The B-to-B Virtual Bazaar

The Internet is reshaping—and elevating—the professional role of CPAs.
BY RUSS BANHAM

  

EXECUTIVE SUMMARY
  • ALMOST OVERNIGHT, A MULTITRILLION-DOLLAR worldwide bazaar is blossoming out of the Internet, and companies that had never heard of each other before suddenly are buying and selling from each other.
  • THIS IS HAVING A MASSIVE impact on the professional role of corporate CPAs and financial managers. With the automation and efficiencies inherently built into Internet transactions, suddenly financial managers find themselves free of such mundane chores as preparing purchase orders. Instead, they can focus on more strategic efforts, such as analyzing purchase and use patterns and seeking the best B-to-B relationships—activities that translate quickly into improved profits.
  • WHAT MAKES THE B-to-B MARKET so popular to business? Despite keener competition, the Internet reduces the cost of buying and selling and provides a fast, effective trading network for nearly every conceivable product and resource.
  • B-to-B SITES OFFER A BUFFER to supply-chain upheavals. When unpredictable factors such as customer demand, plant capacity or the weather create supply–demand imbalances, the e-marketplaces can make real-time trading available for everything from chemicals to sneakers and ballpoint pens.
  • SIGNING UP FOR A SITE is easy, but deciding which one—or, more likely, which ones— to join is a bit more complicated. There are many models to choose from, including e-marketplaces that buy and sell at auctions and others that use electronic exchanges similar to the services provided by traditional offline intermediaries.
RUSS BANHAM is a Pulitzer Prize–nominated business journalist and author of several books. His most recent volume is Rocky Mountain Legend, a biography of the Coors brewing dynasty. He lives in Seattle and Missoula, Montana. His e-mail address is bzwriter@aol.com .

lmost overnight, a multitrillion-dollar worldwide bazaar has emerged from the Internet, and companies that never heard of each other before suddenly are trading partners. Being left in the dust is the relationship-based system in which corporate buyers and sellers deal with a familiar and relatively fixed pool of suppliers and customers.

The B-to-B market will soar more than three orders of magnitude, to $6.4 trillion in 2004. And the electronic bazaar, the Internet-based communities where buyers and sellers log on to trade with one another, is growing apace: In the past two years the number of B-to-B e-marketplaces expanded from 400 to more than 1,000, and businesses are flocking to the B-to-B sites in record numbers.

Although signing up for a business-to-business (B-to-B) site is easy, deciding which one—or, more likely, which ones— to join is a bit more complicated. There are many models to choose from, including those that buy and sell at auctions and others that use electronic exchanges similar to the services provided by traditional offline intermediaries.

The fast-moving swing to conducting B-to-B buying and selling on the Internet also is having a massive impact on the professional role of corporate CPAs and financial managers. With the automation and efficiencies inherently built into Internet transactions, suddenly financial managers find themselves free of such mundane chores as preparing purchase orders. Instead, they can focus on more strategic efforts, such as analyzing purchase and use patterns and seeking the best B-to-B relationships—activities that translate quickly into improved profits.

EFFICIENCY COUNTS

What’s behind the sudden surge in the B-to-B e-marketplace? Price competition doesn’t leave businesses much choice, for one thing. A company—whether buyer or seller—that remains on the sidelines while its rivals trade online will have higher costs. B-to-B trade on the Internet is much cheaper than fielding a huge sales staff to knock on prospects’ doors or maintaining a large purchasing department to hunt for the best price or seek products and resources that are in short supply.

But that’s not the main incentive. Although B-to-B sites intensify the already keen rivalry that exists among competitors, most companies recognize that as the price of admission. Where else can they have exposure to a worldwide market with just a mouse click? A B-to-B e-marketplace provides an efficient and effective trading network for nearly every conceivable product and resource. So despite the intense competition, the e-marketplaces offer an opportunity to expand, or at least maintain, market share.

Equally important, they offer a buffer to supply-chain upheaval. When unpredictable factors such as customer demand, plant capacity or the weather create supply–demand imbalances, the e-marketplace can make real-time trading available for everything from chemicals to sneakers and ballpoint pens.

Buying and selling via an e-site has many advantages, but it also has many dangers. The field is rife with hype, and companies feel intense pressure from shareholders and directors to get aboard fast so as not to miss opportunities.

Some e-sites are geared to the procurement and sale of direct (raw) materials for fabricating products, while others deal in indirect (manufactured) materials—finished products such as desks, fax machines and office supplies. “It is very challenging for a company to sift through all the choices,” says Gene Godick, CPA, senior vice-president and CFO of VerticalNet, Inc., an amalgamation of 56 vertical B-to-B e-sites. “The tough part is figuring out what you want from a site, how it will affect your internal processes and then choosing the right one.”

Perhaps the most important service to evaluate is an e-site’s ability to integrate buy–sell data into users’ accounting systems. That will take careful study and will probably require some customization of a company’s accounting software.

Perhaps the most important service to evaluate
is an e-site’s ability to integrate buy-sell data
into users’ accounting systems.

TIME TO ACT

Since it’s likely that B-to-B e-sites will consolidate, given the growing competition among similar sites specializing in the same industry, one option for a business is to wait for the inevitable shakeout and then use the strongest survivor. That’s a mistake, says Stan Lepeak, vice-president of the Meta Group, a Stamford, Connecticut, research and consulting firm. “It’s a surefire recipe for a loss of market share,” he says. So much business is already being conducted via the e-marketplace that delay probably will mean your competitors will run off with your business, he adds.

There are basically two B-to-B site models, though they are converging: direct material sales and purchases and indirect material sales and purchases.

Direct. Sites for direct goods are diverse, comprising reverse and forward auction, exchanges and aggregator sites such as VerticalNet.com . In a reverse auction, a buyer indicates a need for a particular material and cites specifications such as size, weight, time it must be delivered and the amount the buyer is willing to pay. Suppliers then respond with quotes geared to that need. In a forward auction, a supplier posts an RFQ (request for quote) for a particular material it is selling. Companies then present their bids to buy it.

An exchange, on the other hand, is a site that collects quotes from product suppliers and submits them to buyers. It does this impartially, setting ground rules and charging users a fee for each completed transaction. Some sites, such as PlasticsNet.com , owned by Chicago-based Commerx Inc., apply all these models, offering users access to raw and manufactured materials through auctions, exchanges and catalogs.

Indirect. The sites for indirect materials include catalog sites such as Staples.com and OfficeMax.com , which offer the same products online and offline. Other sites include Ariba.com and Commerce One’s www.MarketSite.net , which aggregate a variety of different suppliers under one “roof” in a sort of virtual mall. (Both companies also build technology platforms and software for sites.) Finally, several retailers, such as Office Depot, sell on their own Web sites and through sites such as MarketSite.

The models for direct and indirect materials present different value propositions. Manufactured-goods sites are predicated largely on the cost savings of consolidating buyers’ purchasing power. Savings also come from procurement process efficiencies through automation of manual employee purchasing. It also eliminates typical “rogue” purchasing by employees who may buy, say, fax paper at a local store at a higher retail price.

Raw material sites promise cost efficiency by trading in much, if not all, of a company’s traditional sales and broking (the trade term for brokering) channels for a virtual marketplace.

A BROADER SPECTRUM

How do companies benefit from the e-marketplace? It opens doors to new business, says David Hannah, CPA, president and CEO of Reliance Steel & Aluminum Co., a Los Angeles metals processing company. “Our outside sales reps will tell you they know every metal-consuming customer in the country, but the reality is they don’t.” Reliance joined MaterialNet.com and found it could reach a broader spectrum of customers. Aggregating a wider range of potential customers in one “place” and presenting their specific needs via RFQs enables Reliance’s 74 service center locations to bid more effectively. (MaterialNet charges users a 1% to 5% fee, depending on the size of completed transactions.)

Like MaterialNet, most direct material sites focus on a single vertical industry and often compete with each other. For example, E-Steel.com, MetalSite.com and MaterialNet go after segments of the metals industry, while CheMatch.com , ChemConnect.com and Chemdex.com vie in the chemicals sector.

In highly fragmented industries beset by inefficient supply chains, such as the paper industry, the e-marketplace can work wonders. In the papermaking business, the return on capital is an abysmal 9%, according to a Paine Webber analysis. To recover high fixed-asset costs (papermaking machines typically cost $800 million), mills must run continuously. When demand ebbs, inventory soars. To move the excess volume, a large and costly sales force must be employed.

Is EDI Dead?

Before there were B-to-B sites, there was electronic data interchange (EDI)—a complex and expensive communication system connecting business buyers and business sellers. Many major buyers—such as the auto companies—were so partial to EDI that they did business only with EDI-connected suppliers. Their reasoning: An automated buying process sharply reduced their costs.

Since the Internet essentially does the same thing—with less cost and much less complexity—what’s the future of EDI?

Dan Garretson, senior analyst at Forrester Group, a technology research firm, agrees two can be better than one. “Most companies I’ve talked with are keeping their EDI systems—at least for now—and joining e-sites.” Nevertheless, he believes many companies eventually will migrate off their EDI systems onto the Web. “EDI is a more restrictive format because it runs on a proprietary network rather than in the open environment of the Internet,” he explains. “And EDI systems tend to be more difficult to use than Web-based procurement ones. Ultimately, the Internet will be the B-to-B pipeline for all.”

PaperExchange.com takes a machete to these costs, says Rod Parsley, vice-president for business development. “Our idea was to create a marketplace that aggregated buyers and sellers in a virtual trading pit,” Parsley explains. “This would be impossible in the physical world because of the industry’s fragmentation. Buyers comprise some 50,000 printers and more than 3,000 converters in the United States alone. The seller base is equally fragmented.” Getting all the players in one trading pit helps to eliminate or, in industry jargon, “disintermediate” expensive broking channels from the supply chain, reducing overall costs. Improved capacity utilization also is realized.

Here’s how it works: Say a mill typically produces 185-inch paper rolls and has presold 150 inches of that width. That 35-inch leftover usually ends up warehoused. Using PaperExchange, the mill can log on and scan RFQs from listed buyers. “It might see one buyer looking for 10 inches, another wanting 20 inches and someone else wanting 30 inches,” Parsley says. “Instead of warehousing the product, the company can post and sell excess machine capacity three weeks before making the product.”

The same strategy is being applied in the retail fashion industry by www.CloseOutNow.com . “We focus on the excess inventory of the fashion industry, using a global platform to buy and sell goods,” says Chairman and CEO Steven Lubinski. By linking buyers and suppliers around the world, CloseOutNow removes the weather as a factor in sales of seasonal clothing. “When it’s winter in the United States, the ski parkas that no longer sell in Brazil can find a home,” Lubinski says.

Other e-malls, such as VerticalNet and PlasticsNet, further extend the definition of an e-marketplace. VerticalNet is an e-market maker, host to online sites for 56 vertical industries, from the wastewater business to property/casualty insurance. By pulling together these various trading communities onto one Web marketplace, VerticalNet offers vertical e-marketplaces a less costly e-commerce platform. Member sites share the cost of software, connectivity and customer service.

PlasticsNet focuses on one industry, acting as an exchange for buyers and sellers of plastics, although its owner, Commerx, plans to add other vertical sites. The difference between PlasticsNet and a single-industry vertical such as PaperExchange is that PlasticsNet seeks to offer everything users might want to buy or sell, from additives and resins to desks and fax paper. That makes it a hybrid of a traditional vertical site like PaperExchange and a horizontal site such as Commerce One’s MarketSite, which sells diverse products to diverse vertical industries.

Recently, the Big Three automakers announced their intention to add a new B-to-B marketplace for the auto industry. If approved by the federal government, Ford, General Motors and Daimler Chrysler would establish a site for catalog purchasing, bidding, online sourcing and auctions for all car parts and supplies. The site could be expanded to encompass other industries involving the same suppliers, backers say. Previously, each company ran competing sites linked to suppliers.

THE RIGHT MOVE

Given the array of models and sites, joining one obviously requires care. First a company has to determine whether an e-marketplace is right for it. Meta’s Lepeak advises a financial manager to appoint an appropriate staff person to spearhead a cross-functional team of finance, marketing and information technology executives. The team should determine what the company wants to accomplish—increase sales, better service, compete more effectively, broaden its market or cut processing costs.

The analysis should include an investigation of the e-site’s financial backing, critical mass (industry jargon for market penetration), technology platform and services. Not all sites publicize this information, so the team has to ask and demand answers.

Each site offers a potpourri of services, from somewhat useful news features and bulletin boards to such vital real-time logistical information as how much shipping adds to the cost of purchased goods and when the goods will be delivered.

E-sites such as PaperExchange and PlasticsNet offer real-time transport choices to buyers, partnering with third-party logistics providers such as C. H. Robinson and Schneider Logistics. “If you can analyze hundreds of RFQs and their respective logistics costs, you can make more informed buying decisions,” says PaperExchange’s Parsley.

Before signing onto an e-site, it’s important to find out if the site checks the creditworthiness of buyers or sellers. PaperExchange and ChemConnect, a San Francisco chemicals exchange, do routine credit checks. PaperExchange, in fact, goes one step further: It buys credit insurance to absorb this risk on behalf of users. The site also has partnered with a third-party arbitration specialist to mediate user disagreements.

As in the nonvirtual business world, online buyers may prefer to buy now and pay later. “We’ve partnered with a financial institution to provide financing,” Parsley says. A Forrester survey of 50 large e-sites indicates 98% plan to offer credit and payment options by next year.

Service differences extend to e-marketplaces for indirect materials as well. Some let users access information and order products with a simple browser, while others, such as Commerce One’s MarketSite, invite buyers to download information into an electronic procurement application that can create a purchase order.

How the e-site information links to a user’s accounting software is critically important. If, for example, strategic data cannot be read by the accounting software, “useful metrics for strategic business purposes are lost,” says VerticalNet’s Godick. VerticalNet is in the process of licensing integration software to provide this functionality. Other e-sites are already there. PlasticsNet, for example, recently launched a partnership with Tampa-based CommerceQuest to integrate the data on its site into buyers’ and sellers’ accounting systems, giving users the ability to check production, planning, order and shipment status with its entire range of partners despite differences in respective systems.

As always, companies must exercise customary due diligence. It is very easy to issue a press release that inflates a service—much harder to execute it.

Other advisories include

  • Ask a site’s current users about advantages and disadvantages. Be wary of sites that discourage talking with users.

  • Find out whether the site measures and tracks buyer satisfaction and then shares that information with users.

  • Select a site with a critical mass of sellers to provide a steady flow of goods and services.

  • Ask how the e-site makes money—its revenue sources and structure. Most charge a transaction commission fee; some prefer buyer subscription fees, which tend to be more costly; and some derive the bulk of their income from posting advertising, which should be considered suspect.

PROCESS REVIEW

Setting up an e-site link requires some preliminary effort. Before purchasing or selling begins, the user must define conditions and double-checks for its employees. In addition, a workflow protocol must be created so POs get routed to the right places.

Perhaps the toughest decision to make is not which site to join, but how many. Analysts say suppliers are compelled to participate in several. “They’re going to have to,” says Barbara Reilly, a Gartner Group research analyst. “They’ll need to either feature all these sites on one portal or wait for the e-marketplaces to do it for them” through consolidation, she explains.

The one-portal strategy Reilly mentions is available through several sites via partnerships. For example, MaterialNet has an agreement with Ariba permitting users of either e-marketplace to procure indirect materials from Ariba or direct materials from MaterialNet. Commerce One has a similar strategy and invites e-marketplaces in different vertical industries to set up shop on MarketSite. “All the sites realize they will have to connect at some time,” Garretson says. “But we’re very early in the process. Like everything else in e-commerce,” he adds, “necessity is the mother of invention.”

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