B2B: Bonanza or Bust?

Monday Oct 9th 2000 by Anne Knowles
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Too many business-to-business exchanges are chasing too few transactions. So how does a corporation decide when and with whom to do business?

Business-to-business marketplaces are a dime a dozen. Every day it seems a new exchange appears on the economic landscape. Most industries are coming together to do business on the Web--no matter how arcane or antiquated their ways are.

In 1999, B2B transactions totaled $215 million, or just 1.4% of all commercial transactions, according to Boston-based market researcher AMR Research Inc. While this is fairly low, projections are for over $5 trillion in transactions by 2004.

Among the growing number of transaction dollars are those spent in the $700 billion global steel industry. Leading producers have agreed to buy and sell four million tons of steel annually on FerrousExchange.com, a New York-based exchange launched in September 2000. In the marine industry, Marex.com, a year-old Miami-based exchange, serves as a B2B anchor for the $40 billion recreational boating market. The multi-trillion dollar global construction industry boasts more online marketplaces than you can shake a two-by-four at, including buzzsaw.com and bid.com, two San Francisco-based sites that plan to offer everything from auctions to project management.

Just name an industry, and it's a sure bet it has a B2B exchange--or two or three or 10. And that's the problem. Even the $100 billion food industry may not be able to support that many separate marketplaces. "There's probably not room for multiple exchanges," says Tom O'Connell, chief marketing officer at FoodUSA.com, in Madison, Wisc.

"We talked to a lot of companies, and their worst nightmare is having to go to a different site for every supplier," says Christine Mason, chief strategy and communications officer at Metal Makers, a metals industry exchange in Chicago. "There is also a backlash because companies worry that businesses they've spent years building up are going to be deconstructed overnight."

The concerns are understandable, but O'Connell, Mason, and others maintain that businesses must get on the bandwagon or risk getting left behind. "It's almost scary because there are so many companies not even using e-mail while others are using technology for everything," says O'Connell. "And I wonder if those avoiding it will survive."

Online Supply Chains Will Dominate
B-to-B buying and selling online is expected to swell from 3% to 42% of total B-to-B domestic trade over the next five years.

Source: Jupiter Research

So how does a corporation, be it supplier or buyer or both, decide on which industry exchange to do business with?

Digital Darwinism

With so many types of B2B exchanges out there, how can they all succeed? It may simply be a matter of survival of the fittest (see sidebar on p. 4, "Private vs. Public Exchanges). As a result, the question of which exchange to work with may answer itself.

It's likely that all types of exchanges will coexist, at least for a while. After that, it's anyone's guess which ones will win out. It may depend on the industry when it comes to vertically focused exchanges run by either a consortia of large players or by independent entities. "The only ones that will eventually survive are the consortiums [consortium trading exchanges or CTEs]" says Kevin Prouty, Boston-based research director for the automotive industry at AMR Research Inc.

The key, says Prouty, is generating enough content and traffic to thrive, which heavily favors industry giants with clout like General Motors Corp. or The Boeing Co. "But even the Covisints [Covisint is the automotive industry exchange established and funded by General Motors, Ford Motor Co., and DaimlerChrysler] will struggle," warns Prouty (see sidebar on p. 4, "Will CTEs Get Voted Off the Island?").

Take Lands' End. The company runs its own private exchange for corporate customers who buy apparel, like T-shirts for company meetings, stitched with their corporate logos. Customers can order clothes, specify their logo and where to put it, generate a purchase order, and pay for it on the site, which launched in 2000. Lands' End uses software from webMethods Inc. and Ariba Inc.

"It was a lot of pain getting established, and it takes some time," says John Manzer, Internet business development manager, at Lands' End. "The behavior of the buyer is different on the Internet. But the Internet is an unbelievable marketing tool. We're just a little company in Dodgeville, Wisc., and we get a lot of business just because we're on the Internet."

But in other industries, which are not dominated by a group of vendors either as buyers or suppliers, an independently run exchange may be the best solution and the only game in town. "We pick markets that are highly fractionated," says Walter Nelson, executive vice president at Ventro Corp., an exchange hosting company in Mountain View, Calif. "Autos, airplanes, those are not highly fractionated industries; they're dominated by a few key players. Our industries have some key players, but there is lots of room for improvements in the way business is done."

He cites as an example Toyota Motor Corp., the Japanese car maker that has its own extranet and has decided not to participate in Covisint. In the end, Prouty says, the public and private exchanges will become one and the same. "The real end role for Covisint is to connect all the private exchanges," he notes.

Problems, Solutions, and Costs

For now, the exchanges have their hands full getting even the most basic offerings up and running. Most of the exchanges have been plagued by problems, including incomplete transactions, antitrust worries, and less than stellar traffic.

Alphabet Soup
Some of the important B2B exchange technologies:

eXtensible Markup Language (XML): The emerging standard for Web documents--which allows designers to create their own customized tags--enables the definition, transmission, validation, and interpretation of data between applications and organizations. Electronic business XML (ebXML) is an effort to develop an electronic commerce standard registry, transport mechanism, and business process description.

RosettaNet: A group formed by American Express Co., Microsoft Corp., IBM Corp., and others, to use XML to standardize labels for elements like product descriptions, part numbers, pricing data, and inventory status.

Universal Description, Discovery, and Integration (UDDI): Announced in September 2000 by IBM, Microsoft, Ariba Inc., and others, UDDI is an XML-based standard now under development to create a directory for online businesses to register themselves and their services.

In the short term, say the next three to four years, private exchanges will be the predominant way for partners to trade with one another, according to AMR's Prouty, as the public exchanges work out all the kinks in their technology and services.

Some are working to contain and complete transactions at their sites. Today, most transactions are settled offline, between the buyer and supplier, and sometimes are never completed for various reasons. "Incomplete transactions are a big problem," says Frank Florence, vice president and general manager, B2B business unit at Interwoven Inc., a content management software maker in Sunnyvale, Calif. "There are buyer identity problems, contract negotiations falling apart. Only 4% to 5% of Net marketplaces are doing a fully integrated transaction, tied into the back end and deleting from inventory."

Part of that problem is financial, and many exchanges are making an effort to offer broader range of credit services in their second generation. GE's Express Marketplace, for example, plans to offer what it calls settlement services, or the ability to generate electronic invoices and to tie that into GE Capital, which will finance and pay the invoice. The service is currently in beta testing.

But the other part--integrating suppliers' and buyers' in-house enterprise resource planning (ERP) systems, supply chain software, or simple ledgers into the exchange--is a gnarly technical issue for the marketplaces. It also often requires an up-front investment, and a leap of faith, for the participant.

"Companies can connect tomorrow via a browser, but the real value is integrating the back end," says Mike Johnson, CIO at Enporion Inc., an Allentown, Penn., exchange for the energy industry founded by several utilities. That includes publishing their catalogs, which may entail a lot of work if those catalogs are paper based. "Some of them don't appreciate all that is involved," Johnson says.

"Just name an industry, and it's a sure bet it has a B2B exchange--or two or three or 10. And that's the problem. Even the $100 billion food industry may not be able to support that many separate marketplaces. "

Probably more daunting is tying back-end accounting, inventory, and other systems to the exchange. Again, most exchanges are striving to make that easier for participants in the future. "Anything that can export or import very basic Excel-like files can connect to our systems," says Eugene Shiu, vice president of business development at BigMachines.com Inc., a Foster City, Calif., exchange for makers of industrial equipment. BigMachines.com also uses integration software from webMethods. "We've spent millions of dollars building standard interfaces to ERP suites out there," Shiu says.

Other exchanges, however, require the participant to bear the cost of integrating their systems into the exchange and provide either their own consulting services or access to outside consultants. And most provide translations, or plan to, between standard formats like electronic data interchange (EDI).

Nagging Issues Remain

Government oversight may still be a concern for the CTEs, but Covisint got the go ahead in September 2000 from the Federal Trade Commission, which had been investigating the automotive exchange for potential antitrust violations. Part of the deal, however, was a guarantee that Covisint's buyers--the Big Three auto makers--wouldn't aggregate purchases to avoid the possibility of price fixing. Covisint agreed, although Hay says aggregation was never a major portion of the exchange's business model. However, the exchange is still under the scrutiny of the European Commission, which proposes trade legislation and oversees adherence to it for the European union.

Such investigation, and the uncertainty it engenders, has led to some delays for the exchanges. Covisint says it will be operational before the end of 2000 and is marketing its many services, including auctions, catalog purchases, and joint product design. Yet the exchange still has to appoint a CEO, hire a permanent staff, and establish a permanent headquarters.

For these and other reasons, traffic at most exchanges is hardly something to brag about. "There's been no stampede to get there," says AMR's Prouty. "People aren't ready for it. Most procurement is still manual, and companies don't see the benefit yet [of automating the process through exchanges]." As an example, Prouty says the average transaction in the automotive industry costs $135 to complete, and vendors will wait until that cost is significantly reduced by an exchange before they jump on the bandwagon.

Some exchanges have fared better than others. FoodUSA.com, for instance, has been operating since April 2000 and so far has closed 700 transactions for a total of $20 million, according to O'Connell. One of FoodUSA.com's biggest tasks, he says, is in the initial marketing of the exchange, starting with the basics. "We had to convince [the industry] that e-commerce was a good thing and change the way people have been doing things for 150 years," O'Connell says.

FoodUSA.com's experience highlights the most important issue of all--people. Complex technology and the fear of regulation aren't the only issues slowing the adoption of exchanges, analysts say. Equally important, if not more so, are the people issues. Suppliers worry that exchanges will erode their margins; buyers worry that suppliers may be unreliable and unable to fulfill commitments; and everyone worries that the cost of participating in an exchange and doing business on it may outweigh the benefits.

So the best criteria for evaluating an electronic exchange, says Bradley Hosmer, founder of the Beta Consulting Group, in Concord, N.H., is the same one used to judge an old-fashioned, real-world marketplace. "Identify the high-quality suppliers and customers in your industry and the exchange they do business on," he says, "and go from there." //

Anne Knowles is a freelance journalist based in San Francisco. She can be reached at aek326@att.net.


Private vs. Public Exchanges
Here's what you need to know before entering the marketplace.

Industry electronic commerce exchanges come in several shapes and sizes. The best known are the vertical, industry-backed exchanges that AMR Research Inc., a market researcher in Boston, calls consortium trading exchanges (CTEs). They include Covisint, the automotive industry exchange established and funded by General Motors Corp., Ford Motor Co., and DaimlerChrysler, and the Global Aerospace and Defense Exchange, founded by The Boeing Co. and Lockheed Martin Corp. for the aerospace industry.

Independent third parties that are neither buyers nor sellers are also creating digital marketplaces for vertical industries. They include FoodUSA.com, for the food industry, and a handful of vertical exchanges, including Chemdex for the life sciences industry and Promedix for the specialty medical products market, run by Ventro Corp., an exchange hosting provider in Mountain View, Calif.

Ventro also is about to launch a horizontal exchange called MarketMile. A joint venture between Ventro and American Express Co., MarketMile will provide a place for any kind of business to buy and sell general business products--a $1.4 trillion market, according to the exchange's partners. It's scheduled to launch in the first quarter 2001 and will initially target medium-sized businesses, with plans to serve large and small businesses as well.

Then there are so-called private exchanges, which are essentially extranets that extend a single company's supply chain to its trading partners. Any company can build one, although economies of scale suggest the larger the company, the greater the benefit. In addition, smaller suppliers don't drum up new business if they limit themselves to private exchanges.

"There are great benefits to the smaller supplier," says Dan Jankowski, a spokesperson for Covisint in Southfield, Mich. "There's more opportunity to purchase and design, not just with the OEMs [original equipment manufacturers] but with other suppliers. They can tap into Covisint and not take on the burden of building their own infrastructure. It will reduce the cost of doing business and drive a lot of waste, especially time, out of the their system."

"The future for exchanges is in small to medium-sized businesses," agrees David Hay, global product manager, marketplace solutions, at General Electric's GE Global eXchange Services, in Gaithersburg, Md., which, by the end of 2000 is set to launch a horizontal exchange called Express Marketplace. "The real economic benefit will be when that market trades with one another," he adds.

But the opportunity to target small to medium-sized businesses includes larger corporations, too, says Hay, which are eager to target the smaller business customer. "Many big corporations have stopped calling on the small to medium-sized customer because of the rising cost of sales." Exchanges, which strive to reduce the cost of doing business for everyone, large and small, provide a way for big fish to once again go after small fry, Hay says. --A.K.
Will CTEs Get Voted Off the Island?

Marketplaces built by industry giants like the automotive industry's Covisint or the aerospace industry's Global Aerospace and Defense Exchange may not survive, say analysts, if they continue to overplay their promises. Here are the top 10 pitfalls these exchanges need to avoid:

Functionality that is promised prematurely. Many CTEs are touting soup-to-nuts services before they even have the necessary technology in place. For the next few years, however, don't expect CTEs to deploy much more than auction, spot-buy, and excess inventory services.

Collaborative commerce apps that are years away. Advanced services exchanges are collaborative applications for design, forecasting, planning, and inventory management, but most of these applications aren't even off the drawing boards yet. Likewise, so-called marketplace-to-marketplace (M2M) integration, which promises to let companies move freely between exchanges, is a technology puzzle that will take years to solve.

Lack of consensus on where functionality should reside. Should applications reside publicly, in front of a firewall, or privately, behind a firewall? No one agrees, and the exchanges are going nowhere until they figure it out.

Costs of use. Companies may get turned off once they add up the costs of integrating ERP, customer relationship management, and supply chain management systems into the trading exchange.

Unrealistic budget forecasts. The total cost of developing one of these exchanges could reach as high as million. Members who fund them may run out of patience--and money--before the exchanges can show a return on investment.

Skeptical suppliers. Recruitment of suppliers will be tough since most don't trust that they'll profit as much as the big-name buyers. The problem is exacerbated by the initial emphasis on auctions and indirect goods, where the lowest price reigns.

Technology headaches. Best-of-breed software may not be the best solution. Most CTEs are being built using a procurement system from one software vendor, a content management system from another, and a logistics package from a third. This could lead to problems stemming from dissimilar user interfaces and never-ending software upgrade cycles.

Immature standards. Promising standards, such as eXtensible Markup Language (XML) and RosettaNet, are just that, promising. Both need work, and neither is used widely.

Political infighting. Remember, consortia members are also industry competitors, and each member company may struggle internally with a conflict between CTE supporters and those who believe a private exchange would better serve the corporation's needs.

Source: AMR Research Inc.

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