On-line exchanges seem like a no-brainer these days. Every company of any size seems to be starting up or joining a group that will handle a mammoth amount of buying and selling electronically. The biggest players in retailing, food processing, mining, aerospace, and the automotive industry have committed to forming Web marketplaces that will control more than $800 billion of purchasing. Add a massive oil and chemicals exchange on the drawing board, and that figure approaches $1 trillion.

But these exchanges are anything but no-brainers. While some companies should aggressively lead the way in forming them, others should not. While most companies will want to at least participate in exchanges, there are valid reasons why others will not, at least for now. Even when companies do decide to join an exchange, they may find different ways to take advantage of their involvement.

Since February, when the two of us helped put together the giant auto-industry exchange now known as Covisint, we’ve been thinking a lot about how exchanges will form and evolve. These exchanges are fascinating and offer powerful possibilities, but prospective members need to think through all the implications before deciding how to proceed. Here are some guidelines:

WHEN TO LEAD? The first rule for building an exchange is: Think big.

If you can’t deliver a huge volume of transactions to the exchange, it will likely never develop critical mass. You might as well not bother.

You also have to think about how you compete. If you have a big advantage over rival companies based on your efficiency in purchasing, you likely don’t want to start, or even join, an exchange.

Look at Covisint, whose principal members are General Motors, Ford, and DaimlerChrysler. They knew they could deliver unbelievable volume to their exchange by buying all the parts that go into building cars. The total comes to some $250 billion a year, and the car makers know that their suppliers will deliver even more volume when they buy from their suppliers through the exchange. But before reaching agreement, the Big Three had to decide that they really didn’t compete on purchasing. They decided they compete on car design. They compete on innovation in engines and on-board technology. Moreover, for GM and Ford, roughly half of their profits come from their financing divisions. So, sharing purchasing efficiencies made sense for all the car makers.

Now look at retailers, which may compete based on purchasing. When Sears Roebuck and European retailer Carrefour decided they would team up to buy their supplies through a single on-line exchange, Wal-Mart Stores declined to help. Wal-Mart has far more buying power than its competitors and uses its power much more effectively. Why share with the competition?

Another solo purchaser is a multinational company we’re working with, whose suppliers have dedicated plants just for our client to ensure quality control for crucial parts. Our client can’t buy those parts on an exchange, because it can’t buy from just anyone.

If you decide to form an exchange, be sure to explore the full range of revenue opportunities—including one-time license fees, access and subscription fees, per-invoice transaction fees, commission fees (based on a percentage of the value of a transaction), and advertising fees. You should also look into providing custom software and services, which could be very lucrative revenue sources over time.

WHEN TO FOLLOW? Even if you can’t deliver lots of volume or can’t afford the risks and collaboration costs of starting an exchange, you might be a prime candidate to join an exchange that someone else has started. But you first need to realize that exchanges will change just about everything about how you sell (if you’re a supplier) and how you buy (if you’re a manufacturer).

You’ll have to go through a huge amount of effort to standardize with others in the exchange. What you call a thingamabob, someone else calls a whatchamahoozit. You have to come up with a common language. Actually, that’s the easy part. You also have to figure out how to assign a monetary value to issues such as quality, reliability, and shipping time, so the exchanges’ software can automatically choose among varying bids.

In addition, you need to think about what participating in an exchange will do to your organization. If you’re a supplier, you might no longer need salesmen. Or your salesmen might no longer look like salesmen.

Of course, you want to join an exchange that will be a winner. Here are some things to look for:

Is the governance simple? Consortia such as New Century Network, a newspaper industry response to Internet news services, failed because the rules were too complex.

How good are the people? If these exchanges are used as dumping grounds for the partners’ mediocre people, they’ll fail.

Are the technology systems open and compatible with other exchanges? They must be, so members can transact business with as many other companies as possible.

Is the equity shared among all the partners? It should be, to keep everyone focused on success.

WHERE ARE THE BENEFITS? The most striking are the efficiencies. The National Association of Purchasing Managers says it currently costs an average of $79 for a corporation to handle a purchase order. CommerceOne, a start-up that does on-line purchasing for companies, says that cost falls to $6 when the process is automated over the Internet.

But the benefits also include possibilities for surprising innovation. Because of these exchanges, industries will suddenly be speaking a common language. Everyone will be on-line and capable of communicating with each other. Who knows what will come of that?

Manufacturers and their suppliers might collaborate on design, sharing expertise on subjects that were previously addressed within the individual companies. Companies might share information on inventory—much as Dell Computer lets suppliers see how many of their parts Dell has on hand at any moment, so the suppliers can decide when to build and ship more. As Federal Reserve Board Chairman Alan Greenspan said recently, "Information is a substitute for inventory."

Participants in exchanges might also find ways to pool the efforts of all buyers and sellers. For instance, while there are currently fleets of half-full trucks on the highways, sharing logistics databases in real time could let participants combine partial shipments and save lots of money.

There will be at least a couple of interesting phenomena to watch over time. First, how will industries restructure themselves? It may well be that industries reorganize around the various "modules" of their core businesses. This would be analogous to the way the computer industry reorganized around the different components—hardware, peripherals, and software. Second will be to see who emerges as the chief beneficiary as these on-line exchanges proliferate. In other words, if these platforms begin to resemble financial exchanges, will the real advantage be in resembling the New York Stock Exchange or one of the huge brokerage houses?

Sviokla, vice chairman of Diamond Technology Partners, can be reached at svioklaj@diamtech.com. Gutstein, president of Diamond, can be reached at gutstein@diamtech.com.