The new B2B: Collaboration is key

In the beginning, everyone seemed to believe that the way to flourish was to become an independent online market maker. Companies such as PaperExchange and e-Steel quickly set up shop using a readily understood business model: Capture a significant share of a particular business-to-business market, charge a small fee for matching up buyers and sellers, and watch the revenue pour in.

By some estimates, more than 1,000 such e-marketplaces--for products that ranged from commodities such as lumber to specialized components such as airplane parts--managed to receive funding. Unfortunately, most of these companies failed to realize that the lifeblood of a marketplace is liquidity, and that, in B2B, a few large enterprises can generate most of the transaction volume so critical for that purpose.

These behemoths typically don't need the help of an independent marketplace, however, and they can bargain fiercely with anyone who hopes to trade with them. Independent, fee-based marketplaces have therefore mostly languished in the absence of a business model that could vindicate their early optimism.

In the second wave of B2B, the large incumbents took matters into their own hands, banding together into consortia with their current trading partners and competitors.

Perhaps the most famous such entity is the GM-Ford-DaimlerChrysler joint venture now called Covisint. Since it was announced early last year, incumbents in various industries have launched more than 100 similar ventures, many with great fanfare. (Well-known examples include ForestExpress and Aero Exchange International, in the forest products and airline industries, respectively.)

For the most part, these marketplaces were initially designed to reduce bid-ask spreads and to bring down transaction costs by matching buyers with suppliers and enabling suppliers to trade with one another--the very kinds of procurement-based benefit that would be expected of an efficient marketplace. Unfortunately, the consortia, like the independent marketplaces, have generally failed to realize the hopes of their founders.

Two difficulties confront both first- and second-wave marketplaces. For starters, they have yet to focus on improving business processes to unlock additional value, since their founders typically focused on the "classical" benefits of an efficient marketplace: the ability to clear the market quickly and cheaply and to aggregate the orders of buyers and thus achieve lower prices.

Second, the early B2B models were typically intended to transform the procurement and sales practices of whole industries, but industries don't make most of the decisions in a modern economy--individual companies and purchasing managers do.

Marketplaces thus confront a massive "chicken and egg" problem. They must show that they can provide real economic value--something that will require them to achieve scale volumes. But those volumes can be achieved only if suppliers and buyers invest to integrate their systems and to manage the change process actively in their buying organizations, and they won't be willing to do so without proof that the effort will be worthwhile.

Most marketplaces have experienced their first transaction between a few buyers and suppliers, but with at best 1 percent or 2 percent of the buyers' expenditure, the value they have realized is hardly impressive.

Some of them are now beginning to experiment with a one-time "all-you-can-eat" subscription model, which encourages individual purchasing managers to use their facilities once the corporate center has paid for the hookup. But even if an industry could somehow be transformed en masse, gains solely from more efficient trading would never be substantial for most buyers and sellers.

Indeed, as many businesses now realize, the real gains from online B2B commerce will come not from trading but from better access to and the sharing of information. Consortia, standalone marketplaces, and perhaps other, as yet undeveloped online structures hold out the promise of facilitating every kind of collaboration between buyers and sellers. Such marketplaces might even help buyers and sellers partially integrate their operations, allowing them to improve their supply chains, to work jointly on product designs, and the like.

The unifying feature of collaboration on this model is the sharing of information over the Web--a development that arises naturally out of ordinary supply transactions. This information might include supply-and-demand forecasts, reports of inventory levels at points along the supply chain, and market-tested predictions of the effect that the price of futures and other options will have on the availability of particular supplies, such as electricity and paper. Both the leading consortia and the companies providing the technology that powers them are already modifying their add-on features to take better advantage of such benefits. The third wave of B2B is upon us, it seems, and the two articles that follow map out some of its structure.

In "B2B's market bubble bursts," McKinsey elaborates on this tailored-solutions approach, explaining, for instance, that each of the five basic categories of standalone B2B marketplace is suitable for a particular purpose. To know which category to choose, buyers must develop a deep and nuanced understanding of the cost structures of all their various purchases.

Of course, the sellers' reaction to B2B has ranged from skepticism to horror. After all, don't these hubs, spokes, networks and marketplaces serve a single overriding purpose--the promotion of price transparency--that entails a race to the profitless bottom? Yes and no, McKinsey says in "Sellers tackle B2B competition." Of course, the authors note, certain buyers are extremely price sensitive when they make certain purchases, which will naturally migrate to low-cost producers. But many other purchases will continue to involve information-rich, bilateral relationships.

A third model--that of the "e-distributor"--lies between the two extremes of the standalone marketplace and the consortium. Like distributors in the offline world, e-distributors take title to the goods they sell, aggregate those goods for the convenience of buyers, and (because they carry only certain products) in effect advise buyers which to choose. In addition, e-distributors perform a critical service for sellers by reaching hard-to-find buyers, such as small ones.

The result, in many cases, is significant extra value for buyers and decent profits for sellers. So cheer up, sellers: This third wave of B2B might turn out pretty well for you too.

For more insight, go to the McKinsey Quarterly.

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