B2B bust: So how come nobody's using it?

Different models of e-commerce are suitable for different businesses. Some of the issues to consider are cost-saving, reach expansion and competition--but don't expect it to be a magic bullet that will solve everything.

The technology for friction-free business commerce is here. So how come nobody's using it?

You've probably seen the commercial: Japanese businessmen huddle around a dimly lit boardroom table as a manager asks for solutions to a supplier problem. "They are our only supplier," one man answers, bowing his head in shame. Then a pluckier coworker announces that he found the parts online from Mitchco in Texas. Mitchco? Texas? Cut to a grinning Mitch with mouse in hand wearing a greasy Mitch & Co. shirt. And the slogan: "E-commerce changes everything."

Sure.

Problem is, IBM's TV ad only fuels the widespread belief in a sort of utopian business deal: spontaneous, instant, cost-saving Web transactions between two businesses unknown to one another and on opposite sides of the globe. Like the dot-com millionaire myth of 1999, the business-to-business bubble is about to burst. And when it does, the true value of business-to-business, or B2B, e-commerce will reveal itself.

The past year saw lots of businesses trying B2B e-commerce—and while there have been some resounding successes, only a small percentage actually benefited from their experiments. For many others, doing business online has proved little more than a bother. The truth is that different e-commerce models suit different businesses to varying degrees, and other businesses not at all. Size, geographic location, and how wired a business is all factor in. And to complicate matters, the idiosyncrasies of various industries and product types also affect which modes of e-commerce will work. There is no one-click B2B e-commerce solution.

Instead, aim for e-commerce solutions that don't cost more time and money than they are worth. Which doesn't mean you should ignore the Internet. "No one has the option to just do nothing. That would be a big mistake," says Arthur Sculley, author of B2B Exchanges: The Killer Application in the Business-to-Business Internet Revolution (ISIpublications, 2000). Businesses that wait until the B2B market has shaken out before getting involved are handicapping themselves, to their competitors' advantage. B2B e-commerce is no miracle, and analysts' predictions are pretty far out. Anybody have a magic wand?

Talk to an average American business owner and you'll see that while B2B e-commerce has potential, it's hardly the miracle it's been made out to be.

"What it did do was give our business some stability," says George Blass, partner in Compucision, a small New Milford, Connecticut, machine shop that builds parts for various industries, including aerospace and automotive. Eight months ago, Blass logged onto FreeMarkets, an online exchange where buyers and sellers bid on goods and services. "We would never have had the resources to generate this amount of work," he says of the three-year, $1.1 million contract that Compucision won on FreeMarkets—allowing the shop to double its employee count and invest in expensive, specialized machinery.

However, Compucision had to do what most supply-side exchange participants must do: shave profit margins to compete. "You have to know what your capabilities are—including what kind of profit margin you need—before you bid," says Blass.

Compucision's experience was essentially a wash, a typical result for the small to midsize businesses that experimented with e-commerce last year. Although companies have seen benefits such as reduced procurement costs and growth of their customer base, they are generally one-time windfalls. The one sustainable advantage of e-commerce is that it improves communication between customers and suppliers.

The state of B2B e-commerce just doesn't reflect analyst statements and forecasts: E-marketplace revenue reached nearly $500 million in 1999, reports GartnerGroup. Business-to-business e-commerce will rise to $6.3 trillion in 2005 from $336 billion in 2000, reports Jupiter Research. According to the Boston Consulting Group, U.S. B2B e-commerce will grow from $1.2 trillion in 2000 to $4.8 trillion by 2004.

For most companies, such numbers are impossible to keep track of—not to mention useless. What does e-marketplace revenue matter to the average chief executive wondering if B2B e-commerce is worth trying? The answer, of course, is that it makes a big difference if your business is owning, starting, and funding e-markets, but no difference otherwise.

A recent McKinsey & Co. report pinpoints the investment community as the source of most of the B2B hype. Complicating matters, the report adds, is that "investors tend to focus on liquidity, number of buyers, and number of transactions to determine whether a B2B e-marketplace is viable, without paying equal attention to the real source of value, a B2B e-marketplace's ability to deliver on customer needs." Here's the secret to e-business: post a site with your name, location, phone, and e-mail. But wait—there's more.

One of the most confusing aspects of B2B e-commerce is its jargon. It's no good hearing "Get started now" when everything from buying folders at Staples.com to installing an electronic data interchange, or EDI, system qualifies as e-commerce. Then there are e-marketplaces, storefronts, auctions, verticals, horizontals, exchanges, aggregators, hubs—the list seems endless.

The secret is that even the most elementary foray onto the Internet can create meaningful business results. Let's say you start by posting a Web page that includes your company's name, logo, location, and phone number. Believe it or not, you're in e-business. Add an e-mail address to that page, and you're transaction-enabled. Post the products you sell, and list their prices, and you've got a storefront.

Stop right there and you're in good company. Only one in three B2B Web sites is even designed to accept orders online, according to ActivMedia Research. "There's so much talk about e-markets, but this year it's going to be back to basics," says Martha Frey, senior consultant for the Patricia Seybold Group, a Boston e-business consultancy. "E-catalogs with a million items will become very commonplace. That could never be done with a paper catalog, and it's a very convenient experience for the customer."

Adding the capability to accept payment online—by credit card or purchase order—increases automation and adds the ability to track sales and collect customer information. And the opportunities multiply when individual storefronts join forces.

Aggregators like VerticalNet pool storefronts in vertical groupings for certain industries—aerospace, farming, plastics, chemicals, and so on. Hubs like Chemdex operate the same way except horizontally, pooling buyers in industry groupings. Exchanges like FreeMarkets allow buyers and sellers to negotiate prices in real time, similar to stock exchanges.

The bulk of the inflated claims surrounding B2B e-commerce centers on these three models—aggregators, hubs, and exchanges—which are categorized as e-marketplaces (and also commonly called exchanges). The popular notion is that e-marketplaces allow small to midsize businesses to "play like the big boys" by providing price breaks and broadening reach to customers and suppliers.

However, the reality is less remarkable. The most glaring problem is that e-marketplaces lack liquidity, meaning they don't have enough member companies to really get going, especially on the supply side. Trish Mosconi, associate principal at McKinsey & Co., explains that her company's analysis (a joint study with the Center for Advanced Purchasing Studies) began with only one criterion for a list of e-marketplaces: They had to be capable of completing transactions. The initial list of 2,000 exchanges immediately narrowed to 400.

Gofish.com, for example, is an e-marketplace for the $350 billion seafood trade, but with less than 500 paid subscribers the site is far from providing the liquidity it needs to dominate the industry. "To be honest, we don't use it a whole lot," says Jeff Nanfelt, owner of Kyler Seafood, a fish-packing plant in New Bedford, Massachusetts, and a Gofish.com subscriber.

Kyler Seafood still does most of its business "the same old-fashioned way," which means selling directly to supermarkets, although it has made one-off sales through Gofish.com here and there. "It takes a lot of time putting our products up there daily. It's almost like you have to have a full-time person doing it," says Nanfelt.

Although Gofish.com's No. 1 selling point should be its bargain-basement marketplace for fresh fish, Nanfelt does not buy off the site at all. He worries that doing so would compromise long-held relationships with the seafood brokers who act as middlemen to Kyler's traditional suppliers. "Brokers are not really crazy about the Internet. They work on a commission basis, and that's the business that Gofish is looking to take away. I have to walk a fine line to keep the relationships with people that I already have," Nanfelt says. He predicts that e-commerce could take from five to 10 years to affect the seafood trade, which means that maintaining offline relationships takes priority.

Kyler Seafood's experience underscores the primary reason for liquidity problems in e-marketplaces: a lack of supply-side participation. Businesses are simply more comfortable buying than selling online, says Mosconi: "Buying is a good way to learn and understand the Internet. You can internalize what your needs are from the buyer's perspective before you go out and jeopardize your own customer relationships."

E-procurement, especially of nonstrategic materials, is the easiest way to get started in B2B e-commerce. Most companies first buy office supplies online and progress to purchasing computer components, machine parts, and other supplies not needed for manufacture of their products.

Most companies are still experimenting with online procurement. While ActivMedia Research found that 54 percent of companies surveyed had made purchases online, it reports that most B2B sites get only about 300 visitors a week, and that 85 percent of those visitors make fewer than 10 purchases a year. The majority, in fact, made only two purchases annually, and those purchases were likely to be smaller than purchases made offline.

"What you hear are a lot of catch-22-type situations: marketplaces not getting liquidity because buyers are not comfortable putting their spend through them," says Mosconi. Private networks can act as the bouncer for your transactions, connecting you to one or many preferred partners.

The hype surrounding market-based B2B models obscures the fact that most e-commerce doesn't happen on public Internet exchanges. In fact, a recent eMarketer study on private networks found that only 7 percent of B2B e-commerce flows through public sites. The remaining 93 percent takes place via private networks.

Private networks, whether built on enterprise software or a hosted Web platform, connect strategic partners. These networks can be either one-to-one project management and transaction facilitators that mimic the benefits normally associated with electronic data interchange (but for a fraction of the cost), or they can be one-to-many, with a single business connecting to a network of preferred partners.

"A company can post information it wants only its good clients to see and provide extra services to keep good clients closely aligned to them," says B2B author Sculley.

Instead of one-time tweaking of buy- or supply-side dynamics, private networks build complex, sustainable relationships. "Initially, the conjecture was that you would just do price comparison on marketplaces. But there's a lot more involved in a transaction than just best price," says Jerry Maginnis, national director of digital marketplaces for KPMG Consulting, LLP.

Like Kyler Seafood, most suppliers are looking to maintain traditional channels rather than find new ones, as when Compucision landed its long-term contract with a new customer. Patricia Seybold Group's Frey points out that loyalty is alive and well on the buy side as well. "Companies spent the past five years on supplier consolidation programs—putting primary and secondary suppliers in place—and they're not just going to throw all that away. They just want to continue working with those suppliers in an efficient environment."

In some industries the possibilities that Web-based private networks create are rapidly changing business practices.

"This was something we had to become a part of or lose access to a part of our marketplace," says Dan Kirk, executive vice president of International Cellulose, a midsize recycled-paper recovery firm in Atlanta that uses Fibermarket.com primarily "as an Internet platform to communicate with our customers." In addition, International Cellulose used Fibermarket.com as a shortcut to e-business. "It's very easy to have a Web site that says here we are and here's what we have, but in the end it has to integrate into your data systems," Kirk says. "Those were huge programming costs that were totally out of our league." E-commerce liquidity has more to do with the offline industry than you would think. Just ask a pig.

The most important predictor of e-commerce liquidity, however, has less to do with a Web site's business model than it does with the offline industry it serves. "Different industries have different cost structures. There's a direct correlation between the business model and the actual commodity," says Mosconi.

When International Cellulose joined Fibermarket.com, for instance, it was less by choice than on demand. The paper industry is so dominated by big players like Georgia-Pacific and International Paper, Kirk says, that the big boys are able to force smaller players to move online. Similarly Covisint, the auto-industry consortium founded by Daimler Chrysler and Ford Motor Company, has made participating in its e-commerce site mandatory for all suppliers.

As a result, the benefits of online commerce for smaller enterprises—cost savings and increased customer reach—don't necessarily extend to industries where a few large players dominate. "No, the Internet doesn't level the playing field," says Kirk, explaining that recycled paper is basically a commodity. "The ultimate consuming marketplace is well defined and actually getting smaller, so I really don't see the Internet as a vehicle for expanding markets. It's really just an efficiency mechanism."

However, Kirk adds, Fibermarket.com has provided important process improvements. "There's only so many phone calls and faxes I can deal with in a day, but if I can get my offers out to the marketplace and to the regular customers that we deal with [online], it just improves my business."

Still, large corporations will continue to drive the spread of e-commerce. "It's a forced solution," says KPMG's Maginnis, "but when the equity founders of a marketplace are major players, they're telling suppliers, 'If you want to do business with us, you have to do it in this marketplace.' "

Success in e-commerce depends on experimentation, mainly because the most important variable is also the least predictable: the nature of the product a business wants to buy or sell.

Take, for instance, the lowly pig. Don Kampmeier, chief operating officer of Central Livestock Auctions in St. Paul, Minnesota, was auctioning swine long before there was a PC in every back office. When he started his own e-marketplace last year, CLAauctions.com, experience told him that feeder pigs would be a natural for the Internet.

First, feeder pigs, sold in large lots, are considered only the raw material for what will later be the fattened-up finished product—the butcher hog. So one feeder pig is as good as another, but a butcher hog is just one sale away from the breakfast table. A butcher hog must be bought in person from trusted sources, but feeder pigs flow perfectly through an online exchange.

Second, feeder pigs behave more like a commodity, which means that they respond well to market-model e-commerce. Computer components, the most liquid of all products sold between businesses online, share this quality of uniformity with feeder pigs. One microchip, like one feeder hog or one bale of recycled paper fibers, is as good as another. Price is the only important difference between lots. When price is the only concern, market-model e-commerce works.

And there have been unforeseen benefits of moving feeder pig trade online. "It's pretty tough on some of those little pigs," says Kampmeier, explaining that young swine are more susceptible to illness and stress than heartier livestock. E-commerce means the piglets can move from farm to farm, instead of from farm to big-city auction house to farm. And happy, healthy pigs fetch higher prices.

When the exchange serves buyers as well as sellers, as with Kampmeier's feeder pigs, B2B e-commerce thrives. "Every industry is going to be different and you customize the exchange around those characteristics," says author Sculley.

By the same token, though, the idiosyncrasies of an industry and its products can impede the liquidity of e-commerce. Ed Carney, owner of Export Oilfield Supply, uses and consults for NetworkOil.com, but he says the oil industry is a long way from moving to the Net exclusively.

Again, commodity-like products sell easily. "Sure, you can get the roller bearings, the casing couplings, the stuff that fits the same everywhere," Carney says. But technology and engineering for the oil industry is complex, and many of the machine parts he handles are one-off special orders, meaning marketplaces don't serve.

Also, oil is an international business, which creates a host of unpredictable headaches when cultures, laws, and languages clash. Carney's specialty is smoothing over such conflicts—usually by phone. When Venezuelan traditional medicine called for frozen pigskin to treat burns after a refinery fire, Carney found it. When his Saudi Arabian customers expect to haggle for a price, Carney knows how to play the game. "You have to realize the mentality they grow up with. They just don't take published prices," he says, adding that he's dubious about e-catalogs for any sort of international trade for this reason.

McKinsey & Co.'s Mosconi points out that different types of online marketplaces serve different products best ("Choose the Right Solution"). Commodity-type products benefit from auction-model e-marketplaces. But custom-order products, like oil-rig machine parts, flow best over private networks between strategic partners, facilitating communication and project management. First movers in e-commerce get to define the systems instead of just trying to catch up—so get moving.

There is no one-stop, one-click answer to B2B e-commerce, so businesses should expect to explore a lot of options before finding one that works.

McKinsey & Co. advises clients to use a "portfolio approach" to e-commerce, Mosconi says, choosing the system best suited to the business problem at hand.

Sculley refines that idea, suggesting a three-pronged approach: "You need to start with your own direct Web site, then set up private networks with your strategic partners, and finally join one or two B2B exchanges. Each solution gives you access to a different level of information."

The most important thing, Sculley says, is to get started with e-commerce as soon as possible, because first movers get to define the systems instead of playing catch-up. "If you try to ignore it, and say you'll come back in three years when it's all sorted out," he says, "then you're making a big mistake." Getting started in B2B commerce is easier said than done. Smooth the process with these steps.

1. If your company isn't wired, don't even consider e-commerce.
At the very least, you must manage your inventory and accounting electronically. In the best case, the information is integrated in a central database as well.

2. Start simple and take small steps from there.
Post a Web page with your company's information. At minimum, include an e-mail address and a list of your products and prices. Then allow business customers to make purchases online. Make sure it is somebody's job to maintain the site, verify that orders are being taken, and route customer queries to the appropriate channel.

3. Try e-commerce as a customer first.
Moving procurement online is easy for indirect goods like office supplies and maintenance, repair, and operations. Experimenting at this stage with different e-commerce models will help you arrive at the best purchasing solutions and get you ready for the next step.

4. Use what you learn from e-procurement to help you sell your own products online.
Join e-marketplaces—but not more than three. Start with an industry-specific consortium site, and try reputable exchanges too.

5. Don't abandon what works.
You will probably find that the time-tested way of doing business still is the best: building one-on-one relationships with trusted customers and partners. Private networks will improve communication with partners and help make your business run more smoothly.

Two things are certain about e-commerce: It won't solve all your business problems, and ignoring it is not an option.

PROS

Slash costs.
The right e-commerce system will save you money—lowering prices or operating costs.

Expand reach.
Shopping for new customers and suppliers is faster and easier on a global, Web-based exchange.

Get the goods on the competition.
Quickly compare other companies' prices and services.

Find it fast.
Track down difficult-to-find materials.

Go deep.
Strengthen relationships with strategic partners, suppliers, and customers with private networks.

CONS

Not a magic bullet.
Real-time e-commerce amplifies—rather than fixes—your existing problems.

Caveat emptor.
Buying from unknown sources is even riskier online.

Caveat supplier.
If you're a supplier, you may have to shave profit margins to compete.

Big boys rule.
The Web makes it easier for dominant players to tighten their grip on the smaller guys.

No cure-all.
E-commerce is still inefficient for some international markets and special-order products.