U.S. B2B Growing Rapidly

Online ordering while price negotiations and online collaboration still to take off

SAN FRANCISCO and CHICAGO, Sept. 6 /PRNewswire/ -- According to a new study of the business-to-business e-commerce market by The Boston Consulting Group (BCG), buyers, suppliers and marketplaces are picking up on the idea of e-procurement. However, online price negotiations and collaboration continue to remain a part of the offline world. "B2B e-commerce is advancing quickly in terms of penetrating the total procurement market, but at the same time, remains fairly immature in its development," says Andy Blackburn, BCG Vice President.

Based on survey responses from more than 260 buyers, sellers and e-marketplaces as well as in-depth interviews these findings show that despite a high level of online penetration, the vast majority of transactions will be ordering and replenishment, and not price negotiations. The study suggests that B2B e-commerce may not wreak havoc on traditional relationships among buyers and suppliers as many originally thought, according to Jim Andrew, BCG Vice President. "Almost half of the companies surveyed find that offline communication is almost always needed to complete online transactions. Suppliers will continue to send sales staff to court buyers, and buyers will continue to demand personal commitments from their suppliers. One emerging message is -- don't sell your golf clubs."

As the market matures and price comparisons become easier, sellers do expect price pressures to increase. While only 25 percent of sellers have experienced incremental price pressure, an additional 50 percent expect to experience it in the near future. Almost two-thirds of sellers are taking steps to differentiate their offerings and fight commoditization.

"The lag in the migration of price negotiations online gives some sellers a window of opportunity to beat the price squeeze," says BCG Senior Vice President Hal Sirkin, leader of BCG's e-commerce business area. "Sellers can use technology to offer more sophisticated forms of online collaboration such as online product design, project management, supply-schedule coordination and build-to-order capabilities. In this way, sellers can differentiate their offering, create stronger client relationships and resist pressures on price."

BCG's research also looked at the evolution of marketplaces. Given the complexities of online procurement, more than half of buyers and sellers expect to work with only a few e-marketplaces per category. And many of the e-marketplaces themselves expect that eventually, they will face only a few major competitors.

BCG's research shows that the size of the B2B e-commerce market is far greater than is commonly reported, in part because it recognizes the established base of Electronic Data Interchange (EDI) over private networks and its extensions to the Internet. Complete findings from the research will be available in a report to be released in October.

In a separate study, Stamford, CT-based Gartner Group reported that the nascent North American B2B market grew 171 percent in 1999. Propelled by "brick-to-click" distributors and established dot-com marketplaces, e-market maker revenue reached nearly $500 million last year, an increase from 1998 revenue of $183 million.

"Online operations of brick-and-mortar intermediaries like Ingram Micro dominated the market in 1999," said Leah Knight, research director for Gartner's e-Business Services. This demonstrates, Knight added, "the relative ease of migrating an existing customer base to an online model over building a new customer base from scratch, which many of the dot-com marketplaces have been struggling to do."

However, Knight also noted that to her knowledge, none of the online operations had reached profitability, including those of the brick-and-mortar companies. "That's largely related to the substantial technological investments they needed to make to build their online operations," she explained.

To compile the revenue statistics, Gartner researched and surveyed some 300 brick-and-mortar companies and Internet pure plays in a variety of markets.