Clouds on the B2B horizon

In one sense the B2B e-marketplace portends a fundamental revolution in buyer-supplier relationships - one that will dramatically alter the procurement process for office supplies, raw materials and manufactured goods.

But just to prove that the more things change the more they remain the same, in another sense horizontal B2B e-marketplaces bear a striking parallel to the English buying cooperatives of the 19th century. And therein may lie the seeds of their eventual failure. The first co-op was the Rochdale Society of Equitable Pioneers, forged by factory workers wanting to buy in bulk direct from farmers in the North of England in 1844.

"The development of the horizontal B2B market is very similar to the formation of the co-op," notes postgraduate student and independent risk management consultant Ian Hord in a paper for the Monash University School of Business Systems.

"However, the nature of the management structure of the co-op stifled growth and many co-ops were bought out by supermarket chains . . . Relating the B2B markets to these models, the co-op based CorProcure will fail like many co-ops due to stifling, committee-based leadership and evolve into a giant private electronic cash-and-carry retailer," Hord predicts.

There's a warning in there for those jumping too incautiously onto the horizontal B2B e-marketplace bandwagon. There's no doubt exchanges are here to stay, Hord concludes. It's just that the complexities of setting up a portal such as CorProcure are immense and it is highly unlikely that the tight time frames will be met and promises kept. And the cooperative-based model will soon self-destruct or the cooperatives will be bought out.

Since their inception, business-to-business digital trading exchanges have been promising to slash the cost of locating and evaluating products, provide more channels for suppliers while helping companies amplify their list of available suppliers and streamline their supply chain processes.

But isn't that just e-procurement by another name, I hear you ask?

You could indeed be cynical and say so, says Rod Gallagher, head of Deloitte Consulting's B2B practice, but if you think e-procurement is what an exchange is all about, you may be headed for failure.

"A lot of work that we have seen to date has been in the on-ramping of organisations into these exchanges," Gallagher says. "That's working with organisations on the buy side, setting up the catalogues of people they want to purchase goods and services from within the organisation then allowing them to actually do that procurement across an exchange."

But Gallagher says while there have been plenty of announcements of new exchanges and the value they'll provide, no announcement is enough to guarantee sustainable value.

That will rely on key success factors like operating structure, ownership, governance and scale, the regulatory compliance and matters of technology: how open the whole exchange is going to be and the use of standards.

Deloittes has done numbers of strategy and business case assessments of exchanges, applying those five principles. In one case recently it did just that for a bricks and mortar organisation keen to pilot an exchange in Australia and then roll it out globally, with numbers of participants on the buyers' side - effectively a buying cooperative arrangement.

"What we did with them was said 'well given the transaction fees you're going to charge, these are the volumes of transactions you need to put through that exchange'," Gallagher says. "Our figures show the volumes they were going to get in the first two years were two-thirds of what we calculated they needed to get to break even."

And he says many companies are underestimating the volume of transactions they'll need to achieve sustainability.

"What we're saying is the vertical exchanges that are market maker exchanges are the ones that are going to be sustainable. There has been a drop-off in exchanges and that drop-off is mainly in what we call the third-party exchanges, in other words the venture capital people, the independent exchanges. The majority of the exchanges that continue to grow have sustainable liquidity and they're the bricks and mortar exchanges."

Advice needed

Gallagher says Deloittes is currently talking to many organisations wanting advice on which exchange to join, and says many organisations have joined exchanges or paid their membership fees just to find out what's happening in a marketplace.

"A lot of the organisations we talk to say 'yes, we've joined this exchange. We're not that committed to it; we are just joining it to find out where everyone's up to and effectively as a learning exercise for us'."

With e-marketplaces springing up like mushrooms every day accurate statistics on the number of actual and potential players don't seem to exist.

At the time of writing Interactive Knowledge Online's Directory of E-Business Trading Hubs listed 122 vertical hubs and 27 horizontal hubs, but that barely starts to account for the new exchanges announced almost every other day.

Even though Australia is late in picking up momentum, some Australian e-marketplaces are presenting themselves as unique case studies worldwide, points out Interactive Knowledge Online (IKO) CEO Aseem Prakash.

"Most industry consortia involve companies ganging up together from the same industry. But, CorProcure and Cyberlinx are multi-industry consortia. That's unique."

But Prakash says based on IKO's tracking of the market, the vast majority of announced e-markets are in the planning phase ('we have sent out the press release, let's figure out what we are going to do'). A much smaller number, including players like Health Exchange and CorProcure, are in pilot/prototype stage. And there's only a tiny minority, including Timber Exchange and e.conomy, which actually have some transactions taking place.

And it's the number of transactions churning through, Pacific Commerce marketing director Colin Kempter insists, that is the only measure that matters.

"We operate the Pacific Health ExChange for hospitals, suppliers and wholesalers within the Australian and New Zealand Health Industry, and it is trading very nicely," Kempter says.

"But our view is that you have to specialise in the vertical industries. We're doing the supply chain stuff, we're not doing the MRO stuff - the papers and pencils, the low hanging fruit."

Kempter says that too many people are thinking of exchanges as a means of attacking that low hanging fruit when it is in attacking the supply chain that the value really lies.

"Supply chain is the bread and butter of these industries. This is the stuff they've got to have or they can't churn out stuff on the manufacturing side or they can't service patients within hospitals and that sort of thing. But I think there's been a lot of confusion between the two types of exchanges. There's a lot more expertise needed on the supply chain because you're actually dealing with financial applications and integrating them and putting in this e-commerce trading ability directly into the applications."

The Pacific Health ExChange model incorporates the entire supply chain from purchase order to payments. Value is being added to ExChange in a number of ways to include content applicable to vertical industries, assistance in moving excess inventory and complete integration with the product side of things (such as e-commerce enablement of Web sites, online catalogues and product information deployment over intranets and extranets).

But there are significant differences between industries, Kempter notes, with much depending on the buyer-and-supplier dynamics in the industry.

"Some industries (like Australian Retail Grocery) are dominated by a few strong buyers and a swag of suppliers. Other industries like health are more evenly matched whilst some are dominated by a few wholesalers/buying groups. Establishment of communities, pricing models, and the like, are determined by the industry," he says.

With the Australian e-marketplace still in its infancy it's too soon to gauge the impact of e-marketplaces locally. However, in the US (which is seen by many to be 12 months ahead of the Australian market), Forrester Research suggests the electronic components industry is set to be the biggest winner with 30 to 40 per cent savings from e-markets. Other industries set to gain include metal machining (22 per cent), forest products (15 to 25 per cent), freight transport (15 to 20 per cent) and computing industries (11 to 20 per cent).

Forrester also predicts the number of buyers using e-markets will increase by 41 per cent by the year 2002 and the number of sellers using e-markets will increase by 53 per cent during the same period.

But currently there are more buyers interested in using the B2B market than sellers. In the US, one study recently found of the roughly 7.4 million small business in that nation, 67.3 per cent plan to buy from trading partners online, while only 16.9 per cent plan to sell online. It is much more complex to sell compared to buy, the study notes.

B2B hubs are hardly new, as Singapore-based Raymond Wee from SGS Global Trade Solutions points out: VAN (value added network) operators have long known the teething problems in funding, setting up and managing online communities. In fact there were VANs set up as 'horizontal portals' as early as the 1980s.

Wee says the relevance of today's B2B hubs will depend on how much value the e-marketplace can bring to their users' businesses.

"Some sectors are known to be faster or easier than others. For instance, the easy ones are manufacturing, distribution and fulfilment; while the tough ones are construction, healthcare and legal," Wee says. "The reason to me is simple - it's easier to electronically exchange orders and invoices than X-rays and A1-sized drawings."

On the other hand, he says success in B2B hubs is hardly rocket science, just pure business sense. He lists the critical success factors for viable B2B hubs as:

* Clear presence of a 'champion' (main buyer or exchange driver)* Strong business proposition to ALL (not some) parties* Clear and achievable objectives (Simple yet difficult to attain during these changing times)* Buying influence (buyer, seller portals) or neutrality (e-marketplaces)* Legal framework and/or trust in many-to-many relationships (includes providing security, confidentiality)* Phased implementation and approach ("Rome was Not built in one day")* Standardisation and rationalisation of in-house processes (many XML variants slows implementation)* Achieving critical mass and continuously innovating as the sure road to success.

Paul O'Hanlon, client account manager for the trade division of the Queensland Department of State Development agrees success in B2B hubs is less rocket science and more pure business sense.

"The predominant issue for B2B hubs (and for that matter e-commerce generally) is to clearly know and understand the business process that you are endeavouring to make more efficient and effective," O'Hanlon says.

"It is perhaps easier to introduce technology into an existing and accepted business process than to use technology to introduce a new business process. Whichever the case, as with any investment, business sense must predominate - that is, a positive net benefit cost analysis is required. If it does not make business sense then do not implement it!"

At the end of the day, he says the technology is secondary to a clear understanding of the business processes, their interactions and how the technology is implemented into this environment.

But e-markets participants will also need to consider how the e-market will enable all the participants and suppliers for the e-market to remain viable.

According to IBM marketing manager global mid-market business James Kyd, only those marketplaces with a strong market proposition that offers value to both suppliers and buyers will have much hope of staying alive.

"I think there's a couple of things that an e-market needs to look at," Kyd says. "One is having a relevant focus, for example a clear vertical market that they're going to serve. If they do have a clear market that they're going to serve, they can get some key organisations on board in that marketplace that will help create its momentum.

"But if you're looking at forming an e-marketplace then you're going to need to enable all those businesses to participate, so I'd actually say that probably the next success point for an e-market is having a plan and the ability to enable the suppliers for the marketplace."

Successful marketplaces at this point in the Internet's evolution must first strive to address these critical inefficiencies or pain points within the industry, or a particular business process, which are not currently being addressed. That way they can capture value for all industry participants, not just squeeze margins, says OzeCorp VP strategy Mark White.

"The value proposition for buy-side exchanges and MRO hubs is therefore not particularly high, because the benefits are not fairly distributed on both sides of the transaction. Processing costs for handling an order are about the best thing the supplier can point to - if in fact the company has already integrated its back end into the hub and its back end is already well-integrated with the rest of its business systems.

White agrees with Hord that the phenomenon of many exchanges for similar commodities like indirect goods is a temporary aberration that will not be tolerated for long. Instead, the growth of standards like UDDI (Universal Description, Discovery and Integration) and XML (Extensible Markup Language) is likely to see vertical exchanges evolve not into one monolithic Web site, but an orchestrated collection of business processes and services delivered across the biggest platform of them all - the Internet itself.

"The 'context provider' will orchestrate the assembly and presentation of the business processes. It remains to be seen what kind of returns (if any) will be generated for indirect procurement marketplace owners over time," White says.

The cost of entry will not be technology, brand, information technology but having trusted relationships and being relevant, notes Prakash.

He says three types of e-marketplaces will survive in Australia:

* Consortia (not because their e-marketplace business model is unique but because they have high sustainable base and strong influence on the trading partners)* Private (the ones that are workflow driven or based on the unique needs of the supply chain)* Regulatory (health, farming)"Right now, we are witnessing dotcom failures. In the not-so-distant future, horror stories will emerge of the blunders made by major corporations," Prakash says.

"Personally, I am not convinced that Australia can sustain multiple e-marketplaces in the same category. Take a look at e-procurement. There is CorProcure, Cyberlinx, PwC e.conomy, CWO, Telstra, Westpac, ANZ, b2bbuyer, Chamber of Commerce with MarketBoomers, eHub from CBD, and so on.

"Now, if you are a supplier, whom will you connect to? And, if you don't have suppliers, you are already showing signs of weakness."

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