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Commentary: An elusive business model

What's the problem with public business-to-business marketplaces? Most benefit buyers but not sellers. Meta Group says a focus on collaboration is key.

Although executives in struggling public business-to-business marketplaces on the Internet may blame the inertia of manufacturing executives for the failure of their businesses, the real reason for that failure is that few of those markets have a solid business plan or opportunity to make money.

Most Net markets were founded on the idea of saving purchasers money by enabling them to aggregate their purchasing and choose the least expensive suppliers at a given moment. Basic procurement, however, is not the "killer app" for Net markets--collaboration is--because the value proposition for procurement is all too often hammering suppliers on price. The value proposition for collaboration and improved planning, on the other hand, lies in efficiencies and improvements on both sides of the relationship. In procurement marketplaces, buyers speak softly and carry a big stick to beat suppliers down on price, while collaborative markets look to commerce chain partners to improve business processes that create value between business partners and, ultimately, for the customer.

With the exception of commodity items, businesses seldom buy components based solely or even primarily on price. They consider numerous factors, including availability and quality and whether the component fits the precise needs of the product. The trend in the last decade has been to reduce supplier complexity by sourcing key components with a small number of suppliers (two to five) and build close relationships with these key suppliers, rather than increase competition between multiple suppliers solely to drive down price.

Increasingly, in industries ranging from automobiles to electronics, manufacturers have created close relationships with a few suppliers--to the point of co-designing products so that the components fit the finished product precisely. Companies with that kind of relationship with their supply chain have less interest in alternative suppliers purely based on price. However, if those suppliers have processes (ranging from new product design to collaborative forecasting and replenishment) that integrate well with existing processes or even improve the way things are done, there is often intense interest.

Those complex relationships require a great deal of face-to-face discussion, and this, rather than the actual transaction, is the real expense in B2B trading. This is why technologies that enable collaboration and interaction are often more critical in commerce than simply technologies that enable basic transactions.

People who need people
Many Net market ventures are learning the lesson that electronic relationships are a poor substitute for human ones. Companies want to use the Net to increase the trading efficiencies in the relationships they have already established, not to replace the important human relationships behind those trading agreements.

See news story:
Leap of faith: Why B2B went bust
Our research indicates that more sophisticated companies are using new technologies to extend human relationships in a cost-effective way. For example, virtual communication consisting of many players "talking to" many players provides a facility not otherwise available.

Another major reason many Net markets have not achieved cost savings is the lack of supplier participation. Suppliers do not want to join a number of Net marketplaces unless that burden can be offset by some additional value. The price savings provide an obvious benefit for buyers, but without similar benefits for suppliers, the point is moot. Collaborative commerce capabilities, such as inventory control and product planning, go a long way toward providing a better model for enticing suppliers to take part.

Yet another problem with the typical cost-based Net market business model is that if the main attraction to potential subscribers is cost savings, the market itself must charge very little per transaction--possibly no more than a hundredth of 1 percent. However, to be successful as intermediaries, the markets must provide significant amounts of technical support. This is why many Net markets plan to provide collaborative services based on subscription fees or simply usage fees that drive increased margin and get them out of the commodity game.

The value-added networks (VANs) of old that supported EDI (electronic data interchange) discovered--and solved--the problem with the model of charging for additional services. Setting up the electronic relationships is often a technical challenge, but no one wants to pay for the technical support. The VAN solution was to hide that cost in their per-kilopacket charges for transmitting transactions. This, along with many true inefficiencies, made VANs look ridiculously expensive compared with Net markets. But the apparently low expense of Net markets--originally a selling point--is now undermining their cause.

This is also a major problem for companies creating private Net markets. Instead of being the technical-support source of last resort, the company creating the market becomes the sole source. Inevitably, some members of the supply chain will need technical support, and that increases the expense of creating and running those Net markets.

A few will survive
Despite these drawbacks, public and private Net markets will not disappear completely. The sales side of Net markets--which is the focus of Wal-Mart's latest investment (with Atlas Commerce) and of many companies in chemical/process manufacturing, consumer electronics, industrial equipment and so on--still offers a valid opportunity. Elemica, for example, is an early-stage consortium Net market in chemicals that will focus squarely on sales and channel management in the chemicals business.

Moreover, private Net markets are no more than "extranets on steroids"--integrated sets of functions, processes and applications designed to present a single face to buyers or sellers--and, as such, will continue to be in demand.

We believe that, eventually, only a few dozen--possibly as many as 100--Net markets will survive, and public or consortium Net markets will probably survive only in areas in which they can demonstrate added value to industry or streamline industrial processes, as in the case of Covisint, with its focus on collaboration, or e2open, with its focus on (ultimately) direct procurement and collaborative design.

Users must define the real value they need from a Net market before participating in a public Net market or creating a private one. At the most tactical level, these markets can provide some savings in prices by aggregating processes, but those benefits are minimal and often short-lived.

The next level in Net market use is to reduce time to market by finding available inventory of commodity components via spot markets. This, too, is only of limited value, but an interesting extension to traditional approaches.

The largest potential benefit from electronic markets comes only at the third level, where Net markets provide collaborative facilities to help suppliers and buyers work closely to improve key supply-chain processes (such as inventory management, manufacturing capacity planning and transportation planning) or aspects of a product's life cycle (such as design, creation and servicing). This approaches the goal of automatic replenishment based on collaborative forecasts of demand that manufacturers have pursued in different guises for decades, but this can only be based on close relationships along the supply chain, not solely on electronic connectivity.

The three faces of Net markets
We expect the convoluted Net market arena to settle into three forms. Private Net markets will optimize buying and selling (a major emphasis in 2001) activities among known groups of suppliers and customers. Consortium Net markets (such as Covisint and Pantellos), though challenged by collaboration (in governance and technology), will offer domain-specific, value-added services to industry. Some independent Net markets (such as PrimeContract, and will survive by owning and providing vertically specific content, applications and services.

Organizations will participate in several Net market types, increasingly driving more stable and strategic relationships to private Net market forms.

Meta Group analysts David Yockelson, Wilson Rothschild, Derek Keefer, Joanne Friedman, Val Sribar, Dale Kutnick, Jack Gold, David Cearley and William Zachmann contributed to this article.

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