Software Magazine - Which B2B Exchange Is Right for You?

Which B2B Exchange Is Right for You?

Follow these guidelines for evaluation criteria and key implementation details to find an e-marketplace that fits your company's needs and provides real value-add.

By JP Morgenthal

The wide diversity that exists in B2B exchange functionality makes it extremely difficult to compare and contrast e-marketplaces. They all share certain properties, however, such as facilitating new business models, creating new markets, and mediating some business process. Organizations can then use these common properties to analyze an e-marketplace's viability and opportunity to provide real value-add.

This article provides a framework for better understanding the landscape for B2B exchanges, and offers some evaluation criteria and key implementation details that prospective trading partners should look for in required exchange integrations. This last point is often overlooked, but can make the difference between success and failure in exchange selection.

Regardless of the function the exchange provides, exchanges are service providers. Thus, a business evaluating a particular exchange is most likely looking to outsource some internal function, with the hope of gaining some financial benefit. Therefore, before subscribing to any exchange, an organization should do a robust analysis.

Target Market. B2B exchanges that target large companies probably do not have the required support services to assist small- and medium-sized enterprises (SMEs). Typically, large companies have sophisticated IT staffs that can manage much of the technical details involved with establishing a communications link with the exchange and managing that connection over time. SMEs, however, may lack the technical resources to setup and configure the necessary software and hardware to communicate with an exchange. They will need an exchange that is oriented around providing these types of services.

Focus. Is the exchange horizontally or vertically focused? Horizontally focused exchanges will attempt to provide generic services, such as credit risk management, bill payment and presentation, or secure communications. In essence, horizontally focused exchanges are forms of application service providers (ASPs) offering mediated services that all companies might need. Vertically focused exchanges are oriented around solving a particular problem within a vertical industry, such as utilities, construction, or manufacturing. A well-documented example of a vertical industry exchange is Covisint (www.covisint.com)—the planned exchange formed by DaimlerChrysler, Ford, and General Motors—to create an optimized or digital supply chain for the automotive industry. (Auto-xchange and GM TradeXchange expect to migrate to Covisint.)

Purpose. What business problem does the exchange solve? In other words, what is its purpose? Exchange type is inextricably tied to exchange purpose. Typically, this category should provide some value-added service to an already existing function.

Profitability. When evaluating an exchange, it is important to understand how the exchange intends to generate revenue. The market has clearly shifted from rewarding technology innovation to rewarding profitability. Those B2B exchanges that survive and thrive will be based on a sustainable business model that generates revenue through their value-added services. One of the more popular business models for exchanges is the per-transaction fee. In this model, the exchange charges a fee to use the exchange. This fee could be charged to the buyer, seller, or both, depending upon the model. Another avenue for profitability is advertising. This model is akin to the Yahoo! or no-charge service providers, where the advertiser pays because the exchange attracts new customers.

Community Size Opportunity. An exchange that serves a community of one, or few, will most likely not survive very long. Unfortunately, B2B exchanges are still in their relative infancy, and may not be able to profess a large community at the time a company is looking to join. Therefore, it is important to be able to analyze the opportunity for community growth, as well as its current size. However, obtaining this data is going to require more resources than a simple topological examination. Depending upon the importance of the exchange's viability to an organization's long-term goals and profitability, companies, at a minimum, should review the exchange's business plan.

In addition, companies should review the opportunity for partnership with the exchange. There are some well-documented cases to date where this has worked successfully. Partnering may not only help the community grow faster, but could also result in some profit sharing.

Implementation. As always, the devil is in the details. Before a company commits resources to an exchange, it needs to feel confident that the exchange has a solid and extensible architecture that will grow and change with the needs of the market it is serving. Organizations need to be sure that the hardware and software chosen to implement the exchange provide the necessary level of high-availability and fault tolerance to ensure the exchange is available when needed. Also, the exchange should provide a level of security with which the trading partner is comfortable, especially if sensitive business will be conducted via this medium.

Service-level agreements (SLAs) have yet to emerge as an advertised component of B2B exchanges. SLAs specify the guarantees the exchange makes with regard to providing service, and details the consequences to the exchange of not living up to that agreement. Any organization considering an exchange should take a tour of popular exchange Web sites and try to locate the terms of the SLA. If the terms of the exchange's SLA are posted, look to see if the site specifies the results of not meeting the terms of the SLA.

Management Team. A very important component of the exchange is the experience of the team leading the endeavor. Organizations should remember the basics when performing any due diligence. The CEO of the exchange should have strong organizational skills with an air of charisma. The CTO should have a solid technical background and a history of delivering. With those two positions solidly in place, the exchange has the basics for moving in a positive direction.

Given this brief list of evaluation criteria, it is clear to see that selecting an exchange requires that a company provide time and knowledgeable resources, which of course needs to be calculated into the overall return-on-investment the company expects from this service. How much time and effort a company puts into selection is heavily weighted by the impact it expects the exchange to provide on profitability.

If participating in the exchange will merely provide minimal cost advertising or marketing, then this decision will be much easier than if a company is expecting the exchange to expand selling opportunity or lower purchasing costs.

To date, it has been difficult to define the term "B2B exchange" because it has been ambiguously used to capture the rise of a concept—the introduction of a broker into an e-business exchange—instead of to define a singular product or service. However, several types of functions or services have emerged: portal, mediator and market maker (see Table: Representative B2B E-marketplaces).

Of note, some exchanges can offer one or all of these services, further complicating the ability to pinpoint the exact value-add an exchange provides.

Portal. Portals are typically vertical market exchanges designed around providing multiple services simultaneously. (See "A Look Through the Portal".) These services include:

Vertical market portals play an important role in bringing an entire vertical industry into the B2B economy. However, their long-term viability is limited if the vertical industry they support does not accept them or is better served through point-to-point relationships.

Mediators. Mediated exchanges bring buyers and sellers together and facilitate e-commerce transactions. There are two types of mediated exchanges: pass-through and brokered.

The purpose of a pass-through exchange is to simplify the process of introducing a buyer to a seller and forming the trading agreement. However, once this relationship is set up, the transactions are handled directly between buyer and seller. In this type of exchange, the mediator acts much like a real-estate broker, taking a commission for introducing the two parties. Pass-through exchanges are more popular for direct materials transactions where the relationship between the buyer and the seller is based upon trust.

In contrast, brokered exchanges manage the entire transaction from start to finish; the buyer and seller never meet. This type of exchange is typically used for procurement of indirect materials, or what is known in the industry as Maintenance, Repair, and Operating (MRO) supplies. These are products that are not mission-critical, but are required for doing business. Examples of MRO supplies include: pens, pads, computers, etc. Because these are typically commodity items, these exchanges facilitate a competitive marketplace where buyers can get the best price.

Market Makers. This is a unique type of mediator, and one with which the financial and utility industries are very familiar. In contrast to mediators that simply provide value-added services through introduction or transaction management, market makers actually purchase the goods from the sellers and sell to the buyers. In effect, they are creating a market based upon perceived future demand for the goods they can purchase at reduced prices. These types of exchanges are usually provided by companies already engaged in this type of business, such as a mortgage broker or salvage operation.

As mentioned previously, an often-overlooked component in selection of an exchange is the requirement for integrating that exchange into an organization. Interestingly, these types of integrations can end up costing millions of additional dollars on top of the fees required to use the exchange's services.

Ignoring implementation details can lead to unexpected results. For example, a lament heard recently by a customer went something like this: "I used to have 30 people searching catalogs to handle procurement of my MRO supplies, now I have 20 people searching [major MRO exchange name substituted] online catalogs and I'm $20 million poorer."

This customer clearly did not compute the cost of integrating with this exchange for MRO procurement. As a result, the company did not gain the cost savings it originally believed it would.

Companies evaluating an e-marketplace should understand the three common integration strategies, as well as the merits and concerns for each.

The Custom Client. There are few exchanges left that provide custom clients. Most exchanges now leverage Web interfaces, which is unfortunate because custom clients can make exchange integration easier. The custom client is a software application provided by the exchange, which offers a rich user interface and implements communication with the exchange's servers.

The key benefit of the custom client is that the exchange has a framework for distribution of local application connectors. Accessing local system data for delivery to the exchange is a very complex part of exchange integration. These connectors allow human users to enter data as well as access legacy systems to directly extract the required data fields.

Exchanges have shied away from delivery of custom clients because they are expensive to build and distribute. Web interfaces will provide some equivalent functionality without equivalent ease-of-use. Additionally, with the rise of XML interfaces, Web interfaces satisfy the needs for human data entry, but are not necessary for machine-to-machine processing.

XML Document Interface. This category, and the following one—XML functional interfaces—are related but slightly different, each having different merits and issues. XML document interfaces define entry points where transactional documents can be sent for processing. A purchase order is an example of an XML document interface because the content of the document defines the items that a company wants to purchase. The receiving system implicitly recognizes the document type and passes the document onto a process that handles incoming purchase orders. Note that the document type is associated with a function on the receiver's system side.

XML document interfaces are probably the simpler to use of the two XML interfaces because they can thrive on one-way communications; that is, a company can just send the document and hope for the best.

The biggest issue with XML document interfaces is the need to build processes internally to reach into legacy systems and extract the data necessary to build an XML document matching a particular vocabulary.

For example, to communicate with Commerce One's exchange (www.commerceone.com), a company needs to map its legacy data into an xCBL Purchase Order. The costs for building these mappings are often underestimated and far exceed the savings expected by outsourcing to the exchange in the first place.

XML Functional Interface. XML functional interfaces leverage XML documents that define specific functional calls within the receiver's world. Here, the user has explicit knowledge of how to execute server-side functionality and executes this functionality by sending an XML document specifying the input parameters.

The XML functional interface implies a synchronous operation—although it can be implemented asynchronously—where the sender is going to operate on the result of the functional call.

For example, the exchange may offer a function called placeOrder, which takes as a parameter purchase order information (or perhaps even a purchase order document). The sending application will then wait to see that the result of the function call was indeed successful.

The key benefit of this type of mechanism is that a company has greater control over internal processes that need to go externally for data. The XML document interface is forced to live with the fact that it may never receive acknowledgment that the order was received, perhaps forcing external polling. But the XML functional interface indicates that the operation either succeeded or failed, which allows a company to more easily decide what to do next. However, XML functional interfaces still suffer from the need to obtain data from internal legacy systems for transport to the exchange.

It's important to remember that a business does not merely subscribe to an exchange and immediately gain business benefit. Rather, B2B exchanges require a company to provide data, either through human data entry or by integrating with legacy systems. Providing this data is a costly endeavor that must be included in the analysis of whether or not to do business with an exchange.

In the world of e-business, selecting an exchange can be as simple as selecting where to order lunch, or as complex as selecting a spouse. The typical reasons why users seek out exchanges are to become part of a larger community or to outsource internal processes in the hopes of regaining focus and saving money. Any business looking to regain focus and save money needs to expend considerable time and effort in selecting an exchange, using, at a minimum, the criteria mentioned here. And throughout the search, that company must make sure to capture the requirements for integrating the exchange into its internal processes, as this tends to be a more significant cost than most realize.

Today's e-business world is changing rapidly. Selecting an exchange for mission-critical processes during this time of volatility can be daunting. However, as with all investments, the odds for success will be higher if the exchange is grounded on solid financial and business principals, offers users real value-add, and has a solid management team.

JP Morgenthal is chief technology officer of XMLSolutions Corp., McLean, Va., and a leading industry expert on application integration and the Internet, XML, and Java. He is also author of Enterprise Application Integration with XML and Java and co-author of Manager's Guide to Distributed Environments. He can be reached at jp.morgenthal@xmls.com.