Controlling Sourcing Risk in Electronic Marketplaces

Despite high expectations, transactions through Internet based electronic marketplaces have not expanded rapidly. Recent evidence suggests that the peculiar characteristics of purchasing through Internetbased electronic marketplaces may actually increase sourcing risk. Such marketplaces may expose buyers to suppliers with whom they have no transaction history. Transacting through a public medium (Internet) may raise security and privacy concerns. Along with an evolving legal framework for governing online transactions such concerns may add to the overall cost of transactions. This paper by drawing on transaction cost economics, agency theory, resource dependence theory and channel risk literature identifies transaction risk, security risk and privacy risk as three dimensions of sourcing risk that buyers may face in transacting through Internet-based electronic marketplaces. It also proposes a risk-control framework that captures the linkage between sourcing risk and control systems. This linkage expounds on various control systems that may mitigate sourcing risk facing the buyers and make Internet-based electronic marketplaces conducive to conducting transactions. The proposed framework can assist market operators in developing effective control strategies that minimize sourcing risk and bolster participation. DO I: 10 .1 08 0/ 10 19 67 80 32 00 00 67 17 2 Co py rig ht 2 00 3 El ec tr on ic M ar ke ts Vo lu m e 13 ( 2) : 16 3– 17 2. w w w .e le ct ro ni cm ar ke ts .o rg INTRODUCTION The emergence of the Internet as a viable channel for exchange activity, especially among firms, has generated immense interest in both research and practitioner communities. Companies such as Cisco, DELL, GE and IBM have reaped cost savings and process efficiencies through Internet-based procurement. Consequently, there has been a surge in the number of electronic marketplaces that facilitate exchange activity among buyers and suppliers through the Internet. ChemConnect.com, Assetsmart.com and SciQuest.com are examples of such electronic marketplaces. Despite high expectation of success, the adoption and use of such marketplaces has not taken off as expected (Sklar 2001). Thus, it is important to understand how Internet-based electronic marketplaces can boost participation, which is central to their success. Anecdotal evidence suggests that buyers are wary of transacting business with suppliers over the Internet via electronic marketplaces. Lack of security, organizational/legal issues, and exposure to suppliers with whom buyers have not transacted before are suggested as the main barriers to online transactions among organizations (Archer and Gebauer 2002; Schoder and Yin A u t h o r s Khawaja A Saeed ([email protected]) is a doctoral candidate in the management science department at the University of South Carolina. He has an M.B.A. in Technology Management from Asian Institute of Technology in Thailand. His areas of research interest are electronic commerce, interorganizational systems, supply chain management, and information technology use. His work has appeared or is forthcoming in CACM, Information Systems Journal, International Journal of Electronic Commerce, and Journal of End User Computing. Robert A Leitch ([email protected]) is a Professor of Accounting and the Wilbur S. Smith Distinguished Foundation Fellow at the University of South Carolina Moore School of Business. He has coauthored two books in accounting information systems and in management information systems. His research interests include information system development, cost management systems, analytical review procedures, and statistical sampling. He has published articles in various journal including Management Science, Journal of the American Statistical Association, Biometrica, Decision Sciences, Journal of Financial and Quantitative Analysis, The Accounting Review, Journal of Accounting Research, Auditing: A Journal of Practice and Theory, Journal of Management Accounting Research, Journal of Information Systems, Journal of Accounting Literature, and Management Accounting Research. D o w n l o a d e d B y : [ S c h m e l i c h , V o l k e r ] A t : 1 4 : 5 3 1 6 M a r c h 2 0 1 0