by Rick Sherlund
Investors and Wall Street analysts are enthusiastically embracing the next big wave of corporate computing—the B2B software sector and the associated collaborative trading exchanges now being formed in every industry from retailing to autos.
Investors are also placing premium valuations on Internet infrastructure software companies that are laying the foundation to enable B2B collaboration. Valuations are continuing to climb (sometimes exceeding 200 times revenues) as investors buy into the technology sector, which is increasingly being recognized as a leading driver of global economies. Are investors irrationally exuberant, or are they onto something?
Historically, computers have been used to automate internal business processes, including financial accounting, manufacturing, and human resources. The next wave of computing will be much more focused on automating how companies collaborate with each other, taking advantage of the common Internet standards like IP and XML.
Historically, this common infrastructure was not available, and companies had to deploy expensive and proprietary electronic data interchange (EDI) to enable electronic commerce. We are now at an inflection point that is analogous to the time when the interstate highway system was put in place, which enabled broader interstate commerce. The ability of companies to conduct business electronically is facilitated by the adoption of common Internet-related standards.
New customer interaction and support systems are also needed as companies begin to engage their customers and suppliers in electronic media.
How one addresses customer support online will be an important service differentiator, and real-time access to customer information will be important for personalization and targeted marketing and advertising.
A new ecosystem is emerging, with real-time e-commerce providing a new set of technology needs, spawning a new generation of applications in the B2C and B2B spaces.
Transaction volume in the B2B space is estimated to be ten times the size of the B2C market within the next year or two. Recent U.S. economic data suggests that retail e-commerce (B2C) now represents only about 1 percent of total retail sales—so this market receives a lot of publicity, but the B2B volumes will be much higher.
The complexities of B2B are also much greater. Estimates vary, but they generally project B2B commerce growing from about $150 billion in 1999 to $7 trillion over five years. This will create a robust growth market for supporting Internet infrastructure, B2B applications, and e-trading communities.
Early trading communities will emphasize electronic purchasing of indirect materials (office supplies) and direct materials (raw materials for manufacturing). Direct materials will require greater expertise and integration with ERP systems and supply-chain planning and execution. Building to order will be a goal of many industries. The auto sector, for example, does a poor job of delivering cars that are tailored to an individual consumer. A build-to-order system is an obvious solution, but the supply-chain expertise required to implement this is complex and beyond the scope of e-procurement systems.
The economics of trading communities is still evolving, but the industrial companies are clearly emerging as the controlling parties. The technology providers (Ariba, Commerce One, i2, Oracle, sap, and others) have a strategic interest in making e-markets and leveraging the relationships with the supply chain to sell additional software. The industrial companies have an interest in capitalizing on their supply-chain relationships to create a multi-billion-dollar-market-value entity, which they have a major equity stake in.
There is likely to be hundreds of billions of dollars in market value associated with these trading exchanges as they go public. The traditional brick-and-mortar industrial companies can capture this equity value for themselves, with the technology providers potentially participating in the equity—but more strategically trying to establish a position of industry dominance and lock out other technology suppliers.
With a rising tide, many winners are likely near-term in the stock market. Over time, the leaders will continue to consolidate and emerge as more dominant vendors.
Rick Sherlund is a managing director in the enterprise software sector at Goldman, Sachs & Co.