B2B Exchanges See Growth In Transactions And Revenue

During the Internet boom, B2B buying and selling was hyped as the next big Web thing. Online marketplaces popped up for every conceivable niche, from car parts to chemicals. The idea seemed simple enough. Use the Internet to connect corporate buyers and sellers located anywhere in the world. Save time and money with Web-based sourcing, negotiating and transacting. But just as a slew of dot-coms went bust in the disintegrating economy, so did some 45 percent of B2B marketplaces by the end of 2002. The other 55 percent, however, are still in business. Far from dead in the water, some exchanges are seeing increased revenue and transactions, says senior analyst Steve Butler of researcher eMarketer. By the end of 2003, B2B e-commerce revenue will surpass $1.4 trillion, he says. By 2004, that total will jump to a whopping $2.37 trillion.
What does it take for an online B2B marketplace to succeed, despite the slumping economy? According to Butler, at least five industries are doing it right. He lists Exostar, in defense and aerospace, Covisint for automakers, GlobalNetXchange (GNX) for retailers, Quadrem for metals and mining and E2Open for consumer electronics. Butler says these e-marketplace leaders share certain characteristics that keep them on track to survive and thrive.

Industry-backed exchanges survived the best

First and foremost, says Butler, many successful B2B e-marketplaces have backing from consortiums of companies within a specific industry. “Industry-backed exchanges are the ones that have survived the best,” he said. Exostar’s founding partners are BAE Systems, Boeing, Lockheed Martin, Raytheon and Rolls-Royce. Though at times rivals for the same contracts, each has a vested stake in growing the marketplace for their mutual benefit. In fact, just 21 percent of all consortia-backed exchanges have gone bust since 2001, says Butler. (He credits consulting firm Booz Allen Hamilton with that figure.) That’s a much better batting average than the overall exchange success rate.
The ability to last is driven by a commitment to high-quality technology, says Butler. Exostar and the others engage in ongoing improvement of applications that handle procurement, supply chain management and other tasks. Exostar delayed by several months the release of the fifth version of its procurement solution rather than release it before it was ready. It came out in February. Exostar and other industry-backed marketplaces “pursue quality rather than a rush to market,” said Butler. Contrast that with what some other exchanges are doing. “Many marketplaces are still rip-and-read. You can access the exchange via a Web site, but there’s less integration,” said Butler. Some industry backed B2B sites are beginning to forge server-to-server connections between themselves and their trading partners. “They have more advanced solutions,” he said.

Key functionality is essential

For example, some exchanges have technology in place to let trading and supply partners perform collaborative product design. “Rather than having folks fly all over the world to meet engineers and product designers, marketplace users can meet and exchange and update the project online, on a central network,” said Butler. Some, such as GNX for retailers, offer collaborative planning, forecasting and replenishment (CPFR), he says. That’s another example of the type of cutting edge technology systems used by the exchange leaders.
Auction functionality is another key component for successful B2B marketplaces, says Butler. Early on, naysayers knocked big consortia exchanges for being “just” online auction sites. Now, analysts recognize that auctions helped early investors get a quick return on their investments by bringing buyers into the fold. Exostar, for instance, counts 13,000 or so trading partners that have generated $2.2 billion in revenue in 1,450 online auctions since its inception.

The next round: Web-based EDI

Those buyers are likely going to stick around for the long haul, says Butler. Many will be incorporated into the next round of e-marketplace technology upgrades, to Web-based EDI. “Some of the industry-backed exchanges are basically offering an alternative to traditional EDI,” said Butler. “Web-based EDI lets auction-based transactions be executed piecemeal, over six months or a year, or longer. All the associated documentation can be transacted online,” he said. That promises to be a huge time and money saver for buyers and sellers, creating a winning situation for all marketplace members.
Most exchanges already offer e-procurement solutions, says Butler. Those systems are Internet-based, but separate from EDI. Auction solutions are used to make single, large-contract purchases. The resulting contract can be executed via paperwork handled electronically, via a legacy EDI system, via Web-based EDI or via a custom e-procurement solution.

The changeover, from traditional EDI to Web-based EDI, is inspired in part from the highly touted systems used by global e-purchasing powerhouse Wal-Mart, which buys some $180 billion in goods. Last September Wal-Mart announced a commitment to move all suppliers to Web-based EDI within one year. E-marketplace leaders are following the retail leader and pushing toward that goal too, says Butler. While 2002 was a year in which exchanges tested Internet-based platforms, 2003 and 2004 will be years they put the Web into play on a broader basis, says Butler. “The biggest growth is going to be a switch from EDI to Internet-based EDI,” he said.

Integration Layers like SAP NetWeaver are key parts of Web-based EDI

Butler’s Highlights
Butler’s Highlights

Quadrem, the metals and mining marketplace, is a leading exchange that has worked to develop a sophisticated e-procurement platform. Backed by 14 of the world’s largest metals and mining companies, it uses mySAP Marketplace and other solutions to enable 2,624 trading partners who buy and sell more than 2.1 million unique products online. Its system can accommodate partners that use Web-based EDI or legacy EDI.
In March, just as B2B exchanges began turning their focus to integrating legacy systems with the Web, SAP launched an enhanced version of mySAP Marketplace. SAP also debuted SAP NetWeaver, an integration layer for disparate enterprise systems, and xApps, pre-packaged, composite Web applications. Both products adhere to Internet standards such as HTTP and XML. That means they can be a key part of Web-based EDI. SAP also offers Exchange Infrastructure and SAP Enterprise Portal applications for a complete marketplace package.
“A lot of companies are looking to integrate their external connections to SAP,” said Butler. As marketplace members try to bolster their internal ERP systems and other enterprise systems as part of their move to Web-based EDI, SAP users will seek such new tools for that metamorphosis, he says. Still, Butler admits that even though electronic B2B has a bright future, some industries are hesitant to embrace it. The consumer packaged goods and agriculture industries are laggards, he says. Unlike aerospace or metals and mining companies, consumer packaged goods and agriculture companies have narrow profit margins. To them, online B2B marketplaces seem more like unnecessary expenses than bottom-line benefits, he says.
That’s a stark difference from the B2B marketplace leaders, says Butler. They see technology in general and B2B e-marketplaces in particular as a competitive advantage to help grow sales and spur the growth of their industries.

Sarah Z. Sleeper
Sarah Z. Sleeper