incorporate credit scoring and finance services into the marketplace. It will also offer systems integration services, such as helping suppliers create electronic catalogs. Eventually it will link regular trading partners' internal enterprise systems through the Dell marketplace.

"We believe the next phase will be interconnected business networks connecting internal processes within a business to each other - such as connecting the finance organization of one company to another's to do accounts payable and accounts receivable processing," says John Hampton, Dell's director of new ventures. "Our intention is to collaborate."

Until recently, collaborative commerce has been little more than a buzzword on the business-to-business conference circuit. But now a handful of Internet market makers are beginning to deliver on the promise of linking multiple businesses and processes through a central marketplace to do more than buy and sell.

Among these is San Francisco-based Bid.com Inc., which operates an electronic marketplace for companies in the building, engineering and real estate industries. The various companies use the marketplace's collaborative tools and services to electronically manage large, commercial construction projects and to buy and sell materials and services.

San Francisco's Orchard Hotel is one of the exchange's more visible success stories. The building project, which came in two months ahead of schedule and earned the hotel an additional $1 million in revenue by opening early, was managed entirely on Bid.com, with contractors, project managers, suppliers, engineers and architects exchanging plans and work orders, buying materials and scheduling deliveries on the electronic exchange.

"The building industry is a highly fragmented one, with lots of islands of technology," says Bid.com Chairman Daryl Magana. What Bid.com does is integrate those systems into a single Web-based platform, which Magana says can cut between 5% and 10% from project costs that run in the hundreds of millions of dollars.

Marketplace Middlemen

But even as marketplaces add collaborative features and other services, it remains to be seen which will survive the shakeout that analysts predict will occur within the next two years.

According to Forrester Research Inc. in Cambridge, Mass., companies that use exchanges now trade about $19 million in goods and services on one to two online exchanges. But by the end of next year, the average company will trade about $49 million in goods over four exchanges.

One of the big issues for both buyers and sellers is how to choose from among the hundreds of electronic marketplaces springing up each month.

Users and analysts agree that nearly all companies will likely do business at multiple marketplaces, which means integrating their internal enterprise systems to several different exchanges using different technologies, data formats and protocols.

"We have 55,000 SKUs in our store, and those aren't being serviced by any one exchange," says Rolando deAguiar, president of e-commerce at Rocky Hill, Conn.-based Ames Department Stores Inc., which operates 460 retail stores in 19 states. "I think down the road the exchange business will go through a consolidation where you have two, three or four very robust exchanges that aggregate features and do most of the [technology] integration work. You'll see us gravitating toward those key players."

One such newcomer is Seattle-based Vitessa Corp., an Emerging Companies winner that provides content-oriented sites, such as online gaming or news Web sites, with all of the technology necessary to add e-commerce functions.

This would enable, say, an online gaming site with no e-commerce capabilities of its own to sell games without buying and stocking inventory plus building all of the necessary technology infrastructure, such as order management and fulfillment capabilities, to support product sales.

Gartner Group is forecasting the emergence of more so-called integration services marketplaces that will focus on links between trading partners.

"In order to survive, e-marketplaces must overcome increased operating costs and provide an extremely compelling reason for moving tightly integrated business processes to a marketplace," says Gartner analyst Carl Lenz.

So far, Lenz says, the complexity of enabling suppliers to participate in a marketplace has been overlooked, which has limited marketplace functionality and participation. But by 2005, more than 500,000 companies will participate in marketplaces as buyers or sellers or both, he says.

But which marketplaces those will be remains very much up in the air, as the ever-expanding number of industry consortia exchanges, new dot-com players and integration marketplaces continue to jostle for position.

"We are 10 minutes into a 24-hour poker game," says noted industry observer Jim Champy, a regularly featured Computerworld columnist. "It's far too early in the game to determine the winners and losers."

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