Shoot Out at the B2B Corral: Value-Added Net Markets

[From iSource Business, December 2000] Out on the ranch a fancy dude is referred to as "all hat and no horse." Likewise, the Net is full of optimistic, would-be digital cowboys sporting ten-gallon e-marketplaces with little in the way of real horsepower to show for the effort. Complex proprietary e-markets can take up to a year to build, making much of the media hoohah a bit premature. If not lengthy ramp-ups, there's the issue of transaction volume as in the lack of any. And then there's the absence of services that would give B2B purchasers real bang for their buck. Call it all e- and no market. Some of these cowboys may be having a hard time getting their boots on, but to give them their due, it's one thing to get an e-market up and running and quite another to set up a one-stop shop that serves business customers end-to-end. Current technologies enable only so many business processes to be automated. Others have to be handled manually, at least for the time being. Mastering services such as fulfillment, returns and logistics requires enormous time and effort and is definitely not the fun part.

However, a few real cowboys, including three we talked to for this story, are out there building full-service shops that are already doing a good part of their customers' heavy lifting, and have concrete plans for introducing more features in the near future. This is Next Generation B2B, targeted downmarket at small- and mid-sized businesses versus the Global 2000, where B2B began, and befitting the less sophisticated reality of the typical company. This is a real turn of events. It might seem that if you're still doing the rip and read thing you're already so out of the loop you're doomed. But, according to Forrester Research, only 250 companies had e-procurement systems in place at the end of the first quarter of this year, not including online catalogs. If you're not working for one of these outfits your company is one of 85 percent of all businesses with paid employees that's more than four million that have yet to experience the benefits of e-procurement.

The problem up to now has been that the vast majority of companies don't have the computing power, automated systems, staff support, organizational structure and financial resources that necessitate e-procurement solutions provided by the likes of Ariba, Commerce One and i2.

However, it's only a matter of time, according to Dr. Ravi Kalakota, Chairman and CEO of hsupply.com. "We tend to be overly optimistic about how long it takes these things to happen, and overly pessimistic about their impact," he says. Next Generation e-markets, such as hsupply's, require nothing more than a PC, a browser and an Internet connection.

But the big news is the services these marketplaces are bundling together to create the equivalent of entire outsourced procurement functions. In addition to processing and tracking orders, these Next Generation Net markets manage fulfillment on the supplier's end, coordinate the buyer's logistics, generate detailed spend reports, check suppliers' credit history, manage returns and facilitate online billing and settlement. But what does it all cost? Next Generation B2B is also shedding its reliance on transaction fees as a primary source of revenue. This means your company logs on and buys free of charge. And if it's not completely free, then it's at such a reasonable cost you may find yourself contemplating your company's purchasing in a way that in the past might have been inconceivable for its size and industry sector.

Making Fragmented Markets Whole: hsupply.com

eMarkets tend to pop up in markets that are highly fragmented. Take the hospitality industry, which is dominated by franchises. The supply chain consists of the franchise, the supplier and the franchisee in an industry that's very "procurement-heavy," according to Kalakota. Hotel guests pay $15 to $20 per room for things such as soap and toiletries, in-room coffee service and the mints on their pillows. Multiplied by four million hotel/motel rooms nationwide, that's a lot of spend. Kalakota sees three flows that must be mastered before "e-service" is perfected: ordering, fulfillment and payment. "Net markets primarily stop at the first flow. Toss it over the wall and hope someone on the other side catches it," he says. "Our objective was, 'How do we manage the fulfillment process better than anybody else?' To do that we have to build the core technology that enables a lot of this stuff." The payment process is a tough nut to crack, and hsupply.com is still working on it. Very soon, the company hopes to take over the payment function from its customers. In the meantime, because it's targeting individual hotels/motels and small- to mid-size chains, it's looking at a lot of businesses that don't have the automated accounting systems needed to integrate online payment. Customers of hsupply.com aren't charged transaction, set-up or consulting fees. Basic services are covered in a standard contract that includes order processing, tracking, reports and credit and collections. According to Amy Schulz, director of corporate communications, "Should a company not want all of the services or if they should want additional consulting outside the basic package, then hsupply.com will negotiate on a one-to-one basis." Buyers benefit from aggregate purchasing and the savings suppliers realize on the costs of selling, customer care and credit and collections. "hsupply customers pay the same or less than they would normally pay for the goods they buy," Schulz says. The company follows a basic reseller model by earning its money on the sale of products. Kalakota's thinking is that the typical business operates on a 20 percent gross profit margin, or as little as five percent net after expenses. As a result, businesses "have to do tremendous volumes to justify paying fees," Kalakota says. Although not a service, hsupply's treatment of the buyer/supplier relationship is definitely a value-add for both parties.

Change can be wrenching, and the Internet poses titanic changes within organizations, as well as personally among employees. There are new tools to grapple with, new ways of doing things and new relationships to foster. "We find it valuable to maintain these existing relationships, to keep them intact as much as possible, from a change management perspective," Kalakota says. "As time goes by and we build relationships [with customers], we'll revisit them and introduce them to new suppliers." In the meantime, buyers are assured of taking their suppliers along and delivering them into the hands of hsupply.com suppliers' relation team, which, among other things, helps them manage fulfillment.

Customer Care Goes Online: Works.com

Customers who order their brooms online through Austin-based Works.com may not know it, but a bunch of folks spent a lot of time figuring out how to get those brooms from Point A to Point B in one piece. As important as a specific e-procurement service is, an e-market's overall attitude toward the care and feeding of its customers is critical. Works, supplier of MRO goods, was one of the seven revolutionary B2B Internet companies we profiled in our inaugural issue in September. We selected it specifically because of its customer care approach, but we're revisiting it for a more in-depth look at how the company manages to deliver the perfect broom. The broom story, as told by CEO Bo Holland, began when brooms from a certain supplier arrived damaged during shipment. Neither the supplier nor Federal Express had ever shipped brooms before. The Works.com staff met with the supplier and quickly discovered that the packaging wasn't working. The supplier redesigned the packaging. No more broken brooms. But an issue like a broken broom is enough to set into motion precisely the kind of trouble-shooting for the company's customers they do for their own company. When Works.com develops a new service, buyers are brought in before it's launched to participate in first-hand testing in the company's usability lab. Problems encountered during testing are fixed on the spot. After the service is launched, the Works.com staff holds critical situation meetings at 8 a.m. each morning and sifts through phone calls and e-mails to catch problems that slipped through the cracks and fix them by the end of the week. Handling returns is a daily issue. "A huge issue," Holland emphasizes, "and a nightmare in the e-commerce space. We've spent the last six months on returns, a result of the daily situation meetings. We've moved the pain from our customers to us. We have to do it manually, but it's automated for our customers." Works charges $1.50 per transaction, or $50 a year for customers that allow it to manage 75 percent or more of their spend. According to Holland, customers are achieving up to 30 percent savings on the purchase of name-brand office supplies and equipment through wholesale pricing that Works negotiates with participating suppliers.

Holland believes B2B companies are just now beginning to understand the back-end challenges of running e-markets. "Technology is 30 percent of the solution. That's the easy part of the project. The much tougher part is managing your customers' buying processes. You're coupling it with your own processes, and coupling it again with the suppliers." Another relationship is the logistics provider. A combination of desires makes it a very logistics-heavy kind of business. Customers don't care all they're concerned about is getting what they need at the right time and at the right price."

The Next Frontier in eCommerce: OnExchange

OnExchange demonstrates the Net's ability to automate complex financial transactions. The "next frontier" of B2B is in commodities and raw materials, according to Peter Kollock, executive vice president of Research and Development at OnExchange, a company that's building an e-market for commodity derivatives. Derivatives are one way companies manage future contracts for everything from lumber and crops to energy and chemicals. The company is targeting

B2B market makers with strong price movement and liquidity, companies with high-volume commodity spend and financial institutions. Within individual companies Kollack sees an opportunity to help both the person who buys and "the one that hedges the treasury." Kollock identifies four key benefits to purchasers. "First, the buyer will be able to lock in a price going out into the future so they know what the price is going to be. Second, because of what we're able to do as a regulated entity, buyers and sellers can engage in offset, which means what I can buy from you I can sell to someone else. As a buyer of a good, I can move in and out of my business positions as my needs change and as markets change. Third, as a result of supporting and creating these transactions, whether forwards, swaps or futures, you create a forward price curve, which is a much better estimate than informal independent surveys or gut instinct. Fourth, by correctly using these tools a company can smooth out its revenues." OnExchange is currently selling its technology, digitalDerivatives, and plans to launch its own online board of trade by early 2001. The technology can be integrated with a customer's existing e-procurement system, whether it's a proprietary platform, a private exchange or any other e-market. DigitalDerivatives enables buyers to manage cash procurement and commodities side-by-side on the same screen without having to flip back and forth between sites. The cost of the service is based on the scope of the project, but the service can be launched in a matter of weeks or just a few months. The federal government is reviewing the exchange for approval as a fully regulated board of trade, with all the protections that implies. As a regulated marketplace OnExchange will have reciprocal trading rights in thirty international jurisdictions. According to Kollock, one of the greatest challenges for e-markets (and perhaps for companies the most important) is the issue of trust, particularly when it comes to any type of online financial transaction, and certainly when dealing with international trading partners. OnExchange "smoothes the waters," he says, and helps makes sure all parties satisfy their obligations by offering credit management and clearing services.

Evaluating eMarkets

The debate over how to evaluate Internet companies and new technologies will rage on for years as Old Economy standards and practices we take for granted are tested online. However, even though e-markets are new and relatively unproven, it's possible to exercise a fair amount of due diligence in judging their credibility. Start with an Internet company's prospects for a long and happy life. Will it be in business a year from now? This is the first question Alan Duckworth would ask. He's the director of product development for Dunn & Bradstreet's Supply Chain Solutions Group, and spends a lot of time talking to purchasers about the Internet. Quality partnerships provide one clue. Duckworth advises buyers to "look for co-branding relationships with partners that you know." Does the technology provider that powers the exchange have a track record? What do its current customers say about its reliability? Who is the e-market doing business with? For example, Works' e-procurement services are available to customers of Dell Computer, Inc. and Merrill Lynch. hsupply's.com partners include major hotel chains Theraldson and Buckhead.

The presence of respected companies indicates that, despite the risks, they've developed a certain level of trust in their e-market partners. Naturally, since D & B's business is information, Duckworth also recommends that buyers be certain of the integrity of the information e-markets are relying on. Lists of all kinds need to be fresh and relevant. Remember garbage-in, garbage-out? The old rule of database management still applies. "As a purchaser I need something more than a long list of 400 people I can buy widgets from. It's not hard to create that list. What buyers need is to have that list reduced to the most quality suppliers," he says. Next, domain expertise should be considered a value to the buyer, and it can be demonstrated any number of ways. Richard Jaycobs, OnExchange's CEO, ran a New York futures exchange, and a number of other key employees have backgrounds in financial services. Works.com was built from the ground up to target small- to mid-size businesses, and it focuses its services on their needs. hsupply.com operates a vertical marketplace that specializes in a single industry, and as a result is able to provide access to qualified suppliers. Finally, there's a glamour factor that causes normally rational people to throw their hands up in the face of technology and surrender. Value-added services are being developed at a fast clip, but your need to implement an e-procurement strategy may be moving along even faster. Beware the beguiling, duded-up e-market. Old Economy fundamentals are still important.

Instead of romantic ballads, you need to hear about a company's smooth-running operation, services delivered as advertised, quick problem-solving and attentive customer care. These are the digital marketplaces that are in the best position to develop reliable services, now and in the future.

Loading