Danny Bradbury evaluates the business case for using extranets for
business-to-business e-commerce
There's nothing worse than calling a business partner to check
on payment for services rendered, only to be told the invoice was
never received. Or faxing a form with a product order, and ending
up with 1,000 boxes of paperclips instead of the 10 floppy disks
you wanted because the fax was misread or miskeyed.
It happens all the time in the paper-based world, which is why
business-to-business (B2B) e-commerce is attracting so much
interest. However, you won't be able to play the B2B game unless
you have an extranet to underpin it.
Chris Webster, head of supply chain at IT consultancy Cap Gemini
Ernst & Young, interprets the term B2B extranet to mean the
application of Internet technologies on a secure basis between
different organisations. The relationship can be one-to-one,
one-to-many or many-to-many, he says.
One-to-one relationships are generally conducted between
different business partners, while many-to-many extranets take the
form of online trading portals. In one-to-many relationships,
suppliers can use extranets to connect to many different customers,
aggregating fragmented, complex ranges of products into a
one-stop-shop online sales proposition.
But why use B2B extranets at all? The corporate applications
market used to be driven by the need for internal efficiency, but
things have changed in the past year. As internal IT projects
designed to tighten up internal business processes have reached
maturity, companies have turned their gaze outward, to explore ways
in which they can streamline their dealings with business
partners.
Software suppliers have been quick to develop products designed
to meet this new B2B focus. Often, they have added interfaces and
modules to existing products so they can support B2B communication.
Before using these products, however, businesses have to understand
the best way to create B2B relationships with suppliers, customers
and other corporate partners.
Although the B2B market has focused heavily on e-commerce
activities, B2B extranets don't always have to involve a
transactional element, according to Colin Tankard, managing
director of Aventail, a consultancy specialising in the development
of business partner networks.
An extranet between two companies working on a business deal is
one example of an extranet created for a purpose other than
e-commerce. And a company going through an acquisition, for
example, may wish to create an extranet for document management
purposes between itself and its legal advisers.
Another example is the creation of information sharing extranets
for airlines, which often have multiple relationships with
different suppliers such as catering companies, maintenance firms
and so on. "They will be looking to share a lot of that information
with different divisions of the airline so they can do global
deals," says Tankard.
But normally, when people say 'B2B', the word 'e-commerce'
appears in the same sentence. A number of different types of B2B
extranet have appeared, most of which are still in the early stages
of development. The success of these business models will depend
largely on the creation of universally accepted standards that will
enable companies to do business with each other on an almost
transparent basis. For many companies, the attraction of such B2B
extranets lies both in their ability to offer access to a multitude
of different potential business partners, and the ability to manage
business relationships on multiple levels, including initial
contact, the creation of a contractual agreement, transaction
management and delivery.
People have been using extranets for the basic sharing of
information on a collaborative basis for some time, says Webster,
adding that the benefits are becoming much more quantifiable as
extranets become e-commerce tools. "You're really looking at cost
savings," he says. The prospect of reducing cost-per-trade by
automating it and taking away the manual work will definitely
appeal to the average finance director.
But cost savings are only part of the picture, according to
Nicola Price, senior southern European marketing manager for online
trading portal company Commerce One. She argues that the real
benefits come from streamlining and structuring processes. It's
easier to make a decision about a purchase if all the information
is easily accessible online, she says, and can dramatically reduce
the time taken to evaluate different prices and sign up to a
deal.
It can also make your internal and external structures more
efficient by reducing maverick and rogue purchases, she believes.
An example could be where a manager has someone starting work
shortly who will need a laptop computer. Often, people will
procastinate and leave such purchases until the last minute,
finally popping out to the shops and buying it on a card before
putting it on expenses. "By making the purchasing process as simple
as possible, you are getting people to stick to the contracts and
prices you want them to purchase with," she says.
One potential downside of such automated B2B relationships is
that they may not be relationships at all. When human interaction
is taken out of the equation, transactions naturally degrade to a
purely price-driven basis. The lowest bidder gets the deal, which
may not always be appropriate in a business context.
There will certainly be a tendency to sell more commodity-based
products through many-to-many business hubs, says Webster, and this
has already been borne out in the industry. Commerce One, Ariba and
others have set up portals designed for trading horizontal products
such as office supplies, for example. More specialised products
will go through one-to-many hubs, he says. When you get into the
areas where human relationships are really important, such as
professional services, Webster believes it will be very difficult
to trade effectively via B2B extranets: "The higher up the value
chain you go, the more difficult it gets."
But this hasn't stopped some companies from taking the plunge.
Elance.com, for example, is a trading portal for
sourcing freelance staff to complete projects. Projects are traded
online in a services market, put up for tender by companies, bid
for by other companies or freelancers, and then awarded over the
network. The quality of the bidders is assessed on a scoring system
contributed to by previous employers.
Commerce One's Price dismisses the relationship issue
altogether, arguing that most of the companies that do business
over these extranets already have well-established relationships.
In which case, why not just establish a one-to-one relationship
using your own extranet, and do away with the portals
altogether?
"If you go to any big organisation, they deal with hundreds of
thousands of suppliers," she says. "If you have relationships with
multiple suppliers in multiple areas, then you would need
point-to-point relationships with hundreds of companies for
everything you buy, which is inefficient."
But that doesn't put such activities out of bounds for smaller
companies. Commerce One has a managed service for SMEs, which gets
them out of installing software on their own equipment, minimising
the upfront investment required. It is important to understand that
the managed service doesn't integrate with users' back-end systems,
which makes it less efficient than the more sophisticated services
that require technology know-how within the business.
There are also advantages to pooling your resources with lots of
different companies, as Webster points out. In the consumer market,
bulk buying has started to emerge, with numerous individuals
clubbing together to buy products en masse, which reduces the
overall cost of purchase.
Webster says he is working with other parties to bring this
model into a B2B context. Certainly, one B2B extranet portal,
EuroSurplus, is working hard to implement such services. Focusing
on the online trading of surplus inventory, his portal lets
companies divest themselves of unneeded stock, and others pick up
goods cheaply. EuroSurplus will move into bulk purchasing this
year.
The future for B2B extranets looks rosy, and the opportunities
for companies wanting to form exciting new business models by using
them are huge. Webster foresees a time when companies move from
basic buying and selling over B2B extranets on an ad hoc basis to
more integrated models in which they tie together purchases over
one extranet link with sales via another. He gives the example of a
manufacturer buying agricultural products from one or more online
portals, processing them into basic food ingredients and then
selling them onto a food ingredients trading hub. "It will rely on
your ability to connect internally and put in all your costs and
value add," he explains, adding that it needs to be tied together
with internal enterprise resource planning, including market trend
forecasts and yield management.
Planning such activities goes far beyond the capabilities of
many firms today, which are still struggling with the internal
justification for such business models. Nevertheless, with B2B
extranets clearly representing a viable business win for many
companies, it seems foolish not to investigate it further. When
analysing whether this route is right for you, think about how much
money you're spending in manual labour on existing trades, along
with the potential for faster purchases from your suppliers.