Will 2002 be the year of B2B?

Firms feeling the pinch and checking processes to cut inefficiency will identify areas where B2B exchanges might help. Daniel...

Firms feeling the pinch and checking processes to cut inefficiency will identify areas where B2B exchanges might help. Daniel Thomas reports

Last week analysts at Gartner said that the first online trading hub for UK farmers, which went live at the beginning of February, signalled the start of a new era for business-to-business (B2B) e-marketplaces.

Gartner said the First 4 Farming Hub (F4F) differs significantly from early e-marketplaces, many of which failed or have had to scale back operations, as it is funded by a number of banks in addition to its users.

"Because it involves consortia of diverse businesses, F4F has a firmer financial and technology basis than many of the e-marketplaces started in 2000," said Andy Kyte, an e-commerce analyst at Gartner.

Kyte said the announcement is evidence that the beleaguered B2B e-commerce market has bottomed out. "Although a small and high-risk venture, F4F's launch indicates that the B2B space still has a scope for a new breed of e-trading hubs."

This could be good news for businesses at a time of economic slowdown, as purchasing online has been shown as an effective way of cutting costs. Researchers at the Aberdeen Group recently estimated that companies implementing good e-procurement strategies can cut costs by up to 75%.

However, these benefits were not immediately evident in the early B2B e-marketplaces, which first appeared in 2000. They were designed to harness technology, standards and methodologies to improve business relationships, boost competition and reduce cost and waste. The first exchanges were formed among retailers and manufacturers, before a number of smaller niche exchanges, such as Covisint, the marketplace for auto manufacturers, were formed.

Companies signing up to these exchanges were promised vast cost savings and efficiency gains - in much the same way that businesses were led to believe that online retailing was a fast-track route to massive profits.

However, as was the case with many Internet-related projects, the promises were over-optimistic, and many e-marketplaces failed or have had to limit operations.

A recent high-profile failure was the Jupiter Exchange, which involved some of the hospitality industry's leading companies, including Whitbread, Bass and Compass. The main reason cited for its closure was that the main protagonists decided to halt further investment in favour of pursuing their own separate schemes.

However, it is not all doom and gloom, according to Michael Evason, an e-commerce analyst at research firm Datamonitor. "There is still a place for e-marketplaces," he said, "but companies need to look at their whole procurement strategy. Procuring goods online is still on the agenda for business as there is a proven return on investment but they must remember that a lot of these savings have come from [re]organising their internal systems."

Some sectors are better suited to public e-marketplaces than others, according to Evason, who agreed with Gartner's assessment of the F4F hub. "Agriculture is one of the industries that has the potential to make a success from public exchanges," he said.

"It is more distributed and, although competitive, it is not as cut-throat as, say, the car industry. There is less investment in technology and access can be simplified through a browser."

Although public e-marketplaces, which are businesses in their own right, are a sound economic proposition, any return on investment will come in the longer term, Evason said. In the short-term he expects more private exchanges - usually between a company and its close suppliers - to be formed.

However, as these private marketplaces expand their sheer size will become a problem, forcing them to change their structure by outsourcing the markets to independent exchanges - similar to the public marketplaces we see today, Evason said.

But there are alternatives to e-marketplaces for companies looking at online procurement. Various suppliers offer online sourcing systems that allow companies to issue electronic requests for quotes. These can be very effective - Littlewoods last month said that it was implementing an Oracle online sourcing system following a pilot project which cut procurement costs by 24%.

But they are not "magic boxes" that can immediately cut costs, warned Evason. "There is no point in implementing a technology product unless you have thoroughly gone through your business processes beforehand," he said. "The technology should be the final piece of the jigsaw.

"Businesses also have to be realistic about what parts of purchasing process they centralise," he added.

Much in the way that online retailing has recovered from the boom of 2000 and the bust of 2001, e-marketplaces and the whole online procurement market are set to consolidate this year, according to most analyst estimates.

Companies such as Littlewoods have shown that savings can be made from the Internet, but businesses need to have realistic aims and make sure that online procurement is used to complement existing good business processes, rather than replace them.

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