The Evolution of B2B eMarketplaces and Collaborative Commerce
The rumormongers and journalists who quickly pen sensational bad-news headlines would have you believe that Exchanges and B2B Marketplaces (last year's newest Internet darlings) all failed and died practically overnight. They pronounce judgments on why it happened: the hype made businesses adapt the model before it was proven; many companies were not willing or able yet to handle the internal processes that go with the technology of such an extended, networked enterprise; buyers didn't venture beyond their already established list of suppliers, and even that the procurement folks didn't coordinate with the planning/administrative folks in many companies.
Others say that the business-to-business (B2B) marketplaces were wounded when profits didn't balloon and Exchanges began to consolidate. Outsourcing Center CEO, Peter Bendor-Samuel, says that commoditization also had an effect on Exchanges. "If you are, for example, a steel pipe manufacturer," he explains, "you are constantly looking for a way to differentiate your pipe from someone else's. Maybe it's coated in some substance that makes it last longer or that makes it lighter. You look for ways to avoid commoditization. But Exchanges are based on a degree of standardization. While that is a great idea, it ends in commoditization. So you can expect in such a situation that a counter-pressure would build for differentiation among the vendors."
While there is some element of truth in all of these pronouncements of reasons for failure, the broader truth is that B2B Marketplace and Exchange models are not dead. In reality, in some contexts, the models are alive and well. In other contexts, we need to look behind the scenes to see what's really happening.
There are a special few moments that happen every day at twilight time. Like some flowers whose petals close at night, the day's trials fold inward. But flowers continue growing overnight and, at the first sunrays of the morning, they blossom even larger and more beautiful than before. For B2B Marketplaces and Exchanges, the past few months have been twilight time.
All or Nothing at All
David Roddy, vice president of Internet Economics at VerticalNet solutions, unravels what's going on with the New Internet Economy. More and more companies, he says, are looking for ROII -- Return on Internet Investment. That the end must justify the means is an old story, but it has a new twist in today's business environment. Whether a B2B Internet initiative promises reduced costs, increased sales or better timing of receipt of materials, Global 2000 companies are looking for situations that are much more tightly focused.
Decision-makers in today's leading companies worldwide understand that a B2B investment cost is relative to the payback period. "It's an even more tightly focused story in a slower growth economy," says Roddy. Increasingly, their strategies for competitive advantage look at the timeline in connection with the bottom line. No longer are they jumping onto the Internet's new wagons quite so quickly.
Tighter focus on ROII has resulted in two new strategies -- Collaborative Commerce and Supplier Relationship Management (SRM). Behind the scenes of the early proliferation and publicity of B2B Marketplaces and Exchanges for the past year, these two strategies were being developed and tested; and there were many who knew, all along, that the "many-to-many, whoever-wants-to-join-situation" was not the goal they were working toward.
The early eMarketplace vision -- fueled by media and marketing reports of vastly decreased prices -- was a sort of operation where people would buy and sell almost everything in a public place. While some jumped in for the immediate gratification, others knew that collaboration is really the best way to build solutions that meet companies' pain points. They went about the business of fine-tuning the infrastructure and process. VerticalNet's economist, Roddy, says the new situation of today -- where buyers and vendors can collaborate in a tighter fashion --"is still a software infrastructure where multiple independent companies go to do business. But now it's more of a private club, as opposed to the public swimming pool."
"Supplier relationship mangement," explains John Kelley, director of market development for SRM at i2 Technologies, Inc., "is about creating strategic relationships so that you can work closely with your suppliers and collaborate on design, supply planning and ordering. What we see with SRM is that people want to create an optimized base of suppliers that they work with so that they constantly have a supply base that is bringing them the best cost structure, the best risk structure, and the most innovation to build products. That doesn't happen with auctions or reverse auctions."
Accept No Substitute
The procurement folks knew all along that strategy in purchasing (sometimes called "strategic sourcing") is more important than quick, low-cost buys. For a typical company, in fact, only 20 percent of its spend is indirect. Indirect materials -- such as paper clips and other office supplies -- do meet business needs, but they are incidental to what is being manufactured. The 80 percent direct procurement market involves items that are critical to a product (such a particular kind of radio frequency chip for a cell phone) or to keeping assembly lines running and factories open. A manufacturing plant won't have to shut down if paper clips are delivered tomorrow instead of today or if they are the wrong size or color. It seldom matters who the paper clip vendor is; it matters only that it's a low-cost provider.
100 percent of indirect procurement can be efficiently and cost-effectively done through public eMarketplaces or Exchanges. But direct procurement has a far more critical impact on business operations. And, of the 80 percent direct market, i2 has found that within each industry only five to 35 percent of the direct materials are items that can be bought from just anybody. The rest were never suitable for public auction places. As John Kelley points out, if a commodity is constrained or limited and is not substitutable (without re-testing the entire product it goes into or reengineering the assembly line), that commodity's supplier is not one that a manufacturer will switch from. "Indirect," he says, "is about browsing, comparing, buying. Direct is about designing, sourcing, supply planning, inventory management and order management. It's a more complicated process that adds more value to the company in the end."
For Members Only
The fact is, some vendors never joined public Exchanges or eMarketplaces, and many withdrew after a time. Daily auctions had a tendency to squeeze the last penny of profit out of their companies. Understandably, they rebelled. As i2's Kelley points out, "Why would they want to participate in a public marketplace that does nothing but run auctions? The last thing you want is for your factory to be shut down because you didn't have a strategic relationship with a vendor for a constrained commodity and you auctioned the last penny of profit out of the guy. Because when they actually hit a manufacturing constraint, he'll ship it to all their strategic customers, but if you squeezed the last penny of profit out of them, you probably won't get the allocation."
For a vendor to get aggressive and give good pricing to its customers, Kelley reasons, there must be a benefit for the vendor. That can be accomplished by customers first helping the vendors reduce their inventory and other cost structure through supply planning collaboration. Second, when customers collaborate with vendors on design and supply, the vendors will be assured that their materials will get designed into the next product. This is the reason some leading customer companies never joined the public Exchanges. Instead, they built their own private eMarketplaces from the get-go so that they could optimize their supply base with collaborative design and supply.
Collaborative groups are companies that do business with each other on a daily basis because they have something in common and can benefit each other because of that commonality. "The customer who buys a computer, the computer manufacturer, and the chip manufacturer that sells its products to the computer maker all have something in common," David Roddy states. "In the old days, manufacturers and suppliers that did business with each other did so on a tentative basis of feeling each other out. Each tried to maximize their own revenue from a given sale." The Internet is a tool that facilitates collaboration, which is a much better approach, leading to win-win relationships.
VerticalNet owns twenty percent of and is the software provider for just such a collaborative group. Members of Converge, a high-tech consortium marketplace, include anchor Hewlett Packard, as well as Gateway, Fujitsu, Sumitomo and a lot of other computer manufacturers and their suppliers. They have joined this "club" because they are able to create great efficiencies trading with themselves in prescribed ways. Collaborating, they each benefit from understanding the supply chain implications of their product design changes.
Having designed and populated 57 B2B marketplaces, VerticalNet has learned what attracts participants: content and community as well as commerce. A hotel industry marketplace, for example, includes more than catalogs and advertisements for hotel equipment and services. There's an information forum where participants can share information on how to manage hotels, which draws them to the site. Roddy comments that the company "didn't just make a product and throw it out there to see what happened. We actually used our product in operating these various marketplaces, so we had the ultimate understanding. Most of the other eMarketplace software companies also operate eMarketplace Web sites now, as well as provide the products, but they didn't do so in the beginning."
B2B has evolved from just matching buyers and sellers to also optimizing relationships. All the players in a collaborative group are part of each transaction. They make sure that their individual components - whether it's the design, supply, shipping or inventory area - does its part to facilitate the transaction's success, despite problems that arise along the way. Thus, the increasing broader importance of supply chain management is of paramount importance these days.
SRM is the newest set of technology and management tools that enables supplier relationship optimization. The 1932 hit song title, "You're Getting to be a Habit With Me" aptly describes one of the end results of SRM. It's obvious that a customer is not likely to dump a vendor with whom it has a strategic relationship, but a company's supply base still needs to be competitive. That's part of what SRM is all about. (See related story in this issue, "SRM Alliances.")
So what's the message here about what has been happening during twilight time this past year? It's that B2B infrastructure is just now blossoming. Because of collaboration and SRM, it will enjoy enormous growth over the next five years. There will be some problems along the way, because the new strategies will necessitate a fundamental change in mindset in the way business is done. But for companies seeking a competitive advantage, the New Economy winners will be the collaborators and those who master SRM.
The big players in the B2B area will be the software companies that design the solutions and the outsourcers that implement, host and manage the infrastructure and solutions. Outsourcing in particular will be of utmost importance as a safe haven and plug-and-play strategy while the technology evolves.
See "The Big Picture"
for the second part of this story and how it affects outsourcing.