Ready to ride the S curve into the trillions

By RICHARD BRADDELL

As with all things internet-related, there has been no shortage of hype surrounding business-to-business (B2B) e-commerce, the development of which is being unashamedly compared to the Industrial Revolution.

In contrast to business-to-consumer selling over the net, which has so far come nowhere near achieving its promise, the accolades for B2B have a lot more going for them.

Industrial Revolution comparisons may be exaggerated, but there is little doubt that the small number of firms engaging in transactions with other companies over the net will grow rapidly in coming years.

A range of pundits from Gartner Group to IDC predict that, by 2004, the global volume of B2B transactions could be of the order of $US7 trillion, from, well, next-to-nothing now.

Market growth will follow the traditional S curve, starting slowly, expanding rapidly, then tapering off as it crawls into the top part of the S.

So far, we are still at the bottom of the S, but forecasters suggest that the volume of B2B e-commerce could nearly double in 2004 alone to reach the $US7 trillion figure, making it one of the most rapid uptakes of a new technology in history. By 2010, B2B transactions could be worth $US21 trillion.

That, of course, depends on what you mean by a new technology. Computers have been around for 40 years, telephony more than a century. But the coming together of the two via the net is much more recent, and their capacity to reshape business procurement is profound.

The great shift B2B brings is that it turns the traditional business purchasing model on its head.

From a "push" model, where suppliers offer goods to the market at set prices, B2B creates a "pull" model, where buyers go to the market stating their needs and force potential suppliers to compete against each other for the business.

This change delivers considerable power to buyers. Because they will have an accurate picture of the market, they will be able to extract better terms and conditions from suppliers.

But that is only the beginning. Using B2B promises to level the playing field between big and small businesses, allowing smaller firms to gain access to services previously available only to their larger, horizontally integrated peers.

The result may well be that many larger companies will seek to become smaller as they, too, are forced to take advantage of more rapidly evolving services available in the wider market.

But one of the big benefits of B2B lies in the ability businesses will have to negotiate more detailed just-in-time delivery and payment terms - meaning faster stock turnover and lower inventory requirements.

Paul Touw, a senior executive with B2B marketplace software developer Ariba Technologies, recently estimated that if the improved stock turnover achieved by Dell Computers, one of the United States' most famous e-commerce pioneers, were translated across the US economy, $US200 billion in value would be unlocked, resulting in 18 per cent gains to corporate bottom lines.

Even without the hype, the economic impact of B2B is likely to be huge. While for many years productivity gains arising from computerisation have been almost impossible to identify, the strong non-inflationary growth experienced in the US in recent years is widely attributed to productivity gains from new technologies - namely, the integration of computers and telecommunications.

If that is only the beginning, as many now believe, then much greater benefits may be in store.

Already, large corporations are reporting huge savings through reduced error rates, lower transaction costs and cheaper services.

British Telecom is reportedly claiming a 90 per cent reduction in the cost of processing transactions, and direct savings in goods or services of 11 per cent.

But if the market sounds cruel for suppliers, there is a bright side. They, too, will benefit from improved efficiency, lower costs for their own purchasing and, hopefully, higher volumes.

But B2B involves much more than companies putting their purchasing online and waiting for suppliers to come along.

Some are doing that. Telecom, for instance, has set up its own private e-procurement market. But increasingly, players in industries such as food and cars are grouping together to capture efficiencies possible through common electronic markets.

Transora, which expects to be up and running soon, is a global electronic market established by leading consumer products companies such as Nestle, Procter and Gamble and Kraft.

Telecom's own e-procurement could easily become the backbone for a wider electronic market.

One of the great benefits of electronic markets is that they will be able to penetrate areas that are too difficult at the moment.

One example frequently cited is the market for back-haul transport loads. If loads could be found for the estimated 30 to 50 per cent of US trucks that return to depot empty, $US300 billion might be saved, a gain of 5 per cent for the US economy.

An electronic market for pallets is another possibility.

But if ideas abound, the competition to put them into practice is even more intense.

On the software side, Ariba and Commerce One stand out. Both American, they are vying for leadership in systems that enable electronic markets.

Ariba, for example, provides the software behind Telecom's e-procurement, and the new Transora market.

Both companies have formed strategic alliances - Ariba with IBM and supply chain manager i2, Commerce One with SAP.

Competition between electronic markets themselves will be fierce. Arthur Sculley, an e-commerce guru who was formerly an executive with JP Morgan, estimates that there could be 1100 markets or exchanges in operation now, and he expects that to grow to 3000 in 18 months.

But in three years, the number could have shrunk to 500.

In the end, what decides an exchange's success will not be who is buying, but who is selling, because that is what will decide the market's liquidity.

In the immediate future at least, it will be the buyers who bear the costs in e-procurement markets, since suppliers will not come if they have to pay.

The successful markets will also have attributes in common with today's stock exchanges.

According to Mr Sculley, they should be for-profit and shareholder owned, to give them flexibility, but they must also have governance and management structures which ensure their neutrality.

"Whatever is done on the exchange needs to be made available on an anonymous basis to all members of the exchange," he said, "particularly prices on recent trades."

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Official e-commerce summit website