When you buy a book online, you do it because it is quick and easy, and doesn't involve standing in a hot queue in a crowded shop. When a business buys 20 desks online, it does it because it's quick and easy, and saves the company around £100 per item.
Welcome to the booming world of business-to-business (B2B) ecommerce: an online shopping centre that will be used by almost all companies that conduct B2B commerce in the material, non-virtual world.
Companies such as Cisco, Dell and Intel already conduct a majority of their B2B commerce over the internet. Less tech-centric companies are following suit, with car manufacturers, wholesalers and companies such as British Airways and General Electric launching major online business initiatives.
"We intend to drive 80 per cent of our procurement online by March 2002, and plan to move ahead with setting up a £32bn airline goods B2B trade exchange with six other airlines," enthuses Pat Gaffey, head of ecommerce at British Airways. "We are also developing a host of tailored and personalised extranets with our key corporate customers, which will serve as a one-stop shop for all business travel."
So far, B2B ecommerce has only a third the traffic of the business-to-consumer (B2C) internet trade, but not for long. All industry watchers agree that B2B will be very big business.
Old idea, new packaging
In a sense, B2B is nothing new: a significant proportion of business has for many years been carried out electronically by using electronic data interchange (EDI), proprietary purchasing systems and email. The difference with the internet is that companies don't have to set up expensive and complicated point-to-point links or proprietary networks. The internet provides a standard, reasonably reliable and secure communications system which companies can use to transact business from Berlin to Beijing. It is a virtual global market square on which any business can set up its own stall.
Unlike EDI, the technology of B2B ecommerce can combine product catalogues and support information and then link directly into retailers' and suppliers' purchasing and enterprise resource planning (ERP) systems. XML, which is heavily used in B2B, can be integrated with existing EDI systems by providing forms that can be completed to generate EDI messages.
There are two different types of B2B ecommerce sites: verticals and horizontals.
Verticals are sites designed specifically to meet the needs of a particular sector, such as retail. The two largest vertically oriented B2B companies are Internet Capital Group and VerticalNet, each of which owns numerous subsidiaries operating in hundreds of different verticals.
Horizontals provide products, goods, materials, or services that are not specific to a particular industry or company. These companies are a completely different breed and operate at different levels across numerous verticals.
Whether it is Ariba enabling companies to procure raw goods electronically, i2 helping to make manufacturing processes more efficient, or Siebel Systems empowering sales forces with critical information, most horizontal companies make their money by selling software and services. Horizontals and verticals can either connect buyers and sellers directly or act as intermediaries.
Exchanges are two-sided marketplaces where buyers and suppliers negotiate prices. They are more sophisticated, and operate roughly in the same way as financial exchanges. They are usually used for trading commodity-like items such as electricity or paper.
Why join the party?
The overriding attraction of B2B ecommerce is that it can make companies much more efficient and cost-effective. Consultants, investors and analysts all agree that the benefits of B2B are substantial.
Some 54 per cent of UK organisations, however, have yet to do business online or even consider it, according to this year's IT user survey by the National Computing Centre. If you are a late adopter, here are some big figures from big names that might help persuade you, and the board, that B2B ecommerce is an opportunity no one can afford to miss.
In manufacturing alone, B2B ecommerce will boost productivity by nine per cent within the next five years, according to the Boston Consulting Group. While Goldman Sachs is predicting great things in processing, with costs being slashed by more than 20 per cent for industries such as electronics and freight transport.
The US is expected to retain its lead in the ecommerce race, with Western Europe lagging 18 months behind - but not for long. Several Western European nations have accelerated their ecommerce investments and will close this gap, with the continent going into ecommerce 'hypergrowth' over the next two years, according to Forrester Research.
Now for the bad news
Don't let such bullish predictions lull you into a false sense of security. B2B ecommerce has its pitfalls, and can be a real budget hog.
A basic B2B site will set you back around $1.5m in development costs, according to Forrester, while a more sophisticated site will top $15m. Then there are the running costs: between $700,000 and $4m a year, depending on the complexity of your site. Most of the money is eaten by labour provision for the development of bespoke security, management architecture and infrastructure.
This initial investment will eventually have to reap profit. As the recent dotcom share shakeout has shown, even ecommerce can't rewrite the basic business rules about cashflow.
While the existing handful of pure B2B ecommerce companies can generate revenues by taking a cut of transactions on their sites, as competition increases, some online market makers will probably stop charging fees, forcing everyone to cut or give up the transaction income. Analysts expect these companies to make most of their money by selling customers various value-added services such as credit processing, financial hedging and market research.
There are two issues that need to be addressed if B2B is to become truly global: product quality and liability. If a company buys components or raw materials from new sources, there is a greater risk of acquiring defective or inferior goods. Therefore you must be prepared to absorb the cost of your company's first uncertain, and potentially disastrous steps, into eprocurement.
To help you understand the pros and cons of online B2B purchasing, Computing has put together a simple guide singling out three areas - back-office integration, security and outsourcing - that you need to address when embracing B2B ecommerce.
Why it matters Big cost savings can be made on bread-and-butter items such as stationery
Good points Cost savings plus cheaper prices. Improved control of purchasing
Bad points Maintenance, repair, and overhaul isn't sexy - UK businesses seem slow to realise the implications and benefits, so uptake is sluggish
IT challenges Intranet and/or extranet is required.
Eprocurement streamlines and opens up the purchasing process, making it quicker, simpler and - most importantly - cheaper. If you set up an eprocurement system, your company could reduce both purchasing process costs and maverick buying by 50 per cent, according to a survey by ebusiness consultancy Axon.
The research reveals existing corporate purchasing systems do not buy indirect goods - consumables, stationery, travel, computer supplies - efficiently.
"Indirect procurement is an IT wasteland even though it accounts for more than 25 per cent of a typical company's expenditure," says Stuart Hamilton, Axon's chief technology officer and author of the report. "Many business activities have been transformed by application software which automates tedious tasks and provides management with visibility and control. Indirect procurement has been left wallowing in a mire of tiresome, manual, paper-based processes."
UK industrial tools supplier Buck and Hickman sells its products via BT MarketSite, an online eprocurement package licensed from Commerce One. "The main advantages for us are increased efficiency and the ability to become a comprehensive sole supplier to a number of large customers," says Sean King, the company's ebusiness manager. "In 12 to 18 months, Buck & Hickman will be unrecognisable from a systems point of view. Participation in trading portals may be essential to a company's survival."
Despite many high-profile B2B ecommerce site launches in recent months, only 14 per cent of businesses in the UK, France and Germany are implementing eprocurement systems, according to a survey by NetProfit and The Chartered Institute of Purchasing and Supply - even though 75 per cent of those surveyed said the internet will be "very" important for procurement in three years.
"UK eprocurement will require a high degree of patience," says Mikael Arnbjerg, an analyst with researcher IDC. "The revenue may be limited but it is a good idea in the long run. Some of these changes will become standard for UK business".
Why it matters You can't avoid this one - legacy back-office systems have to integrate with B2B implementations if they are to deliver the responsiveness that B2B demands
Good points XML is the holy grail of B2B. It provides a level playing field and assists future interconnectivity between businesses
Bad points Get it wrong, and you could be out of business
IT challenges Depends on which B2B kit you choose. Look out for middleware that enables you to connect to ERP and supply chain management systems. Expect in-house development effort.
This is one issue you can't sweep under the mat. If you fail the integration test, everyone notices - from the managing director to Marge in Middlesex, whose stationery order goes missing. This integration process will often involve more than one legacy system - many companies will have more than one system to align with B2B functions.
"Most companies have a mix of heterogeneous systems," says Ben Wright, European vice president of marketing and alliances for B2B software company Ariba. "But the cost of integration is not that great, perhaps only five per cent of the overall cost."
Integration is even more complex for companies with customer records scattered across several databases and who want a single view of each customer. Any financial services company selling a range of financial products will probably manage each by a separate legacy accounting system. There's no easy way to link all of these accounts together to let a customer see his or her entire portfolio without individual authentication for each account.
To get round this, some financial services organisations have created company-wide 'customer information files' that sit on top of legacy systems and have cross-reference keys to customers' accounts.
This approach requires a realigning of legacy systems, so that an alteration in customer information registers with the customer information file. You will need to build in time for plenty of serious data scrubbing, testing and verification.
Some B2B software helps simplify the process. For example, a vendor's package may provide a shell of a data gateway that has all the routines written in, leaving just the data cases to write.
Integration is where XML makes its star turn. Unlike HTML, XML lets developers write custom tags to identify objects, enabling them to integrate websites with back-end systems.
It makes good sense to re-engineer sales processes to be XML-centric or to use components that are easily combinable or reorganisable. This makes it much easier to bridge the gap between your systems and your suppliers' and customers' systems.
Another hurdle is the need to offer 24x7 data availability. Most back-end systems are designed to run a batch cycle at night, which is no good if you are dealing with customers in different time zones who may want to access data out of UK office hours.
Data replication is one way to work around the data availability problem, but the IT manager will have to decide if it's worth the expense of replicating data every 15 minutes or every 15 hours.
"Technology is a big challenge. Most B2B applications are immature," says David Weymouth, chief information officer for Barclays. "You have to integrate and as suppliers move towards interoperability, it is becoming easier."
Why it matters Some companies lack the necessary skills or desire to pick up the overhead of developing a B2B site
Good points Allows companies to concentrate on core competencies. Costs are known upfront
Bad points Some loss of control
IT challenges It's a business-critical project. A good relationship with the outsourcer is essential.
Outsourcing is no stranger to anyone working in IT. It is an option used for a variety of technology projects, and ecommerce initiatives are no exception.
The criteria for outsourcing B2B are much the same as those for outsourcing IT services in general - the biggest factor is the availability of skills within the company. When it comes to B2B, there is a definite shortage.
"It's a question of skill sets and costs," says Kevin Byrne, European vice president for high-tech industries at supply chain specialist i2. "There is a place for third-party consultants. They offer specialised resources in the right volume."
As with any outsourcing agreement, you must ensure there are good service levels and supervise the relationship. "If you are going to outsource any part of the B2B chain, our message is, 'don't just do it then walk away'," warns Graham Nugent, information services manager at UPS. "Outsourcing has to be managed. You have to retain management control and standards, and they have to be measurable."
Do this, and you can expect a variety of benefits including less pressure on internal IT resources and quicker time to market. "Rapidity is important and outsourcing gives you the needed agility," says Phil Wood, B2B ecommerce manager for Oracle. "Larger B2B [initiatives] are often hosted simply to reduce time to market."
If you are planning to use a third party to host your B2B marketplace, there are some extra factors to consider:
To get the real lowdown on different B2B vendors, check out the www.CRMGuru.com and www.CRM-Forum.com websites. Here you'll find extensive archives of online chat discussions among corporate executives, management consultants and software engineers.
Why it matters It might be important for low-value B2C transactions, but when it comes to B2B transactions, it's a strategic necessity
Good points Security is a key B2B enabler
Bad points Good quality security is not cheap. The best result is nothing
IT challenges B2B turns the normal security model on its head, people actually need to be able to access your data and parts of your network.
Securing the perimeters of an ebusiness has altered the nature of security requirements for IT managers. The biggest problem is that ecommerce requires an IT security ethos and computing environment that keeps malicious invaders out, but doesn't interfere with the access needs of the majority of users, customers and business partners.
It's easy to see how IT security is evolving from being regarded as a 'mere' operational requirement to a strategic necessity. Experts now view security as the critical technology that will drive ecommerce applications and sites.
"The security challenge is the key issue," admits Nugent. "The web has been launched in an open media, but B2B transactions need to be private."
"It's important with regards to quotes and bids. We're careful about sensitive costings," says Declan Carroll, general manager of chemical manufacturer Sika Ireland and a user of online markets. "I haven't come across any evidence of security problems through B2B yet, but it will come. It's important to be prepared for the 'wizards' who know how to break into your systems."
When a company can demonstrate it has a secure environment, customers, suppliers and partners are more likely to join its ebusiness effort. Firewalls separate internal from external networks and are the first line of defence against unauthorised access. From there, security products include antivirus software, intrusion-detection packages, virtual private networks and public key infrastructure.
There's a strong case for outsourcing security: it is a complex task that requires continuous updating and specialised personnel, that only the largest organisations can afford the resources to do a good job of.
Additional reporting by Mark Samuels
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