It seemed to be all set. The world was going to be perfect. Increasingly technology-savvy consumers would point and click their way to deal directly with increasingly technology-friendly companies, cutting out the time, expense, and hassles of dealing with no-value-adding middlemen. What could be better?

But something funny happened on the way to the new forum. Middlemen decided they didn't need to go quietly. Instead, they have busily reinvented themselves. As a result, they remain as deeply entrenched in the world of commerce as ever.

Brenda Duchesne Miller was so worried that her job as a realtor might go away that she sold her expansive home and moved into a condo to save for that dark day. After all, who would need a person to help locate a house, when technology could match buyers and sellers so much more efficiently?

Then, the 38-year-old Ms. Duchesne Miller realized that the Internet could be her friend, as well as a threat. She slapped her e-mail address on all correspondence. When her employer, Alain Pinel, in Saratoga, Calif., set up a Web site, she eagerly pursued any leads that came in. She used maps on the Internet to help clients plan house-hunting trips. She began ushering overseas buyers to Alain Pinel's new "video home tour" feature, so they could narrow the list of homes they had to visit physically later.

Recently, Ms. Duchesne Miller sold the condo and moved into a larger home than the one she had previously.

"We may have to cut prices, but realtors won't be cut out completely," she says while discussing her recent Web-spawned sale: a $1.4 million house in Saratoga, yielding a $60,000 fee for her. "Buying a house isn't like buying a pair of shoes. It takes negotiating and skill. The agents who are getting squeezed out of the business are those who refuse to get computer-savvy, which is creating even more business for those of us who keep up with the technology."

Buyers and sellers are certainly trying to shove aside traditional middlemen and deal more directly with each other. With the spread of the Internet helping create a leaner and meaner economy, these are nervous times for travel agents, insurance agents, retailers, stockbrokers, and industrial distributors. As MIT Media Lab founder Nicholas Negroponte says, [See "The Digital Civilization," Context, Summer 1998] "Almost anything that has the word, 'agent,' 'broker,' or 'wholesaler' in it has a little visible flag on its head, as far as I'm concerned, that says, 'Going out of business.'"

But, a few years into the "disintermediation" movement, the gloom and doom is turning out to be just half the story. The flip side of disintermediation is "reintermediation:" changes by existing middlemen and the rise of new ones to capitalize on this tectonic economic shift. These new-era intermediaries tend to be fast, flexible, technology-savvy, and focused above all on providing either broader or more specialized service—not merely existing as a passive channel. If their rationale proves strong enough, these reintermediaries not only can survive but can command a premium.

In any case, it now seems naïve to think that middlemen will just go away. They, suppliers, and customers will continue their long, complex dance well into the future.

Health care may be the most brutal example of attempted disintermediation, because every player in the industry seems to be trying to cut out some other group of players. HMOs want to avoid the insurance companies and deal directly with the employers who buy health care. Groups of employers are even forming to cut out HMOs and deal directly with physicians.

But, so far, everybody is still standing, because even the middlemen who seem most vulnerable keep finding ways to reinvent themselves. For instance, United Healthcare, one of the largest and most successful managed-care organizations, has found it can offer better service to doctors and patients by playing the role of "responsible facilitator." It learned that when it sent letters recommending that its women members get regular mammograms, a tiny fraction did so. So it started preparing letters that the women's physicians simply had to sign and mail in envelopes that United Healthcare had already addressed and stamped.

Patients like the attention. Physicians like getting the credit for that attention, which they receive because United Healthcare keeps its name out of the letters. United Healthcare likes the stronger ties it now has with physicians. And, presumably, everybody benefits because those receiving the letters have proved to be more likely to get mammograms. That result should lead to earlier treatment of breast cancer—reducing deaths and complications from surgery, as well as the total cost of treatment.

In the insurance world, the mediating infrastructure of agencies and brokerages is literally centuries old, and the Internet has made it possible for any insurance company to just set up a Web site and start dealing directly with customers. But insurers are finding that, in many cases, the middlemen own the relationship with the customer.

"The industry is so dominated today by distribution that every time management tries to change something, the system of independent agents promptly kicks management in the groin," says Robert Patin, former chief executive of Washington National, an insurer.

Consumers like dealing with agents partly because they can get information on many insurers at the same time. And the Internet does little to change that. Just as individual insurers have gone on-line, LifeQuote of America, developed a Web site that provides prices from more than 50 insurance companies.

Peter van Aartrijk, a vice president of the Independent Insurance Agents Association of America, says 95% of commercial insurance and more than 93% of personal lines of insurance are delivered via a local agent, and he believes that will continue.

"In fact, we think it's the insurance companies themselves who are more at risk of disintermediation," Mr. van Aartrijk says. "We see more and more groups of independent agents, for example, forming their own captive insurance companies to write risks that ordinarily would be sent to distant companies."

Andrea Loughry is the kind of agent who is proving Mr. van Aartrijk's point. The 53-year-old former college professor bought a family agency 10 years ago in Murfreesboro, Tenn., and lately has been rethinking her approach to business like the rigorous academic she once was. She has used technology to make herself an information broker, gathering faxes and downloading articles that she sends to business clients who might be interested. She is also focusing more on clients who need and value high levels of service.

"There are plain-vanilla types of consumers who look at insurance as a commodity and want a quick fix. They're the kind who are purchasing policies via the Internet or an ATM machine," Ms. Loughry says. "But my customers are the other type: people who own businesses, for example, and who tend to value relationships, an agent who can help them keep up with the law and work their way through the bureaucracy of claims." She adds that her customers "care about getting a hold of a decision-maker at 11 o'clock at night after one of their trucks has killed someone. An insurance executive somewhere in the East with an 800-number and a computer is never going to be able to replace that kind of service."

Travel agents would seem to have as much of a future as the biplane. Airlines have put their fares and schedules on-line in a fairly convenient way, reducing the need for agents. Electronic ticketing means there's nothing magic any longer about the agents' ability to print a ticket—a customer can now go straight to the gate without any paperwork. Even beyond what the individual airlines do, there is Travelocity. Its Web site offers schedules for more than 700 airlines worldwide; reservations and tickets for 420 of them; the capability to select specific seats on airline flights; an engine that searches for the lowest-priced fares; reservations at more than 37,000 hotels and 50 car-rental companies; and a beeper notification service that pages consumers about any changes regarding their planned flight. What travel agent can match that?

"Travel is perfect for the Internet because it's a fully virtual product. You can't see it or touch it," says Terrell B. Jones, president of Sabre Interactive, which operates Travelocity and is part of Sabre Group, the airline-reservation system 80%-owned by American Airlines.

But Mr. Jones adds that even people who buy tickets on the Internet need a lot of handholding for the hand that isn't using the mouse. "Lots of people want someone else to ensure that they've done the right thing," Mr. Jones says. "People also want someone else to blame if they're stranded on a desert island with their wife, and she says, 'You bought this on the Internet, you jerk?'"

That's sort of what Patti Metzger had in mind when she combined her traditional agency in West Bend, Wis., with her background as a wedding consultant to create Weddings on the Move, which arranges nuptials around the world. "Most hotels, even top ones, only have a concierge to help with a wedding, but they're not specialists; and no one else does multiple destinations," says the 37-year-old, whose company books about 300 fetes a year in places as popular as Las Vegas and as exotic as Fiji. For one particularly complex ceremony last summer, Ms. Metzger had to arrange a wedding in Rome for an American serviceman and his Canadian bride, who were living in Saudi Arabia.

Richard Nigosian, like many middlemen, views information about his clients as a key weapon to keep from being squeezed out. He is developing a database of the preferences of the upscale clientele at his New York agency, Bond Street Travel—basically the information that "is now little pieces of paper stuck to things in drawers," he says. He thinks that sort of personal knowledge will endear him to clients and maybe let him sell their profiles to, say, hotel chains that want to identify well-to-do frequent travelers. Mr. Nigosian also thinks that for $50 a year per client he can offer a sort of insurance policy that would obligate him to help with any problems on the road. "If there's a rainstorm in Denver and all flights are canceled, are you going to call Travelocity?" he asks rhetorically.

In the world of dealers and distribution, the Internet would seem to remove their reason for being. Manufacturers can sell directly to customers, cutting out store owners. And the rise of technology-based delivery companies like Federal Express means that businesses can ship small quantities quickly, straight to customers.

But Brian O'Donnell doesn't think he's quite dead yet. Co-owner of a typical family hardware store in Lincoln Park, Ill., the 36-year-old Mr. O'Donnell was a bit restless fixing window screens and measuring out electrical conduit by the foot. So he began surfing the Net, looking for Web sites for brands of goods that his hardware already sold or that would make a reasonable fit. Then he bought Internet domain names that would go with those lines of goods. He approached manufacturers offering to serve as a one-stop Internet shop for their full line of wares. To his surprise, the makers of Weber grills and Combi baby strollers were happy to work with him; one reason was that they could have an outlet on the Web without upsetting their existing distributor network. Now, manufacturers such as Coleman Outdoor Products are approaching him to work out deals. Last year, 9% of the hardware store's business came from the Internet. This year, Mr. O'Donnell is expecting 25% to 30%.

At the other end of the size scale, the Big Three U.S. auto makers are intensifying their efforts to strip down one of the most hidebound distribution systems in the world. "Dealers compete against one another, which means each dealer is operating as a tiny entity," says John Ochs, a Ford Motor spokesman. "It makes no sense whatsoever. So we're going into these medium-sized cities, asking these dealers to join together and form a business in which they're all shareholders and sell from two locations rather than 10." Ford already has agreed with dealer groups in Tulsa, Okla., San Diego, and Salt Lake City to consolidate each metro group into a system of megastores with large inventories, as well as a widespread grid of smaller service centers.

In the face of the pressure to consolidate, Ed Witt, a successful independent Lincoln-Mercury dealer, decided it was time to move on. Although his father and brothers have all run dealerships and although he had worked hard to establish himself as "the Value Man" in Milwaukee, Mr. Witt took an offer from Ford to assist with the reshaping of the dealer channel. "The stick keeps moving," making competition among dealers ever tougher, the 53-year-old Mr. Witt says.

Now, Mr. Witt is in charge of merging the five independent Lincoln-Mercury dealers in San Diego. He is not only forging a new company but trying new approaches to selling cars. Mr. Witt's new megastore launched a no-negotiation pricing policy this summer. He also bakes chocolate chip cookies on the premises for his customers, whom he sometimes refers to as "guests." He holds sales meetings in the middle of the showroom—during business hours. "There isn't anything that we can't say in a sales meeting that one of our clients couldn't listen to," he explains.

Even with the consolidation of the dealer channel, however, the car companies are still doing very little business directly with customers. Car buyers still overwhelmingly want to see a car in person, not on a Web site, and want to drive off immediately in whatever car they decide to buy. So the car companies are just reshaping the current system, not destroying it.

In business-to-business commerce, distributors are having to drastically upgrade their service to keep from being cut out. Distributors of electronic components, for example, increasingly are providing inventory management, putting together "kits" of related components supplied by different manufacturers, performing light assembly, and even establishing some low-intensity programming in the effort to add value to their share of the supply chain. For instance, CompuCom and other computer resellers are starting to do some final assembly for Compaq Computer, which sees the arrangement as a way of becoming more agile. Meanwhile, giant traditional industrial-supply houses, like W.W. Grainger, are assembling omnibus agreements that broaden their role at companies like Motorola. Rather than just distribute its own industrial parts, Grainger now provides a comprehensive, "integrated" supply of practically every conceivable good or service that isn't a core competency of the customer.

"At Grainger, this business has grown from $100 million in revenues to more than $700 million in just a few years," explains Kenneth Rolnicki, who teaches "channel" management at Northwestern University and has written a guide to distribution.

Like many middlemen, Grainger is finding that it can be remarkably flexible as it tries to redefine its role in a rapidly changing world. "They're saying, 'Look, we want all of your maintenance, repair, and operations business; if you want some office furniture, we'll find some; same if you want computer repair or grounds maintenance,'" Mr. Rolnicki says. "'And if you want a new plant built in Madison, Wis., we'll handle that, too.'"

Mr. Buss is a veteran financial journalist and principal of Veritas Communications in Detroit. He can be reached at veritascom@aol.com.

FRIEND OR FOE ?

As makers of goods and services ponder whether they should try to cut out distributors and deal directly with customers, two basic approaches are taking shape:

Go ahead and try to cut out middlemen—but be awfully sure you're offering something they don't. Otherwise, why would a consumer bother to switch?

Terrell B. Jones, president of Sabre Interactive, the travel-information service, says his company's Travelocity Web site offers various products not offered elsewhere by Sabre, as part of its efforts to reduce the use of travel agents. For instance, Travelocity will notify customers when prices drop. "You need to make your virtual products compelling," Mr. Jones says.

NECX, a retailer of computer products with sales of more than $400 million, encourages companies to deal directly with it over the Internet, rather than go to distributors in part by offering links to the sites of competitors if they have a cheaper price. "Why?" asks Henry Bertolon, NECX's chief executive. "I want to get you thinking, 'I'm at least going to go to NECX first because there's no harm in it.'"

Matt Erickson, vice president in the Chicago office of Boston Consulting Group, says companies should at least lower prices on goods sold over the Internet.

Of course, it's possible to just withhold products from your distribution channel if you're willing to risk middlemen's wrath.

Use technology to find new ways to work with middlemen as they try to reinvent themselves.

In an unusually sophisticated approach, Fruit of the Loom produced Web sites at no charge for distributors interested in an Internet presence. The distributors can feature their full lines of apparel—including competitors' products. But Fruit of the Loom gets to run "subtle promotion in the background," says Dudley McIlhenny, a partner in the Context Group, a management consulting firm (not related to this magazine). Fruit of the Loom also becomes the "recommended substitution" any time a distributor is out of stock of a requested item, a position that has helped Fruit of the Loom take business from competitors.