VACs create value for a community of buyers and suppliers
in previously unattainable ways. They revolutionize trading
relationships and B2B e-commerce by introducing new efficiencies
to the supply chain and new, innovative ways of selling and
purchasing products and services. By providing a central platform
for transaction automation, demand and/or information aggregation,
improved market liquidity, and extended market reach, they
reduce product, process, and sales costs. Every member of
the network comes to the table based on a mutually established
need to leverage the market power and infrastructure of many.
In short, VACs create powerful benefits to both buyers and
sellers: lowered costs of doing business, creation of markets
on the network scale, and improved service levels.

Moreover, VACs skillfully leverage the “network effect,”
creating a buying community that becomes more valuable to
members as the number of trading partners increases. In fact,
it is the power of these networks that provides the foundation
of the Value-Added Community. In the very near future, the
potential to increase transaction, sourcing, and market efficiencies
will be so high that almost every business will be clamoring
to participate. Companies that do not join these trading communities
will remain limited by their own market power and infrastructure
– in short, they’ll be about as successful as countries that
remain aloof from the world market.

Creating Value-Added Communities

VACs are expected to form along two primary dimensions, addressing
either industry-specific processes or cross-industry functional
processes. The former, often referred to as vertical communities,
are organized along specific industries to resolve specific
supply-chain inefficiencies – industry “pain points” – that
lower margins. The latter, or horizontal communities, cut
across industries and automate functional processes such as
maintenance, repair and operations (MRO) procurement, and
human resource services – in other words, solving business
problems that are common to more than one market.

At the highest level, VACs draw their strength from three
key characteristics:

• Buyers and suppliers can participate with relative ease

• Market liquidity is created with participation of numerous
  buyers and suppliers

• They are actively managed by independent, or trusted,
  third parties

Despite their seeming simplicity, creating and maintaining
a VAC is far from simple. In addition to the skills required
to initially define the value proposition for the community,
VACs must be actively managed to sustain the community as
well as the value created. This need for active, expert management
has led to the rise of online intermediaries known as eMarket
Makers. Those who opt to play this role must combine a deep
understanding of industry dynamics, market players, and power
balances with the ability to design and deliver a sustainable
value proposition. Often, trusted third-party relationships
with both suppliers and buyers are required to facilitate
relationships of mutual benefit. In addition, eMarket Makers
require sufficient resources and technology expertise to create
a common platform for managing digital trade among multiple
standards. Finally, developing and sustaining a VAC requires
the ability to create a new operating model to derive all
the benefits outlined above.

The VAC – A Unique Value Proposition

Perhaps the most meaningful way to conceptualize the VAC
is as a unique value proposition that links together target
buyers and target suppliers. The following five levers, either
separately or in combination, create the value proposition
of a particular VAC:

Purchase Power

A VAC derives its purchasing power value from aggregating
demand in buying consortiums. This results in such benefits
as volume pricing, sophisticated information for supplier
negotiations, consolidation of suppliers, and spending and
control reports.

Process Efficiency and Operational Excellence

Integrating sourcing, purchasing, billing, and payment vastly
reduces the cost of acquisition for business goods, services,
and customers. VACs that offer process efficiency must build
functionality including electronic order taking and management,
electronic requisition and approval, and improved information
access to reduce transaction and workflow costs. VACs may
provide an additional level of value to members by achieving
operational excellence in the management of select procurement
processes, including strategic sourcing and spend monitoring/control.

Supply Chain Integration

Supply chain offerings might include disintermediation, improved
visibility across market supply chains, reduced lead time,
reduced inventory levels, improved logistics management, and
ERP integration.

Aggregated Content/Community

This lever includes the value gained from the knowledge brought
to the network, whether it be industry best practices, knowledge
management, or benchmarking studies. Other content-based value
includes monitoring/control reports, discussion forums, product
information and reviews, FAQs, and newsletters.

Market Efficiency

VACs that offer this value proposition provide online market-making
mechanisms that match buyers and suppliers (e.g., e-catalog,
auctions, exchanges, and bid processes) to improve both market
and product liquidity and remove search time from the buying
and selling process. By creating a marketplace of aggregated
buyers and sellers, the VAC provides members with broader
access, improved market knowledge, and new sales opportunities
for both buyers and sellers.

VACs – The Current State

Although this business model is just beginning to take shape,
the market is quickly developing. A number of VACs have already
begun to form, and the number is expected to grow even more
dramatically in the next few years. Bear Stearns estimates
that Internet-based businesses have already created more than
200 VACs, with the number launched between 1998 and 1999 more
than doubling. According to the same report, $438 billion
of the $1.7 trillion in B2B online transactions anticipated
for 2003 will occur within VACs. These communities are expected
to generate over $55 billion in value, providing eMarket Makers
an estimated $23 billion in revenues.

Examples of emerging VACs include VerticalNet, Chemdex, and
Bizzed.com, each of which either targets specific industry
groups or solves a functional need. These early-stage VACs
typically focus on only one or two of the value levers outlined
above, and often are targeted at small- to mid-sized businesses.
Many are developing as content or community portals (e.g.,
VerticalNet, Bizzed.com), replicating the business-to-consumer
model of using community to drive commerce. Others leverage
enabling technologies to create market and process efficiencies
through bids, auctions (TradeOut), exchanges (ChemConnect),
or catalog aggregation (Chemdex). As the market matures, eMarket
Makers must continue to deepen their value propositions to
remain competitive – engaging more value levers to develop
increasingly sophisticated B2B solutions.

The Rise of the Meta-Market

As quickly as Value-Added Communities are emerging and multiplying,
a newer and greater market-shaping entity is expected to arise
in the coming months. Known as Meta-Markets, these nascent
forces will consist of portfolios of VACs joined together
to bring even greater levels of value to the online business
system.

Meta-Markets will establish portfolios of VACs to provide
members a cost-effective and comprehensive offering of products
and services. In this way, Meta-Markets will seek to build
and maintain a critical mass of buyers and sellers. Leveraging
the benefits of economies of scale, Meta-Market providers
will rapidly develop new VACs on an ongoing basis to complement
the offerings for existing members. This continuous VAC-formation
process will draw on both the established customer base as
well as the underlying technology platform and back-office
shared services (e.g., billing, customer service) of the Meta-Market.

VACs, meanwhile, will be forced to join or be subsumed by
Meta-Markets as Meta-Markets achieve a significant competitive
advantage through their ability to rapidly form and launch
new communities. Both buyers and suppliers will feel a pull
to participate in the Meta-Markets in order to benefit from
the greater reach and offerings available – as well as the
expanded community and collaboration opportunities.

Before long, the combination of the network effect and the
tremendous economies of scale will begin to create higher
barriers to entry for any fledgling VAC. As the Meta-Market
creation process accelerates over the next couple of years,
these same forces will severely limit the number of viable
Meta-Markets. As a result, there is a tremendous advantage
to those who move quickly and decisively, solidifying the
market position through strategic partnerships, acquisitions,
and joint ventures.

Like VACs, Meta-Markets will require active and expert management
to drive industry transformation and convergence through the
cross-optimization of VACs. Only those Meta-Market providers
that bring certain core competencies to the table will be
able to stake a significant claim to this opportunity. Meta-Market
providers require a breadth and depth of knowledge, characterized
by an in-depth understanding of multiple industry-specific
supply chains and the associated pain points throughout, in
order to rapidly develop a broad portfolio of both horizontal
and vertical VACs. In addition, Meta-Markets will need access
to broad communities of buyers and sellers to gain competitive
advantage through critical mass. The core competence of a
Meta-Market will rest on its ability to make VACs interop-erable
on the front end while integrating them into buyer and seller
systems on the back-end – as well as to develop and integrate
a technology platform for its communities.

Currently, no single entity is strongly positioned to provide
the full range of these capabilities. The more likely scenario
is that a community of partners, by leveraging the collective
synergies, will create Meta-Markets. Seemingly, only a few
players currently exist with the size, power, and breadth-and-depth
to create the community of providers from which the Meta-Market
will draw its strength. Those best positioned to create Meta-Markets
include external service providers with deep industry knowledge,
a reputation of extreme trustworthiness, and a large customer
base on which to draw in building communities – as well as
the necessary IT capabilities. These service providers will
likely partner with large IT vendors and/or software vendors
whose strengths include enabling technologies and market visibility.
Finally, financial institutions, with their unmatched ability
to acquire and develop new customer relationships, have the
potential to emerge as key contributors to the formation of
a Meta-Market. Success, much like that of the VACs, will continue
to rely largely on the ability to develop a community of providers
– joined together, based on mutually established need, to
leverage the power of many.

The Network Is the Business

The message is clear. In the new economy the network will
be the business. The advent of Value-Added Communities, aggregated
and managed through Meta-Markets, is too important to ignore.
Ultimately, these entities will survive, prosper, and thrive
based on their ability to win and keep members. At the speed
that these forces are taking shape, early adopters will be
richly rewarded – and latecomers severely penalized. With
traditional sales and distribution channels crumbling around
us, the stakes are nothing less than survival.