by Tom Kelly

You can't throw a stone in any direction without hitting a technology vendor extolling the virtues of "data leasing," having an outside firm provide a product database for your use for a licensing fee. The database usually consists of a product number, long description, short description, product picture and various other generic fields taken from manufacturer catalogs.  Distributors use the data to develop Web catalogs.

The concept is fine, as long as you understand the limitations of this approach and read the fine print of your contract. Too often, however, distributors overlook the substantial negatives in choosing the data leasing approach.

To understand the potential pitfalls of leasing data, you need to look at how companies will use the Internet to transact business and how distributors will add value in this "new" sales channel.

Today, the Internet is a free-for-all, a colossal land grab that is, at times, more confusion than substance. Your end-users are just as inexperienced as you are concerning which direction to take and what online procurement strategies to follow. So database vendors make a compelling argument that building and maintaining your own database is a waste of time and money, and that you could never develop data as cheaply as they can lease it to you.

But going forward, your end-user customers will become more efficient at procuring products via the Internet. They will choose a procurement model that is most convenient for them. They will not care what formats you support today, only that you support their chosen format. To understand how end-users take standard concepts and customize them, consider the concept of integrated supply. If you looked at 10 integrated supply contracts, they would all differ according to the specific needs of each customer.

Buying over the Internet will be the same. Because customers are unlikely to standardize on any one data format, it may require you to submit your data to 10 different customers in 10 different formats.Therefore, to make a "lease vs. buy" decision on your product database, you first need to step back and develop a company vision and strategy for e-commerce, much the way distributors did for integrated supply.

What do you want to accomplish with the data? To answer this question, project how customers will use the Internet over the next three, four, even five years. This may seem difficult because the Internet is changing so quickly, but do the best you can with information available today.  Read as much as you can about your end-users' strategies and cruise the Internet often (this is important because many executives are not aware of the breadth and depth of solutions available). As you become more comfortable using the Internet, some interesting trends come into focus.

Four Internet issues within the end-user community are:
1) Data control
2) Data security
3) Data simplification
4) Data integrity

Data control is the ability of end-user management to determine what products are available to their employees for viewing and purchasing (i.e., authorized contracts only).

Data security is twofold: 1) to make sure the purchase and credit process is secure, and 2) to make sure product pricing and inventory status are accurate at all times and accessible to authorized users only.

Data simplification is just now gaining momentum. It describes end-user initiatives to minimize the complexity of their databases and systems. Each database connected to an end-user's procurement system increases the complexity of their system exponentially (many companies resolve this problem by having one database populated by data from multiple suppliers).

And finally, data integrity is important to end-users for contract non-repudiation and many other legal issues.

To handle these issues, end-users adopt many different systems. Some develop their own procurement systems on the Internet. Some form alliances, such as Covisint, the exchange being built by Ford, GM and DaimlerChrysler. Others build procurement systems that simply link their own suppliers together.

Whatever solution they choose, the outcome will be hundreds, if not thousands, of customized exchanges requiring distributor participation. Therefore, one downfall of leasing data is this: can you predict today what needs your customers will have in the future? Can you accurately predict in what online exchanges you may or may not participate?

The problem with leasing
A typical leasing arrangement allows you to use the data for a single purpose, i.e. your Web site. But what if a customer wants to host your data on their Web site and have you maintain it (such as what Ford has directed). Your leasing agreement covers your Web site, not Ford's.

What if you want to participate in the top seven MRO exchanges? This may require seven additional use licenses! The cost of your data suddenly increased significantly with no end in sight.

Another problem with leasing data is how end-users will perceive the value you provide in the future. Physical strengths such as size of inventory, geographic location and personal sales calls may not be differentiators in an interconnected world. They may even be liabilities.

Going forward, distributors will provide value through the knowledge and information they provide. Therefore, one of your most important competitive advantages will be how you collect, manage and disseminate information to your customers. This is accomplished through building and maintaining a customer knowledge management system. Your product database is at the core of this system. Because each customer is different and has differing data needs, it is impossible to create a leased data license agreement to cover each contingency.

Let's take this further. Since each customer requires unique data, such as their customer number tied to their specific price, you are forced to touch each record for each customer. The cost to touch a record is $1 to $2, whether you lease the core data or populate it yourself. Therefore, the incremental cost of touching each record is negligible, and owning vs. leasing becomes a mute point. Why not own your data if you have to touch it anyway?

Perhaps the greatest threat to you as a distributor is the loss of customer control if you lease data. Consider this hypothetical situation. Suppose you create a grand e-commerce strategy around leased data. Customers flock to you to do business via the Web and dozens of companies link into your database. One day, you have a falling out with your leasing company. Who owns the data? The leasing company. It can put you in an awkward situation with customers and can be very expensive if you are forced to erase and repopulate your core data.

So the question becomes, how do you affordably create and maintain your own database? Here is one outline of a process used to design and populate a distributor database:

1) Determine the critical SKUs you supply to your best end-user customers. This might be 2,000 SKUs for a small distributor and 50,000 for the very largest. (Not as many as you thought, is it?)

2) Determine what information you require in the database, such as pricing, product number, descriptions, quantities offered, price breaks, etc.

3) Create the database shell in Access, SQL, Oracle or other appropriate software. Make sure you choose a solution that will allow any novice to update and maintain the database.

4) Investigate use of co-op dollars from manufacturers.

5) Populate the database (a typical outsource firm charges $1 to $2 per record for this service). This process usually takes three to four months to complete, but once completed, you have the ability to customize the data any way you wish. Here are a few ways to use your database:

Integrated supply. Connect with as many customers or other distributors as you like.

Online exchanges. Participate in any and all exchanges that match your strategic vision.

Customized catalogs. Build customized catalogs with custom pricing for as many customers as necessary without incurring increased licensing fees.

License your data. Share your database with customers that require you to post your data to their online catalog.

Leasing vs. owning data is a complex issue. As distributors, don't fear leasing data, but fear losing control and losing the customer relationship. Never let anyone come between you and your customer.

Tom Kelly is president of QSSolutions, a Detroit company that develops Web sites and devises Web strategies for industrial distributors and manufacturers. He can be reached at or by e-mail at .

This article originally appeared in the September/October 2000 issue of Progressive Distributor. Copyright 2000.

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