During E-Business Month, Computer Weekly and Asera co-hosted a
round-table discussion on the future of B2B exchanges. Paul Mason
listened in
Business to business (B2B) Internet marketplaces were the "new
business model" that was supposed to save e-commerce, once the
froth was blown away from online retail shopping.
But the B2B exchange model is itself now under pressure - there
are too many exchanges and not enough liquidity. On top of that
there is a growing realisation that, far from being a money-making
opportunity for the start-up companies that pioneered B2B, the
exchange model will be dominated by the large multinational
corporations which trade there.
Last month Computer Weekly brought together e-business
people from across the B2B scene. From solutions supplier Asera
came Kevin Leslie and David Lazarus; from AIM-listed incubator
Brainspark, came Jason Brown; from Netmarkets Europe, Simon
Torrance and from industrial gas exchange gasworld.com, Nick Pledge. Together with KPMG
consultant Patrick Bossert, they discussed the challenges facing
Internet markets today.
Torrance says, "I've been involved in this industry for about
three years now. It started with dotcoms and venture capitalists.
You had this huge rush of blood to the head around the end of 1999
and the beginning of 2000.
"Thousands of these Net markets were springing up on every
subject imaginable - from chemicals to steel to sewage. Everybody
was seeing a market worth $58bn, and saying, 'we're going to take
some profit out of that'.
"Vertical Net was worth $9bn, Chemdex was worth $2bn, and you
had all these fat cats sitting on the panel at the front and
wallowing in their paper success. But, of course, we had the huge
Nasdaq crash.
"You then saw, almost like a correlation to the falling share
price of the dotcoms, the increase in press releases from the
bricks-and-mortar companies saying, 'We're going to do this now;
we're not going to let these upstarts get in our way and take our
marketplace'.
"What we're seeing is a huge loss of nerve from the venture
capitalists; and there's fundamental questioning of the business
model of a traditional exchange-based Net market, where you bring
lots of buyers and lots of sellers together and take a little
cut.
"The fundamental question is whether these are viable businesses
without the big bricks-and-mortar companies getting involved."
Jason Brown says, "People talk about exchanges while not really
recognising the whole idea of disintermediation goes against the
very principle of exchange. There has to be a central value
exchange on both sides. Most of the companies that Brainspark has
in our building have gone through something of a roller-coaster
ride in terms of their thinking.
"In the beginning, [they were] thinking about an information
service which led later to trade, and then thinking about the
number of transactions from day one. Then pulling back and thinking
about what the customer needs, what does the customer want and
trying to address that. I think that's where we are today. There is
a trend to become more customer focused.
"What we're looking for is a strong management team first, which
has an expertise that is provable and a good idea that is
deliverable. And it would help to have some proof of having run a
business."
Nick Pledge says, "Initially our response was no, it's not going
to work. We were ingrained in the traditional big-corporate,
slow-moving industrial-giant type mentality.
"Then we dug down in this and looked at it, and started
analysing what happens in different parts of the supply chain. We
realised that there was an opportunity to enable something between
the participants in the supply chain that would make doing business
easier. It's not just a question of bringing lots of buyers and
lots of sellers together in one space, [and] bang, hey presto,
loads of transactions will take place, and we'll take
commission.
"If it ever becomes that, it will take a long time to get there.
If it fails, it'll have been a good fun ride, and it has probably
put us in a position where we can go on and do something that has
more chance of success.
"Out of all this, there will come something. The B2B space will
not just disappear. There will be a Phoenix rising from out of the
flames in some form or another. Potentially, we have an option of
being one of the Phoenixes that rise from the ashes."
Patrick Bossert confirms that the old-economy companies are
piling into the e-hub space. "I think bricks-and-mortar businesses
have watched the exchange very carefully. Some of the earliest
exchanges I worked on - a rubber exchange, a fish exchange - were
just bringing buyers and sellers together and they really did not
work, for a lot of reasons.
"The interesting thing is, exchanges only appear to work for
spot purchases, and most bricks-and-mortar businesses that we're
working with already have very good supplier relationships. They
want to develop exchanges to extend those and make them work a lot
more efficiently.
"Bricks-and-mortar companies already have huge investments in
EDI operations, right up the supply chain. Some of them have
created incredibly efficient ways of trading already, so what an
exchange needs isn't more efficiency, [or] lower margins. It needs
to bring a greater level of transparency with a greater number of
trusted suppliers. That's the emphasis that were seeing.
"For bricks-and-mortar operations, an exchange is something
completely different to a marketplace. It's like going to an East
End market and ordering a PC from a street trader. You wouldn't
trust him to deliver something that works to the specifications
that you agree. Whereas if you order one, say from Dell, you have
the brand, the reputation, but you can also track it being bought,
being shipped to you and that's really what buyers value above all.
It's not just the price differential, its the operational
suitability to their business.
Kevin Leslie agrees, "Bricks-and-mortar companies have invested
a huge amount of money in ERP. In Europe, the majority of them are
running SAP systems, some of them are involved in Oracle.
Essentially they've spent an awful lot of money.
"They got the point: usually it cost them more than they
expected, it took them longer than expected and most of them didn't
actually quite finish the implementation that they expected. Most
of them have a number of legacy systems now. They may have been
through SAP but then implemented SAP in four different locations,
in four different ways. Now we are talking to companies that have
their business processes locked in these internal systems - and
they are very internally focused.
"How do they address their customers more effectively? How do
they unlock the investment they've made in the business processes
they encapsulate in ERP? After Y2K they don't want to touch their
ERP systems again. They want to focus on the customer facing
systems. So where we come in, is enabling bricks-and-mortar firms
to expose their business processes effectively over the Web."
Leslie believes large corporations will be loathe to share their
liquidity with dotcom marketplaces. "Why would they want to open
their customer relationships to all and sundry? My belief is an
independent Net market will only be successful when it ceases to be
independent. They'll only be successful if they become an
e-commerce distribution channel for corporates."
But do those independent market makers, have either the right
technology or the right skill sets?
"Most of them don't," says Leslie. "Most of them built
technology for an infant market. That technology was handcrafted
and might have cost $20m or $30m to put together. But it's a sunk
cost and it doesn't necessarily fit what a corporate would want for
something that is as awkward as the Web. So I think a lot of these
companies are re-focusing themselves because they are not getting
the liquidity they wanted."
David Lazarus agrees, "The winners are the ones that are going
to have the dominant players in the industry as their backers or as
their partners. The pure independent players just do not have the
weight within the industry to succeed."
Pledge says, "I think it depends on the industry, though. I
think if it's a really highly fragmented industry where there isn't
necessarily any individual or a recognisable group that has power,
then I think an independent has a part."
Lazarus says, "I can think of a couple of examples where people
within highly fragmented markets are starting with community, just
getting people coming to the site and talking to each other without
there being any revenue associated with it, in order to build
confidence within these industries. I think there is an issue that
will take some time to resolve. If you have 1,000 NHS Trusts, how
do you get them to participate in your net market? They are not
necessarily in a position to sponsor a Net market or create a Net
market in their own right. But they're seeing all this activity and
they're thinking, 'which one am I going to play, how do I make my
choice?'"
Bossert says, "There are at least three types of transactions
between corporates. [There is] strategic selection of a supplier.
There is call-off of agreed products under an umbrella agreement -
that is an operational transaction, an order placement. And then
there is the spot transaction - I need something now, I'm not too
fussed where I get it."
Bossert says, "There's probably about five or six different
revenue sources for the marketplaces of the future. The original
assumption that it would be transaction based fees was the biggest
nightmare; it is the one that really doesn't work. If you're
driving down costs of the commodities themselves - as with auctions
- it's not really benefiting anyone in the equation. Even the buyer
ends up with a worse service, usually. One of the most successful
marketplaces I've seen operate is by providing additional
services."
Leslie says, "E-procurement is all about reducing your suppliers
to an item in the catalogue. We are seeing more plays now where
people can differentiate their product and their service
everywhere. Simple things like being able to configure over the Web
and have it automatically translated into an order that is going to
be delivered."
Torrance says, "If you look at a lot of the major manufacturing
industries, there is a different structure, where you have a major
manufacturer and then you have tiers of suppliers. I think it's the
ability to communicate well and most speedily with a range of
people who you've never had any direct communication with. The big
issue to quantify that.
"So a bricks-and-mortar company can decide to participate in the
Net market, but how do you put costs against protecting your
existing business. I don't think the market has figured this out
yet. It's the same with any front-end solution to any customer
facing solution - what is the benefit? What is the cost? Because
there isn't sufficient history to be able to sit down and actually
calculate it out. It's very difficult to say, 'right, we're going
to do this because of this equation here, which is going to result
in this amount of additional revenue, or we don't lose these
customers and therefore we retain this amount of revenue'. It's a
very poorly cost model. Cost is very difficult. People need to be
able to buy into the concept. It's being able to have a vision. And
you can always tell, the level at which you're talking will depend
on how easy it is to sell the solution."
In many corporates the first thing managers hear when they
propose a B2B exchange is the IT department saying "we can't do
it", with the emphasis on 'we'.
That is a tremendous block to most general managers, but it's
also a lifeline for an independent provider of the solution.
Few firms will be prepared in this climate to re-configure
processes that work internally just to meet the needs of an
experimental channel to market.
Round-table who's who
- Simon Torrance - CEO, NetMarkets Europe (moderator)
- Kevin Leslie - UK sales director, Asera
- David Lazarus - e-business consultant, Asera
- Nick Pledge - chief operating officer, Gasworld
- Patrick Bossert - principal consultant, e-business strategy,
KPMG
- Jason Brown - head of B2B systems, Brainspark