|
B2B Shakeout
Few players but real results with e-marketplaces
By Lisa Wichmann
The e-marketplace craze was a swinging party. Caught up in the excitement, many of us over-indulged in utopian Internet fantasies. Money would be saved, new markets plundered, all at the speed of a mouse. Well, the party’s over, and the hangover isn’t pretty.
“People talk about how the dust settled. What happened is (e-marketplaces) just turned into dust—period. A lot of them just evaporated,” says Garrett Wasny, a Vancouver-based management consultant who followed the rise and demise of B2B exchanges.
The bottom line is suppliers shied away from e-marketplaces, fearing buyers would use the portals to beat down prices. For their part, purchasers were nervous about sharing their supplier base with competitors. So essentially, e-marketplaces flopped.
The exceptions are large exchanges such as the automotive industry’s Covisint, where the buyer—because of the massive volume it purchases—can order suppliers to take part, or else. But most of the smaller exchanges that cropped up in the early 2000s have disappeared.
Even so, there are some tenacious purchasers who are optimistic about B2B exchanges. Nestle, for example, just signed on with an e-marketplace called Quadrem International Ltd.—one of the few remaining survivors. Quadrem was set up a few years back by metals and mining companies.
“The initial group represented the largest metal and mining companies in the world,” says Ray Castelli, senior vice-president of global solutions with Quadrem. “In Canada it was companies such as Noranda, Alcan and Inco.”
In a nutshell, these companies realized they had to move toward e-commerce. “They all compared notes and benchmarked against each other and came to the conclusion that ‘this is going to be a pain for suppliers and each one of us will have to make a multi-million dollar investment in building our infrastructure and connecting our suppliers to it’,” says Castelli.
Instead, companies such as Inco Ltd. decided to cooperate and invest in just one solution. “We were using EDI (electronic data interchange), and had been since the 1980s,” recalls Wayne Smith, manager of global procurement and logistics with Inco’s Sudbury, Ont.-based operations.
“But EDI had the restriction of essentially being hard-wired from supplier to buyer. We were looking for the flexibility the Internet would provide us, to use one hub for a lot of suppliers. So we saw the value that marketplaces could bring to the table.”
Electronic payment
At first, Inco considered setting up a smaller e-marketplace with another Sudbury-based company. But costs were an issue, and Inco didn’t have the “wherewithal” to bring it together, Smith says. “So when mining companies around the world started thinking about the possibility of [Quadrem], we were certainly an interested participant.”
That was back in 2001, about the same time Inco started its e-procurement transformation program. The goals included migrating away from EDI, and making more processes electronic.
When asked about the benefits of using an e-marketplace, Smith points to supplier discovery. “We have been able to reach out to a lot of suppliers that we would not have had access to,” he says. Not that Inco has changed its supplier base dramatically because of the e-marketplace, but it has made contact with new suppliers who were previously off the radar.
Inco has also conducted reverse auctions, realizing “double-digit” savings in some strategic commodities and equipment. It’s now working on a pilot project involving another Quadrem e-procurement product to make payments electronically.
“We’re not electronic from ‘req to cheque’,” Smith says. “So we’re looking at taking ourselves further down that road and really, the last piece is paying electronically versus writing cheques.”
For purchasers, the benefits are clear. And even though vendors were vehemently opposed to e-marketplaces a few years ago, many are starting to come around.
After all, they can access most of their customers through one single portal. “If a supplier had to provide us with some catalogue information, they wouldn’t have to copy it 20 times and put it in 20 different places. They’d only have to post it once,” Castelli says.
“And that’s part of the community benefit of a marketplace…It really enables you to streamline the number of connection points you need to do e-commerce.”
Vendors’ marketing and operating costs are slashed, since there’s no longer need to mail catalogues out to customers. Purchasers benefit by having one-stop-shopping. Occasionally, certain products are arranged as a reverse auction on Quadrem, allowing buyers to drive prices down. But reverse auctions represent only five per cent of all Quadrem’s transactions.
“We took a decision right from day one that we wouldn’t do that,” Castelli says. “We didn’t want to get into issues where we were ganging up on suppliers.”
The formula seems to be working. Quadrem is now a “cash-flow positive” company. Its revenues grew 70 per cent between 2003 and 2004, and it tripled its customer base to more than 13,000 companies.
Signing Nestle put the company in the news again, mainly because it’s Quadrem’s first foray into the consumer packaged goods industry. But according to Castelli, expanding into consumer goods is a natural step. After all, the suppliers on Quadrem’s marketplace, such as 3M and Shell, can sell to just about any production company.
“So we got a call from Nestle. They came over and kicked the tires and saw the suppliers we had and said, ‘you know, this is exactly what we’re looking for. You’ve got a lot of our suppliers—not all of them, but a good start, and you’ve got the technology we’re looking for’.”
Long-term survival
Though that’s cause for celebration at Quadrem’s headquarters, some analysts say ‘not so fast’. They question whether it’s wise for e-marketplaces such as Quadrem to chase more volume.
“What they’re saying, is ‘we want to grow by magnitude, be four or five times larger than we are today, because that will allow us to do an IPO (initial public offering),” says Dan Miklovic, a vice-president and research director with consulting firm Gartner G2 in Stamford, Conn. “But if they go with this broad, horizontal strategy, I question whether that will be enough for long-term survivability.”
Miklovic would like to see e-marketplaces focus on value-added services, such as logistics, and other business process outsourcing. “Not just being a clearing house for electronic transactions, but potentially becoming the purchasing departments for these companies. That would be a way for [e-marketplaces] to take real value to their equity partners.”
Purchasers choosing a B2B exchange would be wise to select one that focuses on their industry, and goes beyond the sale transaction. In fact, these extra services, such as purchase order generation and supplier discovery, will be the main draw for purchasers in the years ahead. That’s in contrast to a few years ago, when e-marketplaces were all about getting the best price.
“Companies have used reverse auctions, independent of e-marketplaces, to push a lot of their suppliers down to thin margins already,” Miklovic says. “So the continued aggregation of volumes via the e-marketplace isn’t going to be where you get the price gains from.
“The price gains will be there mostly because if an e-marketplace can consolidate 10 orders, and process them as one, the supplier has a lower cost of handling those orders, and it will pass those savings along.”
In essence, the e-marketplace will become an extension of companies’ accounts payable departments. Electronic payments will be processed much faster than the traditional cheque-in-the-mail system, allowing buyers to take advantage of discounts. “That’s where the value will come in, not in volume aggregation but in improved cash flow and business process management,” says Miklovic.
The bottom line is many suppliers and purchasers just don’t have the resources or the money to take e-commerce to the next level. This is where an e-marketplace can step in.
“The real benefits have always been process driven, not price driven,” says David Crouch, president of consulting firm Grey Matter Solutions Inc., in Markham, Ont. “The opportunity is to reduce the number of steps, the amount of paperwork, and the inefficiency in the purchasing process and that could go into the tens of billions in savings, just in the North American market.”
With this as a main marketing thrust, they may just succeed. The key factor is not repeating the mistakes of the past, Crouch adds. “We were involved in some of the early e-marketplaces and we found suppliers were very leery of exposing their customers to an e-marketplace, because (they) would give up control of their customers. The whole concept failed miserably.”
These exchanges also focused too heavily on communication between the buyer and seller—an effort that was totally unnecessary. “Let’s face it, that’s never been a big part of it,” Crouch says. “Most of the cost in the buying organization is approving purchase orders and requisitions, not articulating to the vendor.”
Explore the options
Clearly, the kinder, gentler breed of e-marketplace sounds alluring. But will purchasers and suppliers be tempted to get on board? After all, there are many technologies competing for purchasers’ attention, including e-procurement systems and reverse auctions.
A recent study by Visa Canada indicates corporate Canada is serious about moving to e-business, but companies want to do more homework before taking the plunge. Titled How Business Buys, the study polled 635 purchasing professionals.
The report reveals companies plan to increase their use of electronic ordering methods such as e-mail, e-procurement and e-marketplaces over the next few years.
Today, most ordering is done by phone, fax or in-person. The percentage of orders placed electronically will grow from 15 per cent of total orders in 2003, to 40 per cent by 2008. At the same time, delivery of e-invoices via the Internet will rise from two per cent to 14 per cent, according to Visa Canada.
Though consultants would emphasis a move away from reverse auctions, there’s no denying they still hold sway in Canada. Companies such Creo Inc., a global company based in Vancouver, supplying equipment and software to the graphic arts industry, are using reverse auctions to get better pricing.
“We’ve been using it since September,” says Richard Luther, e-sourcing manager with Creo. “So far, we’ve run about four events…about $4.5 million worth of purchasing through this tool and we’ve achieved about 40 per cent in savings.”
Creo opted for a reverse auction tool from HedgeHog Inc. (Indianapolis), to buy custom-designed Creo parts. Why did the company decided to try it?
“The best thing I can say about it right now is it’s really helped us improve the efficiency of our sourcing process,” says Luther. The company also realized the usual benefits of cost savings on purchases.
Aside from the auction, Creo is working on boosting its e-procurement capabilities, starting with automatic generation of purchase orders. Also under way is a supplier discovery project, using a database provided by an e-commerce consultant. That project will see Creo locate new suppliers in both local regions and in low-cost areas around the world.
According to HedgeHog, finding new suppliers is one of the main reasons for using an e-business solution. “Most companies tend to stick with the same supplier and try to negotiate the best price,” says Jemin Patel, president of HedgeHog. “We’re trying to help them with qualifying suppliers and shortening that cycle.”
Five years ago, purchasers were less willing to take a chance with an overseas supplier. That was one of the factors putting the brakes on e-marketplaces.
“But those barriers are going away,” Patel says. “The economics of the current marketplace is definitely forcing companies to look at cost and time savings.”
On that note, everyone agrees. But when it comes to the future of e-marketplaces, purchasers will have to decide what e-business projects best deserves the time and money.
|
