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The Online Land Grab
Vertical industries ignore traditional rivalries and rush to establish online markets.
For the rest of the November 2000 issue of CRM magazine please click here
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Think of your company's worst enemy. You know, that cutthroat competitor who will stop at nothing to see you file for bankruptcy. Believe it or not, in the not-too-distant future, that bloodthirsty opponent could be your business partner. Before you begin spitting out reasons why that will never happen, consider this: General Motors, Ford and Daimler-Chrysler recently joined forces to create a futuristic online automobile part marketplace that will, in theory, benefit all parties involved.

Following the auto industry's greatly hyped lead, competitors in a wide array of vertical markets are teaming up to create "vortals," or online B2B and B2C marketplaces where buyers and sellers meet to do business. Examples include, among many others, Chemdex.com, Esteel.com, Metalsite.com and Plasticsnet.com.

These vortals actually deliver the Internet's loudly promised potential by leveling the playing field among competitors of differing sizes and strengths, creating greater efficiencies throughout the entire sales cycle and expanding markets for all trading partners. While there are still a few kinks to work out--the federal government traditionally casts a censorious eye at collusion, real or perceived--it is clear that as business shifts from traditional to online models, the competitive landscape will be irrevocably changed.

"It is going to be explosive," says Adele Revella, vice president of marketing at Hologix, a Phoenix-based supplier of B2B e-commerce solutions. "The values are so easily obtained that there are no limits to the size of this market opportunity."

Vortal Value
How do vortals actually deliver value? By offering specific industries a new, more efficient way of doing business with established partners and customers. Unlike some new B2C e-tailers including Amazon.com or Buy.com that are trying to build a customer base through the use of new technologies, industries using vortals shift everyday business transactions, such as sales or procurement, to a Web site. This site is specially designed to facilitate the business processes of that particular vertical industry.

"The premise in a vortal is that I take a piece of the economy, say automotive or pharmaceuticals, and I syndicate it," says Tom Koulopoulos, president of the Delphi Group, a Boston-based business/technology consulting group. "I take small pieces of one company and small pieces of another company and bring them together online."

Take, for instance, Chemdex.com, one of the first, and most successful vortals. On the Chemdex.com site, hundreds of life science supply vendors, from the American Peptide Company to the Hawaii Biotechnology Group, are represented. Using Chemdex.com, scientific researchers log on to the site, where they find not just their normal supplier, but all of that supplier's competitors, as well.

The buyer can pick and choose among suppliers, research products, and even let competitors bid for his or her business, thus driving down prices. The site offers full transactional documentation, and eliminates the hours traditionally spent on fax machines trying to complete orders.

"The value that our customers see is that users can come to a site and post a request for proposal," explains Revella. "Our software knows the attributes and configurations of the product they order. It will prompt the user for values and correct prices. Once the RFP is posted, the buyer can negotiate through offer and counter offer with suppliers. "There are a lot of cost savings for buyers being able to negotiate this way," she says. "These negotiations can take minutes in what would have normally taken hours and a lot of faxes."

Suppliers--particularly small companies--stand to benefit greatly from such online marketplaces. "They enable companies to extend their purchasing and sales outside of a geographic area," says Rob Rosenthal, research analyst at IDC. "Also, it enables small players and large players to do business with each other. For instance, in the past, GM would require that all their suppliers use a specific EDI (electronic data interface), which small shops couldn't afford. With an Internet-based system, the playing field becomes leveled. Everyone uses the same affordable technology to do business."

"Both buyers and sellers win," says Jeff Zimmerman, senior vice president of Global Client Operations at VerticalNet, a supplier of strategic transaction platforms that hosts such online marketplaces as Bakery Online, Pollution Online, Test and Measurement.com and the ever-popular Adhesives and Sealants.com. "It gives buyers and sellers the opportunity to save on cost and time."

The Corner Drugstore
While the idea of cleanly and efficiently carrying out everyday business transactions online is appealing at face value, the fact is that doing business requires much more than posting an RFP and accepting a winning bid. Business transactions are a fundamental human social exchange, involving feelings, trust, instinct and desire. With the notable exception of HMOs, all businesses must acknowledge and accommodate the humanity of business partners, online and off.

Enter "community," a rather touchy-feely notion that is popping up with more and more frequency these days, particularly in discussions of e-commerce (see "Community," this article). Simply put, in vortals, the term "community" describes all the elements that facilitate the interpersonal side of business: long-standing relationships, trust, conversation, the ability to give and get references on others and so on.

"Vortals are a community of trade that provides all the services and support needed to conduct trade," says Koulopoulos. "The key words are 'community of trade' as opposed to a marketplace. In a vortal, I have all of the things that you expect in a community. I have all of the things that help me as an individual and that help me as part of a community. It is the difference between walking into a corner drugstore and walking into a mega-mall."

According to Koulopoulos, where online vertical markets are concerned, one cannot overstate the importance of community. Vortals are a new business option for established industries with established business relationships and ways of conducting transactions. For a vortal to succeed, it must accommodate that personal element. "The biggest problem right now with vortals is that so much of what constitutes a transaction has to do with relationships around the transaction. It is unlikely that I will conduct a transaction strictly through a vortal; I need a relationship there, and that is an extraordinarily difficult thing to do in a vortal."

The way vortals do it, though, is by attempting to reproduce online many of the elements of business relationships. Vortal platforms offer tools to communicate directly with prospective business partners. These partners are also profiled, with relevant business or personal information included. Following the many popular online auction models, vortals also provide a way to rate the performances of community members. Consequently, if a company provides poor customer service or acts unethically, potential trading partners would know it immediately.

Vortals also typically provide industry-specific news and content on the market, pending legislation that could affect business and any other relevant information that companies need to make informed business choices. Koulopoulos says that vortals actually enhance existing relationships between trading partners in many ways.

• Vortals "take care of the drudgery" of a transaction. With the administrative element of transactions handled electronically, sellers have more free time to cultivate customer relationships.

• They give people more time to form business relationships with the right sort of customer. Through profiling and product specification tools, sellers can focus their efforts solely on people who want their products.

• Sellers and buyers have access to a much greater pool of business partners. Geographical or market boundaries become irrelevant in e-commerce.

These relationship-enhancing elements, along with other vortal benefits, says Koulopoulos, lie at the heart of a vortal's appeal. "The common ground for everyone working in a vortal is building value that you could not create outside the vortal."

All Together Now?
The buy/sell technologies and community enhancements offered by vortals are all useless, however, if there is no one logging on to use them. "The main problem with these e-market platforms is getting users," says IDC's Rosenthal. He explains that some buyers--grocery chains, for instance--have so much leverage with suppliers, they can simply dictate that from now on, business will be conducted in a vortal.

In most vertical markets, though, buying power is spread more evenly, with aggressive competitors vying for market share. In such circumstances, it is difficult simply to move an entire vertical market to the Web. Remember, you have to convince both buyers and sellers that vortals are a secure, superior way of conducting business.

Despite the difficulty in attracting users, ever-increasing numbers of companies are giving them a go. VerticalNet alone now hosts "57 different communities in 14 different industry sectors" and boasts "an average of two million eyeballs looking at VerticalNet Web sites on a daily basis."

"It's far too new to apply any sort of quantitative metrics," says Koulopoulos of the measurable success of vortals. "The reality is the best metric is to look at how many large companies are participating or considering participating in a vortal." Which raises another issue, one that currently stands as the thundercloud on the vortal horizon.

History tells us that when "many large companies"--particularly competitors--join forces to do something, they are up to no good. Washington, D.C. is crowded with anti-trust lawyers working for the SEC and the Department of Justice, who are paid to maintain a capitalistic playing field conducive to competition, not collusion.

"I see more and more competitors joining in alliances," says Zimmerman. "They'll start consortiums, and our legal system will be tested." Tested? Over something as seemingly innocuous and democratic as online markets? Consider Koulopoulos' vision of the e-commerce future. Analysts predict that e-commerce could generate $4 trillion in revenues over the next five years alone. It is clear that Internet trade, in all of its incarnations, will become a major part of our economy.

With that shift from traditional to Web-based business models, markets will change, as will the companies operating in them. Many of these companies will find that the "common ground" of a cooperative marketplace is preferable to competitive, adversarial markets of old. In the creation of the auto industry's online parts supply vortal in which GM, Ford and Daimler-Chrysler all participate, many see a trend that will blur traditional company boundaries into a seamless online whole.

"In 10 years time, we will not call Ford or GM automobile manufacturers; we will look at them as members of communities," says Koulopoulos. "If I'm a consumer, 10 years from now, I don't buy a Ford or GM. I buy Tom's car. I go to a Web site where I build the car with the specs I want. Three days later, the car arrives at my door. I get a piece of the action, and the vortal [which is owned by the car manufacturing industry] gets a piece of the action as well.

"It's a subtle distinction from this side of the fence," he adds, "but in 10 years we will not think of them as manufacturers. The key players in the economy will be the players that own communities."

Wow! The thought of entire industries--former cutthroat competitors--working in unison to produce products is enough to send the aforementioned anti-trust attorneys into states of shock. Current anti-trust laws were, for the most part, written 100 years ago to deal with the Rockefellers and other robber barons of a conspicuously greedy age. It seems highly unlikely that these laws will be able to address an entire new business model, adequately and the intricacies of what may or may not be a classic monopoly.

Over the next few years, Zimmerman's observation that "our legal system will be tested" may well prove to be an understatement. But for now, the rush toward what may well be perceived as an online consolidation continues, with or without modern e-commerce legal guidelines. According to Koulopoulos, many companies are beginning to feel pressure to get on board.

"The question companies face now is, 'Are you going to build it or is somebody else going to build it and undermine our entire industry? The nature of vortals and online communities is so attractive, if we don't build it, somebody else will.'"

He adds, "It's a land grab. Everybody wants to get a piece of this new frontier."

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