Riding the VRM SeeSaw

On Monday the London VRM (Vendor Relationship Management) Hub put together a first half day workshop, looking mainly at User & Supplier issues (though of course it rapidly broadened into all sorts of other topics). I couldn't make it till later, but reading the blogs it seems a good time was had by all. For my bit in the Great VRM Endeavour, I've been looking at the economics and business models for VRM, and on Monday a number of the key issues it faces emerged. I've tried to summarise the key ones below:

Firstly, the economics of Conversational Markets



Doc Searls, one of the Authors of the Cluetrain manifesto, is the spiritual father of VRM, and one of the key tenets of Cluetrain is all markets are conversations. To a large extent this has been taken on board as a VRM core tenet, and is one of the features that gives it it's unique flavour.

However, the immediate comeback from commercially experienced people is that there is clearly a whole raft of relationships where the transaction costs are high, and / or the surplus value in the product is so low (see diagram above) that any conversation more than "Visa - that will do nicely" is impossible to cost justify. What we will therefore need to show going forward is that VRM can push these barriers back, in 2 ways:

- that VRM allows a sustained conversation such that the cost over a series of transactions are bearable

- that VRM can facilitate additional types of value via conversation (reduced churn, say)

Secondly, there is a debate about whether VRM can be executed by the users alone, or whether it needs to tempt suppliers to collaborate (ie either the gross value of serving all those VRM'ers is sufficienly alluring, vs. There has to be a giveaway to make suppliers use it). Any supplier will have to invest in new equipment /processes to serve VRM customers, so will be looking at +ve ROI. To answer this issue I looked at where the benefits are to the supplier, and they lie in 3 key areas:

Firstly, revenue increase:

- Increased Sales Volumes - if there are enough VRM'ers, then catering to them increases sales volume vs competitors that don't

- Increased Average Revenue per Customer - in theory having a deeper relationship should allow higher prices for higher service values, and higher trust can increase on-selling and cross-selling

Secondly, OPEX reduction:

- Relationships should also transalte into loner customer lifecycle / reduced churn

- Reduced OPEX - advertising becomes more predictable so teh 50% that doesn't work can be reduced, and better customer knowledge allows reductions in production and distribution waste, since more certainty allows better Lean Operation techniques to be used

Thirdly, CAPEX reductions:

- more productive use of existing assets via more efficient understanding of demand

- reduction in future CAPEX via better use of existing services and/or better targeting of future investment

While we can see that VRM can potentially address all these areas - even a small % improvement in each area yields huge increase in value - we are still very much in the "prove it" phase. We need some pilots!

Which brings me on to the third model issue - STL's Martin Geddes was there on Monday (see Doc Searls's summary of some of Martin's thinking over here), we have worked together on 2 sided business models elsewhere in the online service space. Martin's view is that VRM is potentially likely to need a 2 sided model (ie a transacting party in the middle), whereas others in the VRM space feel it is far simpler buyer/supplier relationship.

I suspect there will need to be space for both approaches (and others), in the early days at any rate. There will be a huge wave of experimentation across all the VRM axes in the early days, and we need to run a broad ecosystem so that darwinian evolution can occur. In fact, I chatted about this with Doc Searls the next day, he noted that in his view the "best of breed" solutions to VRM could easily come from a direction nobody has yet imagined, as it does so often in new emerging areas.

An excellent day, with excellent commentary, conversation and creative thoughts - as someone said, this is the coffee houses of London all over again. Kudos to Adriana Lukas for driving it....