To B2 B Or Not To B2 B

Online exchanges for small businesses are hatching all over. But most of them aren't ready to spread their wings

Once workmen pour concrete for any building he has designed, architect Bob Wrublowsky is required by law to visit the site every two weeks to "kick the bricks." But until construction begins, Wrublowsky likes to keep things virtual. He goes online and clicks the bricks instead--or at least the plans for them.

Wrublowsky is one of thousands of entrepreneurs joining specialized business-to-business (B2B) Web exchanges that link buyers to sellers. Rather than hopping on a plane, he visits Inc., a San Francisco exchange for the construction industry. There, Wrublowsky, a partner at MMP Architects in Winnipeg, Man., collaborates with clients and contractors in reviewing the blueprints he has digitally stored on servers. He'll pay about $2,400 this year to use its site--far less than he would have to pay a programmer to build a comparable site from scratch, and without the administrative headaches. Besides, good sites pay for themselves. On one project alone, MMP will save $5,000 in travel costs. is typical of most small-business exchanges at this point: Electronic communication, not electronic commerce, is its chief benefit. On most of these sites, each keyed to a specific industry, "e-commerce" is limited to product listings or online auctions in which the transaction is completed offline. That is expected to change over the coming year, however., for instance, is testing out e-commerce. Contractors, suppliers, and professionals have started offering bids and making sales. For now, though, most small-business exchanges make their money in other ways.

If there's not an exchange yet in your business' niche, chances are there will be soon. Several efforts are under way to create markets in cookie-cutter fashion. CommerceOne Inc., whose technology links behemoths Lockheed Martin, Boeing, Raytheon, and BAE Systems with the companies' combined 37,000 suppliers, has a "syndication" plan to bring small-business exchanges to market. "We believe we'll have hundreds, if not thousands, of these customers," predicts Roy Satterthwaite, vice-president of CommerceOne's MarketSite Portal line. Software developers use MarketSite Portal to create business-to-business exchanges on the Web.

One CommerceOne customer, Inc., a startup in Irvine, Calif., is using MarketSite Portal to simplify the process further. It's creating templates for plug-and-play small business exchanges that it plans to sell to anyone who thinks they can serve a particular market niche. The cost: about $100,000 for a complete "franchise package" that would be part of the Biz2Biz site. President Jeffrey E. Richards says Biz2Biz will roll out the first dozen sites this summer, and he ultimately hopes to build as many as 175.

Boston's AMR Research Inc. predicts $5.7 trillion will move through all online exchanges by 2004. If small business enjoys only a fraction of that, it will change the way thousands of small companies buy, sell, and interact. Both buyers and sellers stand to gain by joining an exchange. Buyers, for instance, can save 10% or more on the cost of back-office procurement procedures, say advocates. Instead of faxing and phoning, they can go online and place orders. They also can get better deals by quickly soliciting multiple bids from numerous prospective sellers. Sellers, too, might save 10% on their cost of doing business by tracking orders online and automating accounts receivable. Sellers can also reach new markets. Now, MMP's 12-person team can afford to take on clients whose projects are in remote locations. Wrublowsky estimates his sales have jumped 25% since joining six months ago, in part as a result of this flexibility. "We're really reducing the geographic limitations of working in Canada," he says.


Small-business exchanges face three considerable challenges, however. First, most are less than a year old and are still gathering support; too few buyers or sellers will cause them to collapse. (The only risk to users is how dependent they become--the exchanges typically require little or no financial investment.) Second, many small businesses are still not automated and can't take full advantage of exchanges. While they might keep a PC in the back room to keep track of bills, many still track inventory with pen and paper. And third, small businesses jealously guard their existing relationships with distributors; they look warily on anything that might jeopardize them.

To date, suppliers are in oversupply. It's not hard to see why. A site might draw tens of thousands of names from existing print directories, usually without the suppliers' knowledge, even if the site has no more than a few hundred registered buyers. The result: too much competition for the same accounts. "I don't think we've gotten one lead from Bakery Online," grumbles Roy Scott, a sales engineering manager whose Arde Barinco Inc. in Norwood, N.J., is listed on the site. Arde Barinco, a $4 million-a-year supplier of industrial mixers, is listed on Chemical Online as well, because chemical processors also buy his machines. "We've gotten six or seven leads there in the past year," Scott says. "Have we sold anything? No."

Bakery Online and Chemical Online are just two of 57 sites operated by VerticalNet Inc. of Horsham, Pa., one of the hottest names in the field. (Indeed, the company lured Joseph Galli away from the No. 2 spot at on July 25 to be its new CEO.) Unlike many Web sites, VerticalNet and other B2B market makers are generating real revenue. But most of that revenue, so far, has come from advertising and technology licenses, or usage charges, rather than from e-commerce transaction fees. That's a chief difference between small-business and big-business exchanges. Also, the main goal of big-business sites is to automate the supply chain for all involved. That means that the prices, parts--and payments--are all handled electronically. Not so with smaller exchanges, where the infrastructure is less developed.

There are some exceptions. Inc., a printing-industry exchange in Irvine, Calif., is one of the few small-business sites that allow participants to pay online (page F40). Some suppliers listed on Bakery Online and other VerticalNet sites accept electronic payments, but the exchanges themselves offer no centralized method for making them. If the exchanges do start some e-commerce, don't expect many bargains. Most products sold through B2B exchanges are commodities. By definition, they carry thin margins that cannot easily be reduced.

Despite the obstacles, a growing number of small companies are intrigued by the concept of the exchanges. "It has potential," says Dan Powell, vice-president of Matheus Lumber Co., a $54 million lumberyard in Woodinville, Wash., that buys wood from 150 sawmills. "Eighty percent of lumber orders are awarded through bidding. He faxes you a bid, you fax it back to him, and so on." Powell hopes competitor will make that communication more reliable. The Kirkland (Wash.) company provides online bidding, charging suppliers a transaction fee of 0.25% to 2% of each contract they close. Dave Missen, owner of $4 million Dependable Construction Supply, hopes will help his Seattle business close more deals. "It should cut my overhead because I won't need outside salespeople," says Missen.

Before Missen steps from beneath his overhead, though, he might do well to consider how hard it is to build business on the Web. So far, Dependable Construction Supply has received 40 requests for quotes from contractors. Missen bid on four and won one--for $200 worth of nails. Then again, competition is stiff. Since opened for business on Apr. 3, the names of 90,000 suppliers have been listed. All are vying for the business of 600 businesses that have registered. And earned less than $14,000 from transaction fees in its first five weeks.

Clearly, small-business exchanges are not easy to build--even those serving the construction industry.

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