Watch where you click!

Net market makers can-and do-track every click of a buyer's mouse. Here's what they plan to do with that information.

By -- Purchasing, 10/19/2000

Roughly 80% of the Net market makers and other software hosting agents that have registered this month with PurchasingMagazine say they can-and do-track buyers' activities online. What they'll do with that information is a story that's still being written.

On the face of it, there are two very good reasons why Net market makers closely follow the activities of buyers and suppliers who use their tools to transact business.

The first is simple self-interest. Net market makers collecting fees for transactions at their sites naturally need to document each and every deal at the close. It's also well within their prerogatives to establish tracking mechanisms that can indicate when buyers or suppliers might be gaming the market, completing matches online then finalizing deals offline to circumvent fees.

The second basic reason for tracking buyers' and suppliers' online activities is that Net markets represent, in many ways, large-scale combined versions of installed e-procurement and e-selling software. To deliver the same benefits as installed software solutions, the Net market hosts must deliver at least the same-if not better-levels of reporting, analytical and decision support capabilities to both their buying and selling constituents.

To this end, Steve Hornyak, chief strategy officer with Clarus Corp., a provider of both e-procurement and Net market making technologies, says Net market makers will typically provide standard aggregated activity reports to their various account holders. On the buy side, he says, "This is information that can be used to pursue and win better contract pricing and terms from suppliers."

But while survival and strategic activity reporting are certainly compelling reasons, there's a third-much bigger-reason why Net market makers are tracking each and every mouse click. Bluntly put: There's big dinero to be made in aggregating and selling market intelligence both to Net market participants and to the business community at large.

David Centner, co-founder and president of MaterialNet, a neutral online market where metals suppliers auction surplus inventories and production capacity to buyers, dreams of the day when MaterialNet reflects "real transaction prices" for metals-national or global clearing prices that, unlike the data from the LME or comex, won't be "skewed by financial interests."

Today, Centner says, MaterialNet uses a simple ticker mechanism to report prices on recently closed transactions. In time, he believes that, "One Net market will emerge as the true indicator of pricing for people who buy metals on a day-to-day basis." MaterialNet, he says, aims to be that market for metals.

Not every Net market maker thinks price transparency is such a good thing, however. In fact, Martha Greer, vice president of marketing with Ventro Corp., likes the idea not at all. (Note: Ventro is the Mountain View, Calif.-based developer of Net markets including Amphire, Broadlane, Chemdex, Industria Solutions, MarketMile and Promedix.)

"Our role," Greer says, "is not to change relationships between buyers and sellers by creating advantages for one over the other. To share too much information about transaction prices would be to violate the basic role we play. Our customer is neither the buyer nor the seller, but rather, the marketplace itself." In Greer's eyes, Net market makers "should take responsibility for protecting information on both the buy and sell sides."

On the question of price transparency, Lorne Baine chairman and CEO of WorldOil.com a catalog and RFQ-driven Net market for buyers of oilfield equipment and services, tends to side with Greer. "Suppliers fear price transparency in Net markets because they want to preserve their freedom to offer different prices to different customers, and they worry that these discrepancies might be discovered, in some way, if they conduct transactions through Net markets."

That said, Baine believes that Net market makers will find, over time, acceptable ways of conveying valuable intelligence to buyers without giving away too much on the sell side (and vice versa). "There might, for example, be a way of letting the buying community know that '74% of transactions have sold in such and such a range,'" Baine postulates. "But this would have to be done in ways that preserve the privacy of suppliers' individual pricing structures," he adds.

Peter Leeds, president of technology for Burlington, Mass.-based Biddersedge.com is less accommodating. The company's hosted software product allows buyers to search multiple auction sites for the best deals on used capital equipment. While Leeds says the company will go to great lengths to protect the privacy of its customers' information, he sees nothing wrong with aggregating price information for general consumption by buyers.

"It's really too late for sellers to rely on pricing models that play off buyers' ignorance," Leeds says. "The time is past when sellers could expect to do business that way." Insofar as Biddersedge is unabashedly biased toward buyers, Leeds says the company fully intends to generate intelligence that will help buyers decide if the time is either right or wrong to buy certain items through auctions.

MaterialNet's Centner concedes that rising price transparency may work to the disadvantage of sellers (and, perhaps, to the disadvantage of savvy buyers who might otherwise have beaten the market). But he thinks it will still be possible to provide sellers with new kinds of highly targeted information-aimed at maximizing their profits-that could far outweigh any disadvantages caused by greater price transparency in the marketplace at large.

"In the past," Centner notes, "selling organizations have never known precisely what it cost them to service particular accounts. We're in a position to give them that information, to help them better identify which accounts are profitable and which are not."

What's more, in the Old Economy, Centner notes that sellers rarely used sophisticated tools for pricing products. "They started high and tried to position themselves for the 'last look' in a bid. Most were pricing purely as a matter of gut feel." Today, he says, software embedded in the Net market will give suppliers tools for making some very informed decisions about pricing. "They'll have 'intelligent agents' built around their own rules. These agents will ensure that they always price profitably, rather than suffering constant erosion of their margins."

In this respect, Baine of World-Oil.com shares Centner's vision. "We're going to see Web sites creating valuable information for sellers." For example, he says a Net market might provide sellers with market price ranges for all transactions in their product lines. Alternatively, the Net market maker might inform a seller that for X number of RFQs, it closed deals only 5% of the time. Such benchmarks, Baine says, would suggest to suppliers that their prices (or production costs) might be too high (or too low). "Ultimately, it will encourage them to position themselves more competitively in their markets."

Meanwhile, on the buy side, the Net market maker might, for example, inform a buyer that for all the deals struck in a certain product category, he or she falls into the 90 ^th percentile for pricing. This might inspire the buyer to pursue demand aggregation with other similarly positioned Net-market participants without scaring off suppliers by creating too much price transparency in the market.

Dave Mancuso, director of communications for Boston-based eSprocket, a Net market for used capital equipment, stakes out a cautious position on the question of price transparency. "As a company, we're going to be very careful about creating general market-clearing prices. We're going to respect both buyers' and suppliers' positions as we think about how we might best use our data to benefit the entire market." For example, Mancuso says information about the potential value of used capital equipment-and how that value might change over time-would go a long way to helping a company's finance professionals decide when to replace equipment or how or when to dispose of assets.

Dan Parsley, president and COO of Houston-based Salvagesale.com, says much the same thing. In the notoriously fractured market for salvaged goods, Parsley says there has never been anything even approaching market-clearing prices. But while such data may be valuable to market participants, he thinks the information may be infinitely more valuable to corporate finance folks and to people in the insurance industry who might be looking to refine their underwriting and risk-management strategies with better information about claims-recovery potential.

Permission marketing

While Ventro's Greer says the company will remain neutral on questions of price transparency, she does see big potential for information collected by the company's Net marketplaces. A marketer by profession, she says "My eyes light up when I think about the incredible potential for targeting sales promotions to buyers."

Greer believes that sellers would pay well for the opportunity to market products to highly targeted groups of buyers rather than broadcasting their marketing messages to the world at large. And such capabilities, she says, would serve as a welcome counterpoint to the normalization (or 'commoditization') that Net markets typically impose so that buyers can easily search multiple suppliers' catalogs and compare one product against another. In fairness to buyers, however, Greer says Ventro will only pursue a "permission marketing" model where buyers must specifically opt in to receive targeted promotions from sellers.

Greer also foresees a solution that will help suppliers to maintain better prices. "We haven't committed to doing it yet, but I can see a time when we might offer something like a 'look to buy' ratio for catalog products. How often does a buyer look at a product, then opt not to buy? This would help suppliers to improve their cost and pricing structures without giving too much away."

Sankalp Saxena, director of worldwide applications marketing, supply chain and exchanges for Oracle Corp., an end-to-end e-procurement solutions provider headquartered in Redwood Shores, Calif., says that Oracle plans to deliver intelligence to both buyers and sellers participating in its exchanges. On the sell side, he says, "We'll be able to provide them with information about their participation in the exchange, what business they've won or lost, what their pricing points have been, and how they can calibrate better with the marketplace." On the buy side, Saxena says, "We can tell what types of transactions have gone through the purchasing system and what they've saved. If they're not playing to win, we can let them know. This information is going to be very valuable."

At the same time, Saxena says, there are certain types of data aggregations that Oracle is likely to avoid. "We need to maintain integrity. Suppliers should know to the lowest level of detail what the history of their parts has been. But they should not have a view into someone else's data. There's a danger of creating conflicts of interest."

John Ginelli, CEO of Nitorum Corp., a provider of software and services for electronically procuring professional services, remarks that, "Clearly, there will be information available to us. When we aggregate that information we will learn certain things about the market that we're serving. As we move forward, we'll take advantage of this information to the extent that we can."

Susan Craft with Energycentric.com, a Net market for transmission and distribution products for the electric and natural gas industries, says the company is likely to make promotional features available to sellers for new and existing products. On the buy side, she says, the site is equipped to provide spend analysis-activity by person, product, supplier and so forth. "The data is owned by the clients," Craft says. "It won't be shared with other companies." At the same time, however, Craft says that, "In a large robust market, we will be well positioned to provide valuable information, so we may aggregate purchasing data to create industrywide statistics." An example, she says, might be a statistic tracking the number of transformers purchased and the average cost for a given time period.

Rix Kramlich, director of e-marketing at i2 Technologies, a provider of software for optimizing new part development and sourcing through structured collaboration, says "Right now, information is being aggregated for down-the-road manipulation by both suppliers and buyers. We've built a channel for custom parts manufacturing. Now we're aggregating a sizable quantity of data about what's going on between buyers and suppliers. We're saving the information and intend to build products around it."

The information, Kramlich says, will be geared toward identifying market trends, for example, looming supply shortages and the like. "The clicks are being aggregated but we have yet to build a retrievable product." Because Net markets or hosted versions of software allow each activity to be tracked precisely, Kramlich suggests that it will be possible to generate very accurate activity-based cost data that can help suppliers to better understand the relative profitability of different customers. He's careful to point out, however, that such information will always remain confidential.

Greg Mesaros, founder, president and CEO of Cleveland-based eWinWin, a provider of demand aggregation technology to Net markets, says market makers will be able to provide sellers with information that allows them to "identify the winners and losers in their product portfolios in real-time fashion. Sellers can find out what percentage of the market they're capturing. They can find this out today, rather than in December or January when the financial reports finally come out and they won't have to pay someone to go out and make the numbers up for them. Very quickly they can develop an understanding of what products they should be selling at what price points."

Bad buyers beware!

Something else the Net market makers will do with their click stream databases: Track and flag bad buyer behavior.

For example, buyers might be tempted to use a Net market to establish market pricing through e-RFQs or e-auctions with no real intention of moving their business from a preferred supplier. They should resist this temptation, as MaterialNet's Centner says the behavior will definitely catch up with them over time. "We track everything," Centner says. "If a buyer creates 25 RFQ events and commits only once, that track record is going to follow him or her around. Suppliers will have access to this information so they can determine if it's worth bidding on the business."

On the flip side of that coin, Centner says the site will also be tracking suppliers' behaviors. "If a supplier complains that they're not winning any business at our site, we can pull up their reports. We can show them that they were invited to 80 RFQ events. They participated five times. They were never the low bid. For the 75 times they didn't participate, they passed up the opportunity to bid on $400K worth of business. This kind of data can allow suppliers to take hard look at their own sales strategies." Centner says such "integrity rating" tools will prove very powerful in Net markets. "Some of the information will be disclosed, some won't," he notes.

How secure is secure?

The incredible opportunity to create market intelligence where none has previously existed may prove to be the premier reason for the nation's purchasing and sales organizations to join the public many-to-many Net marketplaces launched by neutral third parties.

But as Ventro's Greer points out: "These are early days. Less than 5% of marketplaces have transactions today. Of those 5%, far fewer have enough velocity to generate real market intelligence." But one of the reasons that so few companies have sufficient velocity is that Net market makers have not done enough to allay buyers' fears about the privacy and security of information captured by the exchange.

Whether or not they're justified, Purchasing's surveys show that buyers remain extraordinarily concerned about how Net market makers might misuse the information captured at their sites. Some questions that purchasers are asking-

• How much might Net market makers be able to glean about a particular company's competitive cost positioning or product development activities based on its buying activities?

• How might they exploit that understanding?

• Will they be tempted to misuse the information, perhaps selling it to sellers?

• If not today, will they change their minds about misusing information if they're acquired by a less scrupulous company or should their solvency become threatened? (As has occurred already in the B2C arena).

• And even if Net market makers take the high ground when it comes to privacy of information, will the data be truly secure from wily hackers bent on industrial espionage? Might it travel out the door with departing or disgruntled employees?

Most of the people with interests in seeing Net markets succeed dismiss these fears out of hand. But Lori O'Neill, director of product marketing for Clarus Corp. says "When transactions run through certain networks, the data is essentially being published. For Net markets to attract buyers and suppliers, they're going to have to make people feel comfortable that their data will be viewed only by people within their own organizations."

Jay Chaudhry, CEO, founder and president of Core Harbor, a Norcross, Ga.-based applications service provider (ASP) hosting e-procurement and Net market-making applications, remarks that, "Net markets will be creating new sets of information about buyers and sellers. The opportunity is there to abuse this information. There is also a question of whether information will stay private despite Net market makers' efforts to keep it so."

Nitorum's Ginelli has plenty of company when he says there should be no security concerns whatsoever. "There's so much protection and security around a single customer's information, it's not something they need to worry about."

But despite such blithe dismissals on the question of data security, Core Harbor's Chaudhry classifies it as a "very tricky" issue. "The more traffic you have," he says, "the more opportunity there may be for someone to steal data. There are no clear answers but, at present, the issue is a minor one as transaction volumes remain small."

While he certainly understands why companies would be feeling uneasy about their privacy, Joseph Postiglione, vice president of eMarkets at SeraNova Inc., a global provider of Internet professional services, thinks that data security concerns are "not necessarily" valid. "Technology and security is available to ensure complete privacy. Now we need a cultural change. People have to learn to trust this technology." As Postiglione sees it, the responsibility for developing this trust lies with the market makers. "Whoever is bringing a Net market together has fundamental responsibility for security. The Net market makers have to make both buyers and sellers feel comfortable."

End note

At this point in time in Net market development Postiglione notes that buyers and suppliers are holding most of the cards. The market makers need their transactions before they can create market intelligence. But over time, as e-procurement begins to gain momentum, he thinks the leverage will begin to shift to the Net markets. Upshot: "In exchange for their early participation in Net markets, Postiglione says buying organizations should be bargaining for low cost access to aggregated intelligence when it becomes available.