Coping With E: Life After Y2K

Doing business on the Internet has changed the economy, not just the language

Seemingly overnight, Y2K has been eclipsed by the first post-apocalyptic crisis for mankind in the next millennium: In a letter, e. E has become the prefix for nearly half the words in the English vocabulary and its definition the necessary prelude to every new business plan. So what is all the hype about? What is the e-conomy, e-business, the e-market — e-everything?

Clearly, in times of great change there is a propensity, perhaps even an instinct, to survive by labeling everything. If the world is in chaos, we can make it tidy by putting all the chaos in its place — at least so goes the sensible person’s thinking.

But in today’s maelstrom of change, this approach is naïve and flawed. A neat and tidy taxonomy will not slow down the world, free markets, or competition.

We need to understand far beyond the labels, at a base level, why the “e-imperative” has so radically altered our perception and the skills we and our organizations will need to survive in the coming years.

Invisible Network, Invisible Hand

Yet the sheer magnitude of the discussion is daunting. Consider a simple question that helps to understand the scale of the e-conomy, “How many companies were involved in the last consumer purchase you made?”

Perhaps it was a trip to the local grocer or an online purchase of a book through Amazon.com You may have bought an automobile, an insurance policy, or a new home. From your perspective, the participants were limited to the businesses directly interacting with you.

Why should it concern you where the raw materials for the pages of this magazine come from, or how the author and the editor collaborated to write it? The complexity of the value chain of events that leads to an automobile’s manufacture is not significant to you. As a consumer you simply want to know that the company and the person you are buying the product from have your best interests at heart and that they possess all the information necessary to stand behind the transaction and make it simple and cost effective.

The e-conomy is the context for this intricate chain of events. And, like a giant perfumery that extracts a few precious drops of essence from acres of flowers, e-business is a distillery, the results of which are encouraging an ever-increasing number of end-user transactions in the e-conomy.

The e-conomy determines the cost, convenience, and complexity of nearly every financial and service transaction you participate in. In a sentence, the e-conomy represents the growing invisible network of transactions that result in business, markets, and work.

Complexity and “E-fficiency”

This network is the engine of business-to-business (B2B) interactions and transactions that drive all commerce. It is, without a doubt, the most broadly reaching development to transform the way all industries operate. While often lost among the noise and hyperbole that has surrounded the consumer side of the Internet during the past few years, e-business has already eclipsed business-to-consumer transactions in terms of dollar volume and holds the very real potential to drastically redefine the rules of business.

According to the study of 600 Fortune 1,000 organizations that Delphi Group recently conducted, 34 percent of all transactions in these companies were e-business transactions. Let’s be clear: This is not e-commerce or the consumer side of selling over the Internet. These numbers reflect the B2B transactions that represent the backbone of the e-conomy. What is even more amazing is that the rate of increase in the number of e-business transactions has exceeded 30 percent yearly for the past three years. At this rate nearly all business will be e-business in four to five years!

It’s no surprise then, when confronted with the e prefix, most of us respond by wondering if anything other than the label has changed. For instance, “isn’t the e-conomy just the same old economy on computers?”

Absolutely not! The e-conomy radically changes the rules of business and introduces new challenges as well as new opportunities. These concepts are so all-encompassing and revolutionary, it is nearly impossible for us to fully comprehend them.

Consider an analogy familiar to many of the road warriors reading this.

I just completed a round-trip flight to Germany from the United States on the heels of a recent flight to Australia. In a time span of just a few weeks, I conducted business in 12 time zones. At the end of it, I was flush with new opportunities but reeling from jetlag. It occurred to me somewhere over Greenland that there was a time when travelers did not have to worry about changing time zones — a time when their bodies had the chance to adjust slowly to the changes of their circadian rhythm. I wondered if the idea of “lag” was even a conceivable state of being for them.

I imagined myself going back in time and trying to explain this odd concept to a citizen of the 19th century, or for that matter the early 20th century. They would have no framework for understanding what it meant to move at a rate of speed that could get you to your destination before you had even left. Think of the first time you tried to comprehend the concept of crossing the international dateline and gaining or losing a day in the process! At the same time, consider a time traveler who comes back from the future (perhaps a mere 20 years — say, 2020) to explain how e-business has changed the world, work, and society.

In the same way that modern airplanes changed the very notion of travel, the e-conomy changes the very nature of business by not only collapsing time but also permitting us to realize complexities and opportunities previously unimaginable.

The easiest way to understand this change is to describe within a simple framework the way the e-conomy evolved from its predecessor. Any economy consists of the basic interactions between buyers and sellers. These interactions occur throughout the value chain — recall the example of the perfumery that distills large amounts of raw material to get a drop of essence. As an economy matures, its products and markets get more complex. If the market’s efficiency — that is, the buyers’ fast access to competitive alternatives — does not also increase, the economy stalls; it cannot grow. If efficiency increases, the economy grows.

The e-conomy is one of reintermediation, where new technologies make it possible to radically increase complexity and efficiency with the introduction of new marketplaces. In these markets, value chains constantly reorganize as the demands of the consumer and business rapidly change.

New Business Models

The result is a market landscape with new business models popping up at a dizzying rate. Look at some recent innovations:

Reverse Markets: These represent a new Internet business model that allows consumers to drive pricing and define a new level of market efficiency. Popular examples in the consumer space include UBid, EBay, and Priceline.com, all of which deploy a private auction model that lets buyers specify their own price. This goes well beyond the basic principle of a customer-driven company.

In reverse-market environments, companies no longer have time to understand the market’s movements, but must simply be able to react to them immediately. The newest version of this phenomenon is Mercata Inc., which provides discounts based on the number of bidders for a particular item — the more bidders, the lower the price. Examples in the business-to-business space include E-Steel Corp., FreeMarkets Inc. and Commerx Inc.’s PlasticsNet, all of which are part of a new, rapidly evolving form of e-business referred to as “vertical aggregators.”

Vertical aggregators act as “market makers” by building communities of buyers and sellers around specific industries and areas of interest, then either exacting a commission on each transaction or charging participants an entrance fee. They are the new agents of reintermediation. The evolution of this model is creating “reverse markets” where aggregators provide buyers access to a competing group of sellers. Aggregators facilitate this by providing a standard approach to bid solicitation, allowing each buyer’s requirements to be entered once and assessed by multiple sellers, creating an economy of scale where requirements are compiled into one bid.

Mass Personalization. The “my.com” phenomenon has moved business beyond mass customization to mass personalization. My.com sites have redefined the Web as a personalized space to filter through the ever-increasing number of information options being created. Virtually every major Internet player now has a “my.com” version of its Web site, from giants such as enterprise software provider SAP to Internet natives such as Launchpad Technologies Inc.’s Entrypoint (the Pointcast spin-off), which is providing customized mini-portals that integrate with a standard desktop.

Infomediaries. These mediaries take your most valuable, proprietary, secure information in an anonymous model and broker it to find products and services that meet your needs without ever actually selling your information to others.

Time Brokers. These brokers capitalize on the increasing volume of opportunities the Web presents by conducting time-based coordination of e-markets in an environment of ever-decreasing opportunity duration.

Future Shock

What is the unseen variable that will make the e-conomy such a phenomenon? Unlike many of the radical technologies that have preceded it, from the advent of telephone, radio, and cable television to the use of electronic data interchange (EDI), the infrastructure for the e-conomy is already in place. There is no information superhighway to build. The roads for the adoption of e-business, e-markets, and e-work are already well paved. And unlike the proverbial cow paths, these roadways are agile, malleable thoroughfares that respond easily to changing market dynamics. Virtually every significant aspect of the e-conomy’s technology framework is in place and waiting to be exploited by a free market hungry for innovative velocity and growth.

The effect is something for which humanity’s technological progress has no precedent. With the innovation of every previous technological marvel, an era of infrastructure building had to follow. From the wiring of the globe necessary for early telecommunication, to the creation of orbital rocketry for global satellite networks, to the evolution of the factory precision needed to create the turbine engines that power modern air transport — decades have always stood between the idea and the promise.

In the past, markets turned like large boats in slow arcs as ideas were translated into a long series of new innovations needed for their success. Today’s markets and ideas take root in a super fertile infrastructure. For better or worse, we have been robbed of our ability to adapt to change as individuals and as a society. Our only recourse is to respond to the new e-conomy — fast.

And it’s none too soon if you ask me — with Y2K nearly behind us, it’s about time for another crisis…er, opportunity.

E-conomy’s Evolution In a mass market where there is little distinction among products, both market efficiency and product complexity are low. (See Figure 1). However, few buyers are satisfied with this “one-size-fits-all” approach to all purchase decisions, and that dissatisfaction is resulting in increasing complexity among competing products. As complexity grows, so does the related set of “transfer costs” resulting from greater time spent by buyers searching and comparing purchase options, the lack of trust between buyer and seller, and the lack of standardization of the purchase process. The result is a corresponding decrease in market efficiency. The two first stages of the e-conomy sought to minimize these inefficiencies by providing impartial buyer-oriented information. Although this approach does enable more educated buying decisions, these models still involve the hand-off of actual purchase, resulting in decentralized purchases and a lack of continuity in the procurement process. The first three stages of e-business evolution follow a model of disintermediation. Through eliminating the “middleman” and offering a buy-direct mode of commerce, the goal is to reduce the transfer costs involved with maintaining a sales force and distribution channel. However, buyers are not often willing to settle for a commoditized, one-size-fits-all product, nor are they willing or able to make all purchases through a single vendor, particularly in the absence of a trusted relationship. The result is greater “switching costs” and time spent evaluating alternatives, resulting in decreased market efficiency. FIGURE 1 Evolution of intermediation in market over time.

RESOURCES EBay: www.ebay.com Entrypoint: www.entrypoint.com E-Steel Corp.: www.e-steel.com FreeMarkets Inc.: www.freemarkets.com Mercata Inc.: www.mercata.com PlasticsNet: www.plasticsnet.com Priceline.com SAP: www.sap.com UBid Inc.: ubid.com

Thomas Koulopoulos (tk@delphigroup.com) is president of the Boston-based Delphi Group, professor of knowledge management at the Boston College Wallace E. Carroll Graduate School of Management, an author, and an internationally recognized speaker.