The Naked Supplier

[From iSource Business, May 2001] On the Internet, (as we know from the now-famous The New Yorker cartoon), no one can tell if you're a person or a dog. Nor, for that matter, can they tell whether you are a legitimate corporate customer or supplier, which makes e-commerce a risky proposition. But a few solution providers are working to take the risk out of online B2B transactions by providing tools to verify the identity of potential e-business partners.

Trust No One

Risk has been a component of every business transaction since trading began, and wise businesspeople have typically assessed their risk before consummating any deal. Since this type of risk assessment slows down business, merchants have relied on relationships with their partners as one way to mitigate the hazards of commerce. Before the digital age, the face-to-face, the eye contact and the handshake kept business personal and fostered a sense of trust. But now, e-procurement and the Internet have influenced that dynamic.

Of course, trust was not an issue in the early days of e-procurement, back when e-commerce meant using Electronic Data Interchange (EDI) to connect to your existing supply base. Companies were generally just hardwiring links to partners they had known and traded with for years.  After all, EDI was such an expensive, complex process that it made sense only when the relationship and trust was already established.

Nor was trust a key issue when the e-marketplaces first made their debut in the late 1990s. Many if not most of the serious B2B exchanges did pre-qualify their participants, but in those heady days the talk was of exposing buyers to vast pools of potential suppliers and vice versa. Many-to-many and fat butterfly were the rallying cries of the Net marketers, and in their rush to gain liquidity (and profitability), the e-markets focused on building transaction volume by attracting a critical mass of buying and selling clients.

Ironically, the Net markets' own value proposition expanding the potential customer and supplier bases brought the trust issue back to the top of the agenda for would-be e-commerce participants. A lot of companies are finding a whole universe of potential partners out  there they didn't even know existed, explains Emmanuel Sodbinow, a senior consultant with the Patricia Seybold Group, a consulting firm headquartered in Boston, Mass. To the degree that those companies want to develop some kind of relationship, they need some way to be sure that the companies they are going to start working with are viable enough and reliable enough to provide supplies or services appropriately, or to pay up when they receive those supplies or services.

Brad Hansen, vice president and chief technology officer for BidBuyBuild, agrees with that view. BidBuyBuild is an online exchange for the construction industry, acting as a matchmaker between subcontractors and manufacturers. You have a lot of people doing business or having the potential to do business with each other who have never done so in the past, Hansen says. What was important for BidBuyBuild was to   find a way to break down some of the hesitation to doing business with people whom you don't know and have only met online.

Recognition of the trust issue as a potential stumbling block on the way to marketplace liquidity has been spreading among the exchanges. In an October 2000 Ernst & Young survey of executives involved in online B2B exchanges, 37 percent of the respondents said that verifying the identity, creditworthiness and trustworthiness of e-market participants would be a critical success factor for the marketplace exchanges.

Trust, but Verify

Business partner verification is nothing new. Dun & Bradstreet, for example, has long made its database of more than 60 million businesses worldwide available to clients to identify potential partners and verify credit and payment histories. In fact, Hansen says that BidBuyBuild's customers would go offline to use Dun & Bradstreet or a similar service to check up on potential partners. But because they did their verification offline, the exchange's customers viewed such a check as an extra step that interrupted the flow of the online transaction process. The feedback coming from our sales force was that people would use the site more if we had some kind of authentication capability, Hansen explains.

Enter GeoTrust, a Portland, Ore.-headquartered startup that began offering an online identity service late last year. Beginning in October 2000, BidBuyBuild customers have been able to validate the identity and creditworthiness of a potential partner with a few clicks of a mouse, giving them immediate access to such information as the partner's performance and payment history, business policies and practices, and standard terms and conditions.

The story of how GeoTrust President and CEO Jonathon Jothy Rosenberg came up with the concept for GeoTrust is becoming the stuff of Internet legend. His wife, a physician's assistant for patients with AIDS, commented to him one day that much of the information available on the Web about the disease was pure quackery. Why, she asked, couldn't he come up with a way to verify that a Web site was legitimate and authoritative? Rosenberg, who has a Ph.D. in computer science from Duke University, took up the challenge of online trust and, in 1999, joined GeoTrust, then a year-old company, to help develop a suite of identity software especially for e-marketplaces called Safe Market.

GeoTrust worked with Ernst & Young's Center for Trust Online to develop an appropriate trust model  for e-commerce, and Safe Market combines software and vetting services. When a company registers with an online marketplace that is using the Safe Market service, it self-discloses certain financial and background information that goes into a digital profile set up by GeoTrust. The company also declares which of its executives have signing authority.

GeoTrust then draws on a number of outside sources to vet the company, including Open Ratings, a supplier-performance rating service; SGS, an old-line Swiss verification, testing and certification company that provides access to information gathered during site visits to companies around the world by SGS inspectors; and Equifax Service, the e-commerce division of Equifax that provides B2B authentication services.

At the end of the vetting process, GeoTrust issues a digital certificate  that authenticates the company's corporate identity for the purposes of e-commerce transactions through the online exchange that is using Safe Market. Potential partners can verify the company's creditworthiness and other information by accessing the company's trust profile online, and transactions involving the company produce a legally valid digital receipt setting forth the terms of the deal. GeoTrust backs up its digital identity validation service with a warranty, underwritten by Lloyd's of London, which provides for compensation, should a company that relies on a GeoTrust authentication get burned. As a result, participants in online exchanges can conduct e-commerce transactions with greater confidence.

GeoTrust charges a set annual fee of $180 per company vetted on a particular marketplace using the Safe Market suite. Rosenberg says that the fee is annual because of the follow-up work that GeoTrust performs to keep the authentication up to date. The marketplaces using Safe Market may  or may not pass the fee along to their customers, and they may or may not require that their participants submit to GeoTrust verification.

Hansen says that BidBuyBuild has gotten good verbal feedback regarding the site's use of GeoTrust services. Significantly he notes that, based on his observations, smaller enterprises those that are not household names or well known in an industry seem to have the most to gain from registering with GeoTrust, since the authentication process lends them legitimacy as potential partners. According to Hansen, BidBuyBuild views the GeoTrust functionality as part of the exchange's competitive edge in an increasingly aggressive online market. Still, Hansen says BidBuyBuild has not been able to nail down the impact that Safe Market might be having on the site's traffic. So much about trust is hard to quantify, he notes.

Watching the Watchers

Sodbinow, in a report on GeoTrust for the Seybold Group, notes that GeoTrust has to date accumulated a database with information on about  12 million companies, even though only a fraction of those companies have signed up for GeoTrust authentication. While none of the warehoused information becomes part of a trust profile until a company registers with GeoTrust, even public companies might feel queasy about having so much valuable information in one place that they cannot control, Sodbinow writes.

To allay concerns about its practices, GeoTrust established an Ethics and Policy Advisory Council and charged the group with helping to refine the trust model that underlies the company's work and with ensuring that GeoTrust maintains its own authority as a fair and unbiased information provider. Sodbinow cites the council as a significant advantage for GeoTrust: It's for the best that a company has that much concern about what it's doing and would put such a body in place. It speaks well for its willingness to make sure that what it does is what it's supposed to do.

GeoTrust was not the first or last company to enter the increasingly crowded online trust market. Dun & Bradstreet's eccelerate provides a similar offering and has the advantage of direct access to the parent company's extensive database as opposed to GeoTrust's indirect access, through its alliance with Open Ratings. Other companies are offering digital certificate software that ensures the security of online communications.

It goes without saying that GeoTrust is betting that it (along with other trust providers) can sufficiently allay the fears of potential participants in   e-marketplaces and thereby help the online exchanges attain the twin Holy Grails of liquidity and profitability. That is by no means a sure bet, given the difficulty that many exchanges have had in attracting buyers and sellers. But it is more certain that if the online exchange model does find eventual acceptance and viability in the marketplace, Safe Market or some similar facility will be a part of what exchange users will come to expect when they go online to buy or sell.

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