More to B2B than counting e-costs

The B2B e-commerce sector has an unhealthy pre-occupation with costs. Customers, both on the buying and selling side, are constantly being told that automation will save them money.

Opinion

For sellers, the cost of sales will fall, while their market reach will increase to encompass customers in territories and industry sectors that were previously unattainable. For buyers, automation promises to lower the unit cost of purchasing for production and non-production goods and services.

Put the two together and there is another magical effect: lower cost of sales, bigger markets and greater transparency - the ability to do comparison shopping on a global scale - combine to drive down prices faster and further than was ever thought possible.

Businesses that predicate their trading strategies on this scenario may be in for a shock. First, there is the cost of systems to consider. Market analysts predict that billions of pounds will be spent on B2B products and services, both in the creation of industry exchanges and in the implementation of the systems customers need to participate in the new economy.

There is no doubt that these investments will be repaid, some of them many times over, by gains in efficiency and competitiveness. But the payback period, particularly for large-scale projects, will be measured not in months but in years. Suppliers that promise customers discounts in return for agreeing to trade with them electronically may live to regret it when the invoices start arriving from their IT vendors.

Similarly, customers that are lured with promises of cost savings may find the apparent benefits eaten away by their own IT costs. For all its attractions, the e-procurement landscape is riddled with pitfalls: there are a profusion of half-formed technical standards; a mass of IT vendors, each putting a different spin on the same story; and legacy problems, some technical, some organisational, to tackle before most businesses can even get started.

Every vendor recognises the need for integration of processes and systems. Far fewer understand how to deliver this integration capability, the cost of which may far exceed the capital outlay on hardware, software and services. IT vendors are busy telling suppliers they can use B2B e-commerce to make more money and just as busy telling customers they can save more. It does not take a degree in economics to see the flaw in this argument.

Implicit in many IT vendors' claims for B2B e-commerce is that the benefit of lower cost of sales will be handed back to customers, but not necessarily so. Some suppliers may prefer retained profit, particularly if their shareholders have a say on the matter.

Against cost considerations, buyers and suppliers alike need to weigh considerations of quality. How reliable is the supplier? What do other customers have to say about the supplier's products? What about the supplier's record on delivery and problem resolution? None of these questions turn on price alone.

The main objection to the industry's obsession with costs and prices is that these are only elements of a bigger, more complicated picture. Automating the relationship between buyer and supplier can only succeed if all the factors that make up a relationship are taken into account.

You have to ask what will be the outcome of an economy in which price is the sole determinant of viability?

The answer is that many suppliers will no longer be profitable or will go out of business altogether.

Commercial success will be determined entirely by economies of scale, and qualities that we say we value, such as choice and variety, will no longer count.

Will the system allow the supplier to treat some customers as more equal than others? What added value will it deliver in terms of management information? How easily can it be made to work with the systems and business processes already in use? What guarantees can the supplier make about security both of funds and trading information?

Of course, the game has to be worth the candle, and no business will buy into the B2B e-commerce proposition without an incentive that starts with a pound or a dollar sign. But it does no-one any favours to pretend that that is where the story ends.

The appeal of supply-side auctions, for instance, is not that they result in lower prices but that they allow the supplier to find the customers prepared to pay the best price. Often suppliers have found the use of auctions has enabled it to push prices up.

John Adamson is joint managing director of Tranmit