Tragedy of Commons: Why did First Generation E-Procurement Companies Fail?

Can the Tragedy of Commons explain why the first generation e-procurement companies failed?

Some background first. "The Tragedy of the Commons," was an essay by Garrett Hardin, a professor at the University of California at Santa Barbara, which appeared in the journal Science in 1968. The Tragedy of the Commons occurs because people pursue their goals with the means available to them. Nothing belongs to anyone, yet everything belongs to everyone. So when people make use of things, they use what everyone else also owns. One good example is a public park.

Another common example is the water resources in the West. Consider a farming community that has fifty ranches. Suppose the residents buy water at a fixed rate $50.00 each. If there is no mechanism in the common reservoir or lake to control the consumption per farm, it is in the interest of every farm to consume as much water as possible! This is because each household would want to gain maximum utility for having spent $50.00. But, what if all households think alike? Water will be consumed quickly leading to depletion of the shared good. This process of each household trying to derive maximum benefit from the common resource and in the process depleting such resource resembles the Tragedy of Commons.

Tragedy of the Commons is likely to exist when a group shares resources. "Communal resources are available to everyone, so everyone has an economic incentive to use them; but no one has an equal incentive to husband the resources," writes Tibor Machan in his introduction to "The Commons: Its Tragedies and Other Follies."

Fishing in coastal waters, is another example of this economic phenomenon. There is every reason for the fishermen to abide by the government rules; otherwise, excess fishing may lead to low reserves, and fishermen may not have enough fish to sustain their livelihood. Yet, these fishermen break the rules. The reason? There is a positive component to their breaking the rules - the more they fish, the more they earn. But there is a negative component as well. As every fisherman thinks alike, all of them tend to fish more. And such excess fishing depletes the reserves, affecting the ecological system, not to mention the livelihood of the fishermen.

So, what is the common resource in e-business? Customers. Most e-business companies in the race to capture market-share went fishing for customers as fast they could. They called this the Get-Big-Fast strategy. The customers they all went after were the early adopter segment. Take for instance, the e-procurement segment. There were 7-10 competitors rushing to lock-in customers as fast as possible. This included vendors like Ariba, Commerce One, I2, Rightworks, Clarus, TradeX, SAP, and many others. Now overlay the hundreds of B2B marketplaces and consortia and you get an idea why the early adopter customer segment got depleted rather rapidly.

Once there were no more early adopter customers to be had, the companies growth began to degrade as the time and cost of acquiring a new customer went up considerably.

To get mindshare of the new customer segment, companies over-promised and under-delivered. They glossed over the difficulties of implementation. As more failure stories emerged, this made the sales cycle more prolonged. Customers began to ask tough questions and ask for quantifiable ROI. This is what happened to B2B e-procurement. The low-barrier of entry and absence of quality control lead to a Tragedy of the Commons, with e-procurement vendors overexploiting a scarce resource (customers) before their competitors could do so.

Today, most of the customers are disinterested due to the over-hyping of the benefits. They simply are waiting for the dust to settle and weak companies to fall by the wayside. All vendors could have benefited in the long-term from a thriving industry. But, vendors acting in their own short-term interest attempted to lock-in as many customers as possible through predatory promises. A true Tragedy of the Commons.

So, the next time, you are part of a hot area that is going after a common customer pool, think carefully about being a first-mover. You can be sure that other first-movers in race to go public or boost their stock price will abuse the customer - a scarce resource. It might make sense to be part of the second-generation of companies. Dell did this successfully in the PC business. It will be interesting to see who does this in the e-procurement marketplace.

To get mindshare of the new customer segment, companies over-promised and under-delivered. They glossed over the difficulties of implementation.