PracticePeople In PracticeThe B2B super markets

The B2B super markets

Many B2B marketplaces have fallen by the wayside as the reverse auction principle has driven sellers away, leaving the shelves empty. Anthony Harrington examines the factors behind B2B exchange failure - and looks at what the survivors did right.

Once upon a time in dotcom land, a group of people stumbled onto a wonderful wheeze. “Let us create an e-space,” they said, “in which buyers can force dozens of sellers to compete against each other in fierce auctions.

We’ll save the buyers squillions of dollars. They’ll be so pleased they’ll pay us billions and the sun will never set on our kingdom.”

It even occurred to our happy dreamers that they could charge the sellers a fee for the privilege of hacking lumps off each other. And of course the sellers would want to come because every seller loves a market that has loads of buyers.

Then morning coffee was served, reality came flooding in through the curtains and e-marketplaces the length and breadth of dotcom land began to crash and burn.

Petra Gartzen, research director at Gartner, has been keeping count of the casualties. “We did the numbers on a worldwide basis. There was an explosion of B2B markets in the US in 1999, followed by equally frenetic activity in Europe last year,” she comments. Gartner tracked the formation of in excess of 1,600 B2B markets launched or announced. Over 400 of these have now failed and, as Gartzen notes with amusement, a number of the announcements never even made it to the launchpad before their sponsors pulled the plug.

The lessons to be learned
So what went wrong for some, and what did the survivors do right? One lesson is so blatantly obvious it remains something of a wonder that some members of a species that evolved by adaption didn’t spot it from the outset. If you design a system that kills sellers and favours buyers, the sellers soon learn, pack up their stalls and sidle off to look for better pastures. Buyers get bored talking to each other and log off to get on with business elsewhere. Voila! no more e-market.

As Jim McCallum, PricewaterhouseCoopers director, management consultancy services, observes, “Reverse auctions create a really brutal environment for sellers. In the old economy, a seller generally gets a couple of weeks to come up with a price. They can take time to understand all the cost factors that come into play. In a reverse auction, you can sit there at your screen and watch the price of the thing you are trying to sell dropping as you look at it. Sellers have to take very snap decisions on whether to stay in the bidding war or bail out, generally without having the infrastructure in place to know if they are going to make any profit at these declining levels.”

Ian Busby, B2B leader for Europe for Deloitte Consulting agrees. He points out, however, that the actual impact on the market of B2B exchanges is complex. “No-one can sustain zero margins for long, so though reverse auctions can be phenomenally successful at achieving very substantial reductions in the price of goods, eventually this forces a massive rationalisation to the supply base. This can ultimately reach the point where the supply base recovers its leverage against the buyer community,” he says.

Busby also argues that sellers can adapt to the price transparency that comes with open bidding arenas in B2B markets. Instead of spontaneously seeking to undercut each other, what sometimes happens is that sellers study the range of prices and move their own prices upwards towards the top end of the range. When sufficient numbers of sellers do this, a de facto cartel effect is created.

“One of the more interesting characteristics of exchanges is that they give suppliers a much clearer view of what the going rate is for any item.

You see this on stock exchanges anyway, where buyers and sellers understand a common rate. But many markets have very little price transparency until a B2B exchange starts up. We have worked with groups of suppliers whose view was that if only price transparency could be created, it would allow prices to move upward,” he says.

One example in the physical world is the way oil companies behave with their pricing at the pumps. Sometimes the price transparency at the pumps triggers a price war. But often what happens is that the suppliers choose to go the other way, and when one raises prices, the others follow suit, seizing the opportunity to increase margins, instead of looking to grow short term market share.

Generating supplier interest
PwC’s McCallum points out that another reason why so many B2B exchanges struggle to recruit sufficient numbers of suppliers to constitute a viable market, is the charging structure they adopt. “Many suppliers look at the opportunities offered by an exchange, and at the buyer community on offer, and it simply looks to them as if they are being asked to pay, in one way or another, for doing business with people that they do business with anyway,” he notes. On top of this they have to absorb the costs associated with electronic catalogues and so on, so they decline the opportunity.

As Busby notes, to be viable, an exchange has to offer a win-win situation for all parties. This situation is most easily achieved in closed communities, where the participants are part of a pre-existing supply chain anyway.

“Supply chain management is the key to success. If it is effective everyone is a winner. Many of the B2B exchanges that have failed, did so because they did not work through the ongoing macro economic impact of their intervention into the market,” he says.

Bob Wild, head of e-business consulting at Compass Management Consultants agrees with Busby that the notion of community is central to success here.

He puts the B2B exchange failures down to the old mistake of people being technology led. “To run a successful exchange, you have to be more than an intermediary, trying to take a slice out of everyone who participates in your exchange. You have to provide services inside the exchange that an individual company would find difficult to get on its own. In this way, it can really add value for its members,” he comments.

Buying on pure price is never going to be a way of developing a strategic relationship with a supplier. It works only where what is being bought is a commodity item, or where a very large buyer takes the view that the supply base is in need of some rationalisation. For more complex relationships there has to be a return to a notion of some added value which everyone gets from participating.

“As far as B2B exchanges are concerned, we have passed the “one-size-fits-all” model. What the more successful exchanges are about now is managing many different channels. We are seeing the dotcoms with plenty of innovative ideas but with underdeveloped business processes benefiting from collaborating with bricks and mortar players who have rock solid processes, but who are in need of some innovative thinking. The combination works well for both parties,” he says.

One issue that all B2B exchanges are going to have to get to grips with is compliance with US and European anti-trust legislation. B2B exchanges collate market sensitive information on both the buyer and the seller side. B2B exchange owners will need to take detailed legal advice to ensure that they will survive an anti-trust investigation.

Gartner research director Daren Siddall published a paper in March on reverse auctions and B2B exchanges. He argues that suppliers can benefit from reverse auctions if they treat them as analogous to car boot sales, and use them as a way of shifting excess inventory.

The downside
However, he too warns of their downside for suppliers. Big customers can use reverse auctions as a way of checking on market conditions and they can leverage the prices they find there in face to face negotiations with suppliers outside the B2B exchange. He is also concerned about the “make-it-up-as-you-go-along” ethos of reverse auction bidding, warning that there are, as yet, still no established rules of conduct for either buyers or sellers in such venues. His advice to suppliers is to limit the size of contract they are prepared to go into under these conditions, and to stick to selling low value products only through auctions. Suppliers will also need to set up guidelines and lines of responsibility as to which of their executives can participate in these intensive bidding sessions.

There is a particular difficulty for suppliers in the buyer anonymity that often goes along with B2B exchanges hosting reversed auctions, Siddell points out. Anonymity itself is not necessarily always a bad thing, but it does hold some elephant traps for suppliers. Sometimes buyers may need to trade anonymously for reasons that are entirely honourable. When a request for a quotation would immediately reveal a manufacturer’s plans for entry into a new market, this could alert competitors. It is also useful for buyers who want to check on pricing in markets where there is little price transparency. However, when suppliers deal with anonymous buyers, they can find themselves unwittingly dealing with one of their star customers, and undercutting their own contracts!

Gartner’s Petra Garzen argues that exchange owners who want to ensure the long term survival of their businesses should make a careful study of successful bricks and mortar intermediaries, such as the UK-based RS Components. “RS Components is one of the most successful implementers of B2B in the mechanical and electrical components space. It has sellers and buyers, but it is not called an exchange. It is very knowledgeable about trade and has relationships where it adds value for both its buyers and its sellers,” she says.

Garzen argues that there are a great many services that still need to be developed to make e-trading places viable for the longer term. The ability to provide the exchange environment as a hosted, ASP delivered application is a good start, since it gives participants a fast way into a multi-party, transaction and information enabled e-space. But there is a lot more that can be done.

“To be able to attract sufficient numbers of new suppliers, the B2B exchange needs to offer a huge range of services. Things they could look at include the whole credit rating issue on both buyers and sellers. Then there is credit insurance and the underwriting of trading risks. They need to look at foreign exchange services, money transfer and the whole logistics side of the operation. Now that a contract has been done, where are the goods, and how can they provide the buyer with a way of tracking the transfer of goods? There is still plenty of work to do here,” she suggests.

Deloitte’s Busby argues that the more successful large exchanges today have begun by doing some very simple things well, such as providing a common trading environment for all players, and facilitating access to the e-market. “The things they are currently doing are not necessarily going to get to the root of what needs to happen to transform their industry sectors, but you have to start somewhere. There is a lot of confidence building that will need to be done and a lot more relationship building, of the kind that we see in the bricks and mortar world, before everyone is going to be comfortable with the idea of collaborative competition that exchanges incarnate,” he says.

He points out that whenever Deloitte Consulting has been asked to analyse a B2B exchange’s working practices, it has found numerous areas where improvements can be made, but also areas where the exchange can improve the business processes of all participants. “The point is that the types of solutions involved in e-enterprise management involve fundamental changes to supply chain management as well. Often it can be hard to isolate the role played by the exchange, in transforming the industry, from the role played by other initiatives in the supply chain space.”

He believes that there is a role for several horizontal, sector specific B2B exchanges in every geographical area. However, there is not a role for hundreds and hundreds of them. PwC’s McCallum points out that even the bigger, more spectacularly successful B2B markets, such as Transora and Covisent have taken longer to develop and moved more slowly than the analysts anticipated. “You have to partner with software houses to make the whole thing work. The payment structure is a big area of weakness in some of these exchanges. However, the people running them are not stupid.

They know they need to offer FX services and the rest. But they have technology issues that they need to solve first,” he says. Often these exchanges start with a skeletal staff and they are compelled to work through the basic priorities before they add on additional layers of service.

In the end it will be the ones that have most to offer participants by way of value added services, that will win. The only trace of the rest in a few years will be a mark in the statistical records.

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