There has been a lot of talk about B2B exchanges but at present there are few role models. So why have they been slow to take off and is there a compelling case for using them?
Despite predictions from analysts, Internet-based business-to-business trading exchanges have yet to win the widespread support of the online business community.
It also seems that venture capitalists are now wary of solely online exchanges. According to some experts, the reason for B2B exchanges' limited progress is that the necessary trust and security are not yet in place Ã, when collaborating with their competitors, businesses need to be sure that security is strong and transactions can be verified.
At its simplest, an online exchange is a tool to link buyers and sellers in a marketplace. But there can be more to exchanges than that. There are some maturing B2B e-commerce products, from companies including Ariba and CommerceOne, that offer more complex integration with enterprise applications. However the territory remains complicated and lacks standards. Chris Baker, managing director of e-business integrator SeraNova Europe, said the reason for this is partly because vendors also want to provide content and take a share of revenues flowing from transactions made through exchanges.
Competition for subscribers
Mike Quinn, head of online collaboration software firm Eqos, described the current situation as 'lots of small exchanges all fighting for critical mass in terms of getting subscribers on board'. He added, 'Most exchanges are focused on transactions, centred on e-procurement and auctions; there's little interactivity to either the back-office function or to other exchanges, and new technology such as XML is only being used in a limited way to develop these exchanges.'
Although the bigger exchanges promise deep back-end system integration to streamline corporate supply chains, for many this is just an aspiration, said Baker. 'Many of the transactions must still be consummated offline,' he observed. Currently most functionality is centred on auctioning capabilities and information sharing. However, Baker predicted, 'This will change as the exchanges roll out their B2B integration platforms and evolve into EDI [electronic data interchange]-like VANs [value-added networks] with a host of additional services such as collaborative planning and forecasting.'
Although many software vendors are repositioning their enterprise resource planning, supply chain management or customer relationship management software as B2B exchange platforms, this may not be the ideal strategy for an exchange that needs a variety of different components, including a robust commerce platform on which to base value-add applications, said Eqos's Quinn. 'If an exchange is made up of applications from say i2 or SAP, exchange members will not want to give up their own applications which they have developed for their own use and go for a generic platform. The challenge that B2Bs face is that if everyone is using the same core Web-enabled applications, where do they get the differentiation?' The solution, Quinn said, is to have a platform with tools onto which collaborative applications can be built to work with members' existing software.
Susan Jakobek, business development director at Net infrastructure firm AduroNet, said the fact that B2B exchanges do not have a long track record is a problem. 'B2B is at an early stage in its evolution. Lots of talk Ã, not too many role models. The players are new, and do not have the comfort afforded by old relationships and associations, and do not always have critical mass to succeed. They are constrained by their [lack of] ability to leverage existing contacts, and by their credibility in the eyes of customers.'
Web-based trading exchanges can be divided into vertical, industry-specific exchanges and horizontal hubs trading goods, such as stationery, between different industries. E-procurement implementations are currently focused on cutting costs Ã, both the operational costs of dealing with suppliers, and the costs of goods and services.
Inherent risks
Jennifer Major, data warehousing programme manager for enterprise software vendor SAS Institute, warned that there are risks for firms in moving to exchanges. 'Many organisations are being tempted to move their more strategic suppliers to e-procurement, because these are the ones that they understand the best,' said Major. 'These are also the suppliers that they have worked on building a relationship with over many years, and by dealing with them via a channel where the main emphasis is on cutting costs, they risk neglecting more important measures of those suppliers, such as reliability.'
Recently there has been a shift from independent startup exchanges towards industry-sponsored exchanges. Industry-sponsored exchanges have been criticised for promoting monopolist activities and doubts have been raised as to whether firms that were previously in competition can co-operate to make the new exchanges a success. A spokesperson for digital exchange solution vendor Atlas Commerce said, 'Many of the early exchanges were custom-developed, such as e-Steel. These days there are a growing number of organisations offering exchange solutions. Most of the players focus on the sourcing process, for example matching buyers and sellers using auction-style mechanisms.'
Most vendors agree that B2B requires a higher level of trust than business-to-consumer (B2C) e-commerce. In a B2B environment the value of transactions is normally considerably higher and so a higher level of security is needed. SeraNova's Baker said, 'These exchanges are struggling, because not everyone is convinced it's a great business idea to join, and the difficulty is in successfully integrating from the individual company systems into a wider trade exchange.'
AduroNet's Jakobek added that online intermediaries might provide the answer. 'These firms combine applications, content and network to deliver transaction-based services that facilitate business processes.'
If digital exchanges are to survive, they need both to consolidate and to differentiate themselves, said Eqos's Quinn. 'The focus will move away from just finding subscribers or buying products at the lowest price to integrating business processes between subscribers on the exchange and conducting business more efficiently. For example, reducing inventory and time to market and improving customer service. Exchanges will change the way business is conducted from one-to-a-few to many-to-many.'
So what is the first step for firms considering joining an exchange? SeraNova's Baker advised, 'Companies must focus on the basics when evaluating the marketplaces where they want to participate. They must ask: How well do they fit my needs today? What is their plan for integration? How well financed are they and who are the backers? What is the financial model for implementation and ongoing usage? Bottom line: what can they do to make me successful?'
