B2B's Operational and Risk Implications.

• Author: Freeman, Emily Q.
• Position: Business to business e-commerce

Participants in B2B networks should consider a long list of risk and procedural questions before exposing themselves to potential legal, regulatory and contractual problems.

In recent months, major corporations have taken -- or signaled plans to take -- equity interest in business-to-business (B2B) exchanges or participate in them. Changes in relationships with suppliers and wholesalers, as well as internal changes in procurement and credit, create new challenges, as well as regulatory and legal concerns. Besides the risks from the operator and investor side, risk concerns apply to the individual buyers and sellers.

Compared to business-to-consumer (B2C), B2B transactions and relationships tend to be far more complex and long-term. They're typically expressed in contracts and involve bigger dollars. The size of B2B orders ranges from $50,000 to $250,000, although some individual transactions are much larger. The average B2B transaction is $75,000 - 1,000 times the $75 average for B2C.

Pricing in B2B is determined in negotiated, long-term contracts, auctions and catalog purchases. Value, trust and partnerships or equity interest will drive the selection for the e-market or portal. Availability and fulfillment details are more important. Payment will involve a variety of mechanisms, including letters of credit, procurement cards, escrows and more complex payments systems.

Despite the myriad of opportunities associated with online B2B exchanges, companies sponsoring, participating or investing in them face a wide range of risks and will need approaches to deal with them. Because an exchange may operate as an independent company separated from its original equiment manufacturers (OEM) investors, the risk management function may not transfer easily to the new company.

Consequently, businesses involved in B2B exchanges need to identify and assess risk, and then develop corollary risk prevention, mitigation and financing efforts. It is important to carefully consider the business issues facing the exchange; related decisions will help determine the corresponding risks.

Strategic Business Issues

Let's face it: There is no guarantee that suppliers/buyers will come and that a critical level of transactions will be achieved. Suppliers are concerned about control from OEM-created exchanges and squeezed margins. Established procurement management practices are slow to change, and many managers may adopt a wait-and see-attitude. Consider these strategic questions:

1. How will the online exchange increase efficiencies and/or lower prices?

2. Why will companies choose to do business on the exchange?

3. Will there be problems integrating IT systems between the exchange and the potential suppliers and customers?

4. Will participating companies still maintain relationships with their traditional suppliers and customers?

5. How willing will procurement managers be to change to the new on-line environment, and what are their issues?

6. Will there be financial or technical requirements or qualifications to join the exchange? If there are membership requirements, what process will be in place to credential the members?

7. Will certain large purchasers...