The Kathie Lee Factor

[From iSource Business, July 2001] It's called the Kathie Lee factor. Kathie Lee Gifford is, of course, the television and recording personality made temporarily infamous in 1996 when it was disclosed that her signature line of Wal-Mart clothing was made, at least in part, by children working in factories in Central America. Since then her name has become synonymous not only with the horrible working conditions that remain endemic in much of the garment industry, but also with any public relations fiasco that ensues when an exploitative labor relationship is uncovered. To her credit, she has worked hard to raise awareness of these issues and, to a large extent, has succeeded.

Now companies, especially those vulnerable to public criticism and boycott, live in fear of the Kathie Lee factor. A consumer goods company, exposed as having purchased goods produced by sweatshop labor no matter how unwittingly and no matter how many degrees of separation there are from its core supply chain can have just as much harm done to its bottom line as would be if it missed earnings projections. Of course, companies face this and other risks day in and day out. However, when conducting business through a B2B Net marketplace, such risks increase significantly.

There are other risks that are less dramatic than the Kathie Lee factor, but equally as important, such as whether or not your company will actually receive what it ordered. Also to be considered is the security of the sensitive corporate information on a Net marketplace and whether or not the exchange system is vulnerable to hackers. Additionally, sellers worry about getting paid, as do the banks that participate by often acting as middlemen in complex online international transactions.

What it comes down to, says Kristin Valente, is trust. The success of these marketplaces is heavily dependent on the trust they can establish with their customers as well as skeptical regulators who wonder if a particular consortium model is legal, says Valente, National Leader for Innovative Assurance Solutions Implementation at Ernst & Young.

Sorry, but when your company's reputation, bottom line or manufacturing schedule is at stake, trusting a supplier whom you have never met face-to-face, or only through a young Net marketplace, simply won't cut it.

Paying for Trust

Fortunately, a host of trusted third parties that provide a wide range of assurance services to both online buyers and suppliers have entered the scene. Their services can include elaborate investigations of a supplier's labor and environmental practices, credit checks, verification of shipment arrival and condition, qualifying a supplier's factory production capabilities or its information technology (IT) system functionalities, and, finally, payment to all parties.

A large number of these providers are accounting firms, such as Ernst & Young and Deloitte & Touche, eager to capitalize on the opportunities provided by e-commerce. Indeed, accounting firms are a natural fit for these services, says Valente. Accounting organizations spent a lot of time developing standards for systems' reliability. We may have started out as accountants, but now we have become tech professionals as well. Business credit rating companies, such as Dun & Bradstreet and Coface, are also very active in this field.

Other players are the old-line, pre-shipment inspection entities, which are familiar to companies engaged in cross border trade. Bureau Veritas and Societe Generale de Surveillance SA, both European-based companies over 100-years-old with offices around the world, fall into this category. Then there are the new companies, with business plans to act as a neutral third party on the Internet. Many provide digital signature and other identity protection services, such as GeoTrust Inc.; Inc.; and SurePay, which is a payment facilitator. To gain credibility, these firms are usually certified by an acknowledged standard setting body, such as the American Institute of Certified Public Accountants.

Banks are also becoming very active in this area, if only for self preservation. The demand for e-commerce payment facilitation is great, yet many institutions have been hesitant to participate because of security concerns.

Consider, for example, the global banking network Identrus. Incorporated in early 1999 by eight of the world's largest banks, one of its initial goals was to provide a way for companies to make sure their online business contacts were truly who they presented themselves to be. Speedy facilitation of payment was important, too, but of a secondary concern.