In-Depth

B2B comes back on a smaller scale

• By Colleen Frye
• February 28, 2003

B2B marketplaces or exchanges, where buyers and sellers come together to do business over the Internet, have morphed considerably since the heady dot-com days. It was a grand vision: Hosted, public exchanges would transact billions of dollars in e-commerce, streamline business processes, and cut costs out of the supply chain for both competitors and trading partners.

That vision has now been scaled back, and business plans have been altered to better fit the needs of supply-chain management. And yet, while many public exchanges have gone out of business or consolidated, some consortia-run exchanges and, more significantly, private trading exchanges and B2B portals restricted to trusted business partners are successfully conducting business and gaining efficiencies in the supply chain.

It is not that the notion of B2B exchanges was misguided, but rather that the majority of the players were not offering true breakthrough applications, concluded Adam Fein, president of Philadelphia-based Pembroke Consulting, in a study he co-authored entitled ''Shakeouts in Digital Markets: Lessons from B2B Exchanges.'' The study also points out some barriers to widespread adoption that include integration issues, too many players and the failure to achieve critical mass, lack of intimate customer knowledge and cultural issues.

Fein, who is also a Senior Fellow at the Mack Center for Technological Innovation at the Wharton School at the University of Pennsylvania, and his co-authors George Day, a professor of marketing and co-director of Wharton's Mack Center, and Gregg Ruppersberger, former senior analyst at Pembroke Consulting, conclude that the survivors will be those who either offer breakthrough applications, acquire innovative players at steep discounts, or retool their strategies to enhance and improve, rather than change, traditional ways of doing business.

While the rise and fall from grace of e-marketplaces may seem unprecedented, the trajectory followed a curve similar to other boom markets, said Fein -- albeit in ''Internet time.'' In a longitudinal study of eight industries conducted by Fein, Day and Ruppersberger, only 43% of independent exchanges survived in the two years following spring 2000. Independent, or public exchanges, represented many-to-many relationships.

''In most business markets, P2P, or person-to-person, still rules,'' noted Fein. The issue is less about price than about trusted relationships and total service.

''If my job is making sure that the factory is running, I care about downtime. I'm willing to sacrifice on price to make sure the factory keeps running,'' explained Fein. ''This is different than a consumer purchase, where a customer may buy a TV once every five years, and wants the best price.

''Most business customers are sophisticated enough to understand the total cost of acquisition -- that lowest price doesn't always equal that. There's only so low you can take product price,'' added Fein. ''We see a shift in the supply chain from companies making money by charging more, to making money by developing more service-based business. Public exchanges tried to level the playing field on price, but our research continues to show that the business customer in the supply chain is looking for a total service package.''

In addition, many public exchanges were not able to ramp up fast enough to deliver on their vision, said Ken Hartley, partner, electronics industry, IBM Consulting Services. ''There were security concerns, various timing issues and [many individual companies] were more ready than some of the technology,'' he said. Also, said Hartley, the public exchanges were not meeting a company's unique business requirements, and were not as focused on an individual company's priorities. As a result, some companies decided to develop their own Internet-based private trading exchanges ''to obtain deeper results, sooner,'' said Hartley.

The needs are broader than the e-procurement and e-sourcing offered via exchanges, noted Hartley. ''Clients I've been working with are tying together disparate ERP systems to do global inventory management across various software packages, to do collaborative planning and forecasting, and for engineering information and scheduling.''

Dough Maulbetsch, SAP's director of automotive, said the model of competitors and partners agreeing on business processes, and outsourcing the management of critical business data, did not work for many companies.

''The challenge was that the tool or solution -- everyone doing business the same way using a service provider -- did not turn out to be the way to solve the problem,'' said Maulbetsch. ''Now that IT departments have gotten up to speed, they understand the technology; they understand that this is available to anyone, and they don't have to go to public exchanges. They can buy the technology from SAP and implement these solutions today in a way that matches their business processes and policies.''

SAP, along with other enterprise resource planning (ERP) as well as pure-play portal vendors, offers technology and collaborative applications for developing a B2B portal. ''Most customers are buying collaborative applications, developing portals and then owning those assets themselves, rather then renting them from a public exchange,'' said Maulbetsch. ''With portals, they are creating a brand for their company, and then extending those business processes to trading partners. We are not seeing them get together with their competitors like in a public exchange.'' Private exchanges, he added, are competitive differentiators.

For Per Hogberg, group manager SAP administration manager, Sweden, for automotive supplier Kongsberg Automotive, the complexities of contractual agreements and relationships can make buying and selling via a marketplace difficult. E-procurement or e-sourcing is not the most important aspect of trading partner relationships. Rather, he said, enhancing and deepening the collaboration between existing partners will reap more important benefits.

''Some of our big customers have asked us to work through Covisint [a trading exchange founded by DaimlerChrysler, Ford, General Motors, Renault Nissan, Commerce One and Oracle]. But for the automotive business, we're doing contracts for three to five years, so it's a more complicated product; it's not so easy to buy and sell over the marketplace,'' said Hogberg. ''I don't think this will be a big thing. The big thing is to create a system that provides help with collaboration during the business processes, to really connect companies when you already have an agreement, to make faster and more integrated work; here is the most important part.''

Kongsberg Automotive recently rolled out mySAP Automotive to all of its production sites in Sweden, Norway, Poland, Korea, Brazil, Mexico and the United States. Kongsberg Automotive had previously been using SAP at headquarters. With the help of consultants, Kongsberg Automotive had built an early portal for its suppliers using older SAP technology, linking them directly to the ERP system.

''When a new delivery schedule is created in the system, it automatically sends out an e-mail to the supplier and tells them a new schedule is available in the SAP system,'' said Hogberg. ''Then they log into the Web site on the mySAP system and read the data. It's very easy to do that in SAP and build views.''

Allowing partners a view into live data is preferable to publishing information, said Hogberg. ''Especially in the automotive business, everything is changing so fast, a published document will be old from the first second it's published.''

Included with mySAP Automotive is mySAP Enterprise Portal, which Hogberg said will enhance the company's ability to work collaboratively with its partners. ''This definitely will open up more of SAP to our customers and suppliers,'' he noted. Kongsberg Automotive is running mySAP Automotive on an Oracle database and Windows 2000. The system sits on a server in Norway, and the various production sites access SAP through a VPN tunnel over the Internet.

Re-inventing yourself
As more companies turn to private exchanges, some former public exchange players are retooling to address this market. ''Private exchanges will be much more numerous,'' said Pembroke Consulting's Fein. ''There will be more companies that want to communicate more richly and fully with their trading partners.'' Fein said collaboration will take place around internal operations, such as order tracking, inventory management and replenishment. ''Private exchanges are opening up internal information to very select, pre-selected companies in the supply chain. Commerce functions like ordering online will be much less important.''

Fein's report, ''Shakeouts in Digital Markets,'' states that successful exchange technology providers will re-invent themselves from open exchanges to software companies and online service companies. The study cites San Jose, Calif.-based Neoforma Inc. as one company that has made the successful transition, developing private exchanges for health-care providers and suppliers. Neoforma's marketplaces are based on i2's TradeMatrix platform. Neoforma currently offers two private marketplaces: Marketplace@Novation for Novation member providers and suppliers, and The Canadian Health Marketplace for Canadian providers and suppliers.

Novation, a leading supply-chain management company in the healthcare industry, was established Jan. 1, 1998, and serves the more than 2,400 members of VHA Inc. and the University HealthSystem Consortium (UHC). VHA, based in Irving, Texas, is a nationwide network of more than 2,200 leading community-owned health-care organizations and their physicians. UHC, headquartered in Oak Brook, Ill., is an alliance of the clinical enterprises of leading academic health centers.

According to Larry Dooley, vice president at Novation, ''We felt Neoforma had the resources, the financing and the knowledge to best meet our needs. We signed the deal in April 2000 and were operational four months later.'' At the end of December 2002, Dooley said Novation had 929 hospitals signed up, 620 of which were connected to the exchange, transacting a little more than $2.1 billion.

There are two sides to Marketplace@ Novation, the ''e'' side or procurement side, which Neoforma hosts, and the ''i'' side or contractual information side, which Novation hosts, said Dooley.

Dooley said integration with the back-end systems of member participants was not as big an issue as he anticipated. ''Integration would initially take 13 weeks; now it takes a couple of days, from the Lawsons and PeopleSofts down to homemade systems,'' he said.

And while several of the hospitals had EDI systems in place for electronic trading, they were typically only connecting with two or three suppliers. The marketplace removed the cost barrier for establishing connections with many more partners. In addition, Dooley said, the marketplace can also ''take a hospital's order via EDI, convert it to e-mail and notify the hospital that an order is waiting at marketplace. The hospital can retrieve it, and it goes back to EDI.''

Novation's goal for 2003, said Dooley, is to ''have 90% of the spending available through the marketplace by the end of the year; we're now at about 70%. We've also identified the remaining hospitals and suppliers who haven't signed, and we're making the applications we have more robust. Another major goal is to drive adoption and make people power users of the marketplace, to get the benefits of all the applications. We've given members and suppliers a lot to use, so we want to make sure they're using it correctly and robustly.''

For companies embarking on establishing their own private exchanges Dooley advised: ''You need patience.'' However, he added, benefits can be immediate, even if only a small portion of an exchange's goals have been met. ''Every time you make a couple of steps, you start seeing benefits,'' he said.

'Heavy lifting'
Choosing the right trading partners to pilot an exchange is one key to success, said IBM's Hartley. ''Choose the ones where you feel there's the best chance of success -- people who are willing to put the time and resources into it, who have a collaborative mindset.'' Choosing the software and technology is the easy part, he said. The ''heavy lifting'' involves aligning strategies and priorities, getting the right security in place, selecting the right pilot partners, keeping the system simple and providing training. ''There's a lot of process work and face-to-face meetings,'' Hartley added.

Hartley worked on the design and implementation of a private exchange for Lucent Technologies, utilizing the Oracle 9i portal. ''At the time, the major thrust was to support a strategic move to a contract manufacturing environment to a virtual supply chain. Lucent was in the process of selling many of their plants, and they needed something to quickly and inexpensively link their company to contract manufacturers and suppliers, and to link disparate systems together for inventory, contracts, prices and product data management,'' he explained. The project was driven from the business side, facilitated by the IT group.

ERP systems in place throughout the firm included ''Oracle, SAP, MFG/PRO, plus a few more,'' said Hartley. ''We had to integrate into that technology, but not change it; that's the beauty [of the exchange].'' Today, the portal has more than 3,800 users and more than 4,000 hits a day, according to Hartley, and the ''project is completely self-funding.''

Lucent has been able to quantify the ROI. ''There has been well over $100 million saved, hard benefits,'' said Hartley. ''Lucent inventory has gone down more than $5 billion in the past year and a half; it's not all attributable to this, but the portal helped enable it.''

Successes such as Lucent's are not isolated incidents, and although expectations for trading exchanges have changed, the concept is a viable one, said Sandy Kemper, founder and CEO of eScout and chairman of the Open Network for Commerce Exchange (ONCE), formerly the Global Trading Web Association. eScout, based in Lee's Summit, Missouri, addresses key elements of purchasing: analyzing, sourcing, procuring, reconciling and remitting.

The company recently announced that it is purchasing Commerce One.net marketplace, a business unit of Commerce One. Commerce One.net currently connects 38 Fortune 2000 buying organizations with more than 1,500 transaction-ready suppliers. eScout will migrate the existing Commerce One.net platform, content tools and other necessary components to the e-Scout hosted environment. According to Kemper, the primary reason for the acquisition was for the market participants, as eScout drives toward gaining more mass. He said the merged company hits the ground running with already profitable operating results.

eScout began life as primarily a public exchange, but like others, now develops private exchanges for large customers as well. ''Without the acquisition, we were growing at 200% per year; that's revenue growth, not transaction processing growth,'' said Kemper. ''It's clear this business is not just surviving, but thriving. There were too many hub operators; there were too many promising too much, too soon, and there was a backlash from buyers and suppliers. We're seeing the inevitable effect of consolidation.'' Kemper said eScout is talking with other hub operators and may make additional acquisitions.

In the future, Kemper believes that ''we'll see hybrid public/private exchanges and hybrid vertical/horizontal exchanges; there won't be a clear line.''

Charles Ballaro, e-procurement product manager at SciQuest, Research Triangle Park, N.C., believes that ''as more smaller organizations get into it, [exchanges] will go semi-private, but I don't see a huge market for public exchanges right now because of privacy issues and sensitivity around contract pricing.'' Like Neoforma, SciQuest has also transformed itself from a public exchange to a developer of private exchanges, targeting pharmaceutical, biotech and other research-based organizations.

Pure-play public exchanges offering true breakthrough technology, such as online auctions which were not possible before the Internet, will also survive, maintains Pembroke Consulting's Fein. For example, he said, ''eBay has a significant B2B strategy, and has become a large player in the B2B market. Consumers were aware of eBay as a way to get rid of Pez dispensers and grandma's chair, but eBay is providing breakthrough service to allow businesses to get rid of obsolete inventory.''

''I see more public exchanges for e-procurement and e-sourcing, where it's a competitive advantage to go public,'' said IBM's Hartley. ''But getting competitors in one industry to agree on functionality is a pretty tough task. On the public side, there are certain things that make sense, like auctions, which you can't do privately and achieve economy of scale; eBay is a great model. I see larger companies doing private exchanges more, smaller and medium-sized companies joining public exchanges as they [the exchanges] mature. I see in the future the two living together; private exchanges for proprietary processes, and linking into public exchanges once an industry has embraced it.''

Still, growth will not be at the ''Internet pace'' analysts initially projected. According to the 2002 IT spending survey conducted by Boston-based AMR Research, just 22% of manufacturing verticals and 23% of service verticals had a budget for a private trading exchange.

For now, companies like Lucent and others are placing their bets on both public and private exchanges or portals. Lucent was one of the founders of E2open, a global collaboration network for the electronics industry, along with IBM and others. According to IBM's Hartley, Lucent is participating in E2open ''on a limited basis right now. The private exchange so far is the winner.''