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B2B Isn't Dead. It's Learning

By Steve Hamm One of the platitudes of the technology industry is that people overestimate the speed of adoption of new technologies in the short term but underestimate their long-term impact. That old saw could well turn out to be true when it comes to business-to-business e-commerce.

In 1999 and 2000, the hype surrounding so-called B2B was deafening. Analysts and tech industry leaders claimed that software and services for handling transactions via the Web would transform the way companies do business practically overnight. Then came the crash. Hundreds of e-marketplaces that had been hastily formed went out of business -- in many cases before they had handled a single e-transaction.

"HIGHLY CONNECTED." But now, behind the scenes, the new technologies are quietly taking hold in Corporate America. Take Delphi Corp. (DPH), the $27 billion-a-year auto-parts manufacturer that was spun off by General Motors (GM) in 1999. It has signed up as a member of Covisint, the carmakers' e-marketplace and is running some software designed to improve collaboration with its suppliers. Little of Delphi's purchasing is done via the Web now, but David Nelson, vice-president for global purchasing and a procurement executive for the past 26 years, predicts that the majority will be online within half a decade.

"Over the next 5 to 10 years, American industry and industry all over the world will migrate and be highly connected all the way along the supply chain, from the customer back to mother earth. But it will be a slower process than people expected," Nelson predicts.

All the things that made B2B e-commerce so attractive in the go-go days still apply. By replacing phone calls, faxes, and FedExes with Web connections, companies can save time and money on administrative tasks, can drive down prices, and can coordinate their operations with those of their suppliers -- stripping out excess inventories all along the line.

GRADUAL IMPROVEMENT. However, many of the hurdles remain, too. Suppliers concerned about being squeezed by their customers have been reluctant to sign up for e-marketplaces controlled by industry consortiums. Corporations found it difficult to change the habits of their employees and get them to buy things online. And, for everybody involved, the costs of linking up technologies were sometimes prohibitive. It could take as long as four months and cost as much as $50,000 to get a supplier's electronic catalog plugged into a marketplace Web site.

A lot of that is changing now -- ever so gradually. In some cases, the operators of e-marketplaces or corporations running their own e-business Web sites pay part of the cost of suppliers getting online. In other cases, suppliers simply have to get involved or risk losing important customers.

Example: Wal-Mart (WMT). The retailing giant last April asked its 30,000 suppliers to start using Internet standards created for the retail industry to describe their products. That way, machines can match orders, inventories, and forecasts without human intervention. It's the first step to having the entire Wal-Mart ecosystem doing business online.

SIGNS OF LIFE. With B2B finally getting real traction, analysts are putting out bullish forecasts again. Tech market researcher IDC says the worldwide value of goods and services purchased by businesses through some sort of e-commerce will reach $5.8 trillion by 2006, up from $870 billion in this year. Analysts are even optimistic about the prospects for the narrower and much maligned e-marketplaces. IDC forecasts that their transactions will total $167 billion this year, up 245% from 2001.

Definite signs of life are evident at some of the e-marketplaces. It took Covisint months to find its first permanent CEO, and then months more to get operations going. But now the company has handled about $70 billion in reverse auctions. It had hoped to have $150 million in annual revenues by this year but will instead log about $70 million. Still, that's up 20% from last year.

And Covisint isn't the only e-marketplace that's beginning to click. A recent report from Open Network for Commerce Exchange, an industry association, showed that all 18 of its e-marketplace members are increasing transaction volumes -- with a weighted average of 75% for the first half of the year -- and most aim to break even next year.

"B2B isn't dead. Anybody who thinks there isn't a new business model is still in the cave -- sleeping," says Harold R. Kutner, CEO of Covisint and former head of worldwide purchasing for General Motors.

BOTTOMING OUT? Companies that sell B2B technology must be feeling like death warmed over, though. Ariba Technologies (ARBA) and Commerce One (CMRC), two early leaders in B2B software, have seen their fortunes slide sharply over the past two years. Commerce One's third-quarter revenues were just $26 million, compared to a peak of $191 million in 2000's fourth quarter.

Things are finally starting to look up for their industry. AMR Research expects the market for e-procurement and sourcing software to shrink 5% this year, to $1.66 billion, but then grow to $3.67 billion in 2006. E-marketplace software sales should expand 12% this year, to $946 million, and then grow to $2.5 billion in 2006. The much larger and more mature market for supply-chain-management software is expected to jump 18% this year, to $9 billion, and grow to $21.4 billion by 2006.

"There's high user interest still, but they're buying in bite-size chunks," says Pierre Mitchell, an analyst for AMR Research. "They're using what they already have, becoming more tactical and risk averse, and using proven technology and suppliers."

BIGGER RIVALS. That last point is crucial. The small fry who pioneered B2B e-commerce markets may not be the leaders -- or even players -- when the dust settles. Already, Commerce One is struggling badly, and Ariba's more deft moves may not be enough to keep it in the No. 1 position in the corporate e-procurement software market (see BW Online, 12/18/02, "Ariba: The Pain a B2B Pioneer"). Some of the larger, well-established software companies, such as Germany's SAP (SAP), are now coming on strong. They're considered more credible. And, bottom line, they won't be going out of business anytime soon.

For the upstarts, Darwinian adaptation is a practical necessity. Take ForestExpress, a company created by six forest product companies including Georgia Pacific (GP) and International Paper (IP). It was established as an e-marketplace and launched in the first quarter of 2001. But it found little demand for online auctions.

Over time it morphed into an order-processing middleman for its members and their suppliers. The actual transactions were handled at both ends, but all orders were routed through ForestExpress' systems so they could be translated into terms that could be understood and processed by very different computing systems. So far this year it has handled 40,000 transactions valued at $200 million. "The lesson learned is it's very important to know your markets, know what customers value, and know what they'll let you do for them," says ForestExpress CEO Robert Renner.

FINDING OPENINGS. For other upstarts, it's a matter gaining heft by branching out into new and lucrative businesses. FreeMarkets started off in 1999 as an electronic reverse-auction service for large industrial companies. That business is still around. In fact, FreeMarkets logged $6.2 billion in auction transactions in the second quarter. But it quickly saw a market for software that let their customers handle auctions themselves on their own computers, so it came out with such a product in 2001.

And since its customers didn't understand how to find suppliers and manage relationships with them online, FreeMarkets put together an elaborate college-level training program. This month it's coming out with a new package of software that helps corporations analyze and optimize their supplier relationships. "We listen to our customers. We heard loud and clear that they wanted to use us, but wanted to be able to do things on their own, too," says CEO Glen Meakem.

The newest technology wrinkle in the B2B world is Web services. That's using standard Web technologies to make it easier for companies to integrate their purchasing applications with their financials and inventory-planning systems on one hand and with the systems of partners on the other.

GIVE IT TIME. While many corporations see this technology as potentially extremely helpful, they're not going to rush into rapid adoption. Ray Castelli, senior vice-president for business development at Quadrem, the Dallas-based e-marketplace for the mining and metals industry, says he's skeptical. "We're focused on this quarter and next quarter, and reaching cash-flow positive in the next 12 to 18 months," he says. "We don't think Web services will be a factor in that time framework, but in 5 to 10 years."

Like the man said: It's happening. But slowly. Hamm covers software and other technologies for BusinessWeek in New York

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