Knowledge Hubs: The Engines Driving Intelligent Trading Networks

By Tim A. Minahan -- Supply Chain Management Review, 1/1/2001

In just a few short years, the Internet has emerged from obscurity to become a widely accepted platform for business communications, information exchange, and commerce. This global communications network has eliminated geographical barriers and lowered transaction costs, enabling even the smallest of companies to manage existing trading relationships more effectively, reach new customers, and deploy new processes and business models previously unimaginable.

Such alluring benefits have ignited a gold rush-like hysteria in business circles, prompting companies in nearly every industry to devise strategies for promoting and selling their products and services via the Web. Likewise, an ever-increasing number of corporate buyers are flocking to the Web to find electronic catalogs, product reviews, market research, and other information to support the evaluation and purchase of products and services.

The transition to business-to-business (B2B) e-commerce has been accelerated in recent months with the emergence of online marketplaces. These e-markets provide a central, Web-based hub for brokering negotiations and information exchange between multiple buyers and sellers for select vertical industries or horizontal processes, products, or services.

The e-commerce models mentioned above have proven effective for automating the promotion, sale, and purchase of standard products, such as maintenance, repair, and operating (MRO) supplies, and excess commodities, such as steel or oil. These are products where a single person often makes the buying decisions and where product configuration requirements are minimal. However, to date, these Web-based channels have been less effective in supporting the sourcing, coordination, and purchase of complex goods and services like custom production products, business services, and enterprise software applications. Effectively sourcing such complex products requires collaborative purchasing decisions as well as the coordination of complementary products and services for effective implementation and use.

Despite its ability to provide a single, low-cost channel for global marketing and for researching products and services, the Internet has actually sparked a proliferation of disparate information sources across the Web. Furthermore, each of these resources varies in its currency, usefulness, and validity. Case in point: Of the two billion pages of information available on the Web, nearly one-third are either trivial in nature, under construction, or outdated. And, despite the original intent, no B2B e-market is completely representative of its target industry or market segment. In fact, many e-markets are biased to benefit either the buyer or the seller, further convoluting product selection and negotiation.

As a result, buyers of complex products have been forced to shoulder the burden of searching, validating, coordinating, and comparing product and supplier information from multiple and incomplete sources across the Web. Likewise, suppliers have been engaged in a battle to differentiate their products and services in a hypercompetitive online world that lends itself to commoditization. Such information disconnections have created significant market inefficiencies—swelling both the costs and cycles associated with complex purchases.

Reducing such inefficiencies will require that Web resources be organized into networks that include all of the interrelated products, services, and information needed for the effective identification, evaluation, and configuration of a particular complex product. The engine driving such an "Intelligent Trading Network" (ITN) will be an intelligence screen, or "knowledge hub," that can integrate and organize the Web's resources in a manner that guides buyers toward intelligent purchasing decisions. These concepts are discussed more fully later in the article.

Even the most conservative estimates indicate that the value of Internet-based B2B e-commerce is growing by more than 200 percent annually and will top $2 trillion by 2003. Afraid of missing out on the e-commerce boom, companies in every industry are clamoring to devise the best strategy to market, sell, and purchase online.

The Internet has proven to be a particularly effective platform for the promotion, sale, and purchase of standard products such as MRO supplies, office supplies, and computer equipment. (The accompanying sidebar on page 81 describes the benefits realized by the early adopters of procurement automation technology.) These products typically have standard characteristics that can easily be normalized into an aggregated catalog and compared across multiple suppliers. In addition, purchase of these non-strategic items is often executed by a single person and does not involve significant product configuration or the coordination of multiple suppliers. Aberdeen research has found that buyers are using the Internet to reduce prices of materials and service, shorten order and fulfillment cycles, lower administrative costs, and cut inventories. Importantly, these procurement savings typically translate into dollar-for-dollar improvements in corporate profits.

In its current state, however, the Web is ill suited for sourcing—that is, the identification, evaluation, negotiation, and coordination—of complex goods and services. By their nature, such products include multiple attributes that cannot easily be categorized within a catalog for side-by-side comparison. Examples of complex products include critical or custom production goods, consulting services, advertising services, telecommunications equipment and services, and business software applications.

Sourcing cycles for complex products are significantly longer than for standard products—they are typically measured in months, not minutes. Because of their critical nature, these complex purchases generally require input from several groups within the buying organization. And this means significant cross-functional collaboration throughout the purchasing process. In addition, because these are high-dollar decisions that have critical impacts on the organization, complex purchases often must be justified to company executives and signed off by them.

Purchasing complex products also involves multiple interactions or transactions between the buyer and supplier, with each transaction further refining the buyer's requirements and further evaluating the supplier's ability to fulfill them. The effective implementation or consumption of complex products also often requires the coordination of a series of complementary products and services, each of which must be identified and evaluated on its own merits. In short, complex purchases require buyers to evaluate and coordinate an entire network of product and service providers. A poor decision about any node on this network can undermine the overall investment, negatively affecting the organization's bottom line and damaging its competitive position in the marketplace.

For example, if a PC maker needs a custom semiconductor for a new product, the manufacturer must not only evaluate multiple chip manufacturers but also coordinate any logistics and subassembly services required for the timely consumption of that product. Even if the PC maker selects the optimal semiconductor partner, a slip in delivery or a defect within the subassembly would limit its ability to deliver a quality product to the market in a timely fashion. In a highly competitive industry like high technology, where products can lose as much as 20 percent of their value in a single business quarter, such lag time can mean the difference between launching a highly profitable, market-leading product and becoming an also-ran.

Corporate buyers traditionally have identified and pre-qualified products and suppliers of complex products through a diverse mix of information sources. These include preferred supplier lists, paper-based directories, marketing materials, market research reports, news articles, and industry conferences. Buyers have also had the non-trivial (and unenviable) task of integrating these dissociated bits of information into a core base of knowledge that can be used to make and justify a complex purchase. Unfortunately, access to information on suppliers, products, and other resources in the offline world has been fragmented and sporadic at best. Buyers have been forced to make complex purchase decisions based on an uneven collection of supporting information.

Similarly, one of the greatest challenges facing companies that sell complex products has been getting up-to-date information into the hands (and minds) of customers. Each year, U.S. companies spend hundreds of billions of dollars on marketing collateral, including brochures, data sheets, presentations, and other promotions. However, marketers often lack information about how useful these efforts are in generating demand and closing sales.

As a result, within complex industries, a major disconnection has developed between the information distributors (sellers) and the information seekers (buyers). Thus, buyers and sellers have been forced to conduct business in disconnected or "dumb" trading networks where critical decision-support information is widely dispersed and highly unorganized. Such inefficient networks expand purchase cycles and costs for buyers while significantly increasing marketing and customer acquisition costs for suppliers. (Exhibit 1 illustrates the inefficiencies associated with such unorganized trading networks.)

On the surface, the Internet appears to be the perfect medium to resolve these issues, offering a low-cost channel for gathering and distributing information. The Web puts a wealth of decision-support information at buyers' fingertips. It offers suppliers the opportunity to continually refresh and "publish" marketing collateral and other information to buyers. In reality, however, the Web is still a largely unorganized mass of information sources—each with varying levels of currency, usefulness, and validity. As a result, buyers must not only sort through an ever-increasing number of Web pages but also attempt to evaluate the currency and validity of the information contained on each page.

Recent industry research provides a snapshot of how onerous this process can be. NEC Research reports that there were a total of 1.5 billion Web pages in September 1999, with the number growing at a rate of 1.9 million pages per day. At this pace, the number of Web pages will exceed four billion by 2004. The leading search engines profile only a small portion of the growing number of Web pages and offer little information on the currency and value of each page's content. The Online Computer Library Center (OCLC) estimates that nearly a third of the existing Web sites are "provisional sites" that either are under construction, outdated, or contain only trivial information.

The proliferation of information available on the Web has also negatively affected suppliers. They now must find ways to rise above the marketing noise to differentiate their products and services in an online world that, so far, has been designed to commoditize products.

In short, the Web is infecting corporate America with an acute case of information overload that actually is adding to the confusion and costs surrounding the purchase of complex products and services.

e-Markets have brought some organization to the Web by providing a central location where multiple buyers and suppliers can execute financial transactions and exchange information. Most e-markets are focused on a distinct industry vertical (such as metals) or process area (for example, MRO purchasing). And some e-markets have even begun to offer complementary goods and services, such as transportation and financing.

These many-to-many virtual trading communities ultimately aim to provide a competitive trading environment that can efficiently match supply and demand through standard orders or through more dynamic transactions, such as auctions and true bid-ask exchanges. Aberdeen research indicates that e-markets have been highly effective at reducing transaction costs and generating competitive pricing. Such potential benefits have sparked an explosion in the number of B2B e-markets, which had grown to nearly 1,000 at the time of this writing.

However, most e-markets remain focused on brokering rapid transactions for standard products, excess inventories and assets, and true commodities like metals, oil, and gas. In the e-market world, transaction volume is king, and time is the enemy. Consequently, e-markets are not generally structured to support the processes required for the effective execution of complex purchases. Further, many e-markets are biased toward either the buyer or the seller, creating barriers to entry for particular suppliers and reducing buyers' ability to conduct a thorough evaluation of the marketplace.

Finally, participation within e-markets is still quite limited. Aberdeen research on 125 Web-based B2B marketplaces conducted in March 2000 revealed that the typical e-market had only 1,200 to 2,000 suppliers represented within its marketplace. This indicates that no single e-market is completely representative of its industry or process area. In short, despite their intent, e-markets only offer a sample of the products and services available on (or off) the Web. As a result, buyers will need to continue to identify and collate information from multiple sources, while suppliers will need to market their products through an ever-increasing number of outlets.

Transforming the Internet into an effective tool for researching complex purchases will require that Web content and resources be organized into comprehensive and logical groupings or "networks." These networks will need to reflect all of the products, services, and information required to identify and evaluate a complex product or service.

Aberdeen describes this structured grouping of Web resources as an Intelligent Trading Network (ITN). The nodes of an ITN include a mix of product and service providers, complementary products and services, and information resources—including e-markets—that can assist buyers in making an informed purchase decision. For example, the nodes of an ITN focused on complex electronic products might include the component providers, logistics providers, contract manufacturers, distributors, e-markets, industry research reports, trade publishers, and peer commentaries.

The effectiveness of any ITN lies in its ability to arrange these resources into a logical structure that enables buyers to make completely informed purchase decisions. Such organization requires the development of a neutral, Web-based intelligence screen. This intelligence screen would aggregate and organize all content and resources available online (and off) in a manner that supports the identification, evaluation, coordination, and purchase of complex products. We call this intelligence screen the knowledge hub.

The knowledge hub is both the brains and the engine of the ITN. As shown in Exhibit 2, it organizes the nodes of the network and creates contextual links between these nodes in a manner that guides the buyer to the optimal purchase decision. These links also ensure that a supplier and its products are closely connected with all of the information and services required to purchase, use, and maintain those products.

In this sense, the knowledge hub is similar to consumer-oriented "metamediaries," such as Edmunds.com or Realtor.com, which have aggregated content and services to support the purchase of automobiles and houses, respectively. However, the knowledge hub builds on this basic concept by providing utilities to support the evaluation and coordination of products as well as collaboration and knowledge sharing between multiple parties—key requirements for complex business purchases.

In short, the knowledge hub brings organization and context to the chaos of the Web. It presents buyers with a tool for making informed purchasing decisions and provides suppliers with a channel for identifying qualified leads and distributing highly targeted marketing messages. The first knowledge hubs have been established to support the purchases of complex business software and professional services. As businesses begin to leverage the Internet for more complex and mission-critical purchases, knowledge hubs likely will emerge to coordinate the products, suppliers, resources, and content available within (and across) many industries.

To deliver the content and services to support purchases of complex products and services effectively, a knowledge hub must do the following:

• Maintain a master directory of products, services, and suppliers. At the core of any knowledge hub is a unified directory of all of the products and suppliers represented within a particular category of good or service. When possible, this directory should include standardized data elements that can be used for base comparisons among products and suppliers. Such elements might include product features and functionality, industry certifications, implementation cycles and requirements, pricing, and availability. The knowledge hub should support direct links to the supplier site for more detailed information such as marketing collateral, engineering drawings, and schematics. The master directory should extend beyond the core products to provide descriptions of any complementary products and services that a buyer might need in order to consume, configure, implement, or maintain the core product effectively.
• Integrate content and resources from all available sources. A key function of the knowledge hub is to provide a central point of access for all content and resources related to a particular product and/or service. Thus, the hub must either aggregate or provide hyperlinks to all related content and decision-support information from both online and offline sources. Such resources might consist of data sheets, marketing collateral, research, news articles, product reviews, trade show information, peer commentary, and relevant e-markets. The knowledge hub also should provide an easy method for the buyer to upload and integrate information from internal resources, including preferred supplier lists and performance histories.
• Organize content and resources into a logical taxonomy. The knowledge hub must organize all product information, content, and resources in a logical classification structure or taxonomy that is designed to help buyers make intelligent purchase decisions. Importantly, this taxonomy must cross-reference product information within the core directory data with related business information like reviews, application notes, market research, and peer evaluations. This contextual linking of related information elements actually creates intelligent "kernels" of knowledge that a buyer can integrate into his or her analysis and share with others.
• Maintain the currency and value of content and resources. To be truly effective, the knowledge hub must maintain the integrity and currency of all of its information sources. This requires the continual monitoring and screening of the hub's information resources to validate hyperlinks, identify new information, and amend existing information as necessary. As a neutral third party, the knowledge hub can offer a mechanism that enables users to share their unbiased opinions and rankings of products, suppliers, and content on the Web. Such peer reviews can build a sense of community within the knowledge hub while assisting buyers in making complex purchase decisions.
• Provide decision support and enforce best practices. The knowledge hub must include utilities to assist buyers in evaluating the products and information they locate. Such functionality can include a simple spreadsheet that enables side-by-side comparisons of products or a more sophisticated analysis tool that automatically evaluates suppliers on multiple parameters. The knowledge hub should provide proactive decision support, alerting buyers to new products or suppliers that match their requirements.
• Support collaborative purchasing and knowledge sharing. Finally, complex purchase decisions typically involve input from multiple business functions. The knowledge hub must be designed to support and enhance such collaborative decision-making processes. It must gather demand requirements; share information; and jointly evaluate products, suppliers, and content. To support this element of community, the knowledge hub must at least provide utilities that enable multiple parties within an organization to exchange, review, and comment on products, services, or content electronically at any stage in the purchase cycle. The hub should maintain an audit trail of all correspondence and recommendations so that these may be referenced in future decisions.

Aberdeen research suggests that knowledge hubs meeting the key criteria will be most effective in industries that:

• Use, sell, or purchase highly complex products.
• Require significant information transfer to support buyer-seller interactions.
• Rely on multitiered supply chains for the effective use/consumption of products.

Examples of industries where knowledge hubs will likely emerge first (and actually are beginning to emerge) include enterprise-class business software solutions, electronic products manufacturing, and pharmaceuticals/chemicals manufacturing.

In order to maintain sufficient neutrality, the ideal knowledge hub managers will be a new breed of independent third parties that will not take an active role in the transaction, thereby reducing any bias toward the buyers or sellers. However, existing information distribution outlets—such as trade publishers like Cahners Business Information, the publisher of this journal—have a large enough collection of objective information to create knowledge hubs that could be highly valuable within select industry niches.

Aberdeen research suggests that buyers using a knowledge hub will realize improved supplier selection capabilities, more flexible and responsive supply chain structures, and shorter sourcing cycles. In fact, our research indicates that organizations automating the supplier selection and negotiation processes have been able to reduce sourcing cycles by 20 to 30 percent on average. Such cycle-time reductions will be critical for organizations competing within industry segments with extremely short product life cycles (the electronics industry is one good example).

The knowledge hub has the potential to provide the order and context that is required to make the Web an effective tool for helping managers make complex sourcing decisions. Aberdeen expects that knowledge hubs will emerge to coordinate the products, suppliers, resources, and content available in industries that face such complexity.