New B2B sweet spot?
The launch of high-profile, public exchanges has slowed from a tidal wave to a trickle. B2B stock prices are gutted and the IPO market, which was expected to fund many of these marketplaces, is shut tight. Meanwhile, hardly anyone—certainly not suppliers or buyers—is convinced that Net markets are better business enablers than the phone, fax or a bottle of Jim Beam over dinner. "E-marketplaces are rapidly sliding to the trough of disillusionment," argues Whit Andrews, research director at the Gartner Group.
What happened? In a nutshell, too much talk and too little action. First, there were the promises that the first wave of e-marketplaces would fit any type of B2B commerce when, in fact, the "fat butterfly" model is well-suited only for a handful of businesses, mainly spot markets for commodities. Marketplaces got built, but suppliers saw little benefit in competing solely on price, and stayed away in droves. As a result, most Net markets lack "liquidity" (transaction volume), the factor that creates marketplace efficiency.
So now the rush is on to go after the trading of indirect materials and goods, a much bigger piece of the B2B pie. To do that, these Net markets not only have to move beyond procurement into product design, financial settlement, fulfillment, logistics and other trading functions that add more value, but they also must integrate all of that functionality into a corporation's back-end systems, which could add the most value of all.
Still, that is a very difficult assignment, and three- to six-month deployment schedules have become a thing of the past. Two-, three- and even five-year projects will be more typical. As for the ultimate goal of e-marketplaces—a global trading Web that vendors and pundits say will transform business—think not in terms of years, but decades.
"We believe this is a huge shift in business on the order of magnitude of the industrial revolution," says Matt Porta, head of e-market strategy for PricewaterhouseCoopers in San Francisco. "A massive technology infrastructure needs to be built, but a massive change in every other aspect of business also [needs to occur]."
Where do e-marketplaces go from here? "We're essentially at the phase where both the suppliers and the customers or prospects are trying to figure out their next step," says William Brandel, research director for e-business at the Aberdeen Group.Surprisingly, many agree on the broad outline of the future, if not the specifics. Everyone seems to be in accord that the next wave of Net markets will be private, although some observers, like Gartner Group's Andrews, say public vs. private is not a useful distinction.
A private marketplace is a single enterprise's trading partner network. AMR Research in Boston calls this the "private trading exchange" (PTX) and projects that application license fees and services for such marketplaces will grow 68 percent annually into a $35 billion business by 2005. About 70 percent of that will be fees for services. AMR says a PTX will cost from $50 million to $100 million to build, and the company recommends that any enterprise with revenue exceeding $1 billion start building one now.
Collaboration is the second thing everyone agrees on. The next generation of Net markets is about collaborative commerce, say the freshly printed marketing materials of major platform vendors such as Ariba Inc. and Commerce One Inc. There are plenty of areas ripe for automation, from new product introductions to supply-chain management.
"There are nearly an infinite number of uses," for collaboration between partners, insists David Kraemer, director of marketing at Extricity Inc., a maker of B2B relationship management software. "It never really ends."
The area generating the initial buzz is product design, which would include the work done jointly by partners to customize a seller's product, such as a circuit board, for a given buyer. That application encouraged Ariba last January to pony up more than $2.5 billion to acquire Agile Software Corp. The company's Agile Anywhere and Agile Buyer, which are being integrated into Ariba Buyer and Ariba Sourcing, respectively, are designed to let partners cooperate on a product's content, and then source and procure its components.
That process involves the management of unstructured data, such as three-dimensional CAD drawings or word-processing documents. While that is tougher than managing structured data, like purchase orders, it may prove more rewarding to corporations. "Trying to control unstructured data is really dodgy," says Narry Singh, VP of global trading and business development at Rapt Inc., a San Francisco-based developer of real-time analytic tools. "But unstructured content is really the intriguing part because it's usually in the first part of the product life cycle that the majority of costs are committed to."
Still, it will take time for companies to be convinced that collaborative product design is worth the massive effort. "It's not one of those things you can give ROI [return on investment] on beforehand," says Andrews. "The most you can say is, 'I think we can improve the process.' That's going to be a tough sell to the board."
That is why Framework Technologies Inc., a developer of software similar in function to Agile's, has surveyed its customers and developed an ROI calculator to measure reductions in product delays and engineering changes. "Everyone has a sense [that] collaboration has benefits," says Dave Halpert, VP of research and development for Framework. "But I think you can show [ROI] even in six months."
Proving ROI will be key for both public marketplaces trying to attract members, and for vendors trying to sell the private Net market concept to corporate customers. As a result, vendors and Net markets will focus on two things in the near term: analytics and inventory control."I'm very interested in trading partners and analytics," says Frank Campagnoni, CTO and VP at GE Global eXchange (GXS) in Gaithersburg, Md. "It turns out the interactions have huge value if you can map those and data-mine them." Campagnoni envisions analytics as a value-added service for users of GXS or other exchanges.
That may help Net markets prove their worth to participants and is certainly part of the reason Ariba hooked up with See Commerce, a maker of supply-chain performance management and improvement tools, for its value-chain initiative unveiled in February. "We see huge enthusiasm from systems integrators because this is the first software that they can embed to show a customer the impact of what they do," says Paul Albright, president and CEO at SeeCommerce. "We provide a similar type of value for the marketplaces."
Like the latest collaborative tools, these so-called e-analytic, or real-time analytic tools, are designed to work in an extended supply chain. The tools are aimed at culling information from multiple sources and partners, analyzing it in real time, and giving access to the results to users at disparate locations.
Datasweep Inc., for example, aims its Advantage software suite at industries that employ a lot of contract manufacturers; Flextronics Inc., an electronics manufacturing services giant, is a customer. Another vendor, Spotfire Inc., maker of DecisionSite, has gone after the process industry, signing on pharmaceutical supplier Eli Lilly, which has extensive extranets, and ProcessCity, a chemicals industry exchange.
The goal is a more efficient supply chain, which is what most private Net markets are looking for. "Once you move into the private arena, it's really about supply-chain demand reengineering," says Aber deen's Brandel. Corporations mulling over their next B2B move in a down economy, he adds, will focus on inventory control as a way to cut costs.
That has raised the profile of supply-chain management software makers such as i2 Technologies Inc., which was working with Ariba until last month when it announced plans to acquire RightWorks Corp. RightWorks software provides the procurement and sourcing functionality that i2, which focuses on demand planning and forecasting, needed to start competing head-to-head with Ariba and Commerce One.
The changes in direction—from public to private, direct to indirect goods, pure procurement to collaboration—have leveled the B2B software playing field. Ariba and Commerce One may have won the first battle, but there's no guarantee they'll win the war. Expect a lot of consolidation, especially in the coming year, as smaller companies run out of money and the bigger players continue to look for opportunities to round out their arsenals. "Agile is not our last acquisition," notes Jon Corshen, Ariba VP of corporate strategy."This game is far from over," seconds Aberdeen's Brandel. "There is enough time for other vendors to enter and have a lot of impact—IBM, Microsoft, the ERP vendors."
There also is room for lesser-known vendors to make their marks. Take Netrana in Houston, for instance. The company was founded by Rusty Braziel, who previously founded Altra Energy Technologies, a successful online energy trading exchange. Altra is what Braziel calls a classic center-based exchange that provides the technology and sets the rules for buyers and sellers. "A center-based model requires some sort of revenue model to pay for the infrastructure," says Braziel, Netrana's president and CEO. "With SpotDealmaker, there is no exchange, so there's no need for the revenue model."
SpotDealmaker is the trading platform Netrana expects to have ready this summer. It will enable buyers and sellers to transact business directly without going through an exchange, and it's based on peer-to-peer technology. "We don't want to get hung up with people thinking of Napster because underneath, it looks quite different," says Braziel. "SpotDealmaker has the ability to be machine-to-machine, a directory, store and forward service on an ASP basis."
FirstPeer is doing something similar. In January, the company unveiled its Personal Servant P2P ASP service, and in February it launched GnuMarkets, which it classifies as a peer-to-peer marketplace. "In the real world, many markets have tens of thousands of participants that are already interacting," says Brent Gutekunst, FirstPeer's president. "Instead of saying, 'Let's change the way you do business,' P2P is a technology that reflects how people do business already."
It remains to be seen whether P2P technology will banish the need for an underlying exchange. "In Ariba and other platforms, it is peer-to-network, and participants follow the rules of that community," says Extricity's Kraemer. "But you can use P2P after you agree to adopt the prevailing standard, whatever that is."
"P2P will not obviate the need for Ariba and Commerce One," says Val Sribar, senior VP at the Meta Group in Reston, Va. "They'll start building it in."
Another interesting company is Viacore Inc., started by the founder of RosettaNet and funded by Arrow Electronics, Avnet, FedEx, Ingram Micro, Softbank and Tech Data. The company has developed what it calls ProcessTone, a managed collaborative infrastructure for connecting hundreds of trading partners to one another. The hub in the middle does all translation between—and validation of—documents. The technology is currently being tested at a number of customers, including one that's processing a million documents in a three-hour daily period.
"A lot of our customers have [enterprise application-integration software maker] webMethods and a systems integration partner," says Fadi Chehadé, CEO and chairman. "WebMethods provides the middleware, the SI connects all the apps, but then how do you connect to all your partners? You need a network and infrastructure to do all the routing, translation and management."
Viacore's only real competitor right now is GXS, which has a similar model. The exchange is talking to "many, many players," says Campagnoni, to provide translation software and services. "We call it our liquidity play," he says, alluding to GXS's one billion transactions annually, worth $1 trillion. "We leverage that to help them provide liquidity."
"We think Viacore has the right model," says PricewaterhouseCoopers' Porta. "Integration is the complexity in all this."
Long, laborious integration is what it will take. "We understand the technology we provide is nothing more than an enabler," says Kevin Shick, VP of product marketing at Commerce One. "It's bringing together the technology and the professional services that will provide a much richer solution."
That's why systems integrators are counting on Net markets, whether public, private or something in between, to surpass the ERP boom. The Net market business, says Porta, "is the most strategic initiative at the firm."