InformationWeek
Defining The Business Value Of Technology
August 24, 1998
Changing The Rules
Online business is challenging-and changing-the rules of commerce
By Clinton Wilder, Gregory Dalton, and Jeff Sweat
Perceived wisdom: The Internet will eventually change the way business is conducted.
Fact: That time is now.
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| Crossing Over New business/IT leaders emerge from untraditional backgrounds to rock traditional thinking. |
For example, this fall LTV Steel, Steel Dynamics, and Weirton Steel-all competing manufacturers-will launch MetalExchange, an industry marketplace Web site for selling steel via one-to-one transactions and online auctions. Also this fall, the Pacific Stock Exchange will open its doors to an intranet-based trading system from OptiMark Technologies Inc. that bypasses traditional brokers; Nasdaq will follow next year.
This week, Enron Corp., Occidental Chemical Corp., and five other companies will expand the way they deal with materials suppliers through online procurement. And last week, a research report warned that online business is threatening banks' traditional role as bill payment processors-the same week computer maker Hewlett-Packard launched a joint venture offering outsourced financial processing and bill presentment services.
"Companies are going to have to collaborate, and the Internet is the most effective vehicle to make that happen because of its ubiquity and relatively low cost," says Jim Shepherd, a VP at AMR Research. "Unlike earlier forms of electronic commerce like EDI, the Net permits informal dialog among partners, not just purely structured transactions."
Enter MetalExchange. After an initial phase of offering industry news, content, and chat groups to members, MetalExchange will begin managing buyer-seller relationships and transactions. Sellers will post catalogs of available products, but only registered buyers, qualified by credit-worthiness and other factors, will be allowed to purchase. Buyers must register separately with each seller from which they wish to buy.
Surplus Selling
The first focus of commerce on MetalExchange will be the surplus inventory that steelmakers
have difficulty selling, including flat-roll steel for construction materials and cans. It's a
common challenge across the industry, and was a big factor in Weirton Steel's ability to
persuade competitors LTV Steel and Steel Dynamics to join MetalExchange as equity partners.
Weirton, the majority shareholder, has already spent more than $3 million researching and
developing the site.
"It's pretty amazing to get competitors in the same industry to come together and say there must be a better way to make markets," says Patrick Stewart, CIO of Weirton Steel and interim president of MetalExchange. Weirton, the first steelmaker to sell excess inventory on the Web (Nov. 11, 1996, p. 86), sells about $55 million worth of surplus steel online annually. But now it plans to shut down the commerce part of its site and move all its buyers to MetalExchange. That will expose those buyers directly to competitors, but Weirton is looking at the bigger picture.
"A marketplace site can aggregate numbers of buyers that a single-seller site can't," says Chris Peters, executive VP of MetalExchange and a consultant who helped develop Weirton's site. "Sooner or later, someone was going to create an online marketplace, so we thought it might as well be us." There's also a revenue opportunity for Weirton and its partners: MetalExchange will charge sellers up to $150,000 to set up on the site and take a 2% cut of every sales transaction. The service is free to buyers.
But that doesn't mean it's easy to pull competitors together online. Activities among the MetalExchange partners "felt like working for the CIA," says Tom Corshen, VP of product marketing for Trade'Ex Electronic Commerce Systems Inc., whose Java software powers MetalExchange. "People couldn't leave their company names on others' voice mail. You have to be very protective when you're trying to get buy-in."
Learning From History
Industrial marketplaces on the Web aren't new. But MetalExchange is the first to be owned and
operated by companies within that industry. Others, such as the chemical industry's Chemdex,
manufacturing's PartNet, and PlasticsNet, are Internet startups funded largely by outsiders. Like
MetalExchange, they hope focusing on a single vertical industry and building on existing
buyer-seller relationships will avoid the free-for-all approach that hurt more horizontal efforts
such as Industry.net, the much-ballyhooed online marketplace led by former Lotus Development
head Jim Manzi that failed last year.
"The best Internet opportunities are where there are existing commerce chains," says Trade'Ex's Corshen. "You have to support complex multi-buyer and multi-seller capabilities like auctions but not threaten one-to-one buyer-seller relationships."
Not threaten, but certainly transform. That's what's happening in the fast-growing market for online procurement of maintenance, repair, and operations products. Online procurement changes the rules between companies and their suppliers, and elevates the long-overlooked and barely automated purchasing function to a more strategic activity.
This week, Occidental Chemical and six other petrochemical and manufacturing companies will unveil online procurement projects that integrate Aspect Development's Morocco electronic catalog software with their SAP R/3 applications. For Ashland Oil, Engelhard Chemical, Enron, Halliburton, Newport News Shipbuilding, Occidental, and a joint venture of Shell, Texaco, and Aramco Oil Refineries, the goal is collaboration with materials suppliers rather than an adversarial relationship based solely on price. "We want to streamline the buying process to improve productivity, and the sellers appreciate the chance to exchange data electronically," says Ted Chucko, administrative manager at Occidental.
Translation: Change the rules. "The rule used to be that you never, ever shared demand or production information with suppliers because that gave them an unfair advantage in negotiations," says AMR's Shepherd. "You'd have been fired for even suggesting it. Now it's becoming routine."
Nowhere is E-commerce changing the rules more than in the financial services industry. The increase in online transactions-and the number of third-party processors serving that increase-calls into question the role of banks in a new paradigm that gives businesses and consumers more choices about how and where to pay their bills. "Whoever presents the bill is going to be the one to manage the payments," says David Jung, an analyst at Killen & Associates, which last week released a study concluding that online bill presentment and payment threatens the banks' cash-management services business. The cash-management services that flow from bill payment account for about 30% of profits at large banks, according to the research firm. Jung says if early adopters of online bill presentment move to nonbank processors, such as CheckFree and MSFDC, a joint venture between Microsoft and First Data Corp., it could cut into bank revenues. "That could cost them 10% to 15% of profits. At best, it would shave their growth for a few years," Jung says.
The banks are defending their turf with their own aggressive moves into online bill presentment. Those efforts increasingly involve buddying up with computer industry players that can provide needed IT expertise. Last week, Intria, the online transactions unit of Canadian Imperial Bank of Commerce, formed a venture with Hewlett-Packard to handle outsourced financial transaction operations for nontraditional financial players. The partners project annual revenue of $1 billion within four years.
West Coast Energy, a Canadian natural gas company, is offering bill payment services to its 1.5 million customers through its Enlogix IT unit. Enlogix turned to Intria-HP for help implementing a plan to move those services online and expand them to include bill presentation from other utilities. "Billing systems are a high-risk activity to build and install," says Anthony Haines, president of Enlogix. "We had no intention to build that infrastructure for a bundled offering."
New electronic models are also changing the rules in securities trading. This fall, the Pacific Stock Exchange will implement an intranet-based trading system called OptiMark that lets investors buy or sell in large volumes without telegraphing their moves to other traders, which helps keep the market from moving against them. It also raises the volume of trades for the exchange. "To the extent that our volume goes up, our revenue goes up," says Dale Carlson, VP of corporate affairs at the PSE.
In business-to-consumer commerce, one of the most radical rules-changers is Priceline.com, which has sold 50,000 airline tickets over the Internet since April. Priceline.com lets customers post prices they want to pay for trips, and the first airline to accept that offer gets the business. By year's end, Priceline will expand its business model-which received a patent earlier this month-to packaged vacations that include rental cars, plane tickets, and hotels. Travellers will state their price for a specific trip, challenging the businesses involved to cooperate to make the package work for all parties.
"It introduces cooperation because they all know if a rental car company is too piggish [on price], nobody is going to play," says Priceline president and CEO Jay Walker. "Consumers will say, 'You sellers work it all out. I'm going to bed.' "
--with additional reporting by Justin Hibbard and Beth Davis
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