SETTING STANDARDS FOR CORPORATE PURCHASING ON THE INTERNET AMERICAN EXPRESS AIMED TO FOSTER ONLINE SYSTEMS THAT WOULD BOOST THE USE OF ITS SERVICES TO BUY BUSINESS SUPPLIES. IT MAY WIND UP ABETTING WEB-BASED COMPETITION.
By MARY J. CRONIN

(FORTUNE Magazine) – Three years ago, Thayer Stewart began pondering the billions of dollars companies spend each year on paper clips, pens, and all the other consumables in their supply closets. As vice president of American Express's corporate services division, he dreamed of channeling such purchases through Amex. The costs of ordering and processing payments for keeping a myriad of business supplies in stock often exceed outlays for the goods themselves. That suggested a gambit: Help companies cut costs by offering them an efficient online purchasing system with Amex inside.

But when Stewart convened a buyer-seller focus group to define the features of a killer purchasing system, the list of demands was sobering. The system would have to be open to all vendors, be easy to implement on the buyer's end, and use existing hardware and software--pricey proprietary software was definitely out. It also would need a single simple interface for ordering, approval, and secure online payment. When Stewart showed the list to his colleagues at American Express, the reaction was: "This isn't a set of specifications; it's the Holy Grail." But when he ran it by Peter Roden, who was developing an online purchasing system at Massachusetts Institute of Technology with Amex and supplies vendors, his response was simply: "Sounds like the Web."

Roden had found it relatively easy to sell the idea of Web-based purchasing at MIT, where the culture was imbued with the Internet and cutting costs was a high priority. Roden's team developed an online catalogue, and American Express provided payment services, including invoicing and back-end accounting. The project's success stirred corporate interest, convincing Stewart and Roden that selling Web purchasing systems would work as a business. Funded by Amex, Roden and several colleagues left MIT in April 1996 to start SupplyWorks.

The company quickly encountered a daunting reality: Many companies are wedded to proprietary computer systems for business-to-business purchasing. Offering purchasing software on the Web wouldn't induce them to abandon investments in such systems, especially in the absence of a widely accepted standard that could ensure compatibility among buyers and sellers. Going back to the drawing board, Stewart and Roden sketched out Plan B: Develop standards for buying supplies on the Internet, hastening the day when the Web would be the preferred medium for such transactions.

Last fall, SupplyWorks, with additional funding from Amex, organized an Internet purchasing roundtable to pursue that goal. A score of FORTUNE 500 companies with big buying budgets accepted the invitation to join. Like Stewart's original focus group, their primary goals were to help different buying systems interact seamlessly and put vendors on an equal footing. The group's first draft, issued in May, is called Open Buying on the Internet, or OBI. Recently the roundtable was reorganized as a nonprofit consortium open to all interested organizations. SupplyWorks handles administrative functions.

As a general framework for business-to-business transactions, OBI offers multiple payoffs. It will discourage software vendors from populating the Web with proprietary systems that can't interact. It will encourage innovative vendors to jump in, since customers needn't buy from a dominant vendor to ensure their software can interact with others' systems. A critical mass of companies already has endorsed the standards, including sellers of purchasing software; big buyers and sellers of corporate supplies, such as Ford and Office Depot; and major Web-commerce players, such as Microsoft, General Electric, and Oracle.

But will Amex reap extra benefits from having spearheaded the standards? Officially, it is just another member of the standards group. Amex is betting that OBI will foster ever more transactions on the Web, and that many will be authorized, invoiced, and paid through its purchasing-card programs. If the standards consortium does its job well, however, this lucrative new niche will be open to competitors, even companies from entirely different industries. Amex could lose corporate-card customers to suppliers of Web interface software that branch out to offer payment services. Providers of Internet communications links might also make a play for the business.

Stewart says that risk is intrinsic to Internet commerce: "Trying to hold on to a proprietary advantage on the Internet is like putting up a dam after the river has run dry. If the market adopts Web purchasing in a big way, we'll definitely be competing with alternative card and vendor programs. But at least the flow of business will keep growing." Amex can count on at least one reward from its efforts, though: It will be perfectly positioned to stock up on paper clips.

MARY J. CRONIN is a professor of management at Boston College and strategic adviser to Mainspring Communications. An expanded version of her column is available online at www.mainspring.com. Cronin can be reached at cronin@mainspring.com.