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What do Michael Jordan and apparel industry e-marketplace company Fasturn Inc. have in common? Both were indirectly caught up in the controversy that arose a couple of years ago when large apparel companies such as Nike Inc. were accused of using offshore contractors that relied on underpaid child labor. Jordan, then the all-universe star of the NBAs Chicago Bulls and a highly paid Nike spokesman, was criticized for not ending his relationship with the company, based in Beaverton, Ore.
The hit on Fasturn didnt come until last fall when the Century City, Calif., company found that its plans to roll out an e-marketplace to connect major apparel brand retailers and makers with contract manufacturers were not exactly a slam-dunk. The problem? Many manufacturers were concerned about being caught up in the same type of scandal that had ensnared Nike and Jordan. They couldnt be sure that suppliers they encountered online at the Fasturn e-marketplace were not engaging in questionable labor practices.
Unable to shake those concerns, officials at Fasturn late last year decided to shift their strategy. Rather than operating primarily as a public e-marketplace open to all industry participants, Fasturn would become a software company offering industry-specific tools to help apparel companies build their own private exchanges and more easily screen and control participants.
“If you have a many-to-many model, you have to take out all the risks associated with the model,” said Belita Ong, senior vice president of strategy and alliances at Fasturn. “One clear, glaring gap is trust. How do you know whom you can trust? How can you be sure that they supply sufficient goods?”
Ong isnt the only one asking those questions. Business-to-business commerce, of course, has always required a level of trust. Sellers need to know buyers will pay on time. Buyers need to know sellers can deliver. Both need to know confidential information such as prices paid and quantities ordered wont be leaked to competitors.
In the world of online B2B e-commerce, however, where potential partners are less likely to be known and where deals can be finalized in a matter of seconds, such issues have begun to loom especially large.
A lack of trust is one of the top inhibitors for business buyers considering using e-marketplaces, according to a survey by New York-based Jupiter Media Metrix Inc. Forty-five percent of the 60 U.S. procurement agents surveyed cited it as a reason they werent buying online.
In some cases, trust concerns are forcing open, public e-marketplaces to become more exclusive. In others, e-marketplaces are embracing an emerging set of online trust service providers who, they hope, can help reassure potential participants. Over time, many e-marketplaces plan to use such hosted trust services as the foundation of value-add services—such as transaction insurance policies—for which they will be able to charge buyers and sellers.
A slew of e-service vendors is stepping in to address the B2B trust issue. Most are targeting one or more of the following aspects of B2B e-commerce trust: identifying the credibility of trading partners, providing information that can be used to decide whether to extend financing credit to potential partners, and ensuring payment or guaranteeing the ability of a supplier to make and deliver goods.
Many of these trust services providers, such as Tradenable Inc., of Redwood Shores, Calif.; GeoTrust Inc., of Portland, Ore.; and Open Ratings Inc., of Boston, are startups.
Others, including eCredible NV, a subsidiary of Dutch trade credit insurer NCM NV; Avantrust, a joint venture of The Dun & Bradstreet Corp., of Murray Hill, N.J., and New York-based American International Group Inc.; and SGSonsite, a division of SGS Société Générale de Surveillance SA, of Geneva, are associated with more established business services providers attempting to make the move to support e-commerce.
The target customers and pricing models of these providers vary, but they typically sell their services to e-marketplaces for a yearly subscription rate, on a per-transaction basis or according to a formula that combines both. The e-marketplaces, in turn, may charge their members for services or offer them for free.
Some of the trust services providers also work directly with B2B sellers. eCredible, for example, sells its credit information service to suppliers. The service authenticates buyers, checks their credit, guarantees payment and, if necessary, handles collections. The services are integrated into suppliers, B2B Web sites and back-end accounting systems. Suppliers pay an upfront integration fee as well as a percentage of each transaction being guaranteed, usually less than 2 percent, based on the risk associated with an individual supplier, said Jurgen Leijdekker, a managing director at eCredible.
Building trust among trading partners is especially critical to open e-marketplaces serving industries that rely on transactions between buyers and sellers that arent well known to one another.
Take WHN Exchange, an e-marketplace that links retailers with the manufacturers of 500 or so brands of licensed merchandise such as Harry Potter mugs and Digimon toys. Soon after launching in June, officials at parent company WhatsHotNow.com Inc., of Marina del Rey, Calif., began to hear loud and clear from retailers and merchandise license holders that wanted the ability to gather more information on potential trading partners in real time.
In one case, a manufacturer that had received an order from Guam delayed filling it until a Dun & Bradstreet credit report could be obtained offline, said Paul Rider, vice president of product development at WhatsHotNow.com.
So, this month, the company implemented MasterSource from MasterCard International Inc., of Purchase, N.Y. Its a rebranded version of a hosted service called Buyer Insight, which was co-developed by Open Ratings and Dun & Bradstreet.
“It really was driven with conversations from manufacturers and understanding what they need from retailers to complete transactions,” Rider said. “Most of the connections on our site currently are new connections. Buyers are buying from a manufacturer they havent purchased from previously.”
Manufacturers can use the service to, among other things, gather information that can help them decide whether to extend credit to a retailer.
The service provides Dun & Bradstreet credit information, and manufacturers can request that retailers submit an electronic credit application through the e-marketplace. Retailers, at the same time, can check the stability of a manufacturer by learning how long it has been in business, its size and its sales history.
WHN Exchange offers the service free for site members, and the e-marketplace pays MasterCard an annual fee to use it.
But WHN Exchange isnt stopping there. Beginning next month, the exchange will allow buyers and sellers to rate one anothers performance using a survey service from Open Ratings. Giving buyers and sellers better information about one another should increase transactions and liquidity for the e-marketplace, Rider said.
“Because of the nature of our e-marketplace, were always trying to create information in real time that creates a greater comfort level for business partners [to do] business together,” he said.
Like WHN exchange, BulkMarkets.com Inc. is beginning to use hosted trust services to drive online transactions and build a foundation for value-add online services designed to attract more participants to its e-marketplace sites.
BulkMarkets.com, which operates a B2B bulk wine exchange, WorldWineTrade.com, and a bulk juice e-marketplace called WorldJuiceTrade.com, is planning to deploy next month trust services from GeoTrust that will allow it to profile trading partners through business background and credit history information. Eventually, that information will help BulkMarkets.com offer other services such as transaction completion insurance, which will protect buyers and sellers in the case of a botched online order.
“You need to offer a full solution from end to end for an online marketplace to really work,” said Tom Errath, vice president of corporate development and strategy at BulkMarkets.com, in Chicago. “We knew we needed some kind of functionality that qualified members and [provided] third-party credit reports.”
Once the GeoTrust service is in place, BulkMarkets.com can take its next step of offering online transaction completion insurance through GeoTrusts partnership with Safeonline Ltd., of London, Errath said. BulkMarkets.com hasnt decided whether to charge members to use the GeoTrust service. GeoTrust typically charges e-marketplaces an annual fee of $180 for each company credentialed, along with fees when the credentials are used to complete a transaction.
Many e-marketplace operators arent relying just on business authentication and credit services providers such as GeoTrust to check out buyers and sellers, however.
BulkMarkets.com performs its own due diligence examinations of potential members. In fact, the company has already turned down about 100 applications that didnt seem trustworthy, Errath said. On its wine exchange, for example, BulkMarkets.com is careful about qualifying producers because of the thousands of small producers from such wine-rich countries as France, he said. BulkMarkets.com representatives call companies to check details such as a suppliers production capacity and trading and bank references. Salespeople in the field even will visit some operations, he said.
“Were not in this to get as many members as possible but to get quality members,” he said. “A good buyer [on our site] wants to be able to count on the fact that the wine is good and that [the seller] is someone who can do what they say they can do.”
Going private
While relatively open e-marketplaces such as BulkMarkets.com are becoming increasingly sensitive to the need to establish trust between their buyers and sellers, industry-backed e-marketplaces and corporate private exchanges are able to sidestep many trust issues simply by connecting companies that already have decades of experience trading with one another.
Partly for that reason, experts say, such private e-marketplaces are becoming increasingly popular as enterprises search for ways to avoid the uncertainties of the B2B marketplace.
Boston-based AMR Research Inc. predicts that, of the $5.7 trillion in B2B e-commerce that will be transacted annually by 2004, most will occur on private exchanges, not startup public e-marketplaces or industry-led consortia.
As a result, even consortium players such as Omnexus Americas Inc., initially founded by leading suppliers in the plastics industry, and Elemica Inc., founded by leading chemical companies, are becoming more private, concentrating on transactions between known, trusted partners.
Omnexus officials said that about 80 percent of the companys business is fulfilling transactions negotiated in long-term contracts outside of the e-marketplace and directly between suppliers and buyers.
Elemica is having a similar experience, with about 90 percent of its volume resulting from long-term contracts.
“We focus on how the chemical industry works today as opposed to trying to change how the industry works,” said Chuck Gruber, vice president of Elemica, in Philadelphia. “Once [companies] decide to do business, this is a place to conduct transactions.”
Because theyre primarily facilitating existing trading relationships, officials at such private e-marketplaces said they have no need for third-party trust services.
Thats not to say, however, that private e-marketplaces arent trying to enhance trust, even between known trading partners.
But private exchanges such as Omnexus and Elemica, rather than helping buyers and sellers check one anothers identities and credit histories, are instead concentrating on issues of information security, processes for guaranteeing neutrality and privacy of data.
Todays private exchanges, some predict, will help buyers and sellers gain confidence in B2B e-commerce.
That in turn could lead more buyers and sellers to use open e-marketplaces to find new trading partners. There they will require the extra confidence that business identity, authentication, credit and insurance trust services can bring, predicted Fasturns Ong.
In fact, even though Fasturn is de-emphasizing its open e-marketplace, the company still plans to implement trust services from companies such as Avantrust and SGSonsite.
“Such services,” Ong said, “will have more traction later on when the markets are more developed. The trust issues are so real that clients are mandating a middle step, which is a private exchange.”