Is the Third Time the Charm for B2B

The first two waves of B2B e-marketplaces generally failed to prosper. But the next wave may benefit all of their participants--even the markets themselves. During the months since "B2B" (business to business) became the password to success on the World Wide Web, conventional wisdom has shifted at least twice. In the beginning, everyone seemed to believe that the way to flourish was to become an independent on-line market maker. Companies such as PaperExchange and e-Steel quickly set up shop using a readily understood business model; capture a significant share of a particular B2B market, charge a small fee for matching up buyers and sellers, and watch the revenue pour in. By some estimates, more than 1,000 such e-marketplaces--for products that ranged from commodities such as lumber to specialized components such as airplane parts--managed to receive funding. Unfortunately, most of these companies failed to realize that the lifeblood of a marketplace is liquidity and that, in B2B, a few large enterprises can generate most of the transaction volume so critical for that purpose. These behemoths typically don't need the help of an independent marketplace, however, and they can bargain fiercely with anyone who hopes to trade with them. Independent, fee-based marketplaces have therefore mostly languished in the absence of a business model that could vindicate their early optimism. In the second wave of B2B, the large incumbents took matters into their own hands, banding together into consortia with their current trading partners and competitors. Perhaps the most famous such entity is the GM-Ford-DaimlerChrysler joint venture now called Covisint. Since it was announced, early last year, incumbents in various industries have launched more than 100 similar ventures, many with great fanfare. (Well-known examples include ForestExpress and Aero Exchange International, in the forest products and airline industries, respectively.) For the most part, these marketplaces were initially designed to reduce bid-ask spreads and to bring down transaction costs by matching buyers with suppliers and enabling suppliers to trade with one another--the very kinds of procurement-based benefit that would be expected of an efficient marketplace. Unfortunately, the consortia, like the independent marketplaces, have generally failed to realize the hopes of their founders. Two difficulties confront both first- and second-wave marketplaces. For starters, they have yet to focus on improving business processes to unlock additional value, since their founders typically focused on the classical" benefits of an efficient marketplace: the ability to clear the market quickly and cheaply and to aggregate the orders of buyers and thus achieve lower prices. Second, the early B2B models were typically intended to transform the procurement and sales practices of whole industries, but industries don't make most of the decisions in a modern economy--individual companies and purchasing managers do. Marketplaces thus confront a massive "chicken-and-egg" problem. They must show that they can provide real economic value--something that will require them to achieve scale volumes. But those volumes can be achieved only if suppliers and buyers invest to integrate their systems and to manage the change process actively in their buying organizations, and they won't be willing to do so without proof that the effort will be worthwhile. Most marketplaces have experienced their first transaction between a few buyers and suppliers, but with at best 1 or 2 percent of the buyers' expenditure, the value they have realized is hardly impressive. Some of them are now beginning to experiment with a one-time "all-you-can-eat" subscription model, which encourages individual purchasing managers to use their facilities once the corporate center has paid for the hookup. But even if an industry could somehow be transformed en masse, gains solely from more efficient trading would never be substantial for most buyers and sellers. …