Tech Industry

BigCompany.com: Corporate America embraces the start-up

During the past several weeks, a plethora of large companies have announced the formation of standalone business-to-business exchanges that will streamline direct goods procurement in their respective markets.

Time may change me, but I can't change time.
--David Bowie

During the past several weeks, a plethora of large companies have announced the formation of standalone business-to-business (B2B) exchanges that will streamline direct goods procurement in their respective markets.

Ford, GM and DaimlerChrysler have pooled their resources to create an online auto supplier network that may process over $240 billion in annual spending. Sears and Carrefour also are launching an exchange that could streamline over $80 billion in purchasing from more than 50,000 suppliers. Likewise, Chevron and Wal-Mart's McClane division are teaming to create an online marketplace, RetailersMarketXchange.com, for convenience-store distribution. Many other exchanges have been announced, and many more are in the works.

What's driving this aggressive behavior that appears to be transforming the entire economic behavior of corporate America? The first answer is simple: Moving transactions to an online marketplace makes a great deal of sense. No industry is 100 percent efficient, and global e-commerce networks have the power to eliminate waste, streamline inventory, and reduce processing costs.

Corporations also must harbor a great sense of "dot-com envy" with respect to valuation. Procter & Gamble and Dial traded down last week after announcing lower-than-expected results, while Internet stocks, particularly B2B stocks, continue to rise. The growing divide in the valuation of new economy stocks and old economy stocks is drastic. So why let some other company gain from your purchasing power if you could simply start that company yourself?

This must be an intense moment in the boardrooms of corporate America, as leaders wonder: Do we spin out a new company to attack this opportunity? Do we just take an equity stake in an existing company? Who will build the technology? How will it connect with our current systems and business processes? How much of this entity can we own? Do we do it ourselves or partner with our competitors? If we partner, will it create a competitive advantage for us? Who will control it? Who will run it? How much will it charge us for its services? Will Wall Street give us credit for owning a piece of this valuable entity? The questions are numerous, and frankly, the answers are not straightforward.

A good way to start tackling the issues is by answering the following: Is the opportunity being considered core to your operating business? If not, creating a separate company would be overly opportunistic and potentially ill-fated. Just because your company purchases a ton of office supplies doesn't mean that you are well positioned to start an office-supply exchange. The same is true of functions such as human resources, recruiting, advertising, marketing, PC hardware and software, manufacturing equipment, maintenance repair and operation, asset disposal, real estate, and so on.

It's in your company's best interest to work with best-of-breed suppliers and solutions in these non-core areas. You wouldn't want to buy PCs from a third-tier producer just because they give you equity. If you can get equity in the best-of-breed supplier, great. But don't jeopardize the quality of your operations just to make a quick buck.

If the business process you are evaluating is core to your business, then the questions and answers get much more complex. On one hand, you would hate to see a start-up wander into your industry and walk off with all of the attention. Likewise, it would be difficult to sit idly by while your competition launches a venture that grabs the excitement and attention of the trade press and Wall Street.

There is also the issue of universality. A network used by everyone is more interesting and powerful than one used by just a few players. But how do you gain competitive advantage if everyone is using the same system? The right thing to do is to take two steps back and focus on two core principles. First, will this new initiative be successful, and second, will this new entity help my company?

Perhaps the biggest issue surrounding these exchanges, and the single decision that may have the biggest impact on potential success, is structure: Should this be done in-house, as a newly formed company, or by working with the leading start-up in the field?

As a venture capitalist, I am extremely biased on this issue in favor of working with start-ups. New companies have several innate advantages over corporate consortiums. First, founding entrepreneurs are extremely passionate about what they are doing and where they are going. It is very difficult to inject this enthusiasm and vision into a synthetically created organization. In addition, the structure of a start-up is flexible and freewheeling. Bureaucracy in large organizations is a key component of the entrepreneurial opportunity. If you burden a small company with big company issues and processes, you seriously reduce the advantage of being independent.

Consider the early decisions of the automakers. First, GM and Ford created separate exchanges with separate technology partners. After their suppliers pushed back and suggested that a single network would be of much more use to them, GM and Ford decided to merge their efforts. In an attempt to appease their technology partners, the decision was made to use multiple providers.

When DaimlerChrysler received an invitation to join the exchange, it also was allowed to bring along yet another technology partner. To top it off, a system integrator was hired to integrate the three technology solutions. Integrating three technologies is quite a burden to place on an innovative new company. While it is easy to understand this "compromise," using three providers plus an integrator is a decidedly "big company" decision that significantly increases the degree of difficulty in terms of execution.