The Real Business of B2B

Abstract

It may be hard to create a successful business-to-business marketplace, but ignoring the trend just isn't an option. Two years ago, business-to-business (B2B) marketplaces barely existed, even as an idea. Today, there are plans to establish thousands of these on-line businesses. New deals--many involving some of the world's biggest companies--are announced almost daily. is the attraction? For buyers, B2B marketplaces promise not only to deliver more competitive prices but also to rid the supply chain of a host of inefficiencies. Hopes are so high that money can be made before even a single transaction has been concluded: the mere announcement that General Motors was to form a marketplace powered by technology from Commerce One caused the latter's share price to shoot up by 23 percent. GM benefited as well: recognizing that a successful marketplace needs liquidity Commerce One gave the automaker warrants for up to 20 percent of itself, depending on how much liquidity it brought on-line. [1] Amid such optimism about B2B marketplaces, it is easy to forget that they are still in the very early stages of development (see sidebar What is a B2B marketplace? on the next spread). The vast majority of Fortune 500 companies have yet to form or join a major marketplace, meaning that much value is still up for grabs, both for the buyers and for the marketplaces that succeed in attracting them. Five factors for success Indeed, no B2B marketplace is fully up and running so far. The technology standards needed to connect buyers and sellers, such as XML (an enhanced World Wide Web language designed to support commercial transactions), are still in development; meanwhile, many software vendors are advancing their own versions of these standards. Other technical hurdles remain, too. Consider the cost and time that must be devoted to building intracompany enterprise resource-planning (ERP) systems, [2] which have grown into a market worth some $20 billion a year. [3] Then think how much more difficult and costly it will be to create a cross-enterprise system that integrates many different supply chains. In addition, payment systems that ensure timely and secure settlement must be created; logistics systems must ensure that items ordered show up at the right places and times; and all this information must be provided in real time over shared networks. Most important, the marketplace must do whatever is needed to attract and retain enough buyers and sellers to thrive. Given all this, it is quite likely that some marketplaces built at great expense will fail. Five factors will influence the outcome of the shakeout. 1. Early liquidity As in all markets, the B2B marketplaces most likely to succeed are those with the greatest liquidity. The more buyers trade on a marketplace, the more suppliers will be tempted--or forced by strong buyers--to join them, which in many cases will lead to lower spreads. (Experience in many on-line financial markets shows that they survive only if they can maintain reasonably low spreads.) Moreover, successful marketplaces will endeavor to bring as much buying volume on-line as quickly as possible, in the same way that Amazon.com spent millions of dollars to acquire customers, reasoning that once it had them, it would be easy to sell more goods across more product categories. 2. The right owners Those companies that bring liquidity to the marketplace are its logical founding partners and therefore have the best chance of capturing the value it creates in the form of lower prices for the goods and services purchased through it. Most industry-focused marketplaces, such as those announced in the automotive and petroleum industries, will be built around large pools of buyer spending. But the buyers are not always in control. A seller (such as Cargill, the producer of basic food ingredients) that has a wide range of buyers might also be in a position to take ownership of the marketplace. …

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