Value-Chain Report -- Evaluating The Functionality Of B2B Marketplaces

B2B marketplaces have emerged at a rapid pace during the last few years. Some of the more notable exchanges include Covisint in automotive, eSteel in metals, Elemica in chemicals, and Exostar in aviation. These electronic marketplaces are predicted to continue growing because companies can see a measurable value in migrating their supply chains to an online environment, electronically conducting the business transactions that were formerly performed manually or semi-automated between trading partners. Companies are joining B2B marketplaces because there is the potential for significant cost savings due to faster and more efficient transaction processing. Companies also see the opportunity for competitive bidding, as well as the ability to attract new customers at an overall lower cost. Companies that host B2B exchanges also can generate incremental revenue through transaction-based fees, online advertising, and other value-added services. However, as a result of the significant benefit potential, the B2B exchange playing field has already become very crowded. Based on the number of existing and planned exchanges, B2B marketplaces are likely to experience significant consolidation. Forrester Research estimates that 800 to 1,500 B2B exchanges exist today. Forrester predicts that less than 200 B2B marketplaces across all industries will survive past 2004. Many experts believe that only two to three B2B exchanges will remain in each industry. Technology And Services Are The Differentiators. As consolidation continues, technology will become the differentiator that separates B2B marketplace winners from losers. Exchanges will need to evolve from simple transaction hubs to places where buyers and sellers can conduct all of their business. Currently, no single B2B marketplace has put together all of the pieces necessary to become a complete end-to-end provider for companies wishing to do business electronically. Several well-known applications providers, including Ariba, Commerce One, i2, and Oracle, are competing to become the dominant eCommerce solution for B2B exchanges. Because B2B participants are demanding greater functionality and a wider range of services from their exchanges, these applications vendors and other technology companies, including ERP and supply-chain-software vendors, are coming together (through acquisition or partnership) to provide more comprehensive solutions. These alliances will begin to compete directly, providing what the META Group calls a B2B exchange "operating system -- a comprehensive set of functions that includes supply-chain management and logistics, catalog and content management, RFP/RFQ management, dynamic pricing/auctioning, contract management, and financial services." Companies planning to participate in electronic marketplaces must be prepared to evaluate the full range of features and functionality that B2B exchanges offer. Prospective participants must educate themselves on the underlying technology of successful exchanges. There are a number of functional elements that are essential to ensuring the scalability, reliability and long-term survival of B2B exchanges, including:

• Content Management
• Transaction Capabilities
• Workflow
• Integration
• Value-Added Services

Content Management Robust content management is essential for B2B exchanges. Participants can tell a lot about an exchange simply by reviewing its available catalog content. Some key content-related questions include:

• Does the B2B exchange host its own content or is content hosted by suppliers? Can products be configured online?
• If the exchange hosts the content, does the exchange use the suppliers own product photographs and descriptions? How are changes, such as price updates, discontinued stock and the introduction of new products and services accomplished?
• Is content management outsourced? If so, to what provider?
• Does the exchange offer product branding and advertising features for suppliers?

Transaction Capabilities A robust B2B marketplace needs to be capable of handling large volumes of transactions. One of the evaluation criteria for a prospective exchange is whether the exchange conducts transactions itself or whether transactions are handled offline by the buyer and seller directly. An exchange in question with full transaction-related functionality will handle transaction processing within the exchange. More functionally advanced e-marketplaces offer a breadth of transaction capabilities, including forward auctions for sellers, reverse auctions for buyers, and complex bid/ask and negotiate transactions. Each is a mechanism for dynamically setting prices. Prospective participants must evaluate which transaction types are most suited to the kind of buying or selling in which the participant engages. Advanced B2B marketplaces have transaction platforms that support multiple buyers and sellers. They establish trading rules and historic pricing that facilitate quick trading by matching bid/ask offers and pricing in real-time. Workflow Participants must also assess how a B2B exchange handles workflow, particularly as it relates to contract negotiation. Because many exchanges focus on providing forward and reverse auctions for commodity items, they are not equipped to handle more complex contract-based negotiations. Some of the questions participants should ask B2B exchanges about workflow-related functionality include:

• Does the exchange facilitate online negotiation, including message documentation?
• After a contract is signed, can the exchange ensure that transactions comply with contractual terms (e.g., rebates, volume-pricing discounts)?
• Does the exchange host its own contract negotiation application or one that is hosted by a partner?
• Does workflow functionality include after-contract capabilities, such as routing approvals of purchase orders or return authorizations?

Integration Most B2B marketplaces fail to provide the kinds of sophisticated supply-chain capabilities, including collaborative planning and forecasting, that customers will ultimately require. In a recent study by AMR Research, only 100 of 600 exchanges provided any integration to connect disparate supply-chain partners to the exchange. For the remaining 500 exchanges, manual intervention is required at some point to transfer key data between buyers and sellers. Because this adds time and expense to the transaction, as well as increasing the potential for error, the odds of realizing the increased efficiency and lower transaction costs for online trading are significantly reduced. For online exchanges to be fully functional, buyers and sellers need to be able to share pricing, product, and supply-chain information in real-time. This requires robust integration -- the ability of the exchange to trade information directly with the back-end business applications/ERP systems used by buyers and sellers. For most companies assessing B2B exchanges, integration capabilities are becoming one of the most important evaluation criteria. For participants evaluating B2B exchanges, some of the questions to ask include:

• Can the B2B exchange interact directly with a suppliers order, inventor,y and catalog applications so that sales are handled automatically and data flows directly into inventory management and manufacturing systems?
• Can the exchange input data directly into its purchasing and accounting systems, thereby making the procurement process easier?
• Does the exchange employ an integration platform (e.g., Extricity, WebMethods or Vignette) that allows internal applications, such as ERP, to exchange data directly with the exchange systems?

Value-Added Services The long-term success of B2B marketplaces will not result from transaction fee revenues. Although initially relying on these fees, most analysts agree that this model is not sustaining in the long run. Exchanges can be expected to supplement transaction and subscription revenues by providing a full range of value-added services for participants. The kinds of value-added services that exchange participants might want to look for include:

• How does the exchange handle the financial transactions? Does it offer payment services and credit verification? Who guarantees payment?
• What are the exchanges logistics services? Does the exchange have viable logistics partners? Does the exchange handle returns?
• Can the B2B exchange support global operations? Does it offer multi-language and multi-currency functionality? Is it able to calculate duties, tariffs, taxes and other costs related to fulfilling international orders?

B2B marketplaces are evolving. Companies considering participation in these exchanges are advised to exercise due diligence in selecting a B2B marketplace partner. Marketplaces with vulnerable business models, little prospect for earnings in the near future, and dwindling capital are likely to disappear or be acquired by larger, stronger competitors. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.