B2B business is booming

If industry observers are right, B2B marketplaces look set to revolutionise the way in which businesses deal with each other

If industry observers are right, B2B marketplaces look set to revolutionise the way in which businesses deal with each other

Business to business marketplaces have become the hottest topic in e-business, driving a future surge in revenues that could reach around $200 trillion within 10 years.

In industries across the board, many believe half of their business procurement could be made online by 2004.

But, despite a blur of announcements, many still face a reality check. In some industries, key players are competing to get their operations up and running, others are still deciding whether or not they want to take part, and some have been sweating on not breaching antitrust rules.

In this special marketplaces section, Mark Vernon cuts through the hype and confusion around exchanges, defining the different types of exchange, and the issues they face. Nina Kruger explains why German car giant BMW chose not to join Covisint, the auto marketplace. David Bicknell looks at two new marketplaces in the shipbuilding and energy sectors, and finally, two key players in the chemical and paper industries, Chematch.com and PaperX.com discuss driving liquidity through a site, and tailoring a business model to match suppliers' requirements.

B2B marketplaces are already big in e-business, but they are set to become massive. Of all the initiatives seeking to exploit network economics, these exchanges are the frontrunners when it comes to revolutionising the way businesses deal with each other.

PricewaterhouseCoopers, for one, estimates that the sector will be worth $200 trillion in worldwide capital market value within 10 years.

"Marketplaces will take the lead position [in B2B e-business models] as a number of them manage to establish themselves as de facto marketplaces in specific industries," says Mikael Arnbjerg, program manager of IDC's European Internet and e-commerce strategies service.

But with transformation comes confusion. Dynamic pricing, many-to-many business models and new business models altogether, such as reverse aggregation, may sound wonderful on paper, but can be bewildering in practice. Further, when a growth market presents a large cake, everyone rushes in to claim a piece. For example, Zona Research's B2B Marketplaces 2000 database lists nearly 850 at the time of writing. The dangers are both that the technology and processes underpinning the services are fragmented, and that consolidation of the market as a whole will inevitably follow. These are substantial sources of risk for all concerned. It is a land grab. But not all will find gold.

B2B marketplaces have arisen because the Internet has created unparalleled opportunities for companies to create markets that deliver products more effectively, whilst offering increased efficiencies in the supply chain, and richer ways of responding to customers.

"Traditional business models are becoming obsolete. Business leaders must fully understand and embrace the new B2B realities or face severe consequences in the future," says Alan Hammill, European strategic change leader at PricewaterhouseCoopers Management Consulting Services. "The next year will mark extraordinary change as the financial markets continue to reward companies that re-focus away from the management of production and large internal capital bases and use new technology to re-organise themselves by integrating new players and forging new partnerships."

So what do these marketplaces look like today? A typical example is t-dental.com, recently launched for dentists, built by Round, a CRM service provider, and Asera (www.t-dental.com). It aims simply to bring together dentists' practices, dental hospitals and dental suppliers for the exchange of everything from drills to fluoride, as well as industry news and research. The marketplace was built in seven weeks, proving that organisations can realise quick wins once they have tested the water.

At t-dental.com users can search from a catalogue of over 5,000 product lines, delivered as a managed service on a pay-as-you-use basis. T-dental.com's main revenue streams come from the sale of these supplies, subscriptions to publications, being a reseller for a variety of services such as accountancy, legal, and credit services, and from advertising on the site.

A more complex service is provided by bfinance.com. Here, for example, Olivier Govare arranged lease financing for 1.5m euro of computer equipment in his company. The site found five offers in 10 days. "I merely filled in an online form with all the details of the financing required and then sat back," Govare says. The bfinance site brings together 60 financial institutions, half handling treasury placements such as money market funds, and half looking to lend. Govare estimates that previously the process would have taken the best part of a month to complete.

Another kind of marketplace is demonstrated by Acequote.com for the sourcing of IT goods and services. It uses a reverse auction quotation method, whereby buyers post a request for quotes on goods or services requirements.

Derek Dodson of Cyber-central was a customer looking for a Compaq PDA. "Within 24 hours I had two quotes e-mailed to me, one of which saved me over £100 on an item which was being sold elsewhere for £400," he says. In the week of writing, the site saw £5m of business transacted, generating a lot of new business for resellers in particular.

"Acequote is sending our company a huge amount of sales leads on a daily basis and we feel that this gives us a great opportunity to produce orders we possibly would have missed," says Michael Kleynhass of Cable-Trak Installations in Wimbledon.

Marketplaces are also changing the balance of power in commercial relationships in a number of ways, commonly by enabling smaller organisations to club together when dealing with entities much larger than themselves. Consider the case of Organics-on-line.com, a supply marketplace for the organic food industry, deploying Unipower Systems' technology.

"A key way the Internet can help is through aggregating suppliers," says Annette Ward, founder of the marketplace. "Many producers of organics are not big enough and they are frightened of the multiples, some of which are so big that they are like an elephant rolling over who does not know that he is crushing the mouse. This technology can put small producers on a equal footing with big producers, giving them access to very large markets," she says.

B2B marketplaces have sometimes gained the reputation of being disintermediators, generating cost savings by knocking out the middlemen. However, a new strand of exchanges are emerging that encourage the participation of both buyers and brokers. Cigrex is one (www.cigrex.com), the first pan-European grain exchange. Agriflow, the company heading up the exchange, believes that brokers have a key role in animating markets and bringing liquidity.

"In many regions of Europe, brokers wake up the market every day, they add essential value to the supply-chain," says Daniel Maury, co-managing director of Agriflow.

As these examples demonstrate, suppliers are typically taking the initiative for now, as a study from e-procurement specialist Biomni, just completed by Total Research, confirms. Nearly 50% of the major UK suppliers asked now have e-commerce solutions in place, nearly twice the number that were fully operational in March 2000. Having said that, only 12% are actively participating in marketplaces. This is indicative of the economic change they represent.

"Despite the offer of exchanges to help suppliers reach new customers, their evident lack of interest for this model of electronic transaction is not surprising, given the difficulties they face in maintaining any form of competition other than price when participating in an exchange," says Angus Gregory, CEO of Biomni.

"The biggest problem we find we're facing in the field is fear," says Martin James, UK managing director of B2B solution vendor eXcelon. "'Where do I start? And does anyone really understand what I need?' type of questions are worryingly frequent. We see greatest misunderstanding within vertical industry sectors - they know they need B2B but have not been users of leading-edge technology."

Education and solutions that reflect business processes more accurately are two key issues. This is where the confusion takes hold, notably as competitive companies, on both the sell and buy side, realise that there are new opportunities to co-operate if only they can be found.

"Revolutionary new laws govern the actions and formation of B2B exchanges," says Ian Charlesworth, senior analyst at Butler Group. "They throw together old counterparts, such as International Paper, Weyerhaeuser, and Georgia Pacific Group for the formation of an online marketplace for the pulp and paper industry." He points to the automotive giants too, as an example of a sector that spun out multiple vertical market exchanges amid a frenzy of hype and publicity, before realising that there is much to be gained by not locking horns, with rivals.

Other sectors would do well to look at their mistakes and learn. "The arrangement between Ford, GM, and DaimlerChrysler is particularly noteworthy as it displays the kind of new business models and arrangements that the Internet economy is capable of throwing up," he says. "Previously, these competitors and rivals wouldn't have entertained the idea of collaboration." Here, though, the three have worked together to devise a procurement marketplace that simplifies and shortens convoluted supply chains. Whilst automotive giants and other multinationals, however, have the clout to forge the way ahead, B2B marketplaces could be stymied by participants that can resist change.

"Many of the marketplaces as we know them will not succeed in the long-term because companies will not want to give up control of their direct relationships with customers," says Robert Claren, global project manager at Alfa Laval, a B2B process engineering company. He believes this will lead to significant consolidation among marketplaces, and joint ventures between sites in complementary markets, to force change.

Learning from past mistakes is something that Ian Busby, Deloitte Consulting's European B2B leader, thinks is vital. "The emerging consensus is that the business case is now clear and major companies are ready to commit to the re-engineering of processes around this new e-supply chain concept," he says. And it is true, he admits, that the focus among analysts has recently been on consolidation and the likelihood of many marketplaces failing.

"This should not overshadow the real issue, however, which is the emerging clarity and understanding about how marketplaces operate. In the US, this means a transition from 'exchange hype' to value-based investments. Here in Europe it means that we face the rare opportunity of being able to bypass the hype phase, build on tested learnings and position corporates just in time for the 'new genesis'."

The technology itself is another problem. "Trading exchanges take all shapes and sizes, as do their requirements," says Pierre Mitchell, an analyst at AMR Research. "Private exchanges emphasise strong back-office integrations and flexible collaboration features. Consortium trading exchanges demand a many-to-many data model, bullet-proof security, and compliance with trading-partner rules. They need to operate and interoperate effectively, so that business processes can fluidly traverse them and back-office applications." In short, a tall order.

All of which leads UBS Warburg, in its recent report, The A-Z of B2B, to conclude: 'We expect the power of the network effect, added to tougher financing conditions for new entrants and the complexity of integration into users' back-end systems, should lead to a winner-takes-all scenario. This will likely mean the value created is concentrated in a handful of winners while the majority of marketplaces created will be subsumed or will fail."

The analysts estimate that over 80% of existing B2B marketplaces will disappear, making the market a minefield for anyone trying to pick a winner - either to trade with or to back. From now the rout will begin: by the end of 2001 they expect the number of marketplaces in Europe to be under 100. But those that do survive will be worth their weight in gold.

Different Types of Marketplace

1. MRO marketplaces

Horizontal marketplaces used to systematically source maintenance, repair, and operating goods (MRO), such as office supplies, spare parts, airline tickets, and various generic services. Systematic-sourcing involves negotiated contracts with qualified suppliers.

Examples: MRO.com
Industrial supplies
MRO marketplace

BizBuyer.com
Business Services
Online procurement for small businesses

2. MRO exchanges

Horizontal marketplaces used to spot source MRO goods, that is fulfill an immediate need at the lowest possible cost with pre-negotiated contracts or established relationship.

Examples:

AdAuction.com
Advertising & Media
Sells remnant ad space
CapacityWeb.com Manufacturing
Exchange for engineered parts. Online collaboration from quote to delivery

3. Vertical exchanges

Industry specific marketplaces used to spot source raw materials or components that go directly into a product or process.

Examples:
e-Steel.com
Metals
Steel exchange
PaperExchange.com
Paper
Catalog shopping; online auctions; company storefronts. Real-time market info
AltraEnergy.com Energy
Realtime energy auctions

4. Vertical marketplaces

Industry specific marketplaces used to systematically source raw materials or components that go directly into a product or process.

Examples:
ChemDex.com
Chemicals
Biological/chemical marketplace
PlasticsNet.com
Plastics
Plastic products marketplace

Source: Zona Research

Technology and services providers

Company URL Industry Description
Brio Technologies www.brio.com B2X e-services Builds and delivers business intelligence, enterprise reporting, and analytic applications to users in intranet and extranet environments
CyberCash www.cybercash.com B2X e-services Payment service and software for online business
Check Point Software www.checkpoint.com B2X e-services Offers secure virtual networking architecture
VeriSign www.verisign.com B2X e-services Provider of Internet trust services, including authentication, validation and payment for the B2B market
Ariba www.Ariba.com IT Solutions E-business software. Includes Tradex and Trading Dynamics
Commerce One www.commerceone.com IT Solutions E-business software. Includes CommerceBid
i2 Technologies www.i2.com IT Solutions Provider of supply chain optimisation solutions
InfoBank www.intradeonline.com IT Solutions Develops B2B marketplace solutions
Tradex www.Tradex.com IT Solutions Exchange market software with auctions
Vignette www.vignette.com IT Solutions Supplier of e-business applications for building online businesses

Tips on Entering Marketplaces

UBS Warburg has scored sectors according to their suitability for B2B marketplace operations in the short and long-term. Generally speaking, industries that have low technological readiness and are highly fragmented will not fare well today. This provides some indication as to which marketplaces are likely to offer good services now and in the future.

1. In the short-term, the three sectors most suited to B2B were computers and electronics, automotive, and travel and transport.

2. In the long-term, the three sectors most suited to B2B were travel and transport, publishing and printing, and SMEs.

Other issues to consider when assessing the benefits of signing up include:

1. Does the exchange create price transparency for both new and existing goods?

2. If the seller is disposing of excess goods is the benefit passed onto the buyer?

3. Does the exchange encourage co-operation between parties, bringing intangible benefits such as goods standardisation?

4. Check that the marketplace in question has good buying power to deliver economies of scale.

5. If you are a volume buyer, ask about acquiring equity in the marketplace.

6. Ask about the maturity of the technology underpinning the marketplace. This is a competitive area for IT vendors and problems may occur such as incompatibility of solutions.

7. Are you using the marketplace to compete with your competitors, or would going in with them benefit all? For example, car manufacturers might want to co-operate on procuring wiper blades but not on sourcing CD machines.

8. If you are joining a new marketplace are you clear what risks you might be asked to absorb?

9. Is the governance of the marketplace settled, especially in the light of recent problems to do with anti-competitive practice?

10. Is it worth joining a marketplace and ditching your legacy investment in the existing supply chain? Don't get caught up in hype.

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