E-MARKETPLACE VISION COLLIDES WITH REALITY -- B-TO-B E-COMMERCE HAS TURNED
BUSINESS MODELS UPSIDE DOWN, BUT THE FRENZY SEEMS TO BE COOLING DOWN
Jun. 13, 2000 (InformationWeek - CMP via COMTEX) -- It's the great vision of new
economists: vast, economy-shaping partnerships that transform huge, competitive
industries such as automobiles or steel into online cooperative states. During
the past 18 months, hundreds of companies have launched online communities where
suppliers and buyers can swap everything from restaurant and medical supplies to
specialty chemicals. By 2004, $2.7 trillion worth of business, accounting for
17% of the economy's total trade volume, will be conducted via
business-to-business E-commerce, Forrester Research predicts.
The companies carrying out the vision are hardly radicals. Boeing, General
Motors, and Union Pacific are among companies investing vast amounts in
research, software development, and cooperative marketing to make
business-to-business E-commerce reach its potential. At the same time, hundreds
of small and midsize businesses along their supply chains are being asked to toe
the line.
Online trade exchanges are taking center stage, but extranets and procurement
software are providing the essential glue behind the revolution. Simple
corporate portals grant unprecedented ways for suppliers to present their
products to users and for staffers to gain real-time procurement access. Fully
37% of 375 business and IT managers polled by InformationWeek Research for a
survey released this week say they use E-marketplaces for buying and selling.
Also, 54% use extranets or supply chains and 40% use portals.
That's heady stuff. But some air is being let out of the business-to-business
commerce balloon. Many see the visions on a collision course, and for an
increasing number of ventures, customers and suppliers are proving hard to
find-and revenue-generating matches are even more rare. It's re-evaluation time.
"Nobody has managed to build a community around a market of any size," says Otto
Kumbar, VP of business-to-business services at GE Global Exchange Services, a
unit of General Electric in Rockville, Md. Kumbar says many E-commerce tools are
so new that they haven't been refined yet. Although GE has made great strides
over the years moving supply-chain partners to electronic data interchange and
now to Extensible Markup Language technologies, it hasn't completely transformed
the company to E-business as many would like.
Those who operate E-business exchanges are wary as well. "Right now, there are
25 trading companies that offer auctions of chemicals. We think that will drop
down to two or three," says Chad Steigers, managing director of ChemPoint.com in
Bellevue, Wash., a subsidiary of Royal Vopak, a chemical distributor in the
Netherlands. In its first quarter of operations, the company reported $24
million in business transactions. It has 127 customers and sells 1.3 million
products provided by 2,200 suppliers.
ChemPoint aggressively signed up 3,000 users-fully 10% of its potential
marketplace-in its first 10 weeks of operation, but now it's a slower sell.
Steigers acknowledges that his parent company's deep financial pockets will
prove essential to expansion, but nothing is guaranteed.
What's gone awry? Basic business behavior, such as the desire to keep
proprietary information private and loyalty to certain suppliers, is slowing the
growth of some online exchanges. For others, it's a matter of the initial
feverish growth cooling off as marketplaces analyze their returns and determine
where they want to go next. In a survey of 50 E-marketplaces earlier this year,
Forrester Research found that 95% were doing fewer than 10,000 transactions a
month-fewer than a decent-sized grocery store might do in a week. Fully 63% of
the marketplaces surveyed were logging 1,000 transactions a month or fewer. In
part, that's because the industry is so young-and, in part, marketplaces target
segments where there simply isn't enough room to generate huge numbers of
transactions.
The market may be equally tough for established companies trying out E-business
models. DaimlerChrysler, Ford, and General Motors teamed up to create a trading
exchange market focused on the automotive world in February, but suppliers
didn't rush to join it. Analysts say GM's dream could become a fantasy if
partners balk. "If you talk to the tier-one companies, they say, 'No way am I
ever going to give the automobile companies access to my suppliers,'" says Staci
McCullough, a senior analyst at Forrester Research's E-business applications
teams.
However, since May three major tier-one automotive suppliers-Meritor Automotive,
Johnson Controls, and Magna International-have confirmed their participation in
the Covisint Internet Exchange, as it is now known.
"Being one of the first suppliers to join Covisint underscores our commitment to
take the lead in E-business initiatives," Meritor chairman and CEO Larry Yost
said in a statement. "This will allow Meritor to communicate more efficiently in
real time with our own suppliers and transact business via the Web to improve
the overall speed and efficiency of our supply chain. As a result, we anticipate
enhanced revenue streams, reduced supply-chain costs, and compressed cycle
times."
The notion of E-businesses, particularly among supply-chain partners, is at
least three decades old. In a series of evolutionary steps taken in the late
'60s and early '70s, electronic data interchange and bar codes made the quiet
leap from lab to workplace.
Although EDI is considered a clunky, expensive, and rigid standard,
advanced-logistics EDI and bar codes have elevated traffic and procurement
departments from back-office ghettoes to front-line competitive weapons.
Just-in-time inventory practices are the norm for most large industries, and
electronic messages move by the millions every day. The U.S. Department of
Commerce says more than 250,000 companies do in excess of $3 trillion of
business a year using EDI.
E-marketplaces and their associated technologies build on this decades-old
foundation, yet they're not heeding its lessons. Besides the time required to
link disparate partners, perhaps the most important lesson is that
business-to-business activities aren't about technology or even
communication-they're about trust and relationships, and that's where many
marketplaces may stumble.
Just ask Marlis Elliot, purchasing manager for Cell Genesys Inc. The Foster
City, Calif., company specializes in gene therapy products such as vaccines for
lung, pancreatic, and prostate cancer. The company has a market capitalization
of $740 million and employs around 130 people. Elliot sees her role as crucial
in the research process. "I work for the scientists," Elliot says. If a
researcher needs anything from a pipette to a centrifuge, her job is to get it
swiftly and seamlessly, so the research process proceeds uninterrupted.
A new tool has emerged in recent months to make Elliot's job immensely easier:
SciQuest.com Inc., an online marketplace for specialized scientific equipment of
all kinds. Elliot is a booster of SciQuest.com, saying it has improved her job
and created new efficiencies. "We can take 25 purchase orders and turn them into
one, so it saves on our time and labor. We don't have to make those 25 phone
calls," she says.
Manually processing a purchase order can cost $100 to $125, Elliot says, while
an E-marketplace can cut that cost by almost 80%. SciQuest .com also makes it
easier for Elliot to pay bills, cutting down on paperwork, she says.
And with thousands of suppliers, the site is a great help for a small company as
well. "They are basically purchasing for me. SciQuest.com has set up accounts
with the different vendors I'd be ordering from, and they're ordering with
them," Elliot says. Other benefits include trend analysis and access to new data
from prices to on-time delivery.
Yet for all her support, Elliot says she understands the problems faced by
today's online markets. Traditional values and behaviors are as important as
technological whizbangs when it comes to shaping Elliot's choices. Though
E-marketplaces might save her a lot of time, there are times she wants personal
contact as well.
"The main thing I like about SciQuest is that customer service is still there.
They still have a live body if I need one," Elliot says. "If I'm stuck or my
computer's down or the Internet's down, I can always get somebody and we can go
back to the old way of doing it-manually or over the phone."
Elliot's concerns could trip up business-to-business marketplaces. "People
aren't taking into account the dynamics within their industries. They're not
looking at how people feel about technology-at what the trust is out there,"
says Forrester's McCullough. Loyalty and familiarity play a big part in how
business is conducted-online or elsewhere. Elliot trusts her salespeople and is
committed to them-which is why she chose SciQuest.com over its larger
competitor, Chemdex. "A lot of Chemdex people are techies from Silicon Valley
who don't really know our business, which is unique," Elliot says.
In fact, Chemdex employs more than 30 life-science Ph.D.s to work with
customers, but often it's perception that matters most when decisions get made.
SciQuest.com has its work cut out for it as well. "For marketplaces to gain the
maximum adoption within the organization, we need to be part of the workflow
processes within an organization," says Scott Andrews, CEO and co-founder of
SciQuest.com, in Raleigh, N.C. SciQuest.com has already spent about $30 million
building its infrastructure and doesn't expect to see a profit until 2002 or
2003.
FindMRO.com, another fast-growing marketplace, focuses on hard-to-find
maintenance, office, and business supplies. It has a lot of costs, too, but like
ChemPoint.com, it has something else that's proving key for success in the
business-to-business world: a rich parent. W.W. Grainger Inc., a Lake Forrest,
Ill., company with revenue of $4.5 billion in 1999, has spent more than 70 years
supplying businesses with products from hydraulic pumps to garbage bags.
When FindMRO.com had to assemble a database of more than 5 million products
growing by 200 items a day, it was less daunting with Grainger's experience-and
its $110 million investment in FindMRO.com's catalogs and infrastructure. "We
have domain expertise. We've been doing this for 73 years, and every person in
my shop has at least 10 years' experience, and that's a huge competitive
advantage for me," says Ron Paulson, president of FindMRO.com. "A lot of our
customers have thousands of suppliers. Some customers deal with 15,000 to 30,000
suppliers, and it's $300 to manage each supplier. So if you had 17,000
suppliers, that's $500 million you'd eliminate with FindMRO," Paulson says.
FindMRO .com opened about five months ago and is already doing about $50 million
a year in business.
Supplymarket.com is an electronic trading floor, rather than a digital
marketplace like SciQuest.com or FindMRO.com. Just like a marketplace,
Supplymarket.com faces the intimidating task of building dual databases-one for
clients and the other for providers. But rather than offering a place where
companies can shop for specific products, Supplymarket.com acts as a forum where
deals can be put together. This model embodies one of the most important
possibilities of the new economy: giving smaller companies a chance to reach out
to a vast universe of potential customers at a very reasonable cost.
While it may take a giant such as GE years to see a corporate transformation,
Pete Vougiouklakis, president of Diewall Tool and Die Co. in Utica, Mich., can
testify to the new, dramatic business opportunities marketplaces create. Getting
new clients in Diewall's business can take months of effort and a great deal of
in-person selling time.
For that and other reasons, business at Diewall-a small, privately held supplier
of custom-made manufacturing equipment-remained flat but reasonably profitable
for a number of years. Supplymarket.com changed that. "We've probably secured
about three-quarters of a million dollars worth of work that we've bid on and
had the bids accepted by the companies themselves who were the end users,"
Vougiouklakis says.
Although users are enthusiastic about Supplymarket.com and similar independent
exchanges, their future depends on a lot of funding and support. As a startup
launched in October, Supplymarket.com faces well-heeled competitors entering the
field at a rapid pace; the expense of building and maintaining databases; and
labor-intensive investments in customer-service managers.
So far, Supplymarket.com has signed on 9,000 registered suppliers and 5,000
buyers, and has grown to 140 employees. But Bill Sheehan, VP of business
development at the Burlington, Mass., company, acknowledges that "we're not
doing hundreds of auctions a day. This is built-to-order material. It's not a
commodities exchange, but we're getting a lot of transactions," he says.
Supplymarket.com gets a commission of 2% to 4% of the value of each deal it
generates, depending on the size.
Many business-to-business ventures straddle the world of marketplaces and
exchanges. Transplace.com, owned by J.B. Hunt Transport Services Inc., one of
the nation's largest trucking companies, calls itself a freight logistics
company that will not only move freight, but also take orders for service and
make sure the goods arrive on time, says chairman and president Jun-Sheng Li. A
module called Freightexchange .com works well; however, "it's a very small part
of the services we offer," Li says.
Ultimately, marketplace success-as in any business-hinges on far more than
technology. "You have to combine a tool like Freightexchange with your
vertical-industry expertise, your business relationships, and all the different
things together that make your industry work," Li says.
Price is only one part of the equation, Li says, and ties to J.B. Hunt haven't
prevented Transplace.com from forming relationships with 5, 000 carriers. "We
are not in competition with truck lines. We are a logistics company," Li says.
And for Transplace.com, the formula seems to be working-it will reach $1 billion
in freight revenue this year, and the company's growth rate is in the 30%-to-40%
range.
One indication that business-to-business commerce is steadily becoming a way of
economic life is its appearance in every type of business for a wide range of
applications. Mailboxes Etc., which operates 4,200 mail service franchises
worldwide, recently signed a deal with Getajob .com. "The labor shortage is
almost epidemic out there. Our franchisees are struggling to get associates and
managers," says Heather Rose, VP of learning and people services for the San
Diego company.
In effect, Getajob.com is an exchange that trades in people, not products-and
that's the commodity Mailboxes Etc. needs. Mailboxes Etc. set up an agreement
with the exchange under which its franchisees sign up for $250 instead of the
normal $300 to check out at least five bona fide potential employees.
Chances are very good that marketplaces will become a crucial sales and
marketing tool for companies of all kinds and more creative uses will be found
during the coming years. "They have the potential to be just as significant as
any route that exists, including call centers," says Wendy Lea, VP of consulting
at Siebel Multichannel Services.
By their very existence, the new marketplaces will alter the business equation,
she says. "Everything is out in the open. It's transparent now-what it costs,
who has it."
Alice Miles, president of Ford ConsumerConnect and a member of the Covisint
executive team, says, "Covisint will provide the language for manufacturers and
suppliers to talk to one another in the future. With complete confidence and
security, buyers and sellers-regardless of their size and position in the supply
chain-will soon have a way to communicate with one another in a real-time,
virtual way."
At least that's the vision. The question now is what the next stage will bring.
The result might be an endless cycle of predatory price-cutting wars, or the
online environment may well turn out to be just another place to buy and sell
goods. "At the end of the day, these electronic marketplaces represent another
medium for transacting business," says Fred Hollahan, VP of business-to-business
solutions at SilverStream Software Inc. in Billerica, Mass., which builds and
integrates electronic markets.
If EDI is the role model, companies will be forced to change the way they do
business, but it will take significant technological expertise and many years to
reach a critical mass. "E-business is all about reengineering the business
process," says David Altschuler, an analyst with the Aberdeen Group. Getting
people to change fundamental business processes takes vast amounts of time and
energy. "The real thing that's going on here is that a process that has been
historically defined in terms of relationships has been redefined with different
technologies and infrastructures-all enabled by the massive infrastructure
called the Internet."
The change may mean freedom from the old ways of doing business, and freedom can
be a scary thing. "The idea of suppliers being able to commoditize their
Rolodexes and move away from the heavy personal approach and more into the wild
and woolly commodities-oriented world is very uncomfortable for some companies,"
Hollahan says. "That's one of the challenges for these exchanges to overcome." |
