Is the exchange shakedown on the way?

During E-Business Month, Computer Weekly and Asera co-hosted a round-table discussion on the future of B2B exchanges. Paul Mason...

During E-Business Month, Computer Weekly and Asera co-hosted a round-table discussion on the future of B2B exchanges. Paul Mason listened in

Business to business (B2B) Internet marketplaces were the "new business model" that was supposed to save e-commerce, once the froth was blown away from online retail shopping.

But the B2B exchange model is itself now under pressure - there are too many exchanges and not enough liquidity. On top of that there is a growing realisation that, far from being a money-making opportunity for the start-up companies that pioneered B2B, the exchange model will be dominated by the large multinational corporations which trade there.

Last month Computer Weekly brought together e-business people from across the B2B scene. From solutions supplier Asera came Kevin Leslie and David Lazarus; from AIM-listed incubator Brainspark, came Jason Brown; from Netmarkets Europe, Simon Torrance and from industrial gas exchange gasworld.com, Nick Pledge. Together with KPMG consultant Patrick Bossert, they discussed the challenges facing Internet markets today.

Torrance says, "I've been involved in this industry for about three years now. It started with dotcoms and venture capitalists. You had this huge rush of blood to the head around the end of 1999 and the beginning of 2000.

"Thousands of these Net markets were springing up on every subject imaginable - from chemicals to steel to sewage. Everybody was seeing a market worth $58bn, and saying, 'we're going to take some profit out of that'.

"Vertical Net was worth $9bn, Chemdex was worth $2bn, and you had all these fat cats sitting on the panel at the front and wallowing in their paper success. But, of course, we had the huge Nasdaq crash.

"You then saw, almost like a correlation to the falling share price of the dotcoms, the increase in press releases from the bricks-and-mortar companies saying, 'We're going to do this now; we're not going to let these upstarts get in our way and take our marketplace'.

"What we're seeing is a huge loss of nerve from the venture capitalists; and there's fundamental questioning of the business model of a traditional exchange-based Net market, where you bring lots of buyers and lots of sellers together and take a little cut.

"The fundamental question is whether these are viable businesses without the big bricks-and-mortar companies getting involved."

Jason Brown says, "People talk about exchanges while not really recognising the whole idea of disintermediation goes against the very principle of exchange. There has to be a central value exchange on both sides. Most of the companies that Brainspark has in our building have gone through something of a roller-coaster ride in terms of their thinking.

"In the beginning, [they were] thinking about an information service which led later to trade, and then thinking about the number of transactions from day one. Then pulling back and thinking about what the customer needs, what does the customer want and trying to address that. I think that's where we are today. There is a trend to become more customer focused.

"What we're looking for is a strong management team first, which has an expertise that is provable and a good idea that is deliverable. And it would help to have some proof of having run a business."

Nick Pledge says, "Initially our response was no, it's not going to work. We were ingrained in the traditional big-corporate, slow-moving industrial-giant type mentality.

"Then we dug down in this and looked at it, and started analysing what happens in different parts of the supply chain. We realised that there was an opportunity to enable something between the participants in the supply chain that would make doing business easier. It's not just a question of bringing lots of buyers and lots of sellers together in one space, [and] bang, hey presto, loads of transactions will take place, and we'll take commission.

"If it ever becomes that, it will take a long time to get there. If it fails, it'll have been a good fun ride, and it has probably put us in a position where we can go on and do something that has more chance of success.

"Out of all this, there will come something. The B2B space will not just disappear. There will be a Phoenix rising from out of the flames in some form or another. Potentially, we have an option of being one of the Phoenixes that rise from the ashes."

Patrick Bossert confirms that the old-economy companies are piling into the e-hub space. "I think bricks-and-mortar businesses have watched the exchange very carefully. Some of the earliest exchanges I worked on - a rubber exchange, a fish exchange - were just bringing buyers and sellers together and they really did not work, for a lot of reasons.

"The interesting thing is, exchanges only appear to work for spot purchases, and most bricks-and-mortar businesses that we're working with already have very good supplier relationships. They want to develop exchanges to extend those and make them work a lot more efficiently.

"Bricks-and-mortar companies already have huge investments in EDI operations, right up the supply chain. Some of them have created incredibly efficient ways of trading already, so what an exchange needs isn't more efficiency, [or] lower margins. It needs to bring a greater level of transparency with a greater number of trusted suppliers. That's the emphasis that were seeing.

"For bricks-and-mortar operations, an exchange is something completely different to a marketplace. It's like going to an East End market and ordering a PC from a street trader. You wouldn't trust him to deliver something that works to the specifications that you agree. Whereas if you order one, say from Dell, you have the brand, the reputation, but you can also track it being bought, being shipped to you and that's really what buyers value above all. It's not just the price differential, its the operational suitability to their business.

Kevin Leslie agrees, "Bricks-and-mortar companies have invested a huge amount of money in ERP. In Europe, the majority of them are running SAP systems, some of them are involved in Oracle. Essentially they've spent an awful lot of money.

"They got the point: usually it cost them more than they expected, it took them longer than expected and most of them didn't actually quite finish the implementation that they expected. Most of them have a number of legacy systems now. They may have been through SAP but then implemented SAP in four different locations, in four different ways. Now we are talking to companies that have their business processes locked in these internal systems - and they are very internally focused.

"How do they address their customers more effectively? How do they unlock the investment they've made in the business processes they encapsulate in ERP? After Y2K they don't want to touch their ERP systems again. They want to focus on the customer facing systems. So where we come in, is enabling bricks-and-mortar firms to expose their business processes effectively over the Web."

Leslie believes large corporations will be loathe to share their liquidity with dotcom marketplaces. "Why would they want to open their customer relationships to all and sundry? My belief is an independent Net market will only be successful when it ceases to be independent. They'll only be successful if they become an e-commerce distribution channel for corporates."

But do those independent market makers, have either the right technology or the right skill sets?

"Most of them don't," says Leslie. "Most of them built technology for an infant market. That technology was handcrafted and might have cost $20m or $30m to put together. But it's a sunk cost and it doesn't necessarily fit what a corporate would want for something that is as awkward as the Web. So I think a lot of these companies are re-focusing themselves because they are not getting the liquidity they wanted."

David Lazarus agrees, "The winners are the ones that are going to have the dominant players in the industry as their backers or as their partners. The pure independent players just do not have the weight within the industry to succeed."

Pledge says, "I think it depends on the industry, though. I think if it's a really highly fragmented industry where there isn't necessarily any individual or a recognisable group that has power, then I think an independent has a part."

Lazarus says, "I can think of a couple of examples where people within highly fragmented markets are starting with community, just getting people coming to the site and talking to each other without there being any revenue associated with it, in order to build confidence within these industries. I think there is an issue that will take some time to resolve. If you have 1,000 NHS Trusts, how do you get them to participate in your net market? They are not necessarily in a position to sponsor a Net market or create a Net market in their own right. But they're seeing all this activity and they're thinking, 'which one am I going to play, how do I make my choice?'"

Bossert says, "There are at least three types of transactions between corporates. [There is] strategic selection of a supplier. There is call-off of agreed products under an umbrella agreement - that is an operational transaction, an order placement. And then there is the spot transaction - I need something now, I'm not too fussed where I get it."

Bossert says, "There's probably about five or six different revenue sources for the marketplaces of the future. The original assumption that it would be transaction based fees was the biggest nightmare; it is the one that really doesn't work. If you're driving down costs of the commodities themselves - as with auctions - it's not really benefiting anyone in the equation. Even the buyer ends up with a worse service, usually. One of the most successful marketplaces I've seen operate is by providing additional services."

Leslie says, "E-procurement is all about reducing your suppliers to an item in the catalogue. We are seeing more plays now where people can differentiate their product and their service everywhere. Simple things like being able to configure over the Web and have it automatically translated into an order that is going to be delivered."

Torrance says, "If you look at a lot of the major manufacturing industries, there is a different structure, where you have a major manufacturer and then you have tiers of suppliers. I think it's the ability to communicate well and most speedily with a range of people who you've never had any direct communication with. The big issue to quantify that.

"So a bricks-and-mortar company can decide to participate in the Net market, but how do you put costs against protecting your existing business. I don't think the market has figured this out yet. It's the same with any front-end solution to any customer facing solution - what is the benefit? What is the cost? Because there isn't sufficient history to be able to sit down and actually calculate it out. It's very difficult to say, 'right, we're going to do this because of this equation here, which is going to result in this amount of additional revenue, or we don't lose these customers and therefore we retain this amount of revenue'. It's a very poorly cost model. Cost is very difficult. People need to be able to buy into the concept. It's being able to have a vision. And you can always tell, the level at which you're talking will depend on how easy it is to sell the solution."

In many corporates the first thing managers hear when they propose a B2B exchange is the IT department saying "we can't do it", with the emphasis on 'we'.

That is a tremendous block to most general managers, but it's also a lifeline for an independent provider of the solution.

Few firms will be prepared in this climate to re-configure processes that work internally just to meet the needs of an experimental channel to market.

Round-table who's who

  • Simon Torrance - CEO, NetMarkets Europe (moderator)

  • Kevin Leslie - UK sales director, Asera

  • David Lazarus - e-business consultant, Asera

  • Nick Pledge - chief operating officer, Gasworld

  • Patrick Bossert - principal consultant, e-business strategy, KPMG

  • Jason Brown - head of B2B systems, Brainspark

  • Read more on E-commerce technology

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