Business harnesses the net

By RICHARD BRADDELL

It is as big as the Industrial Revolution, or even bigger, those who claim to know say of business-to-business (B2B) e-commerce.

And it was with that in mind, and not just to marvel at the 3600 place settings for lunch, that people flocked to a convention on the subject organised by B2B market operator and software company Ariba Technologies in Miami Beach last week.

Still in its infancy, the B2B market is going to be huge, by some estimates worth more than $US7 trillion globally by 2004.

In the United States, it has the potential to make gains from the "new economy" - already credited with powering five years of the strongest non-inflationary growth in 30 years - look like a mere beginning.

B2B does several things. By automating procurement over the net, businesses not only save time and eliminate maverick buying within operating divisions, but can participate in new markets and save on costs by eliminating inefficiencies in their supply chains.

If, for instance, an internet market could be created to fill with backhaul loads the 30 per cent of US transport that returns to the depot empty, $US300 billion a year could be saved.

That would equal about 5 per cent of GDP, said Greg Brady, the chief executive of supply chain expert and Ariba partner company i2 Technologies.

Markets are being created. Transora, a global food industry B2B marketplace announced in Miami, combines 50 of the world's largest consumer products companies with joint purchasing power of $US500 billion.

Transora is not the first online food exchange. It joins Novopoint, which includes the US grains giant Cargill and is initially focused on North America's $US460 billion food and beverage industries.

Meanwhile, Ariba and rival Commerce One, whose equivalent shindig in Las Vegas the same week attracted 2600 people, are in hot competition to capture a large share of a market for the creation and management of B2B markets and exchanges.

Both have formed partnerships with other firms. Ariba has linked with IBM - which is handling backend systems integration, among other things - Hewlett-Packard and i2. Commerce One has teamed up with SAP.

Such organisations might be regarded as a second generation of internet-oriented companies which have a good deal more going for them than dotcom in their names.

Certainly, Wall St thinks Ariba is on to something, valuing it at $US40 billion, despite its March-quarter revenue of only $US40 million.

Started four years ago, Ariba is built upon a reversal of the traditional "push" business procurement model in which suppliers hawk goods and services to business buyers, who then contract to buy them if they want to.

Instead, using the internet, business buyers make the initial offer, perhaps specifying a price or service standards, setting in train a process in which competing suppliers bid the price down in a reverse auction.

In New Zealand, Telecom is using Ariba software and market systems to shift its business procurement online. Fletcher Building is understood to be working on a similar move.

Markets can be arranged in a number of ways, but while the identity of a buyer or a seller may be concealed, the price or terms are typically made known so competitive price discovery can take place.

A single business might set up a private market, or a group of businesses might band together.

Markets might be fully public, with anyone free to enter on the buy or sell side once they have established their bona fides. Or they may be private, with restricted membership. Huge savings are already being made.

Ariba's senior vice-president of strategy, Paul Touw, said that if those achieved by Dell Computers, which is close to taking most of its orders online, were translated across the US economy, inventory turns in the US would jump 320 per cent, unlocking $US200 billion in value and resulting in corporate bottom-line gains of 18 per cent.

It is not just Dell Computers that is benefiting from the inventory reductions possible from putting procurement on to the internet.

Hewlett-Packard claims to have achieved most of a targeted $US400 million in savings within its first year, while IBM saved $US250 million in 1999.

"This is really going to change the world forever," said IBM's general manager of B2B solutions, Patrick Toole.

One of the features of the B2B procurement model is that the buyers, not sellers, bear the costs of maintaining the markets or exchanges.

Getting suppliers on board may not be easy, even for the successful. As a Miami-based niche software developer said after the conference, persuading smaller suppliers to spend $US25,000 or so to integrate their systems with online exchanges and markets is hard if they have existing procurement relationships.

* Richard Braddell went to Miami as a guest of Ariba.