Commentary: Undefined goals detrimental to Net exchanges

In general, online trading exchanges and their participants face numerous hurdles on the way to success; technology is a relatively modest impediment.

Other obstacles include organizational

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redesign, privacy and regulatory review. We expect that 85 percent of business-to-business exchanges will fail because they have not defined their objectives--the roles, responsibilities, risk management and rules of engagement--and because the more complex exchanges are too hard to use.

The aircraft exchange announced Thursday--which is in effect a major expansion of the existing MyAircraft.com partnership among Honeywell, United Technologies and i2 to add several major airlines--has a better chance for success than most.

Because the airlines were relatively less competitive and more cooperative for much of their early history, they tend to have a greater similarity in their internal operations than do the members of most other industries. This should make it easier for them to adapt their procedures to the standard methods demanded by the exchange.

The exchange may face some regulatory and privacy issues, however, because Honeywell (one of its initial members) is being bought in a proposed acquisition by General Electric, which is one of the two U.S.-based jet engine manufacturers. The other is United Technologies, also an original member of the exchange and GE's major competitor in aircraft engines in the United States.

Exchanges will be most successful in industries where the members traditionally have cooperated in purchasing organizations in the past, and therefore, are already accustomed to making their purchases in this manner. Exchanges will have a harder time when their members are new to cooperative purchasing and must change basic practices throughout their purchasing organization.

Exchanges are segmenting into two distinct groups: those focused on procurement and those focused on sourcing. Procurement exchanges are concerned with tactical issues of pressuring sellers for better prices. Sourcing exchanges support strategic initiatives for creating and maintaining sourcing partnerships and sharing information.

Companies contemplating participation in online exchanges should be prepared to make fundamental changes to their business methods surrounding sourcing and procurement, rather than trying to force the exchange to modify its approach. Companies should look for exchanges with clearly defined goals that meet their needs with clear, strong processes and defined rules. Exchanges should also possess strong integration and security skills, at least from an architecture perspective.

Companies must also carefully assess their own privacy needs. They will need to reveal significant information about their internal methods to use an exchange. They must decide whether this will open them to the possibility that competitors will find ways to gain competitive advantage by designing more efficient business methods.

Meta Group analysts Peter Burris, William Zachmann, and Dale Kutnick contributed to this article.

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