Debunking the myths of B2B
Driving this third wave are companies that are thinking carefully about the role B2B e-commerce should play in their value chains and how B2B may shift the economic value in their key relationships.
Before we conclude this miniseries with a roadmap for developing a good B2B strategy, however, we wanted to debunk some common B2B myths.
Net market makers and consortia alike talk about how B2B is reshaping whichever particular industry the market happens to be in. It is true that B2B will eventually reshape most industries. However -- like the advent of the steam engine and IT before it -- the B2B "revolution" will take a while.
Many marketplaces moved quickly from announcement, to formation of a newco, to completion of the first transaction, typically manually executed in a highly controlled environment. Now, they find themselves faced with the slow, arduous task of developing standards that truly integrate their systems and processes.
Even someone who is good at standards development, such as RosettaNet, has a multiyear roadmap for creating the more than 120 standards needed to e-enable just the electronics industry. In the meantime, we can expect to see individual companies developing particular solutions that create advantage and value for themselves and for their business partners.
Large marketplaces have hogged the spotlight, but much of the real activity in B2B is taking place in bilateral e-commerce between individual companies. Ventro, arguably one of the most successful chemicals marketplaces, has about $100 million in revenues, compared with $900 million on General Electric's Polymerland.
Similarly, VerticalNet transacts about a $200 million run rate, most of which comprises electronic components on NECX. Eight incumbents -- Cisco, IBM, Intel, Dell, Ingram, Micron, Arrow, and Nortel -- transact more than a billion dollars each over their e-commerce sites. Notably, Cisco, IBM, and Intel transact roughly $10 billion each.
Overall, both Gartner and Forrester estimate that in 2000, only 15 percent of online transactions will flow through net marketplaces. The rest will flow directly between incumbents, mostly via private exchanges and bilateral initiatives.
While many current marketplaces and proprietary e-commerce efforts focus on lower prices and processing costs, many industries gain just as much in increased revenues, margin, or from new Web-based services.
In the apparel industry, for example, companies that e-enable their global supply chain relationships can see as much as 10 percent volume upside from reduced stockouts; 5 percent lower markdowns; 30 percent less inventory; and 5 percent to 10 percent savings in COGS from lower labor, less excess thanks to faster cycle times, and lower material costs. Overall, this translates into 4 percent of sales dropping to the bottom line in profits, of which roughly half comes from revenue upside, rather than cost savings.
Current wisdom states that, in the long run, he who draws the most liquidity will win. Experience in the financial-exchange world indicates that this assumption is true, but only so long as the value delivered by the exchanges is roughly on par.
If you offer more valuable or substantially lower cost offerings, you can draw liquidity even from well-established exchanges, just as Eurex drew away all liquidity from the dominant London International Financial Futures & Options Exchange (LIFFE) between 1996 and 1998. Because Eurex built an electronic exchange (similar to NASDAQ), it was able to offer substantially lower trading cost than the traditional LIFFE.
There are many versions of this myth. One says that the 1,000-plus net market makers and 100-plus incumbent-backed exchanges will consolidate into one or two per industry.
While this consolidation may occur among industries that are already global, such as electronics or apparel, a lot of products can't be shipped economically around the world.
Many supply markets (especially overseas) do not have national, let alone international, suppliers. And this does not even take into account regulatory barriers to global aggregation of demand or supply.
A closely related myth -- that broad scope is more important than deep, valuable offerings -- suffers from the same problem: that liquidity is product-specific and limited to whatever range of products can be substituted for one another. The space to watch will be transportation marketplaces. Many observers have bet that intermodal transportation is required to solve the user's problem. However, GF-X's success seems to indicate that concentrated liquidity in airfreight is better than some liquidity spread across sea, land, and air.
A common assumption is that overall, B2B shifts value from sellers to buyers, by virtue of increased competition and transparency. However, the emergence of many seller-driven consortia suggests that many sellers will not simply leave it to their customers to define how they do business.
Some, like Transora, are finding ways to reduce processing costs without creating price transparency. Others, like myAircraft.com, are also approaching the buyer consortia in their industry to jointly optimize the supply chain.
As Berryman indicated in his previous article, in the long run, this is likely to result in a shift in value, not to buyers, but to creation of value in the supply chain that benefits both buyers and suppliers. Over time, a whole new set of technology players is likely to emerge to help sellers automatically price customized bundles of offerings for key customers and generate detailed, cost- structure-driven bids on reverse auctions.
Finally, here's the biggest myth of all. Most of the activity in the B2B space is not fundamentally dependent on TCP/IP or HTML. Although Internet standards may offer a cheaper connectivity layer, for most, the same business process and industry strategy changes could just as easily have been implemented with EDI or server based architectures.
As such, this may be part of the reason why equity stakes of technology providers in new consortia have dropped from 30 percent to 50 percent in early 2000 to 2 percent to 5 percent today. It is also a signal that the hardest work remains: developing the new business processes, the standards, and the skills and capabilities to execute a good B2B strategy, regardless of the technology used.
Eventually, some software vendors may find ways to code these new processes and optimization capabilities into software algorithms, and may again capture significant value. However, that value will be captured more in the applications rather than the transaction platforms and connectivity.
In our next article, we will take a look at what a good B2B approach looks like and the importance of crafting a carefully orchestrated strategy.
Stefan Heck is an associate principal in McKinsey's Silicon Valley office and co-leads the firm's B2B practice. He is also a core member of the firm's High Tech, e-Commerce, and Venture Capital practices. In McKinsey's last article on B2B for ZDNet News, Ken Berryman described a third wave of B2B evolution centered on supply-chain integration as opposed to purchase aggregation or transaction matching.
Driving this third wave are companies that are thinking carefully about the role B2B e-commerce should play in their value chains and how B2B may shift the economic value in their key relationships.
Before we conclude this miniseries with a roadmap for developing a good B2B strategy, however, we wanted to debunk some common B2B myths.
Net market makers and consortia alike talk about how B2B is reshaping whichever particular industry the market happens to be in. It is true that B2B will eventually reshape most industries. However -- like the advent of the steam engine and IT before it -- the B2B "revolution" will take a while.
Many marketplaces moved quickly from announcement, to formation of a newco, to completion of the first transaction, typically manually executed in a highly controlled environment. Now, they find themselves faced with the slow, arduous task of developing standards that truly integrate their systems and processes.
Even someone who is good at standards development, such as RosettaNet, has a multiyear roadmap for creating the more than 120 standards needed to e-enable just the electronics industry. In the meantime, we can expect to see individual companies developing particular solutions that create advantage and value for themselves and for their business partners.
Large marketplaces have hogged the spotlight, but much of the real activity in B2B is taking place in bilateral e-commerce between individual companies. Ventro, arguably one of the most successful chemicals marketplaces, has about $100 million in revenues, compared with $900 million on General Electric's Polymerland.
Similarly, VerticalNet transacts about a $200 million run rate, most of which comprises electronic components on NECX. Eight incumbents -- Cisco, IBM, Intel, Dell, Ingram, Micron, Arrow, and Nortel -- transact more than a billion dollars each over their e-commerce sites. Notably, Cisco, IBM, and Intel transact roughly $10 billion each.
Overall, both Gartner and Forrester estimate that in 2000, only 15 percent of online transactions will flow through net marketplaces. The rest will flow directly between incumbents, mostly via private exchanges and bilateral initiatives.
While many current marketplaces and proprietary e-commerce efforts focus on lower prices and processing costs, many industries gain just as much in increased revenues, margin, or from new Web-based services.
In the apparel industry, for example, companies that e-enable their global supply chain relationships can see as much as 10 percent volume upside from reduced stockouts; 5 percent lower markdowns; 30 percent less inventory; and 5 percent to 10 percent savings in COGS from lower labor, less excess thanks to faster cycle times, and lower material costs. Overall, this translates into 4 percent of sales dropping to the bottom line in profits, of which roughly half comes from revenue upside, rather than cost savings.
Current wisdom states that, in the long run, he who draws the most liquidity will win. Experience in the financial-exchange world indicates that this assumption is true, but only so long as the value delivered by the exchanges is roughly on par.
If you offer more valuable or substantially lower cost offerings, you can draw liquidity even from well-established exchanges, just as Eurex drew away all liquidity from the dominant London International Financial Futures & Options Exchange (LIFFE) between 1996 and 1998. Because Eurex built an electronic exchange (similar to NASDAQ), it was able to offer substantially lower trading cost than the traditional LIFFE.
There are many versions of this myth. One says that the 1,000-plus net market makers and 100-plus incumbent-backed exchanges will consolidate into one or two per industry.
While this consolidation may occur among industries that are already global, such as electronics or apparel, a lot of products can't be shipped economically around the world.
Many supply markets (especially overseas) do not have national, let alone international, suppliers. And this does not even take into account regulatory barriers to global aggregation of demand or supply.
A closely related myth -- that broad scope is more important than deep, valuable offerings -- suffers from the same problem: that liquidity is product-specific and limited to whatever range of products can be substituted for one another. The space to watch will be transportation marketplaces. Many observers have bet that intermodal transportation is required to solve the user's problem. However, GF-X's success seems to indicate that concentrated liquidity in airfreight is better than some liquidity spread across sea, land, and air.
A common assumption is that overall, B2B shifts value from sellers to buyers, by virtue of increased competition and transparency. However, the emergence of many seller-driven consortia suggests that many sellers will not simply leave it to their customers to define how they do business.
Some, like Transora, are finding ways to reduce processing costs without creating price transparency. Others, like myAircraft.com, are also approaching the buyer consortia in their industry to jointly optimize the supply chain.
As Berryman indicated in his previous article, in the long run, this is likely to result in a shift in value, not to buyers, but to creation of value in the supply chain that benefits both buyers and suppliers. Over time, a whole new set of technology players is likely to emerge to help sellers automatically price customized bundles of offerings for key customers and generate detailed, cost- structure-driven bids on reverse auctions.
Finally, here's the biggest myth of all. Most of the activity in the B2B space is not fundamentally dependent on TCP/IP or HTML. Although Internet standards may offer a cheaper connectivity layer, for most, the same business process and industry strategy changes could just as easily have been implemented with EDI or server based architectures.
As such, this may be part of the reason why equity stakes of technology providers in new consortia have dropped from 30 percent to 50 percent in early 2000 to 2 percent to 5 percent today. It is also a signal that the hardest work remains: developing the new business processes, the standards, and the skills and capabilities to execute a good B2B strategy, regardless of the technology used.
Eventually, some software vendors may find ways to code these new processes and optimization capabilities into software algorithms, and may again capture significant value. However, that value will be captured more in the applications rather than the transaction platforms and connectivity.
In our next article, we will take a look at what a good B2B approach looks like and the importance of crafting a carefully orchestrated strategy.
Stefan Heck is an associate principal in McKinsey's Silicon Valley office and co-leads the firm's B2B practice. He is also a core member of the firm's High Tech, e-Commerce, and Venture Capital practices.