Mornin’ Cup: Can Web 2.0 Save the Exchange?

I was having a cup o’ Joe with a good friend of mine yesterday (after moderating a panel on business blogging over at the 400 Technology Connection), and the subject of B2B exchanges came up. Since we had just attended a discussion around blogging, we wondered whether or not the new iteration of the web (so-called Web 2.0) could provide the much needed ingredient for the continued resurgence of the online exchange model.

Back in the good old days of the original “new economy”, he and I both held senior management positions at two different B2B “exchange” plays; me within the metals industry, and he within the paper/pulp industry (two sexy industries if ever there were such a thing). Given our similar backgrounds, invariably the subject of online business models comes up early and often.

First, I have to say that I think “Web 2.0” is one of the most overrated industry buzzwords that I’ve ever seen. There is nothing inherently “new” about Web 2.0. As a software engineer by trade, when I hear “anything” followed by a version number, I immediately think “hey, this is new and improved! There must be some new goodies here!” Bupkus, I say. There is nothing inherently new about Web 2.0. It is the same technology we had before – we’re simply using it differently. We’ve simply figured out new and innovative ways of leveraging that technology to facilitate human communication.

The phrase “Web 2.0” is also horribly misused by many. The phrase “Web 2.0” ranks right up there with “scalable”, “extensible”, and “enterprise”; all good phrases in their respective heydays, but horribly misused nonetheless. I especially love telling the story of the B2B salesman here in Atlanta who told me quite proudly that their “web site leverages AJAX, and all the other good Web 2.0 stuff.” When in reality, his firm’s web site/platform exhibit none of the concepts of social interaction or online community. Web 2.0 is not about AJAX, XML, Ruby, or any other technology. It is a paradigm and a process, not a tool. But I digress.

Web 1.0 was more about making computers and systems communicate better. Web 2.0 is about leveraging that technology infrastructure to make communication between people better. Prior to the bursting of ye olde digital bubble, we certainly had the technology to make the B2B transaction more efficient. Can you say Ariba, Tradex, Oracle, CommerceOne, VerticalNet, et al? Yet so many exchange plays failed. Why?

While we were building our online B2B marketplace for the metals industry, one thing became very clear to me. Actually, many things, but we don’t have that much time. During our requirement-gathering endeavors, I visited a number of steel foundries and mills. Operations within the metals industry, by and large, has not changed in the past 100 years. Forget digital dashboards. Forget supply chain visibility. Forget demand pulling. When Bob the foundry procurement manager needs a new load of sand (silica is a key ingredient used in making steel), he knows this because he physically looks over his shoulder, peers out back, and eyeballs his existing pile o’ sand. If it “looks” low, he orders more, otherwise, he just keeps on trucking.

Centric to any business are relationships. The metals industry is no different. Bob, our fictious foundry worker, has been ordering his sand from Chuck for 25 years. In some cases, Bob’s father ordered his sand from Chuck as well, or perhaps Chuck’s father. Bob buys his scrap metal from Susan over at “We-Be-Scrap-Metal, Inc.”, and as with his purchasing relationship with Chuck, he has been buying from her from a long time. He has very little desire to switch to other suppliers.

We walked in the door preaching “efficiency”, “better margins”, and “more choices.” Of course, in the end, Bob didn’t want any of those “new-fangled” goodies. He simply wanted to do business with his current trading partners. Those relationships were grounded in trust. Why should he do anything to upset that? Was it worth the tiny potential savings on margin? Was it worth upsetting his suppliers by potentially buying from someone else?

Every research firm, from Gartner to IDC to Forrester to my grandmother, proclaimed that within x number of years, y billions of dollars would be spent in B2B transactions through exchanges. It sure sounded good, and the Kool-aid tasted great, I can attest to that first hand. Widespread adoption of exchanges simply did not happen, for a wealth of reasons.

Its all about perception and adoption. In Web 1.0, there was no widespread user adoption of B2B procurement services. Then again, part of that was probably due to the fact that the industry was simply flooded with “online exchanges” (at one point, AMR Research, Inc. tracked over 600 online exchanges that launched within an 18 month period back in 2000). Clearly, most of those have fallen by the wayside. The choices are a little more focused now, and those choices are rife with value.

Now, fastforward to now, 2006, some five or six years later.

Online social networking and communities are becoming commonplace. Adoption of these tools and platforms is shooting through the roof. People are more interconnected than ever, and the trend is obviously continuing upward.

Will Web 2.0 lead to a resurgence in the online exchange model? How will this affect the relationships between buyers and suppliers in a B2B context? Will Bob realize that perhaps he can still buy his scrap metal from Susan, only do it online and be a little more efficient with the whole process?

I say yes.

Consider Here is a very niche procurement portal that, at the time of this writing, has a little over $60M in outstanding RFQs within their system. That’s a lot of fabricated metal parts, folks. Also consider VertMarkets, Inc., which operates nearly 70 different online marketplaces in 8 industry groups, including the venerable

Neither of the aforementioned platforms has really embraced the concept of online communities, but they are clearly taking advantage of the swing in buyer behavior.

I honestly feel that the online exchange is enjoying a bit of a renaissance. Those exchange plays that move to leverage online social networking and communities will eventually find themselves in a very advantageous position moving forward, as they leverage online communities to foster trust among their buyers and suppliers, and indeed, take advantage of an existing trust. It will be very interesting to see how this evolves over the next 12-24 months.

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