B2B NETWORKS LINK STRANGE BEDFELLOWS.

Getting into bed with the enemy has always been a popular theme of film and fiction, as the spats and squabbles of Kiss Me Kate, It Happened One Night, or Pride and Prejudice have amply demonstrated. But these odd alliances are no longer confined to the cultural domain: Old rivalries between corporate foes are being smoothed over as a rash of business-to-business (B2B) exchanges bring rivals together.

These electronic networks are in their infancy, but the technology promises big improvements in costs and speed of delivery as companies across the country and around the world pool resources to streamline procurement and transaction processing. Giant companies like the Big Three automakers are in the game, having announced formation of such a network last winter. So are major auto parts suppliers and huge consumer goods companies like archrivals Coca-Cola and Pepsico.

Such traditional competitors may eye each other warily, but now must seriously consider putting aside their differences and enter exchanges. That's not an easy decision, as most rivals are haunted by fears of losing trade secrets, eroding pricing margins and potential antitrust concerns.

Still, many companies are concluding that the efficiencies gained outweigh the risks. Announcements have come hot and heavy in recent months, even if most of the groups are still in the planning stages. Most have not yet named a chief executive, settled on a final structure or even chosen a name. (One exception is Transora, a B2B network in the consumer packaged goods area; see "Transora's Speed from Seed," page 26.) "Most have yet to process their first transactions," notes Don Etsekson, founder and CEO of Seattle-based LiveListings, which is currently launching an online system for automotive/truck/industrial parts.

As companies mull over their roles, they must decide whether, and to what extent, exchanges make sense and truly add value. Exchanges come in a variety of flavors, differentiated by ownership and transactional models. As defined by ownership, exchanges may be structured as co-investments among equals, possibly to be taken public at some point. Alternatively, an independent investor may set up and maintain an exchange as a separate entity from the participants.

Despite all the hoopla, the word "exchange," Etsekson insists, is easily abused to describe any e-commerce-enabled Web site. The real McCoy is a "neutral playground where all the power is shared." Transactions may be conducted in several ways, such as in auctions and/or catalogs, in which sellers post offerings on the site and buyers bid. Other models compel buyers and sellers to follow strict site rules, and provide a fee for each transaction.

Whichever the model, the rationale of a good site is to attract critical mass and plenty of eyeballs. Matt Porta, a partner in charge of e-market strategy at PricewaterhouseCoopers, cites the importance of uniting major supply chain anchors and smaller participants. He thinks that ultimately, the e-market may provide the most value to smaller and less sophisticated members, whose infrastructures aren't so well developed.

One potential headache is that a dominant exchange may end up acting like one big monopoly. In concentrated industries, participants may be tempted to coordinate their activities, leading to collusion and illegal agreements. When members have access to restricted information, buyers may be positioned to manipulate that knowledge downstream. This "club" model inevitably triggers antitrust concerns, says Porta. "As the current regulatory rules were designed for a traditional enterprise model, we are going to need new ones," he says.

Even some of the erstwhile enemies, who now find themselves running exchanges together, may end up sharing information. Another danger is that the clubs may impose rules that exclude or discriminate against particular competitors. Such agreements are red flags to antitrust enforcers.

The Federal Trade Commission is taking a keen interest in the implications of various B2B consortia. But there is a precedent: The Justice Department pursued and settled a precursor case in 1994 involving the major airlines. It had been concerned that the carriers were using their joint electronic fare system to boost ticket sales and undermine the discounters.

Many companies, however, are convinced that the benefits out weigh regulatory and competitive risks. The paramount use of an exchange is undoubtedly to improve the supply chain, as new exchanges like Transora seek to demonstrate. "Everyone in our group saw supply chain management as the main benefit, which made it easier for us to proceed," says Glen Barnard, executive vice president for strategic development at Kaufman and Broad, one of the largest U.S. homebuilders. Kaufman and Broad has partnered with four major rivals on Homebuilders-Xchange. "We had all bought in intellectually before we sat down together," he says. "In our industry, with literally hundreds of transactions required to build each home, it's hard to deny the efficiencies that we'll gain."

Enterprise resource planning (ERP), a buzzword of the mid '90s, was developed to facilitate electronic communication among the various components of a company s supply chain, from order processing to manufacturing to warehousing and shipping. While ERP performed superbly in integrating these functions, it was also prohibitively expensive for all but the largest players.

The more fragmented the industry, the more compelling the supply chain rationale. In Etsekson's automotive parts business, "buyers and sellers had a hard time finding each other." To make matters worse, multiple descriptions for the same item drove up procurement and transactions costs. So the participants took their former fax network, which linked 1,300 companies, and "put it on steroids" by launching a real-time, anonymous, transaction-based exchange. The new entity, instead of displacing the original supply chain, creates "seamless pathways" between in-house systems and an exchange environment.

To utilize supply chain efficiencies, a company must identify where in the value chain it enjoys competitive advantages (a central theme in Cracking the Value Code, a new book reviewed in the July/August issue). For example, the retail sector historically integrated R&D, brand management and logistics. In fact, however, the retailers' real advantage lay in R&D and branding, not in distribution. In the network model, competitors agree to pool resources in areas that are not sources of competitive differentiation.

An added benefit of joining an exchange is the discipline it imposes on the back office. Barnard observes that linking functions like procurement, invoicing and payments to the common communications platform "is often the trickiest part." John Cohn, senior vice president for marketing communications at Rockwell International, believes that large companies like his have the most to gain in this area. The $7 billion, Milwaukee-based electronic controls and communications giant relies on a huge infrastructure. "We are using e-business activities as an opportunity to optimize our back office and take out costs and waste, such as reducing assets and floor space," Cohn says.

Some companies are doubtless jumping on the B2B bandwagon as a public relations exercise, looking to translate the announcement of an exchange into higher share prices. Besides, if companies don't organize their exchanges early on, somebody else will. Take the automakers' alliance: Old politics haven't gone away, and there is still a chance for the next group in line to crack the market in the event that the lovefest between the Big Three falls apart.

Gimmicks Won't Do

While some managers have been caught up in an early burst of enthusiasm, gimmicks will never Lake the place of value-added services, caution some of the experienced voices from traditional industries. "People buy value-added ownership solutions, rather than products," Cohn explains.

Some industries have not yet reached the stage where big B2B networks make sense. Steel, for example, isn't easy to ship. B2B add-ons, such as software programs for logistics, will eventually prove useful for putting orders together on line and combining loads of different product types, as well as tracking the status of mill operations to know whether a rolling schedule is on time. "We won't take the costs out until we have enough timely tracking information to lower inventories and improve just-in-time management," says Michael Parrish, executive vice president at Nucor. "We totally embrace the Internet as a tool. However, we'll sell any way our customers want -- even by Pony Express!" Nucor has chosen to develop its own purchasing network and extranets.

Adapting to a business paradigm shift isn't easy for entrenched players. Traditional corporate culture doesn't grasp the opportunities of the Net with the nimble aggression of some smaller competitors. "Many people still view a business within four walls," notes PricewaterhouseCoopers' Porta.

Developments in management science have progressed over the past decade, from an emphasis on core competencies in the late '80s, through economic value added (EVA) and shareholder value measurements in the early '90s, to today's network models. Technology and management have evolved together to cut across old barriers, which has given rise to new models like B2B networks.

At this juncture, companies are at different stages with respect to exchanges. Some are apprehensive about how the new models will work and are biding their time. Others are determined to be pioneers, having concluded that the majority of hits go to a minority of Web sites. Whichever the route, whichever the model, the fundamentals of good business do not change, says Parrish: "Costs, employees, customers, and adding value."

Vanessa Drucker is a freelance business writer in New York.

TRANSORA's SPEED FROM SEED

There are a number of fairly remarkable things about Transora, the new B2B consortium formed by 49 consumer packaged goods companies.

First, there is the size of the effort, which encompasses not only a huge number of companies but the biggest worldwide names in the market: Procter & Gamble, Unilever, Nestle, Coca-Cola, Kraft, and Sara Lee. Collectively, the 49 represent about $350 billion of the $900 billion spent annually for goods and services in the packaged goods industry.

Second is its mandate for inclusiveness. Transora, an independent Chicago-based company, intends to open its pipeline to everyone in the $1.3 trillion space, offering equal access to suppliers, distributors and retail outlets. Transora plans to provide auctions, vendor catalogues and sourcing, as well as online procurement.

But perhaps the most astounding thing about Transora is the speed at which it came together -- a riveting reminder of the pace at which new business models are being put together, literally at Internet speed.

As related by Judith Sprieser, the former Sara Lee chief financial officer who left Sara Lee in July to run the new entity, the seeds for Transora were planted in early March at a meeting of packaged goods executives impressed with the B2B network announced by the major automakers. In such "co-opetition," they felt, was the answer to reengineering their industry's fragmented and inefficient supply chain.

Sprieser, who chronicled the venture's development in a presentation at FEI's annual leadership conference in May, called the speed "astonishing," especially for an effort spearheaded by Old Economy companies. By March 15, 50 consumer products firms had expressed interest. A week later, a steering committee was in place for what was then known as eCPG.net -- with "CPG" standing for consumer packaged goods.

A concentrated planning period began in early April and on May 8, the planning team made a presentation in Chicago and asked investors to pony up contributions within 30 days. By the end of the first day, Sprieser said, $60 million in equity had been committed. On June 14, Transora was ready to be announced to the world, and a month later, it had $250 million in equity.

Says Sprieser: "I see this as [leading] the next wave of value propositions to come out of my industry." -- Jeffrey Marshall