Re-engineering the Dutch Flower Auctions

Reengineering the Dutch Flower Auctions: A Framework for Analyzing Exchange Organizations Ajit Kambil • Eric van Heck Information Systems Department, Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012 akambil@stern.nyu.edu Department of Decision and Information Sciences, Rotterdam School of Management, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands eheck@fac.fbk.eur.nl T his paper specifies a generalizable model of exchange processes and develops a process- stakeholder analysis framework to evaluate alternative market designs. This framework is applied to analyze a number of information technology initiatives in the Dutch flower markets. The Dutch flower auctions are the world’s leading centers for trading cut flowers and potted plants. We undertake a cross-case analysis and apply our framework to analyse successes and failures in the introduction of new IT-based trading mechanisms in these markets. Based on our study, we develop a number of testable propositions on: the separation of physical and informational processes in trading, the responses of stakeholders to changes in available information due to IT initiatives, and economic and incentive conditions required for adoption of new trading processes. Finally, our detailed cases illustrate the institutional and incentive constraints, and complexities encountered in the introduction of new electronic markets. (Electronic Markets; Transaction Costs; Reengineering; Technology Adoption) 1. Introduction traders’ bounded rationality and market uncertainty, combined with the potential for opportunism given the Information technology enables new ways of coordi- divergent interests of different market participants nating the exchange of goods and services. Improved (Williamson 1975, 1985). Markets and other gover- communications and processing systems, such as the Internet and video conferencing, allow individuals and nance mechanisms provide specific information pro- organizations to radically re-engineer existing trading cessing capabilities to exchange parties and serve to processes enabling new forms of electronic commerce generate information and trust to reduce the uncer- and markets. tainty and risks inherent in the exchange process Markets are real or virtual meeting places where (Kambil 1992). To reduce uncertainty and risk, markets buyers, sellers, and intermediaries meet to exchange or as institutions provide specific routines and proce- transfer property rights from one party to another. dures for coordination, and for the information and Typically, buyers and sellers confront many different guarantees that enable the buyers and sellers to un- uncertainties and risks in trading. These include the dertake the exchange. inability to forecast or plan for the future given the Prior research on the effects of information technol- 1047-7047/98/0901/0001$05.00 Copyright 1998, Institute for Operations Research Information Systems Research and the Management Sciences Vol. 9, No. 1, March 1998 1

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions ogy (IT) on exchange organizations and processes typ- structure and benefits of different markets for various ically applied transaction costs and agency theory to stakeholders. Building on transaction costs and predict shifts from hierarchies toward market or other information-processing models (Galbraith 1974, intermediate forms of organizations (Bakos 1991a, Tushman and Nadler 1978), this paper provides both Johnston and Lawrence 1988, Malone et al. 1987, a model of key exchange processes and a process- Powell 1990). A central argument of these articles was stakeholder analysis framework for comparing across that information technology would improve commu- different market structures. Such a framework is im- nications, searches, monitoring, and information- portant to managers who must select and design new sorting capabilities to reduce transaction costs and al- trading models. It is also important to researchers who low purchasers to take advantage of production econ- want to develop models of how information technol- omies available in markets. A critical drawback of this ogy affects exchange organizations and create theories analysis was the definition of markets in abstract eco- that can be generalized across cases. We illustrate and nomic terms (i.e., markets coordinate economic activ- apply this framework to evaluate different electronic ity through a price mechanism) without consideration commerce initiatives in the Dutch flower markets. The for differences in market organization. For example, framework for analysis developed in this paper can some different market types include direct search mar- apply to the analysis of other market structures. kets where partners directly seek each other out (e.g., a typical retail fruit and vegetable market), brokered markets where exchange parties employ agents to seek 2. Exchange: A Process Stakeholder compatible partners (e.g., private placement offerings Analysis by investment banks), dealer markets where dealers as Exchange is a critical subject of study in marketing, intermediaries hold, buy, and sell product inventories economics, finance, and information systems. Building (e.g., NASDAQ), and auction markets where traders on these disciplines, information systems researchers transact directly through a centralized intermediary have typically adopted a number of outcome dimen- (e.g., Sotheby’s art auctions). Each of these mecha- sions to characterize and evaluate markets. For exam- nisms organizes the trading process and related infor- ple, Clemons and Weber (1990) characterize financial mation processing activities in different ways. Thus, markets in terms of liquidity, volatility, and transpar- we can expect the impact and role of IT can vary across ency. Liquidity is the ability of the market to absorb types. large orders without significant price changes, indicat- More recently, information systems researchers have ing the depth and extent of market participation by examined the impact of information technology on buyers and sellers. Volatility refers to the variance in market institutions. Konsynski et al. (1989, 1990, 1992) day-to-day volumes and prices, and transparency re- provided a number of descriptive case studies of elec- fers to keeping the widest group of buyers informed tronic markets providing a rich case base for research. on current prices and allowing them access to trading. Clemons and Weber (1990, 1991) examined the effects Highly liquid markets with low volatility and high of computerization on the London Stock Exchange, transparency provide stable forums for exchange. and Lee (1993) provided a technology to support order While these outcome characterizations of different matching of complex products. These studies begin to market institutions are important, they are not easily consider the importance of different market types and generalizable across settings. For example, liquidity is institutional histories. a key indicator of market quality for financial markets Despite the increasing number of cases on electronic but it is an inappropriate measure in the case of Dutch markets, a common language and categorization of flower auctions. First, the size of any one flower order key processes in a trading system is lacking. Such a is limited, so it is hard to evaluate the impact on price categorization is a precondition to building a frame- of large orders. Second, the flowers are sold from the work to systematically evaluate and compare the auction to the buyer without further resale among the Information Systems Research 2 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions buyers. Common outcome characterizations such as li- ications and computing, product representation, legit- quidity do not apply to all market exchange relations. imation, influence, and dispute resolution). The basic Outcome characterizations also do not help managers trade processes are distinct processes required in all evaluate the potential impact of a new information transactions of goods and services. The trade context technology innovation on the operations of a trading processes facilitate and enable or reduce the costs of or system, or the costs and benefits to different “frictions” in the basic processes. Figure 1 illustrates stakeholders. these processes, which are defined and discussed in A model of key exchange processes is necessary to Tables 1 and 2. provide a reference point for comparing the organi- The ten process categories described in Tables 1 and zation of different market institutions. Traditional pro- 2 provide parties to an exchange relation with the in- cess classifications of exchange include search, bar- formation processing, coordination, and influence gaining and negotiation, monitoring, and enforcement mechanisms required to mitigate uncertainty and processes (Coase 1960, Dahlman 1979).1 However, this exchange-related risks. While we cannot prove that level of classification does not provide sufficient detail our categorizations define all processes related to ex- for the comparison of alternative market structures. change, we propose that these categories define the key What is required is a classification of exchange pro- processes underlying trades. The categories allow sys- cesses that is generalizable, focuses attention on salient tematic identification of processes affected by a specific dimensions of an exchange relation and provides suf- administrative or technological innovation and enable ficiently detailed information for effective classifica- us to systematically examine and represent the impacts tion of exchange features into independent process of information technology across interdependent pro- categories. We adapt work by Kambil (1992) to build cesses and stakeholders in an electronic market. such a classification scheme grounded in transactions The implementation and operation of the above pro- cost and information-processing theories. cesses and systems create transaction costs for different 2.1. A Model of Exchange Processes stakeholders to the exchange. Transaction costs and Kambil (1992) identifies ten distinct processes that can the complexity of these processes increase as products operate in an exchange relation, providing a basis for and production become more complex, and as the mar- a finer grained analysis of market structure and costs. ket environment becomes more uncertain. Transaction This categorization also recognizes that basic trade costs also increase as exchange parties establish more processes exist within a wider context of support pro- complex mechanisms to defuse opportunism risks. cesses that implement dispute resolution, and other Traditional economics postulate that firms will choose mechanisms to ensure that counterparties to trades to organize exchange relations so that they achieve the will meet their obligations. We adopt, refine, and lowest possible combined transaction and production extend his model into five trade processes (search costs. This would suggest the trading mechanisms valuation, logistics, payments and settlements, authen- with the lowest sum of transaction costs across all the tication) and five trade context processes (commun- processes will evolve and dominate the market. How- ever, real-market institutions are complex, constituting 1 Coase (1960) states for “a market transaction it is necessary to dis- a meeting point for stakeholders with both convergent cover who it is one wishes to deal with, inform people that one and divergent interests. Innovations by a specific wishes to deal and on what terms, conduct negotiations leading up to a bargain, to draw up a contract, to undertake the inspection stakeholder may reduce overall transactions costs but needed to make sure that terms of the contract are being observed can increase the costs to other parties. This can result and so on.” This specifies a minimum of three sequential activities: in the failure to adopt a specific technology or admin- search to gather information and determine products and parties to istrative innovation in the marketplace. Thus we pro- transactions; bargaining and negotiations to determine the terms of exchange; and the construction and adoption of monitoring, polic- pose the need for a process-stakeholder analysis to sys- ing, and enforcement mechanism to ensure parties will satisfactorily tematically evaluate the effects of technological perform the exchange. innovations on specific processes as well as costs and Information Systems Research Vol. 9, No. 1, March 1998 3

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Figure 1 Exchange Processes Reprinted by permission from: “Doing Business in the Wired World,” Ajit Kambil, IEEE Computer, May 1997. IEEE 1997. benefits that arise from the innovation on different Annual sales of the seven Dutch flower auctions ex- stakeholders. ceeded $2.9 billion U.S. in 1996. Below we develop and illustrate the utility of a The flower auctions use the “Dutch” auction method process-stakeholder analysis in focusing attention on for price determination. This method uses a clock, with critical features of trading mechanisms, by using it to the clock hand starting at a high price determined by systematically represent and evaluate the effects of the auctioneer and dropping until a buyer stops the various information technology initiatives in the Dutch clock by pushing a button to bid for a lot at the price flower auctions (DFA). determined by the clock hand. This method was in- vented by a Dutch cauliflower grower in the 1870s to trade agricultural products. It reduces the time spent by growers at markets and frees them from the task of 3. The Dutch Flower Auctions bidding and price determination, thereby allowing The Netherlands is the world’s leading producer and them to focus on production. It also reduces the time distributor of cut flowers and potted plants. This in- buyers spend in bidding or bargaining for goods. dustry consists of about 11,000 growers and nearly The flower auctions provide a central location for the 5,000 buyers. Growers typically are family businesses, meeting of buyers, with suppliers allowing for effi- while buyers represent both large and small wholesal- ciencies in quality control, logistics, and product re- ers and retailers. The Dutch dominate the world export distribution. Flower Auction Aalsmeer (VBA) near markets, with 59% world market share for cut flowers Schiphol airport and the Flower Auction Holland and 48% world market share for potted plants in 1996. (BVH) near Rotterdam are located close to major trans- The Dutch flower auctions established and owned by portation facilities and have some of the largest com- grower cooperatives play a vital role in Holland’s lead- mercial buildings in the world. Both auctions spread ership of this industry by providing efficient centers across the equivalent of about 100 soccer fields, each for price discovery, and the exchange of flowers be- with the capacity to host 2,000 buyers. At the VBA the tween buyers and sellers. The world’s two largest flower auctions occur in different auction rooms under flower auctions are the Flower Auction Aalsmeer 13 different clocks. The computerized clock in the auc- (VBA) and the Flower Auction Holland (BVH) in Hol- tion hall provides buyers with information on the pro- land. These auctions trade over 30 million flowers and ducer, product, unit of currency, quality, and mini- conduct nearly 60,000 transactions daily, generating mum purchase quantity. The flowers are transported together over $2.4 billion U.S. in annual sales of cut through the auction hall and shown below the clock to flower and potted products from the Netherlands and buyers. When the buyer stops the clock, the auctioneer other producers such as Israel, Kenya, and Zimbabwe. uses the intercom to ask the buyer how many units of Information Systems Research 4 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Table 1 Description of Basic Trade Processes Process Description of Basic Trade Processes 1. Search The information gathering and evaluation process undertaken by buyers and sellers to identify opportunities. A trading opportunity consists of a supplier willing to offer a good and a buyer interested in purchasing the good. Thus search processes identify potential suppliers, goods, and customers willing to purchase the goods. Different market mechanisms implement varied methods and venues to identify trading opportunities. Different search methods allocate different search costs to buyers, sellers, or intermediaries. 2. Valuation (Price The process and methods of negotiating and discovering a purchase or sale prices for a product. A variety of different Negotiation) price discovery and bidding processes exist that differentially attributes costs to buyers, sellers and intermediaries. For example, various auction methods are specified in Davis and Holt (Davis and Holt 1993) for finding prices. Price discovery mechanisms can also be biased to shift surplus from the trade to specific transaction stakeholders. 3. Logistics The processes specifying and coordinating the actual delivery of goods from the seller to buyer. Again, in a trade the direct costs of delivery may be assumed differently by different players. 4. Payment and Settlements These processes define the terms and methods of payment permitted and ensure the settlement of payments in the exchange. Third parties often provide the infrastructures for exchange. 5. Authentication This is a core set of activities used to verify the quality and features of the product offered, the authenticity of the trading parties, and monitor conformance to the contract or agreement among parties. Authentication may involve third parties who provide credit check, notarization, and other services to reduce the uncertainty of buyers and sellers. Authenticating the quality of a product prior to purchase mitigates against adverse selection risks (Akerlof 1970, Klein et al. 1978). Monitoring processes in a complex transaction work to ensure that the trade is successfully completed and mitigate against moral hazard risks. Third parties to the transaction may play a critical role in monitoring transactions, ensuring nonrepudiation and completion of agreements. a lot he or she will purchase. The buyer provides the different stakeholders. A case method was used be- bid and, when the bid is accepted, the clock is reset cause it enables rich data and “reality” to be captured and the process is re-started to clear the remaining in- in greater detail than other methods. The case method ventory. The auctioneer may introduce a new mini- also permits us to consider a greater number of ex- mum quantity to ensure the entire lot clears. Each clock planatory variables. We then undertook a cross-case can handle nearly 1,000 transactions an hour (approx- analysis on multiple IT initiatives in the Dutch flower imately one transaction in four seconds). On average, markets to generate propositions that explain the suc- 15 million flowers are traded daily at the VBA in 30,000 cess or failure of specific innovations and more general transactions. impacts of new information technologies on markets. We investigated the use of information technology While we acknowledge that a single case cannot be in these auctions over the span of three years, collect- generalized into a theory, a cross-case analysis is a use- ing data through interviews with auction officials and ful step in theory construction by identifying patterns participants and through review of all relevant pub- that provide testable propositions (Eisenhardt 1989, lished reports and archival material. Next we used the Yin 1981). process categories identified in the previous section to 3.1. An Evaluation of the Traditional Dutch organize the information and systematically evaluate Flower Auction or compare the impacts of specific IT innovations and Utilizing the previous process categories, Table 3 sum- process changes on different stakeholders in the DFA. marizes the key features, strengths, and weaknesses of This process-stakeholder analysis was used to identify the traditional Dutch flower auction. This provides a changes in benefits and costs of different exchange pro- baseline for comparision and evaluation of process cesses, and the relative value of these innovations to changes enabled by information technology. Information Systems Research Vol. 9, No. 1, March 1998 5

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Table 2 Description of Trade Context Processes Process Description of Trade Context Processes 6. Communications and Communications and computing processes underlie and bind all trading processes. New communications capabilities in Computing terms of richer media, faster transfer speeds, improved ease of use and lower infrastructure costs transform coordination capabilities within and across trade processes. Similarly, improved processing, storage, input-output, and software technologies, further transform the coordination and decision making capabilities of stakeholders in each process. These transformations change the specific transaction costs and opportunity costs perceived by buyers, sellers, and intermediaries. 7. Product Representation Product representation processes determine how the product attributes are specified to the buyer or other third parties. To what extent is there a standardized product and quality specification language? Both the buyers’ and sellers’ costs are reduced by informational standards or well-specified languages to represent the key quality, functional and aesthetic attributes of the product. If the product is well represented, the uncertainty of the buyer is lower. The costs and methods of implementing a uniform product representation scheme vary in different market mechanisms. 8. Legitimation This process is used to validate the trade or exchange agreement. It defines how bids, or agreements are recognized as valid and binding commitments by exchange parties. In different trading situations, different procedures and rituals are undertaken to legitimate a transaction. Often this is done by announcing the agreement, and participants to the agreement, to a broader audience through a formal process. 9. Influence Structures and These processes implement mechanisms to enforce obligations or penalties to reduce opportunism risks. Kambil (1992) Processes defines two distinct influence processes developed from social exchange and transactions cost theories. These are: incentives and sanctions, and credible commitments. Incentives and sanctions include performance rewards for completing a contract on time, or penalties for misrepresenting products, or denial of access to an exchange network. A reputational system defines a special class of incentives and sanctions. Actions taken to enhance and create a good reputation serve to create trust in the party. When a social system establishes a reputation as a valued asset to sellers or buyers, opportunistic behaviour that can sully the reputation becomes more costly. Investment in credible commitments (Williamson 1985) or asset-specialized investments by both exchange parties creates hostages such that the loss of the relationship will create a significant cost for both parties. This serves to signal commitment to the relationship by both parties and mitigates against opportunism risks. The types of commitments, the importance of reputation, and institutional authority to create incentives and sanctions can serve to reduce risks and the costs associated with other processes. 10. Dispute Resolution All exchanges occur in a broader legal or institutional context which provide various processes for resolving disputes among parties and structures decision rights in the event of conflict. Firms may elect to directly resolve disputes through negotiation, commit to third-party arbitration or court ordering of disputes. The latter is typically the most expensive alternative. Dispute-resolution processes adopted in an exchange relation, and the allocation of decision rights to structure solutions to disputes are crucial to reducing risks for buyers and sellers. Where goods are exchanged, disputes can be resolved by replacement of a defective product, and warranty mechanisms. The Dutch flower auctions provide buyers and sell- of nonstandard and unusual-value products (Milgrom ers with a highly efficient infrastructure to support and Roberts 1990). By operating at a high clock speed, exchange. As summarized in Table 3, they provide encouraging competition among buyers, and setting a efficient search, communication, and product repre- fixed time by which to complete a transaction (or the sentation capabilities for highly varied products. The clock goes to zero), the auction enables efficient trad- auctions are also very efficient in determining price, ing. The hub and spoke operation and the logistics enabling approximately 1,000 transactions per clock within the auction hall allow the timely transfer of a per hour on a low-value good. The auction method large volume of flowers from suppliers to buyers. By eliminates problems of haggling and reduces bargain- intermediating all buyer–grower exchanges, the auc- ing costs that are otherwise associated with the trade tion also provides efficient quality control, settlement, Information Systems Research 6 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Table 3 Features of the Traditional Dutch Flower Auctions Exchange Process Implementation Strengths Weaknesses 1. Search All trading opportunities are found at the Search costs are reduced as the The buyers have to come to the auction auctions. centralized auction aggregates major halls, and sellers have to deliver trading opportunities in one location. products to the auction hall. 2. Valuation The Dutch auction clock method. Very efficient for small lot trading. All Auction prices for specific products transactions occur in a fixed time slot decrease during the day. To assure leading to 1,000 transactions per fairness, assignment of auction hour. sequence for different growers is done by lottery. Clock speeds and small lots stretch the cognitive capabilities of buyers favoring higher prices for growers. 3. Logistics The auction facilities are a central hub Very efficient transfer of product from Packaging costs are incurred multiple providing logistics support for seller to buyers. The centralized times—for transport to and from the transferring products from sellers to auction trading allows specialization, auction. Multiple handling of flowers buyers. These costs are shared among transportation, and other resources. can damage them. all buyers. 4. Payments and The auctions provide systems for order Shared costs among auction participants Settlements tracking, payments, and settlements and economies of scale in these with efficient one-day settlement systems. periods. 5. Authentication The auction house authenticates Very efficient for large numbers trading. Buyers and growers perceive quality participants and grades the quality of The auction reduces counter-party grades as too broad, artificially the products. It is also responsible for risks, product, and related inflating valuation of products at the tracking and ensuring delivery of authentication costs for buyers and lower end of quality rating. orders to buyers. sellers. 6. Communication and Simple visual communications of Efficient and low costs for shared Requires synchronous communications Computing competitors, product, price, and other communications infrastructure. for trading, and colocation of parties trading information on the clock. A to the limited trading floor. Growers simple computerized system for do not know final demand patterns for communicating bids. products. 7. Product The product is represented by itself, and Buyers can directly inspect the product Buyers and growers perceive quality Representation simple codes identifying grower and a in the auction hall if they want to do grades as too broad. The cost of gross level quality grade. so. visual inspection. 8. Legitimation The auction intermediary is responsible for recording bids and legitimating transactions. 9. Influence The auctions can exclude growers or The auctions, by centralizing and Auction rules tend to favor the growers. buyers who do not meet various requiring the product to be delivered criteria. prior to sale, minimizes opportunism risks. 10. Dispute Resolution The auctions provide for various arbitration mechanisms and rules for resolving problems. This reduces dispute resolution costs. Information Systems Research Vol. 9, No. 1, March 1998 7

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions and dispute resolution mechanisms that mitigate in the flower industry created increasing demands for against opportunism risks encountered by buyers and logistics support, space in the auctions and complaints sellers. These features reduce transaction costs to about nearby traffic congestion. As the two major auc- growers and buyers. tions were close to their limits in terms of complexity, However, as summarized in Table 3, there are dis- capacity, and room to expand, increases in capacity advantages of this specific model of trading. First, buy- would require changes in auction logistics or invest- ers must be physically present at the correct location ment in new facilities. A second problem confronted and correct time to bid on a specific product. In addi- by the industry was the consolidation of buyers into tion, it is hard to simultaneously search other markets larger entities. Buyers for supermarkets and large retail to estimate prices. Today, large buying organizations store chains wanted to purchase larger lot sizes and provide cellular phones to their buyers to coordinate coordinate purchases across different markets to take purchases across auctions. In response, the auctions advantage of the best price. Some large retailers, like are beginning to coordinate trading similar products Marks and Spencer, were bypassing the Dutch auc- at the same times in different auction houses. This will tions and their commissions to source directly from allow the large buyers to find the best price across auc- growers in Spain and other countries. Third, the suc- tions. The auction structure also inhibits growers from cess of the Dutch auctions as the world’s leading understanding the true preferences of buyers, as grow- flower auctions and entry point into downtream logis- ers are separated from the sale of their produce by the tics and distribution led to an increased flow of foreign auction. cut flowers to the Dutch flower auctions. In 1994, 15% Other disadvantages for specific stakeholders are of flowers traded at the largest Dutch Flower auctions understood when we consider the auction’s ownership were imported from and re-exported to foreign coun- and incentive structure. A number of auction rules fa- tries (sometimes back to the country of origin). This vor growers, who are the auction owners, over buyers. increased foreign competition to Dutch growers, and First, the clocks move at a high speed. Higher speeds in 1993 the import of foreign rose stems to the two reduce the decision time available to buyers. This re- largest auctions reduced average prices by 40% during sults in higher bid prices. The auctions have experi- the winter season. Subsequently, the Dutch grower co- mented with different clock speeds and it is widely operatives voted to limit foreign access to the major known that faster clock speeds result in higher prices. auctions in 1994. These challenges led to a number of However, the auctions are unwilling to fully disclose successful and unsuccessful information technology- the results of their experiments and selection of auction enabled transformations of trading in the industry. clock speeds. Second, the auction rules and service These initiatives are critically examined below, using costs to buyers for processing trades favors trading in a process-stakeholder analysis, to illustrate major pro- smaller lots instead of purchases of large lots. This en- cess changes and benefits or costs of the initiatives to sures that no one party can purchase the entire lot different stakeholders. without competition. It also increases the cognitive complexity and competition confronted by buyers. Buyers must now purchase products and adjust pur- 4. IT-Enabled Dutch Auction chasing decisions to availability across multiple clock Transformations: A Process- auctions. This imperfect information and low transparency about available inventories favors growers, al- Stakeholder Analysis though more empirical work needs to be done to dis- Four major information technology-enabled initiatives cover the magnitude of the growers’ advantage. were undertaken to transform the Dutch flower auctions and respond to the above challenges. Two un- 3.2. Challenges to the Traditional Dutch Auctions successful initiatives were the BVH’s Holland Vidi- In the early 1990s the Dutch flower industry and auc- fleur system and the VBA’s Sample-Based Auction tions faced a number of challenges. First, rapid growth (SBA) system. These initiatives promised to simplify Information Systems Research 8 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions auction hall logistics and add extra transaction capac- office provided a screen-based representation of the ity to the auction. Two successful initiatives were the clock which was synchronized with the clock in the Holland Supply Bank (HSB) system and the Tele auction hall. Flower Auction System (TFA). The former system re- The Vidifleur experiment initiated by the BVH in- sponded to the need of large buyers, and the latter pro- formation technology staff (Spooner and Copeland, vided a new auction for foreign produce. While the 1992),2 was implemented with minimal changes to the auctions have used information technology exten- original auction clock process. Experimenters con- sively to support order processing, inventory, and lo- verted one of three auction clocks in a room to have gistics, they primarily supported or automated exist- video screens for product display around the clock. ing auction processes having impacts typically limited The auction also moved the real product under the to the auction intermediary (Van Heck and Groen auction clock, providing a second visual display of the 1994). The IT-enabled initiatives discussed below fun- product. An auction room solely dedicated to this ex- damentally changed the implementation or conduct of periment was unavailable because of the demand for limited auction facilities, and altering existing logistics one or more specific auction processes, and the way in processes was deemed too expensive for the which buyers, auctions, and sellers interact. Summary experiment. information on the initiatives is given in the Table 4. Auctioneers expected this remote video auctioning 4.1. The Vidifleur Initiative to provide buyers with better information, as they The BVH auction implemented the Vidifleur initiative could work from the comfort of their own offices and in response to the growing capacity and logistics re- also access their office computers for purchasing, or- quirements of the auction. Vidifleur intended to use der, sales, and local inventory information. The auc- video auctioning to decouple the price determination tioneers also knew that buyers often tended to select and logistics mechanisms and to allow buyers to trade goods from specific sets of growers rather than inspect from outside the auction hall. When the product ar- the product in great detail and expand the selection of producers. This buyer behaviour suggested that rived at the auction a picture was taken, digitized, and grower reputations played a substantial role in shap- stored in auction computers. These computers trans- ing purchases, and that the visual inspection of flowers ferred the picture for display to a screen in the auction hall, where buyers could bid for the product based on 2 Spooner and Copeland (1992) provide a teaching case of IT initia- the image of the product. Buyers were also able to bid tives at BVH (previously called Flower Auction Westland) in which for and look at the flowers on computer screens in their they discuss the motivation and technology used to implement the private auction offices. The computers in the private Vidifleur experiment. Table 4 Dutch Flower Auctions Initiatives Traditional DFA Holland Vidifleur System VBA Sample Based Auction Holland Supply Bank Tele Flower Auction System Start (End) Year 1890 1991 (1991) 1994 (1994) 1993 1993 Product Flowers and Potted Plants Potted Plants Flowers and Potted Flowers Potted Plants Plants Sellers Growers Growers Growers Growers Growers Intermediary Flower Auctions Flower Auction Holland Flower Auction Aalsmeer Flower Auction East African Flowers (EAF) (BVH) (VBA) Holland (BVH) Buyers Wholesalers Wholesalers Wholesalers Wholesalers Wholesalers Valuation Dutch Auction Dutch Auction Clock Dutch Auction Clock Negotiated Posted Dutch Auction Clock Clock Offer Information Systems Research Vol. 9, No. 1, March 1998 9

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions prior to purchase was less important to the process. into the decision making of the buyers. Video-based Despite these expectations, buyer reaction to screen- auctioning on a computer was a limiting medium, not based trading was negative and led to the termination rich enough to capture this information. Thus buyers of the experiment in late 1991. Table 5 summarizes the had limited advantage in trading from their offices, areas of key process changes, benefit expectations and when there was also a floor-based auction which pro- actual results of the initiative. We focus only on buyers vided the traders with more information. Indeed, buy- and the auction intermediary, as no major process ers who tried to trade from offices complained that changes occur for sellers. they could not feel the “tension” in the marketplace. As highlighted in Table 5, buyers cited three main Third, at the back of each auction hall is a coffee shop reasons for not adopting the new system. First, the where buyers interact informally and share informa- clock-based trading system provided no new efficien- tion about the market. Again, access to the social in- cies for buyers. Second, the quality of the auction hall teraction and information was more difficult through video display was perceived as poor, and trading from screen-based trading. outside the auction hall created an informational disadvantage. In floor-based trading the buyers could ob- 4.2. The Aalsmeer Sample-Based Auction serve each other, and the reactions of other major buy- In contrast to the BVH, the Aalsmeer auction began a ers (from supermarket chains, etc.) to specific bids. sample-based auction for trading potted plants This important nonprice information was incorporated (Griffioen 1994a, 1994b; Van Heck and Groen 1994). In Table 5 Process-Stakeholder Impacts of Vidifleur Exchange Process Auction Intermediary Buyer 1. Search No change. No change. 2. Valuation No change. No change. 3. Logistics Expected: Auction hall logistics would be eliminated No change. allowing for cheaper and more frequent transactions and new space for clocks. Actual: No change during the experiment due to potential disruptions to the current process. Real product appeared in the hall synchronized to clock. 4. Payments and Settlements No change. No change. 5. Authentication No change in the quality grading process. In a full-scale system, buyers would find it harder to visually inspect and authenticate quality. 6. Communication and Computing Shift to electronic communications. Electronic Expected: Electronic communications could substitute representation of the clock as well as the product. for buyer presence in the auction halls. Reality: Electronic communications does not capture nonprice information, such as other bidders’ expressions and reactions to specific bids. It reduces social interaction opportunities. 7. Product Representation Expected: Electronic flower clock and video Expected: Buyers would make decisions from their representation of flowers would not adversely affect offices using computers rather than the auction the sale. hall. Result: Negative buyer reaction to video quality. Result: Negative reaction. Buyer perceive the video quality as poor. 8. Legitimation No change. No change. 9. Influence No change. No change. 10. Dispute Resolution No change. No change. Net Benefits None. Negative. Information Systems Research 10 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions this model, growers send a sample of the product to would be priced multiple times during the auction, the auction house along with information on available hoping it would lead to higher prices. Third, the auc- inventory. During the auction the sample represents tion rules initially did not provide incentives to buyers the entire inventory available to buyers who can bid by supporting transactions on large lots. Instead, the for the product and specify product packaging and de- auction maintained rules to favor transactions in small livery requirements. Growers then package the prod- lots. Thus, an insufficient number of buyers and sellers uct as specified and deliver it the next day to the buyer initially adopted this new form of trading (Van Heck location in the auction complex or to other buyer ware- and Ribbers 1996). houses. Growers, buyers and auctions used electronic In response to this failure, the auction undertook data interchange to share all the information required various rule changes beginning in March 1994. First, in this process.3 This trading model reduces the num- the auction established a price floor of 70% of average ber of times a product is handled, reducing overall price of a flower type in the most recent five days to packaging costs and damage. reduce volatility and downside risks. Second, the rep- The different actors—the auctions, growers, and resentative lot was auctioned first. This sample lot typ- buyers—expected a number of different benefits. First, ically received a higher price than following lots of the by uncoupling logistics and price determination, the same type and quality. Buyers believed the first sample auctions and growers expected the number of trans- to always be of best quality within any quality rating. actions per hour to increase. In reality the number of Third, the lot size was increased to three stapelwagens4 transactions per hour decreased, as buyers had to spec- from one. The growers were also forced to increase the ify terms of delivery. Second, while the auctions ex- number of plants offered in any one transaction, so that pected 45% of the supply of potted plants to be trans- they did not game the system. To meet the needs of acted in the sample-based auction, only 10% of the large buyers, buyers were permitted to buy either one product was transacted this way. Thus, sample-based or three stapelwagens per transaction. To prevent auctions also did not effectively reduce storage re- gaming, the grower for any type of flower was only quirements at the auction. After numerous attempts to allowed one auction per category of product for price increase the volume of sample-based auctions, they determination. These rule changes temporarily stabi- were discontinued in late 1994. Table 6 summarizes lized the market, but the lack of growers and buyers results of the initiative. Only areas of change are dis- adopting the method led to its demise in late 1994. cussed below. The sample-based auction failed to meet expecta- 4.3. The Holland Supply Bank: Image tions for many reasons. First, the incentives and bene- Representations and Negotiated Trading fits to buyers and growers (in particular) did not To respond to the needs of larger buyers, the BVH and change substantially to encourage their participation Aalsmeer auctions have diversified to create a bro- in this market. Specifically, growers received no extra kered market for flowers and potted plants. In the “be- compensation for modifying packaging and delivery middelingsbureau” (BB), or Mediation Office, an auc- practices to suit the customer. Second, the growers per- tion employee acts as an agent for the growers and ceived that they got lower prices in a slower auction. negotiates between growers and buyers in a forward To overcome this disadvantage growers would break market. Prices, product specifications, amount of lots, the same product into different sample lots so that it and delivery specifications are specified in a contract which is legitimized and monitored by the mediation 3 Beginning in 1992, growers and auctions adopted electronic data office. In 1994, about 18% of flowers and potted plants interchange to communicate product, order, and transaction infor- were traded this way. In 1996, this amount increased mation to each other. EDI reduces double entry of data into systems to 22%. The mediation office is useful for the sale of and paperwork, and reduces errors. Growers who use EDI can sub- 4 mit data on shipments until 3:00 p.m. instead of 12:00 p.m. for paper Stapelwagens are a fixed-size cart used to transport flowers transfer. through the auction complex. Information Systems Research Vol. 9, No. 1, March 1998 11

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Table 6 Process-Stakeholder Impacts of the Sample Based Auction Exchange Process Growers Auctions Buyers 1. Search No change. No change. No change. 2. Valuation Expected no change. Expected no change. Greater uncertainty about product Result: Classify into smaller lot sizes Auction process is slowed down due quality leads to discounting of so same product is sampled and to the need to specify packing nonsample lots. effectively priced multiple times. information and buyer gaming. Price is on average 10% less on Lower commissions on remainder for remainder than sample lot. This sample lot. results in less revenue. 70% of previous five days’ average price as a price floor. 3. Logistics Increased burden from needing to Lower logistics costs. More efficient delivery of the product. customize packaging to buyer specifications. 4. Payments and Settlements No change. No change. No change. 5. Authentication No change. Minor change ensuring product is Inability to authenticate quality ahead properly delivered. of time. Must verify product is properly received. 6. Communication and Computing Minor change: More use of EDI to Minor change: More use of EDI to Minor change: More use of EDI to send coordination information. send coordination information. send coordination information. 7. Product Representation Enabled to select a sample lot that is Sample lot substitutes for actual Buyers cannot visually evaluate the of higher quality than the transaction lot. whole offer. remaining product. Must decide to buy based on the sample lot. 8. Legitimation No change. No change. No change. 9. Influence More difficult due to more complex No change. No change. transaction. 10. Dispute Resolution No change. No change. No change. Net Benefits Negative. Negative. Negative. large lots to large buyers, like supermarkets, for the 4.4. The Tele Flower Auction System occasions market. Since 1993, the Dutch flower industry has been con- The mediation office, as an honest broker, reduces cerned about the increasing flow of foreign flower the costs of search, communications, and bargaining products into the Dutch flower auctions and down- for buyers and sellers. It also provides a mechanism to stream logistics and distribution systems. These im- legitimate the transaction and resolve disputes in the ports were having an adverse effect on the margins of event the contract is not met. Image databases of prod- Dutch growers and the prices of key commodity product types and inventory are especially useful for trans- ucts like roses and carnations. After a referendum in actions in the mediation office. Wholesale buyers find September 1994, the growers, who are the owners of that the pictures of the product are also very useful the Dutch auctions, decided to ban foreign grower par- marketing tools to downstream retailers. Electronic ticipation in the auctions during the summer. These data interchange is used for communications of orders efforts to reduce foreign access to the traditional Dutch and the coordination of settlements, and delivery. This auctions led buyer organizations and foreign growers results in fewer errors and greater transaction to announce the creation of competing auctions. In par- efficiency. ticular, the East African Flower (EAF) importers asso- Table 7 summarizes the major impacts of the Hol- ciation responded to this ban by developing the Tele land Supply Bank on different stakeholders. Flower Auction (TFA) (Van Heck et al. 1997). Information Systems Research 12 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Table 7 Process-Stakeholder Impacts of the Holland Supply Bank Exchange Process Growers Auctions Buyers 1. Search Benefit: The HSB permits growers to Benefit: Efficient image database Benefit: Large buyers’ search costs search for buyers. combined with broker matching are reduced. system. 2. Valuation Expected no change. Mediation process is less costly than Cost: Slightly higher prices but Benefit: Slightly higher prices with logistics-intensive process. reduced uncertainty. less uncertainty. 3. Logistics Benefit: Efficient product transfer in Benefits: Less logistics in the auction Benefits: Direct delivery from seller bulk to buyer. hall. with no repacking costs. 4. Payments and Settlements As specified in the contract. Managed by mediation office. As specified in the contract. 5. Authentication No change. Costs: Quality managers evaluate Cost: Inability to authenticate quality sample, and assign a quality ahead of time. grade. Monitor and ensure delivery. 6. Communication and Computing Minor change: More use of EDI to Minor change: More use of EDI to Minor change: More use of EDI to send coordination information. send coordination information. send coordination information. 7. Product Representation Cost: Growers send data and sample Cost: Quality managers create a Cost: Buyers cannot visually evaluate lot. Growers perceive quality digital image of sample lot to the offer and perceive quality grades as broad and don’t reflect present to buyers in addition to grades are broad. Benefit: true quality. the rating. However, images are useful for downstream trade. 8. Legitimation No change. Mediation office. No change. 9. Influence No change. No change. No change. 10. Dispute Resolution No change. Mediation office. No change. Net Benefit Positive—higher prices and less Positive—less logistics requirements. Positive—ability to transact for large uncertainty. lots into the future. TFA is a completely electronic auction that enables PC screen the buyer sees the Dutch auction clock. The buyers to trade at a distance. Decoupling the logistics clock hand starts at a high price and drops until a and price discovery processes, the buyers can bid for buyer stops the clock by pushing the space bar at the different flowers via their personal computer (PC) keyboard of the PC. The auctioneer then asks the buyer screens (Bos 1995, 1996; Eras 1995; Van Vliet 1994). Us- via an open telephone connection how many flowers ing ISDN services of the Dutch PTT, each buyer’s PC of the lot he or she will buy. When the buyer provides is connected from his or her office to a fully comput- the amount, the auctioneer legitimates the transaction. erized Dutch auction clock. The PC provides infor- The clock is then reset, and the process begins for the mation on the producer, product, unit of currency, next lot until the remainder of the product is sold. quality, and minimum purchase quantity. For added The auction logistics are substantially simpler than convenience, the PC also provides the buyer with tex- the traditional DFA. The EAF receives and stores flow- tual information on the available flowers, specific lots ers and plants from growers in a distribution ware- for sale, and two digital images of each lot. One image house facility in the nearby town of Amstelveen. The gives an overview of the lot to inspect ripeness of flow- flowers from the Amstelveen facility are transported ers, and the other presents details of the flower bud, to the wholesaler’s address directly by transporters of to evaluate its size and diagnose potential diseases. EAF. In an agreement with the VBA, the EAF was also The buyer can then use the PC’s custom software to permitted to deliver products to the buyer’s rented fa- flag interesting lots, so that the computer can alert the cilities at the VBA. This way the auction minimizes buyer when it is time to auction the specific lot. On the most internal logistics operations and is able to deliver Information Systems Research Vol. 9, No. 1, March 1998 13

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions flowers to buyers in a timely way. The major process in turn will permit more varied forms of trading, customized changes relative to the traditional Dutch auction are to different user requirements. summarized in Table 8. The four cases illustrate the use of information tech- Overall, TFA was an immediate success. Since its nology to separate the informational and physical trad- implementation in March 1995, it has grown from auc- ing processes. In all cases the valuation and logistic tioning the product of 2 main East African growers to processes are increasingly de-coupled from one an- include products from 40 growers in Africa, Spain, Co- other in time and space. For example, the Holland Sup- lombia, France, India, and Israel. By the end of the ply Bank illustrates the implementation of the media- year, the TFA had nearly 160 buyers (about half are tion bureau to broker trading of large futures contracts located in the Aalsmeer area; the rest are scattered between large buyers and different growers separating throughout the Netherlands). The TFA was estimated logistics and information processes. Similarily, in the to be the fourth largest flower auction in Holland by Tele Flower auction, the buyers are able to bid for the end of 1996. products from remote locations. The buyers can cus- Why were buyers willing to accept this new auction? tomize the system by specifying preferences and re- First, it uniquely satisfied the buyers’ needs to inex- ceiving alerts when the product they want is being pensively purchase foreign flowers and include them auctioned. in their existing distribution chains. Second, buyers we These observations also lend support to Malone et interviewed said the flowers they purchased from the al. (1987), who note that information technology en- TFA often exceeded their quality expectations as de- ables personalized markets where software agents termined by the quality grades. Thus, the TFA created would support trading customized to individuals and a reputation for setting high quality standards, en- firm preferences. While the new flower auctions are hancing trust in the auction and minimizing adverse not as fully advanced, they achieve a better fit between selection. If necessary buyers close to the warehouse the transaction preferences of larger buyers and the location could physically inspect the product. Buyers organization of exchange processes by overcoming the were also impressed with the computer data, the qual- capacity limits and colocation requirements for floor- ity of the products, and the speed of delivery after their based trading. These new trading mechanisms better purchases were completed. The buyers also felt they suit the unique requirements of large versus small had a better overview of the auction, as compared with buyers. the traditional Dutch auction. The observations across cases illustrate that information technology substantially reduces coordination 5. Lessons Learned from IT- costs and enhance communications capabilities. These changes allow transacting parties to separate in space Innovations in the Dutch Flower (e.g., TFA bidding process) and time (e.g., HSB deliv- Auctions ery logistics) the informational and physical compo- Based on our research we did a cross-case analysis to nents of trading processes. Indeed, the informational identify factors that influence the successful or unsuc- and physical components within each of the ten ex- cessful use of information technology in markets. We change processes defined in this paper could be de- use this analysis to develop a series of observations on coupled from one another and provided by different the market impacts of IT as well as the success and actors without the necessity for colocation. Over time failure of IT-based initiatives in markets. These obser- this will permit the creation of more distributed and vations stated as propositions, and the supporting customized market institutions for the trade of physi- analysis and discussion are given below. cal goods. Proposition 1. The application of information tech- Proposition 2. Information technology-enabled pro- nologies to trading can enable increased efficiency and sep- cess innovations change the information available to differ- aration of informational and physical trading processes. This ent stakeholders. When different stakeholders perceive these Information Systems Research 14 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions Table 8 Process-Stakeholder Impacts of the Tele Flower Exchange Process Growers Auctions Buyers 1. Search No change from DFA. Benefit: Efficient databases and Benefit: Up-to-date online database online system for presenting trade reduces search costs for specific opportunities. products. Alerts inform buyers of opportunities. 2. Valuation No change. Very efficient screen-based auction Benefit: Screen trading enables better clock process. oversight and concentration on bidding. 3. Logistics Benefit: Efficient product transfer to Benefits: No auction hall logistics are Benefits: Faster delivery from auction Amstelveen warehouses. necessary. Less errors due to due to decoupling of logistics and simplicity of a decoupled system. price discovery. Cost: Transport to buyer locations. 4. Payments and Settlements 24-hour payment and settlement Managed by EAF. 24-hour payment and settlement clearing. clearing. 5. Authentication No change. Costs: quality managers evaluate Benefit: Auction quality control sample, and assign a strict quality reduces risks—may exceed buyer grade. Monitor and ensure expectations. Cost: Inability to delivery. authenticate quality ahead of time. 6. Communication and Computing Simplified phone and data Simplified phone and data Text representations and digital communications. communications. images enable simplified communications. 7. Product Representation Cost: Growers perceive quality Cost: Text representation of product Cost: Buyers cannot directly evaluate grades as broad and don’t reflect in addition to the quality rating. the offered product. Benefits: true quality. Screen-based representations enable remote trading. 8. Legitimation Benefit: Growers don’t have to be an EAF is primary authority. No change. EAF member, enabling foreign imports. 9. Influence Growers have little influence on EAF organization defines the market Buyers do not have direct influence auction policies. rules. on auction rules. 10. Dispute Resolution No change. No change: Arbitration by the auction No change. reduces costs. Net Benefit Positive: for excluded foreign Positive: lower cost auction model. Positive: product access and remote growers. buying. changes reduce the relevant information or trust, they will technology applications enable the provision of more act to either increase the information available or discount relevant information to decision makers (Bakos 1991b, prices to account for increased risks. Brynjolfsson et al. 1994, Gurbaxani and Whang 1991, Market organizations, like other governance sys- Malone et al. 1987). However, the cases above illustrate tems, are information processing systems that repre- that IT can actually reduce the relevant information sent a consensus among different competing stake- available to decision makers. The application of infor- holders on organizing the interdependent processes mation technology to communication and product rep- identified in § 2. These processes serve to generate or resentation processes had major impacts on relevant organize information, or to reduce uncertainties and information available for price discovery, authentica- mitigate opportunism risks faced by different stake- tion, and logistics processes. When information or trust holders (Kambil 1992). The prior literature on markets as perceived by specific stakeholders was reduced in and technology generally presumes that information these processes, they or other interested stakeholders Information Systems Research Vol. 9, No. 1, March 1998 15

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions acted to increase the information and trust, or reduced or trust-generation costs. Market designers can re- prices to discount for new risks. spond to these requirements by allowing more infor- For example, in the SBA, the buyers chose to dis- mation gathering by different stakeholders (buyers count the prices bid for non-sample lots by nearly 10% and sellers) or create trust and reputations for fairness. because they could no longer authenticate quality by Both these choices lead to differential levels and allo- visual inspection. Similarily, growers in the SBA de- cations of costs across stakeholders. These costs and creased lot sizes or reclassified their product so that their distribution across stakeholders must be consid- the same product was displayed multiple times. The ered by designers of new IT-enabled market mechanisms if the new market is to be adopted. growers’ objective was to have multiple new bidding cycles for price determination, hoping that multiple Proposition 3. Market organizations are the meeting bidding competitions for smaller lots among buyers point for multiple stakeholders: buyers, sellers, and inter- would generate new demand information leading to mediaries with conflicting incentives. Given existing or competing market alternatives, no new IT-based initiative is higher prices. Both of these responses reduced the at- likely to succeed if any key stakeholder is worse off after the tractiveness and efficiency of the sample-based auc- IT- enabled innovation. tion, leading to its ultimate demise. While the Holland Supply Bank and the Tele Flower The process-stakeholder analysis framework devel- auction reduced the ability of real-time authentication oped in § 2 of this paper was applied to map process changes and their impacts on different stakeholders. In of the product, they provided new benefits to the dif- the two cases of failure, the application of the frame- ferent stakeholders or created trust in new ways. In the work clearly identified either the grower or the buyer former, parties were able to trade in a way that re- was worse off from the innovation. For example, in the duced uncertainty and generated information about SBA the grower incurred new packaging costs and lo- future availability of demand, prices and goods. In the gistics costs. In the Vidifleur auction, the buyers did latter, to create trust among buyers in the new auction not perceive a new benefit from the system. The video process and establish a reputation for quality, the Tele quality was poor, authentication of quality less con- Flower auction ensured that the product matched or venient, and trading online did not provide all the in- exceeded buyers’ expectations given a specific quality formation available in the auction hall. rating. While we cannot establish that the product was In contrast, the Holland Supply Bank and the Tele traded at a lower price than when it was visually in- Flower auctions created new advantages for all stake- spected, the tight quality control that assures a product holders who participated. In the Holland Supply Bank, matches or exceeds its quality ratings leaves it open to buyers were able to order large quantities of product being discounted to the price level of the quality rating and specify a contract for delivery on a future date, rather than the price of the flower given perfect quality reducing the growers’ uncertainty about future price information. levels. The Tele Flower auctions provided Dutch buy- The above observations are consistent with prior re- ers with a source of foreign flowers, foreign growers with a trading location that could take advantage of search on the governance of exchange relations. First, the Dutch wholesaler’s demand for flowers, and the need for information seeking to reduce uncertainty downstream logistics facilities. is well known. The generation of trust (the expectation These cases illustrate the need to carefully design of future nonopportunistic behavior) and preservation and implement electronic markets and to include ad- of good reputations is also important to reduce trans- equate incentives to different stakeholders for partici- action costs or “friction” in exchange (Arrow 1974, pation. All stakeholders must be better off with the Fukuyama 1995). Third, social exchange theorists have new system rather than the old system, otherwise the identified the importance of equity and fairness (Blau new market will fail and revert back to the prior sys- 1964, Homans 1961). The cases illustrate that reduc- tem if this alternative remains available. The process- tions in information available due to an IT-enabled stakeholder analysis framework can be used by market process discontinuity creates new information seeking designers to evaluate the consequences of their designs Information Systems Research 16 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions on processes and stakeholders to fulfill the above As buyers become more powerful, and move to by- conditions. pass the auctions or source foreign flowers, the existing consensus auction arrangement is being renegotiated. Proposition 4. Biases in trading will depend on the For example, by not participating in the sample auc- ownership of the market and the availability of cost-effective tion, the buyers were able to influence the restructur- trading alternatives. As owners of existing markets may not ing of the sample-based auctions. Second, the Holland benefit from electronic trading, this incentive incompatibil- Supply Bank brokered market represents another new ity will impede the transition to new electronic markets. A arrangement for large buyers. Finally, the Tele Flower solution to this problem is to change market ownership or auction was the EAF and the buyers’ response to re- create new sources of competition. strictive foreign flower trading rules in the traditional Why did the traditional Dutch markets fail to suc- Dutch flower auctions. The latter was a departure from cessfully adopt an electronic trading system? Why did renegotiating the consensus around a specific auction the leading auctions allow the Tele Flower auction to to creating a competing structure. This structure was reframe competition among the auctions? In part, the created because the traditional auctions were forced to various electronic initiatives of the traditional auctions restrict the sale of foreign flowers by their owners. did not fulfill compelling needs among the different The emergence of Tele Flower is especially instruc- stakeholders. In addition, the IT-based trading initiative. Despite the advice of the traditional Dutch Auc- tives were embedded in a specific organizational con- tion officials, the owners voted to deny access to for- text and set of assumptions that limited the initiatives. eign growers. The subsequent creation of the Tele Historically, the Dutch grower cooperatives have Flower auction resulted in the loss of a key revenue owned the auctions and have been the dominant influ- stream to the existing auctions and its owners. Con- ence on the use of technology in the auctions. The well- forming to the existing auction models limited inno- organized growers who own the auction intermediary vation by the traditional Dutch auctions. In contrast, established a consensus on the trading rules and or- information technology allowed the EAF to coordinate ganization that best favored specific grower groups— and implement trading processes without colocation from clock speeds to auction mechanism. and at lower costs than setting up a facility similar to The technology-enabled initiatives of the existing the traditional Dutch auctions. As buyers and foreign auctions, with the exception of the Holland Supply growers implement and continue to innovate in de- Bank, generally assumed the existing valuation model veloping alternate markets, they will, most likely, in- and auction structure. As auction officials mentioned creasingly reshape the access, price determination and to us in interviews prior to the Tele Flower initiative, trading rules to their favor. The emergence of Tele it was unlikely that any other form of trading or price Flower could probably have been avoided if the buyers discovery mechanism would be approved by the own- had an ownership stake and greater influence in the ers other than the Dutch auction. The innovations were traditional Dutch auctions. This would have led to less thus embedded within the context and framework of biased or restrictive trading practices. We expect that the traditional auction model. Converting this model information technology will enable new trading pat- to an IT-based representation had the potential for a terns that are less biased in favor of Dutch growers. number of advantages to sellers. For example, by hav- These new trading models (e.g., clearinghouse auc- ing a very fast auction clock, and trading in small lots tions, brokered markets) could better serve different in the traditional auction, the sellers found they could buyer segments. get higher prices. Electronic trading that preserved In summary, current owners of the auctions may not these features benefits the sellers but creates more costs have sufficient incentives to adopt new or more effi- for larger buyers, who are increasingly important in cient auction mechanisms. The capacity of existing the market. Other price discovery mechanisms and market structures to adapt to new electronic and non- trading rules, including larger lots, can be more effi- electronic innovations will be determined by the rela- cient for large buyers. tive power and capabilities of different parties to the Information Systems Research Vol. 9, No. 1, March 1998 17

KAMBIL AND VAN HECK Reengineering the Dutch Flower Auctions trade, the current ownership structures, and potential changing information available to stakeholders, is one of competitive entry. In the Dutch auctions, we see an factor that can alter the relative costs and benefits to increasing shift of power toward buyers as new actors, or the power of actors leading to a renegotiation sources of supply become available, buyers become of the consensus. When the renegotiation fails, the new larger, and technology enables new low-cost trading market form is not adopted. As new information tech- mechanisms leading to competing markets. nologies make feasible new models of electronic commerce, our analysis suggests that designers of new 6. Conclusions markets should carefully manage the context in which they apply their technologies by constructing suitable This paper makes four key contributions to the litera- incentives and processes to arrive at a consensus. ture on information technology and markets. First, we Finally, the paper provides new tools and directions identify a series of distinct processes that underlie ex- for inquiry for managers and researchers of electronic change relations. In contrast to the traditional case commerce. First, the process-stakeholder framework studies of electronic markets, this categorization pro- allows managers and researchers to systematically vides a useful basis for examining how technology in- characterize process changes and the allocation of costs novations affect specific trading processes. Second, we and benefits from electronic commerce. Second, the propose and illustrate the use of the process-stake- cases highlights new questions for research. As the In- holder analysis framework for comparing different ternet evolves to a powerful and reliable infrastructure forms of trading, and evaluate the impacts on different for electronic commerce, Dutch auctions become more market participants. This is a useful guide for design- important as a trading mechanism. However, there is ers of new market systems as well as those studying little published empirical research on the Dutch auction markets to evaluate or explain the successes and fail- mechanism and the effects of clock speed, and other ures of IT-based initiatives in new markets. Third, the development of a detailed case study of market change information variables on equilibrium prices, buyer and a cross-case analysis of IT initiatives in the Dutch strategies, and the distribution of benefits. New devel- flower markets result in a series of testable proposi- opment tools (Java, etc.) will enable researchers to de- tions. The propositions address the separation of velop simulations and test market designs over the In- physical and informational processes in trading, the ternet to develop a richer understanding of individual responses of stakeholders to changes in information in behaviors in electronic markets.5 markets due to IT initiatives, and economic and incen- 5 tive conditions required for adoption of new trading We thank Hank Lucas, Ted Stohr, and the anonymous reviewers of Information Systems Research for their comments and suggestions processes. Finally, we propose a more complex and on previous versions of this manuscript. subtle view of markets than typically analyzed in the MIS literature. References While there are a number of teaching and research Akerlof, G. A., “The Market for ‘Lemons’: Qualitative Uncertainty cases on electronic markets, these are either unsuitable and the Market Mechanism,” Quarterly J. Economics, 84 (1970), 488–500. for generating new theories (Kambil and Short 1994) Arrow, K. J., Limits of Organization, Norton, New York, 1974. or articles analytically apply transactions cost or net- Bakos, J. Y. “Information Links and Electronic Marketplaces: The work externality models to emergent markets (Bakos Role of Interorganizational Information Systems in Vertical 1991b, Lee 1996). While some of the analysis provides Market,” J. Management Information Systems, 8, 2 (1991a), 31–52. conditions for market adoption, they shed little light ——, “A Strategic Analysis of Electronic Marketplaces,” MIS Quar- on why different actors failed to adopt new market terly, September (1991b), 107–119. Blau, P., Exchange and Power in Social Life, John Wiley & Sons, New forms. In contrast, the rich cases in this study illustrate York, 1964. that markets represent a socially constructed consen- Bos, J., “De Klok met Afstandsbediening,” Groot Handelsblad, No- sus that is constantly renegotiated among stakeholders vember (1995), 22–23. with different levels of power. Information technology, ——, “Een Jaar TFA: De Innovatieve Noodsprong,” Groot Handels- by enabling new low-cost trading mechanisms and blad, March (1996), 8–11. Information Systems Research 18 Vol. 9, No. 1, March 1998

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Information Systems Research Vol. 9, No. 1, March 1998 19

Re-engineering the Dutch Flower Auctions

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