B2B: Putting the extra in extranet

Danny Bradbury evaluates the business case for using extranets for business-to-business e-commerce

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.

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