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Business

B2B: Back to basics

Getting ahead of B2B's third wave.
Written by ZDNET Editors, Contributor on
In the roughly 12 months since B2B became the most important buzzword of the Internet economy, the conventional wisdom about B2B winners has shifted at least twice.

The first wave of the B2B explosion consisted of so-called "net market makers," such as PaperExchange and eSteel, setting up shop to match buyers and sellers in independent marketplaces. The business model was easy to understand: Capture some share of transactions in an industry, charge a small margin for matching buyers and sellers, and watch the revenue pour in.

By some estimates, more than 1,000 of these net market makers were funded and set about attempting to transform their industries. Unfortunately, the majority of these early business builders neglected to realize that liquidity is the lifeblood of a marketplace and that, in B2B, most of the liquidity is in the hands of large enterprises.

Then came the second wave of B2B. Not wanting to give up value to upstart intermediaries, most incumbent enterprises created their own markets with existing trading partners. The consortia were heralded most notably with the announcement of the GM/Ford/Daimler-Chrysler marketplace, now called Covisint.

Since then, more than 100 of these industry mega-marketplaces have been announced with great fanfare, although thus far with few real results.

Recent developments indicate growing skepticism about this second wave of B2B. In particular, many companies are recognizing that the value created by consortia may derive more from collaboration and integration than from trading or transaction matching.

Many of the early arguments for marketplaces -- aggregation of purchasing to lower costs, improving market efficiency -- are being replaced with arguments in favor of supply-chain improvements, collaborative design environments and the like. In developing or partnering for additional capabilities beyond their early procurement-based solutions, leading players, such as Commerce One and Ariba, are already moving in this direction.

Furthermore, it is rapidly becoming apparent that profitable revenue streams for the marketplace itself are highly suspect -- and with no profits, the future equity value of these ventures is questionable.

Given the swift evolution during these first two waves of B2B, the question is, "What will happen next?" In the first two waves, new business models were created that promised to transform industries. But in each case, what was largely ignored was that industries don't make decisions, companies do.

And if we look at the e-commerce decisions being made by leading companies today, it is clear that the next wave of B2B involves a shift back to basics: Understand sources of differentiation and use a mix of new e-commerce models to improve profitability and competitiveness. The value at stake can be enormous -- by many estimates, costs lowered by 10 percent to 20 percent, and similar increases in the top line, leading to dramatic profitability jumps.

But just as many models evolved in the offline world to facilitate the many different types of commerce across industries, it is increasingly apparent that to capture this value enterprises will need to employ multiple models in the online world.

In particular, both of the models developed in the early phases of B2B have their place -- for some part of a company's business. On one hand, for goods that are sold across multiple industries, and for which price is the major component of total cost of ownership, buying through a net-market-maker may be appropriate.

On the other hand, goods that are confined largely to a single industry, such as jet fuel in the airlines industry, are probably best sourced through an industry-led consortia. And for goods where non-price costs (such as supply risk or logistics costs) are large compared to the price, one-to-one commerce facilitation that addresses supply chain integration could be the best model.

Enterprises that want to maximize their competitiveness will therefore look across the portfolio of goods they buy and sell, and choose appropriate models. Companies such as Cargill, Dow Chemical and DuPont have already begun to move in this direction by simultaneously investing in multiple e-commerce ventures.

In addition to deciding on a portfolio of B2B models for buying and selling, another aspect of this next phase of B2B is that enterprises will accelerate the outsourcing of non-core processes. This outsourcing can occur either to new entities, such as marketplaces, or to specialist outsourcers that concentrate on a few processes.

For instance, MRO procurement could be entirely outsourced to an MRO marketplace, while some HR processes could be taken outside to an HR service bureau. BP Amoco provides the most dramatic illustration of the latter, having recently outsourced many of its global HR functions to Exult in a deal worth $600 million over five years.

Since this third wave of B2B is focused on decisions made by companies, it is more likely to lead to persistent, fundamental changes in the way most companies do business. It therefore stands a better chance of delivering on some of the early promises of the e-commerce revolution.

However, it does require that companies carefully consider and take advantage of the full range of B2B models. In our next article, we'll explore how to make those decisions.

Ken Berryman is an associate principal in the Silicon Valley office of McKinsey & Co. He concentrates on serving high-technology clients and is active in the High Technology practice in the areas of B-to-B electronic commerce and business building, market strategy, and pricing strategy. In the roughly 12 months since B2B became the most important buzzword of the Internet economy, the conventional wisdom about B2B winners has shifted at least twice.

The first wave of the B2B explosion consisted of so-called "net market makers," such as PaperExchange and eSteel, setting up shop to match buyers and sellers in independent marketplaces. The business model was easy to understand: Capture some share of transactions in an industry, charge a small margin for matching buyers and sellers, and watch the revenue pour in.

By some estimates, more than 1,000 of these net market makers were funded and set about attempting to transform their industries. Unfortunately, the majority of these early business builders neglected to realize that liquidity is the lifeblood of a marketplace and that, in B2B, most of the liquidity is in the hands of large enterprises.

Then came the second wave of B2B. Not wanting to give up value to upstart intermediaries, most incumbent enterprises created their own markets with existing trading partners. The consortia were heralded most notably with the announcement of the GM/Ford/Daimler-Chrysler marketplace, now called Covisint.

Since then, more than 100 of these industry mega-marketplaces have been announced with great fanfare, although thus far with few real results.

Recent developments indicate growing skepticism about this second wave of B2B. In particular, many companies are recognizing that the value created by consortia may derive more from collaboration and integration than from trading or transaction matching.

Many of the early arguments for marketplaces -- aggregation of purchasing to lower costs, improving market efficiency -- are being replaced with arguments in favor of supply-chain improvements, collaborative design environments and the like. In developing or partnering for additional capabilities beyond their early procurement-based solutions, leading players, such as Commerce One and Ariba, are already moving in this direction.

Furthermore, it is rapidly becoming apparent that profitable revenue streams for the marketplace itself are highly suspect -- and with no profits, the future equity value of these ventures is questionable.

Given the swift evolution during these first two waves of B2B, the question is, "What will happen next?" In the first two waves, new business models were created that promised to transform industries. But in each case, what was largely ignored was that industries don't make decisions, companies do.

And if we look at the e-commerce decisions being made by leading companies today, it is clear that the next wave of B2B involves a shift back to basics: Understand sources of differentiation and use a mix of new e-commerce models to improve profitability and competitiveness. The value at stake can be enormous -- by many estimates, costs lowered by 10 percent to 20 percent, and similar increases in the top line, leading to dramatic profitability jumps.

But just as many models evolved in the offline world to facilitate the many different types of commerce across industries, it is increasingly apparent that to capture this value enterprises will need to employ multiple models in the online world.

In particular, both of the models developed in the early phases of B2B have their place -- for some part of a company's business. On one hand, for goods that are sold across multiple industries, and for which price is the major component of total cost of ownership, buying through a net-market-maker may be appropriate.

On the other hand, goods that are confined largely to a single industry, such as jet fuel in the airlines industry, are probably best sourced through an industry-led consortia. And for goods where non-price costs (such as supply risk or logistics costs) are large compared to the price, one-to-one commerce facilitation that addresses supply chain integration could be the best model.

Enterprises that want to maximize their competitiveness will therefore look across the portfolio of goods they buy and sell, and choose appropriate models. Companies such as Cargill, Dow Chemical and DuPont have already begun to move in this direction by simultaneously investing in multiple e-commerce ventures.

In addition to deciding on a portfolio of B2B models for buying and selling, another aspect of this next phase of B2B is that enterprises will accelerate the outsourcing of non-core processes. This outsourcing can occur either to new entities, such as marketplaces, or to specialist outsourcers that concentrate on a few processes.

For instance, MRO procurement could be entirely outsourced to an MRO marketplace, while some HR processes could be taken outside to an HR service bureau. BP Amoco provides the most dramatic illustration of the latter, having recently outsourced many of its global HR functions to Exult in a deal worth $600 million over five years.

Since this third wave of B2B is focused on decisions made by companies, it is more likely to lead to persistent, fundamental changes in the way most companies do business. It therefore stands a better chance of delivering on some of the early promises of the e-commerce revolution.

However, it does require that companies carefully consider and take advantage of the full range of B2B models. In our next article, we'll explore how to make those decisions.

Ken Berryman is an associate principal in the Silicon Valley office of McKinsey & Co. He concentrates on serving high-technology clients and is active in the High Technology practice in the areas of B-to-B electronic commerce and business building, market strategy, and pricing strategy.

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