B2B networks: Intelligent extranets

Getting from a viable business case for a B2B marketplace to the point where you're making your first e-trade is a huge step....

Getting from a viable business case for a B2B marketplace to the point where you're making your first e-trade is a huge step. Danny Bradbury evaluates the B2B extranet models, along with their strengths and weaknesses

The business case for developing business-to-business extranets is clear for many companies looking to automate trading relationships with their partners. There is a world of difference, however, between doing the business analysis for an extranet and getting to the point where you're ready to begin exchanging electronic information.

There are different types of trading relationship to choose from. One comforting fact is that you don't have to restrict yourself to just one - different models may suit different divisions within your company. Whatever you decide, you'd be well advised to wait until the market settles down, and the early players have gone through the consolidation process that is an inevitable part of any market growth cycle.

Online marketplaces

Online B2B marketplaces have received plenty of attention over the past few months. Such marketplaces serve as online trading hubs for companies to sell and buy products and services, often on an international basis. The real benefit of these portals is their many-to-many nature allows companies to come into contact with others they may not have dealt with before.

There are two main types of online B2B marketplace. The first is the horizontal trading hub, run by third-party independent service providers, where non-industry-specific products are traded. Generally, such marketplaces will trade commodities such as office supplies, for example.

Companies that have established a significant presence in this area include Commerce One with MarketSite. There are others too - Ariba, for example, operates a commerce services network, which again hooks up buyers and suppliers.

Significantly, independent players such as Commerce One and Ariba are also actively involved in supporting the second type of trading hub, through a series of commercial agreements with vertical market companies. The latter use the former's software and services to create their own marketplaces where they can interact with their own business partners on a more automated basis.

While some of these networks are produced by single players in a vertical market, many have been consolidating to form vertical market trading consortiums. One example is the trading network formed by Ford, Chrysler and General Motors, which clubbed together back in April to operate an electronic trading marketplace for the car industry as a joint venture.

One particularly interesting aspect of horizontal trading networks is the development of corporate auctions. Auctions used to be consumer-to-consumer phenomena, but Commerce One has implemented an auction specifically for business-to-business use. It offers two types: the forward auction enables suppliers to auction off products (useful for getting rid of excess inventory), while the reverse auction is essentially an electronic version of an invitation to tender, where potential buyers ask potential suppliers to bid for their business.

This latter model can result in the creation of new long-term business contracts.

One potential problem with vertical market trading hubs is conflicts of interest between suppliers. If a supplier is running an electronic marketplace open to other suppliers in the same market, there is always a possibility that dissatisfied members of the network could question the impartiality of the system. So if company A has an electronic trading network and allows another supplier in the same market, company B, to advertise its products there, company B may at some point accuse company A of giving itself preferential treatment in the display of products.

Another potential danger with such an arrangement is the loss of privacy between competing companies that run an online marketplace. If both company A and company B run an online marketplace through which suppliers can trade with them, then executives within both companies will need to assess the risk that their rivals can somehow see the pricing data that should remain confidential between a supplier and a buyer. Such information is commercially sensitive, and could damage a company's ability to trade if it fell into the hands of the competition.

It seems that everyone is getting in on electronic marketplaces. Even IT companies that have carved out a niche in enterprise resource planning are becoming involved, because it represents a logical extension to their business. SAP, Oracle and PeopleSoft have all launched electronic marketplaces, for example. Not all the trading hubs currently in existence will survive. There will be a period of consolidation in both horizontal and vertical markets, and until things settle down, users would do well to adopt a conservative stance.

Direct supply chain integration

Instead of connecting to an amorphous community of potential business partners via a hub, established business partners can integrate their supply chains. This model best suits those companies that have a well-established relationship with a select few business partners already, and don't intend to change those relationships very much. Such relationships generally take place over VPNs (Virtual Private Networks) or a direct-dial ISDN link.

The model of choice in this area used to be EDI (Electronic Data Interchange), which has been around for the past couple of decades. The problem with EDI is that few companies other than large blue chip players use it, because EDI-based trading relationships are expensive and complicated to arrange. Technology standards based on XML (Extensible Markup Language) are under development to make direct integration possible for small companies.

Such integration can be used to automate trading tasks between business partners, so that, for example, invoices and purchase orders can be exchanged and automatically fed into back-end systems. As such relationships extend across more companies in the supply chain, they become part of a supply chain integration solution.

The problem with a lot of this technology is that it is very new, and still needs a lot of work before it can offer everything companies need. In particular, it would be very useful to have collaborative facilities alongside general document exchange capabilities. This would assist companies working in one-to-one vertical market relationships by letting them work on things such as product definitions and designs, while exchanging supporting information of a transactional nature.

Tom Clowes, head of e-business strategy at Internet consultancy Realise.com, says that the online portals that form the basis of electronic marketplaces will probably end up developing this technology and renting it out to their customers. "I believe that the services will appear, but as a service rather than a product," he says, adding that timescales may prohibit the in-house development of such systems in time to meet users' changing business models.

Case Study: Identrus

Security is an important part of any extranet solution, and Indentrus, the consortium formed by a collection of top-tier financial institutions, is preparing a system of electronic certificates that it says will guarantee security across trading relationships.

These top-tier financial institutions will grant authorisation privileges to second-tier institutions, which will in turn be able to issue digital certificates to their customers.

The idea is that Identrus customers will then be able to trade online with each other in a secure environment, making use of various B2B e-commerce services. You can find more information at www.identrus.com.

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