B2B comes back on a smaller scale
- By Colleen Frye
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
''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,''
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
''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
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.
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
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.
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
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
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
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
In the future, Kemper believes that ''we'll see hybrid public/private
exchanges and hybrid vertical/horizontal exchanges; there won't be a clear
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