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Investing while you wait for B2B utopia

Despite blistering rates of growth and adoption of B2B e-commerce, utopia is still years away. In fact, as industry participants are discovering, the B2B "revolution" is turning out to be more of an "evolution," with progress happening in fits and starts and incremental change occurring in a two-steps-forward, one-step-back kind of way.

When talk of the business-to-business (B2B) "revolution" began 12 to 18 months ago, entrepreneurs' and investors' heads were filled with visions of a frictionless, paperless digital economy.

In this "utopia," products, services and money would flow seamlessly between buyers' and sellers' computers; email and instant messaging would replace phones and fax machines as the communication systems of choice; dynamic pricing and global sourcing would coldly displace time-tested relationships in the name of market efficiency; businesses would collaborate effortlessly through Internet-based solutions; enhanced supply chain visibility would minimize inventory inefficiencies; and salespeople and distributors would become, in a word, irrelevant.

Despite blistering rates of growth and adoption of B2B e-commerce (B2BEC), however, utopia is still years away. In fact, as industry participants are quickly discovering, the aforementioned "revolution" is turning out to be more of an "evolution," with progress happening in fits and starts and incremental change occurring in a two-steps-forward, one-step-back kind of way.

Why the delay? Put simply, the re-engineering of whole industries doesn't happen overnight.

B2BEC, for instance, requires heavy doses of structural, behavioral, cultural and psychological change throughout entire enterprises. Marketing approaches may need to be re-evaluated; purchasing managers may need to adopt new buying practices; salespeople's roles within organizations may need to be modified; co-opetition may need to be reconsidered; inventory management practices may need to be re-engineered; pricing strategies may need to be rethought; and work flow management processes may need to be overhauled.

Assuming these issues get resolved, senior management still needs to develop trust in the new systems or processes before shifting mission-critical corporate purchases and sales online. After all, losing $16 on a CD purchase gone awry is a bit more palatable than a glitch in a $250,000 transaction that results in manufacturing delays, lost revenues and profits, strained customer relations, or angry shareholders.

More important than the aforementioned factors, however, is that technology itself (or lack thereof) may hold B2B utopia at bay for some time to come. Although countless hours and billions of dollars have been devoted to corporate IT systems during the past 20 or so years, precious few resources have been allocated to enabling and facilitating external transaction and communications functionality between businesses. Rather, most have been focused on automating and streamlining corporations' internal processes--financial accounting, for example.

As a result, few companies have the underlying infrastructure, software or applications in place necessary for seamless B2BEC. Even if they did, we think it highly unlikely that their business partners do. Said differently, a completely new layer of technology--one that is more outward-facing and that helps businesses to communicate and collaborate with one another, sell more effectively, and purchase more intelligently--must be developed, launched and integrated among enterprises globally before a truly frictionless, paperless digital economy can become a reality.

While this notion of "evolution, not revolution" may frighten some investors eager to participate in the growth and development of the B2B market, we would encourage them to look a bit more closely. For within this framework may lay one of the most potent investment opportunities in the Internet economy over the next five to 10 years: e-commerce enablers.

As mentioned previously, true B2BEC requires the wide-scale adoption of next-generation commerce software, applications, tools and services. E-commerce enablers, or the developers of these advanced solutions, are therefore sitting at the very epicenter of what we anticipate will be a seismic shift in corporate behavior extending well into the 21st century. Demand for their products and services already appears to be ravenous, as company after company in country after country attempts to develop online buying and selling capabilities. As an indication, one need look no further than the truly awesome second-quarter financial results posted by Ariba on July 12. Equally important, the sheer magnitude of the anticipated B2B infrastructure build-out suggests that robust demand for next-generation commerce solutions may well continue unabated for years to come.

There are already several public e-commerce enablers, many of which have quickly become Wall Street favorites. Though we attempt to neatly classify a handful of them, by their product sets' primary functionality, recognize that each continues to evolve and expand its offering to provide a more comprehensive solution.

Art Technology Group and Epiphany, for example, are leading providers of personalization and customer relationship optimization solutions. Ariba and Commerce One, meanwhile, present advanced online procurement solutions and trading platform technologies. VerticalNet offers Internet-based marketing and procurement solutions, community and dynamic trading functionality, and catalog digitization capabilities. BEA Systems focuses on transaction processing and personalization. Interwoven and Vignette provide enterprise-class Web content management software. WebMethods is a leading provider of XML-based business integration software, and Agile Software provides collaborative manufacturing commerce solutions. There are also several other companies, including Oracle and i2, for which B2BEC appears to be a natural extension of their core businesses.

So, as you whittle away the time waiting for B2B utopia to emerge, consider, for a moment, the reasons for the delay...You might like what you discover.

WR Hambrecht+Co makes a market in the securities of VerticalNet (VERT).

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