B2B e-marketplaces: the new frontier

The B2B e-marketplace is the new frontier in the continuing battle for e-commerce supremacy, and Deloitte Consulting is predicting the e-war between competing B2B hubs will reach epic proportions in the coming months.

According to Stephen Resar, a senior manager with Deloitte’s Toronto office, the opening salvos of the coming e-wars are evident with the decline in growth of e-marketplaces in some industries.

“Serious competition is starting to occur in certain industries’ e-marketplaces,” Resar said. “A lot of companies are wondering why they should be dictated to by a third party that owns a particular exchange rather than simply get in bed with the competition and create their own.”

Deloitte recently published its view of the e-wars: B2B Darwinism – How E-Marketplaces Survive And Succeed. In it, the consulting firm researched about 1,400 e-marketplaces in various stages of development and found that rather than the number of separate exchanges growing to 10,000, as some analysts have predicted, the market is already showing signs of maturing.

“Creating a separate entity and the controlling governance within that entity presents massive challenges for all concerned,” Resar said of exchanges that are evolving from competing players, rather than a third party. “These players have to work together and make decisions for the exchange that are not always optimal for each individual player.”

Despite the global stage on which on-line exchanges exist, Resar stressed the importance of Canadian-based exchanges.

“We’re about six months behind the U.S., but we’re catching up,” he said. “Home-grown exchanges need to consider there’s still a border and logistical issues to deal with. The issue now is that the ideas and business have jumped ahead of technology…therefore, it’s important to have Canadian sites with Canadian products at Canadian prices.”

The report also warned that more e-marketplaces will fail rather than succeed within the next two years. The multi-trillion dollar projections from a variety of industry analysts indicate that B2B is only beginning to hit its stride.

“Most evidence on B2B exchanges points to the fact that they are not doing well, even the ones in commodities, their businesses are only capturing about five to seven per cent of their total volume,” said Anthony Wensley, an associate professor of management and information systems with the University of Toronto. “One reason for that is we’re reminded that the value proposition was confused in the first place. The realization is you can’t measure (an exchange’s) efficiency by the input price.”

Wensley – who teaches courses on e-business and information management in addition to contributing articles to the Financial Post – cited regulatory issues as being an inhibitor of greater B2B success.

“The FTC looks at a lot of them, and the Europeans don’t know what to do about it, so there really hasn’t been a clear precedent,”

he said. “The irony is everyone is worried about [B2B exchange partners colluding], but there’s no evidence that exchanges are a threat.”

Deloitte’s bleak view of the B2B movement is evidently shared. Last May during the Association of Strategic Alliance Professionals Summit (ASAP) in San Francisco, e-commerce executives voiced a similar outlook for competing B2B hubs: the vast majority of B2B e-marketplaces will vanish within two years as failures and consolidation continues to sweep through the once high-flying sector.

“You could see the writing on the wall fairly early,” remarked Fara Warner, communications manager for the Ford Motor Company in Dearborn, Mich. “Our suppliers were already dealing with disparate systems from [automotive makers]…the decision was made last February when we realized through our discussions with our suppliers, General Motors and DaimlerChrysler, that we had more than one supplier exchange to deal with. That’s when it was decided to create one exchange named Covisint.”

The U.S. Federal Trade Commission recently concluded its inquiry of Covisint.com; the Big Three auto makers will now forge ahead with their on-line exchange in conjunction with the Nissan Motor Co., CommerceOne and Oracle.

“It can be frustrating for a supplier and it adds considerable cost and time to the equation to have to deal with separate exchanges,” Warner said. “The idea (behind Covisint.com) is to cut cost and time, and free up humans to do what they should be doing, not writing up additional order-entry forms for different systems.”

Added Resar, “The Covisint exchange is a great concept but it still lacks a lot of execution.”

The big five

Deloitte’s recent report, B2B Darwinism – How E-Marketplaces Survive And Succeed, identified five factors critical for e-marketplaces and participant companies to producing a viable and successful hub:

Operating structure and ownership – e-marketplaces must attract and retain a critical mass of transactions. This means they must offer value and a level playing field to all participants. Third-party e-marketplaces offer participants a neutral trade environment, however in industries where power is concentrated in the hands of large brick-and-mortar organizations, brick-and-mortar led consortia may have the market-making power to reach critical mass and beat neutral third parties.

Governance – balancing the interests of shareholders, members and outside interests (for instance, the federal government) is of utmost importance for long-term success.

Scale – an e-marketplace must maintain transaction volumes that satisfy scale considerations for buyers, suppliers and other intermediaries alike. It must provide buyers with leverage, geographic coverage, and in some cases a broad array of available products. Sellers must be provided with sufficient economic scale to offset the resources invested and intermediaries with sufficient reason to play.

Regulatory compliance – an e-marketplace must walk the fine line of maximizing benefits and leverage to its members and owners without attracting the scorn of the U.S. Federal Trade Commission.

Technology – buyers, sellers and the e-marketplace itself must build a robust, interconnected system that spans a number of processes.