Business-to-business growth sees return of the middleman

Flexible companies relating to each other via business-to-business exchanges and hubs will be characteristic of the new economy,...

Flexible companies relating to each other via business-to-business exchanges and hubs will be characteristic of the new economy, says a recent report by Durlacher.

David Bicknell

A recent survey into business-to-business electronic commerce has painted a new picture of the kind of infrastructure needed to really compete in this rapidly emerging part of the economy.

Although first-mover advantage has become a prerequisite in the business-to-consumer space, in the business-to-business arena it is less important. Instead, scale, expertise, service quality, valuable content, and industry understanding are likely to be the key factors in determining winners.

According to the Durlacher report "Business-to-business e-commerce" the likely winners will be those organisations that are:

  • Highly responsive - able to work in temporary partnerships with others

  • Focused - able to concentrate on areas of specialisation

  • Flexible - willing to participate in ventures, such as supply chains, that are shared across a range of industries

  • Transparent - information will become transparent, leading to a decline in importance of areas such as accounts payable

  • Lean and efficient - with minimal internal processes

  • Real time - able to operate in areas such as build-to-order.

    The reasons for the growth in business-to-business exchanges is that through ERP systems, much of the direct procurement of products that feed into the production process has already been streamlined. That is not the case with indirect procurement, which covers the purchase of goods and services used in peripheral maintenance, repair and operations. Such purchasing is less streamlined, and so more inefficient. According to the Centre for Advanced Purchasing Studies, indirect goods account for over a third of all costs to a business, up to 60% in service companies. So a small reduction in these costs can see some real improvement in the company's bottom line.

    Business-to-business e-commerce also has the potential to streamline existing transactions by speeding up other parts of the procurement chain, such as:

  • An improved ability to find companies and products through search engines

  • Online credit checks

  • Online bill presentment

  • Digital fulfilment of orders and digital tracking of delivery.

    The other area directly affected by business-to-business is customer service. The Internet offers the prospect of improved customer service at lower incremental cost. Cisco has become a specialist at improving customer service, tying staff remuneration packages to improved customer satisfaction.

    Although an oft-quoted reasons for the success of Internet commerce is the "disintermediation" of the buying process i.e. cutting out the middle man, in the business-to-business space, Durlacher predicts increasing use of intermediaries because:

  • The rapid growth of Web sites and content means potential buyers and sellers in trading communities will find it difficult to locate suitable partners

  • The cost of searching for such partners will exceed the likely benefit in terms of lower prices

  • Time is needed for familiarisation and due diligence costs for a buyer considering a transaction with an unknown seller.

    Intermediaries therefore will provide the following functions:

  • Bringing buyers and sellers together

  • Providing a method for transactions to take place

  • Qualifying buyers and sellers, i.e. giving assurance that sellers have a track record and can deliver quality, and that buyers can pay

  • Aggregating third party content

  • Creating original content

  • Value-added service such as insurance, logistics, and financing.

    Such functions will therefore give rise to "online intermediaries" that combine enabling business-to-business technology together with market-specific or process specific expertise to facilitate trade. It is these functions that have begin to spring up in a series of sectors, such as automotive (GM-Ford-Daimler-Chrysler) and retail (Sears- Carrefour).

    Overtime, Durlacher suggests, many of the intermediaries are likely to evolve in their own right. For example, functional or horizontal hubs such as Commerce One, Ariba and Infobank are likely to migrate to become service providers, while vertical trading exchanges such as Band-X (telecoms), and Chemdex (chemicals) are likely to link up to provide value-added services offering procurement management, financial settlement and quality assurances. Closed industry hubs may also spin off such offerings into separate entities.

    According to Durlacher, there are likely to be increasing levels of interconnection between separate trading communities so that organisations can source both indirect and increasingly direct goods through a central entry point. For example, general hubs are likely to link to industry specific hubs, which in turn will link to smaller niche hubs to deliver specialised services.

    Commerce One has already suggested that this increased blurring of communities through interconnection is likely to herald the creation of a series of new industries. Rather than thinking vertically with sectors such as chemicals, retail and metals, industry lines will become blurred in the future.

    If you cannot even tell what the name of the industry you are working in will be in five years time, you really are going to need an organisation that is flexible, lean, adaptable. It will then need IT systems to match, whether they are provided by a traditional - but responsive - IT department, or by an application service provision (ASP) model.

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