The New Face of B2B E-Commerce

At the peak of the business-to-business boom, which coincided with the dot-com glory days, there were more than 2,000 B2B exchanges, according to eMarketer senior analyst Steve Butler. However, most of those fledgling enterprises did not survive the subsequent bust.

In fact, insiders are predicting that when the shakeout is over, only about 180 will be left standing. Which ones will survive, and why?

Not About the Money

The original concept of a B2B exchange involved an intermediary company that created a marketplace to match buyers to suppliers, create market liquidity, balance supply and demand, and reduce the cost of trading for partners. When this concept took the business world by storm in 1999, Butler told the E-Commerce Times, everyone believed an exchange could enter a US$50 billion industry and take a 1 percent cut of every transaction — producing an instant $500 million per year in revenue.

But today’s reality is that, for the most part, money is not being made in B2B transactions. “That’s what led to the demise of a lot of these startups,” Butler said. “B2B exchanges are not so much about the dollar value of transactions that are being brokered and cut.”

He noted that nine out of 10 B2B companies still standing are not focused on trading or matching buyers to sellers. “They are more about a big buyer bringing on its smaller suppliers and processing paperwork back and forth,” he said, “and they’re doing it at a much more efficient cost than they would with a traditional Electronic Data Interchange (EDI) network.”

He added that in the land-grab mentality of the boom, many exchanges did not consider the long-standing relationships companies have with their suppliers. “I think that was part of the excitement of the Internet bubble, where everything seemed to be possible, and people didn’t really think things through entirely.”

Flawed Concept

In fact, Johan Sauer, vice president of strategy and business development at B2B company Transora, said he believes the concept of an exchange is inherently flawed. “I think of a Turkish Bazaar where everyone brings their wares and you come and barter and buy with cash, and at the end of the day, everyone goes home with a better value than they came with,” Sauer told the E-Commerce Times. “But that’s not really how exchanges grew up.” He said there is no single marketplace for anything outside of stock and commodity exchanges, so the concept of exchanges on a trading platform is flawed, and the word has been misapplied.

Sauer noted that a lot of procurement is strategic, not commoditized, especially in the consumer packaged goods industry. “The content of a product is proprietary, so how you procure your grains or packing materials is all part of the competitive advantage.”

He added that many of the technologies required to support exchange services were immature when the concept first took root. Additionally, he said, it has taken far longer than anyone anticipated for many industries to embrace any online technology at all.

“It’s not a technology issue, but a business transformation issue,” Sauer explained. “You have to change people’s jobs, how things are done and how things are measured, and as a result, change is much more difficult than anyone anticipated.”

Real Benefits

Butler said original forecasts for the B2B wave included huge payoff predictions. Although the top players in today’s exchange industry are saving 20 to 30 percent on their online transactions compared with traditional methods, those savings are related less to the dollar value of transactions and more to the amount of data flowing over the exchange networks. “That’s how I think companies will evaluate the success or failure of the exchanges,” Butler said, “along with the cost savings generated through moreefficient planning and productivity.”

In addition to savings on transactions, Butler said, companies want exchanges to help them share data in a more collaborative way, though that is no easy task. He noted that although a company can set up an online auction in a few months, collaborative planning, forecasting and replenishment (CPFR) capability takes a lot longer.

“But that’s where the real benefits are,” he added. “If you can drop your inventory levels by a third, then you’re saving a lot of money. And when you’re not stocking as much inventory, your suppliers benefits from having better insight into what’s flying off the shelves and can adjust production, and it goes right on up the supply chain.”

Who Is Still Standing?

Butler said that although many exchanges have fallen by the wayside, those that have survived have been quietly moving forward within their own industries, signing up members and helping them achieve quick ROI using online trading features, such as reverse-auctions. He noted that these quick-to-implement, quick-to-get-a-return projects have kept large companies interested while the exchanges built up their technology platforms. Now, many of those platforms are completed, and exchanges can shift their focus from building up their products to signing up new members and increasing usage by existing members.

WorldWide Retail Exchange (WWRE) spokesperson Keri Phifer said a lot of companies began by offering auctions to their members because they were a quick, easy and fast way to get a return on investment on a membership fee. “But now we see solutions moving from the auctions area to the more collaborative area where the true long-term value can be realized,” Phifer told the E-Commerce Times.

Exchange Survivors

One of the B2B survivors is Exostar, an exchange created by large players in the aerospace and defense industry. Exostar’s vice president of marketing, Ludo Van Vooren, said he believes his company survived because it had an open business model and had large players ready to “prime the pump” by making a commitment to use its technology and services. He told the E-Commerce Times that many failed B2B exchanges were independents on the outside of an industry looking in.

The WWRE is another exchange that was formed by its customers. “From the very beginning, our founders helped us create our business plan and our road map — the very same people we were going to be serving,” Phifer said. She added that member support is the key reason why the exchange is still in business. “We had member involvement from the get-go, and they continue to be involved in the exchange.”

Adapting To Survive

Of course, some B2B exchanges did not fail so much as evolve. For example, Sauer’s Transora was founded as an exchange in 2000 but now focuses on data synchronization. “When we started out, everyone was trying to do the same thing, and that was everything, such as procurement services, goods for resale, data synchronization, forecasting, replenishment — a whole host of stuff,” he said. “The mindset in the very early days was that of a land grab — if we don’t do it now, we may lose the opportunity.”

Sauer said Transora focused on procurement and sourcing because tools for those services were relatively mature at the time. The company then spent a lot of time building its data synchronization network solution, which eventually overtook everything else in terms of revenue.

“In the early days, we were very well funded, as waseveryone else,” he said. “There was an awful lot ofmoney chasing ideas in this gold-rush mindset, and mypersonal hypothesis is that there were quite a lot ofmediocre ideas that found funding that shouldn’t havebeen funded. I think some of those that have survived didso because the investor community believes there issomething there.”

Looking Ahead

Van Vooren said that although the shakeout was brutal,it was necessary, and the players that are still standing will survive if they stay focused on the right things. “There are a number of requirements necessary to make an exchange a success, but I believe that in the long term, people will manage their supplychain over the Internet. Unfortunately, a lot of companies are still on the sidelines, and I think that those who remain on the sidelines will suffer.”

Butler said exchanges that proved to have staying power throughout the bust understood how best to deliver value to customers and adapted quickly, focusing on their core business and delivering returns to clients.

“In the first wave, companies expired,” Sauer noted. “Now there will be a consolidation of those left standing into stronger entities. Then, segmentation of services into those that are industry-focused and don’t create a unique advantage for the participants. From there, who knows?”