By Mark Evans

AT ONE TIME, BUSINESS-TO-BUSINESS EXCHANGES WERE SET TO REVOLUTIONIZE HOW COMPANIES DID BUSINESS. THE VALUE PROPOSITION WAS STRAIGHTFORWARD: buyers got lower prices and reduced paperwork by making transactions electronically with a wide variety of suppliers, and suppliers increased revenue by gaining access to a larger audience.

These Web-based systems also meant traditional tools such as faxes, phone calls and face-to-face meetings would become less important.

The B2B marketplace was a win-win scenario.

But in most cases, it hasn’t turned out that way. Despite significant investments and a lot of work, the exchange track record has seen only spotty success. Now a newer exchangemodel is set to take centre stage, and it may fare better.

P r o m i s i n g p r o s p e c t s

The simplicity of the exchange concept attracted a great deal of attention and venture capital, and not surprisingly, B2B marketplaces popped up everywhere, offering everything from steel and auto parts to dental software and chemicals.

B2B marketplaces work by attracting buyers and sellers to Web sites that facilitate the placing of orders and soliciting of business. Buyers place their orders for products and serviceselectronically by selecting a single supplier or by requesting competitive bids from multiple suppliers.

IDC estimates more than 1,000 marketplaces have been created in North America in the past two years, while venture capitalists poured US$23 billion into 1,200 B2B companies last year.

The creation and financing of B2B companies has been driven by enormous optimismabout the market’s potential for growth. The Gartner Group in Stamford, Conn., predicts that US$8.5 trillion worth of B2B transactions will be conducted worldwide by 2005, which would represent a full 10 per cent of the total value of goods bought and soldbetween companies.

S o b e r i n g r e a l i t y

Despite the financial support and interest, most B2B exchangeshave been a disappointment—the value propositions have not risen above some fundamental issues and business-plan flaws.

At the top of the list is the fact that B2B exchanges are expensive to build and operate—the companies running them must make a significant investment in computer hardware and software to run back-office systems.

Then there are marketing costs required to attract enough buyers and sellers to create a vibrant marketplace. Most B2B exchanges have relied on sales commissions to generate revenue, a strategy that hasn’t worked well because it doesn’tprovide enough revenue to support operations until the marketplace generates large business volumes.

Another huge challenge is creating enough sales volume in the marketplace to make it interesting for buyers and sellers to get involved. It’s a Catch-22 situation: you can’t get sales volume without buyers and sellers, and you can’t get buyers and sellers without sales volume.

Buyers have not enthusiastically embraced B2B exchangesfor several reasons. Many firms are reluctant to buy missioncritical products and services in the same marketplace as competitors because it could provide rivals with informationabout their corporate strategy. Buyers are also reluctant to deal with unknown suppliers and are balking at paying a commission to the exchange for a transaction that previously did not cost them anything.

For sellers, price is also a hurdle; it’s one of the few ways to compete for business in an exchange where there are few means to differentiate from rivals. Rather than opening thefloodgates for a wave of new business, B2B marketplaces have left many suppliers wondering what all the fuss has been about.

John Leffler, global head of collaboration value chain solutionswith PricewaterhouseCoopers (PWC) in New York, said very few exchanges that have multiple buyers and sellers— known as public exchanges—will survive.

“The ones that do survive will have created a niche value area, and the participants will continue to use them as long as the value is greater from that marketplace than elsewhere.

Their challenge is survival and whether they can drive value to keep them in sustainable mode.”

N e w m o d e l

Leffler’s pessimism about public exchanges does not suggest the B2B concept is doomed. Rather, these exchanges must evolve into more viable entities that have value propositions with greater appeal to buyers and sellers. Such entities are split into two groups: markets focused on specific industries, and private exchanges operated by large companies.

These new versions are supplanting public exchanges because they focus on strategic issues other than price. Formany companies, industry-specific and private exchanges are a natural evolution of their business process strategies, following on the heels of enterprise resource management and customer relationship management software of the 1980s and 1990s.

The biggest advantage of industry-specific exchanges is liquidity, as large companies commit to conduct a significant amount of their business through them.

Covisint, a B2B exchange that involves more than 40,000 auto-industry companies, is thriving because General Motors (GM), Ford Motor Company and DaimlerChrysler are heavily involved. In October, GM said it used Covisint to buy US$96 billion worth of raw materials and parts last year.

Industry-specific exchanges also provide significant cost savings. Ford said it expects to save US$350 million by purchasing products through Covisint in 2001.

Meanwhile, private exchanges are growing because they offer unique advantages over the industry-specific model. A company with long-time suppliers, for example, can exchangeinformation about sensitive topics such as inventory levels and production forecasts so that everyone can have a better handle on planning issues.

Business processes are also streamlined. For example, administrative functions such as requests for proposals, accounts payable and receivable, and invoicing can now be completed electronically.

PWC’s Leffler said larger companies have little choice but to establish private exchanges if they want to stay competitive.

In Canada, automotive dealers using the recently-launched e-Lending Interchange have seen credit applications approved in seconds, instead of the hours previously required, through retail loan provider Scotiabank.

BCE Emergis provides the technology behind the e-Lending Interchange. Jacques Malo, president of BCE’s Canadian operations, said auto dealers are enthusiastic about the exchange because it makes business easier. “It’s not about getting a cheaper loan for your car—it’s how a dealer can get a loan secured from a bank or financial institution with less hurdles and more security.”

P u b l i c l i f e

As much as industry-specific and private exchanges have the potential to dominate the B2B landscape, there is still a role to be played by public exchanges.

They will likely serve as useful places for companies to buy commodity products such as office supplies, where there are opportunities to cut costs.

In Canada, public exchange Procuron is carving such a niche. Procuron sells products and services including bulk paper, computer hardware, software, office supplies and equipment, and translation services. Steve McKeown, Procuron’s president and CEO, said the five to 15 per cent savings is attractive to his customers given the low margins on products and services being offered.

Unlike many public exchanges, Procuron has no problem with liquidity because its shareholders—Bell Canada, CanadianImperial Bank of Commerce, Scotiabank and the Mouvement des caisses Desjardins—have committed to spend $1 billion a year as Procuron expands its portfolio of products and services.

McKeown said more than 1,200 business have registered with Procuron, and interest is growing as tougher economicconditions make saving money an imperative.

That said, public exchanges also need to ensure their survival by offering more than just savings.To keep customers engaged, many public players are starting to offer value-added services and information. BellZinc, for example, is now offering Web-based software services to its 250,000 members.

“The business has to be more than lower prices,” said BellZinc president Luc Filiatreault. “[That’s] not enough to keep clients coming back.”

Web exchanges
BCE Emergis http://www.bceemergis.com
BellZinc http://www.bellzinc.ca
Changepoint http://www.changepoint.com
Covisint http://www.covisint.com
DaimlerChrysler http://www.daimlerchrysler.com
Ford Motor http://www.ford.com
Gartner Group http://www.gartner.com
General Motors http://www.gm.com
IDC http://www.idc.com
PricewaterhouseCoopers http://www.pwcglobal.com
Procuron http://www.procuron.com