CIO — JUST TWO YEARS AGO, business-to-business trading exchanges were the rage. Experts, including myself, waxed eloquent about the potential of B2B exchanges to act as hubs, connecting buyers and sellers in electronic marketplaces. Of course, we were all very wrong. The B2B boom quickly went bust as investors started asking inconvenient questions about the viability of the business model. Now, most B2B exchanges are either dead or on life support. One might conclude from the evidence that the idea of a B2B exchange is fundamentally flawed. However, it’s not the concept of the exchange that is flawed but the execution of that concept.
At the root of the failure of B2B exchanges is the fact that their founders put the cart before the horse. Their logic seemed elegant: create marketplaces that would match buyers and sellers, bringing improved liquidity, efficiency and transparency to B2B transactions, and make money through transaction fees from the trades. Once the buyers and sellers were on board to conduct transactions, the exchanges could augment that core functionality with value-added services such as logistics management, credit and settlement, and supplier verification.
But getting an exchange off the ground requires a minimum level of liquidity, and getting that liquidity requires solving the classic chicken-and-egg problem. If you don’t have a critical mass of buyers, how do you attract suppliers? And if you don’t have most of the suppliers, why would buyers participate? Most B2B exchanges failed because they could not get past that first hurdle. Suppliers resisted joining the exchanges because they feared direct comparison with competitors would erode their margins. And buyers as well as sellers were loath to pay transaction fees for what they felt was a simple matchmaking function.
But the struggle for liquidity is merely a symptom of the real problem, which is that the creation of exchanges to match buyers and sellers preceded the creation of software and services that would make exchanges truly useful. That amounted to putting the cart before the horse. B2B exchanges should have begun by solving a focused business problem one customer at a time. That approach means that exchanges will need to do much more than merely facilitating transactions, which, after all, involve far more than a simple purchase or sale. Most B2B interactions involve intense collaboration on planning, forecasting, design and problem solving. The real problem that enterprises face is not in finding new suppliers or buyers. Rather, it is in improving the efficiency and effectiveness of the processes by which they interact with existing suppliers and partners. Those processes start deep within the enterprise and extend outward to customers, suppliers and channel partners.
