Evolution be damned

Most digital exchanges were doomed from the start: They were attempts to re-engineer marketplaces to create greater efficiency. The problem is that sellers don't benefit from increased marketplace efficiency.

Consider plumage. If Mother Nature were to hire some of my consulting colleagues, the male peacock would find itself shorn of tail feathers; likewise the bird of paradise. Even the cardinal's crest would go, re-engineered in the interest of efficiency. As for ungulates, their antlers -- along with the head-butting contests many engage in for territory and mates -- would be replaced by more efficient resource allocation algorithms. Alas, poor Bullwinkle.

Were more evolutionary theorists to enter the realm of business consulting we'd see a different approach. Evolution results in optimisation, certainly; but it isn't always efficiency that's optimised. In business, as in nature, there is a place for energetic efficiency and even a place for plumage. But there isn't a place for group effects. Neither species nor ecosystems enjoy optimisation, except as an accidental byproduct.

This is just one of the reasons that most digital exchanges were doomed from the start: They were attempts to re-engineer marketplaces to create greater efficiency. The problem is that sellers don't benefit from increased marketplace efficiency.

Buyers might benefit from the result, but the benefit to buyers is, in most circumstances, also questionable. They face two huge hurdles: The cost of re-engineering internal core processes to take advantage of an exchange may be too much; and digital exchanges fail to provide value until they've reached critical mass -- until, that is, enough suppliers participate that it makes sense to buy there.

It's been at least four decades since the quality movement first pointed out the importance of stable vendor relationships. Sure, digital exchanges let buyers get the best price for each batch of merchandise, but that's only valuable when they're buying pure commodities. The moment product quality and special services enter the picture, a stable vendor relationship provides benefits far in excess of the small price advantages a business might get by going shopping in a digital exchange.

Exchanges are trying to overcome these barriers by adding value-added services, such as collaborative design and product information services. This might work in some special situations, but in general the overall impact of this strategy is to require process re-engineering of entire value chains. If you've ever re-engineered a process within a company, you know how hard that is.

Having lived through some of the EDI wars 15 years ago, I can tell you firsthand that just getting an industry to adopt a common technical standard is hard enough. Only if you require all participants to re-engineer their processes in common and only in special circumstances (such as in the auto industry, where a few key buyers can dictate terms to a vast array of relatively small suppliers) is there even a chance of success.

In this, the first year after the end of the New Economy (until a name emerges, let's call it the Even Newer Economy), e-commerce is still an important business priority, but IT leaders need to help their companies take a fresh look at where to invest. Digital exchanges, with their high cost of adoption and high risk of failure, just aren't good bets.

What is? Here's one place to look: Get a copy of Capturing Customers.com by George Colombo. George understands the importance of plumage (you should see some of his ties!) and that understanding is reflected in his book. You won't find digital exchanges between its covers. You will find a dozen or so pragmatic ideas -- every one of them practical and achievable through short, manageable projects -- that businesses can use to gain a competitive advantage through the use of the internet.

I like this book not because George is a good friend (he is), and not because an interview with yours truly occupies a small place in it (it does), but because George, a former salesman, understands the point of business: To persuade noncustomers to become customers, and to persuade existing customers to remain customers and to become better customers.

It's a perspective we share. One service I provide in my consulting practice is providing a mechanism for deciding which projects to undertake and which to reject. Here, free of charge, is the most critical test to apply: Ask how each proposed project will help the company attract or retain customers.

Until the proposer can answer that simple question, the project isn't worth doing.

Exchange your thoughts digitally by sending an email to Bob Lewis. Lewis is an independent consultant specialising in IT strategy and effectiveness.

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