Business to Business

eBusiness: The Hope, the Hype, the Power, the Pain

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“All good ideas are simple. This one's real simple.... You look for something that's inefficient and ask why is it staying that way? There are lots of markets that are really, really inefficient.” Jeffrey Skilling, President, Enron Corporation

''I don't want to paint this as some utopian lovefest,'' J. Kevin Vasconi, Covisint’s chief technology officer.

The Business to Business (B2B) Surge

Established enterprises have led the way on the deployment of eBusiness applications in the business to business (B2B) arena. While most of the new eBusinesses were targeting the eCommerce market, established enterprises had sound business reasons to focus on the Business-to-Business market.

For example, In 1997 eMarketer estimated that B2B was about 3 times larger than consumer eCommerce (B2C). By 2002 they estimate that B2B will have grown by 48 times (4700 percent!) and will then be over seven times as large as B2C (which will still have grown by almost 20 times!). In mid 2000, eMarketer was estimating that B2B revenues would reach $851 billion by 2003. Estimates from other sources range from a low of $633 billion (IDC) to a high of 3,161 billion (Computer Economics). B2B is a huge market opportunity. Goldman, Sachs & Co notes that total sales using B2B e-commerce reached $114 billion by early 2000. Deloitte Consulting LLC estimates that 91% of U.S. businesses will do their purchasing on the Net by the end of 2001 and that approximately 31% do so now. They expect B2B sales to be six times as large as the business-to-consumer market.[1]

Huge market opportunities attract huge investments, and B2B is a no exception. According to PriceWaterhouseCoopers, in the first quarter of 2000, venture capitalists invested $1.4 billion in B2B opportunities.[2] This represents a growth rate of 1600% (15 times) over the same quarter in 1999.

The pattern of growth and consolidation that is so often seen with new business models was played out by the B2B sector between 1999 and 2000. The number of new industry sponsored marketplaces being created grew rapidly and declined almost as rapidly.[3] The figure below shows the rate of creation of new marketplaces throughout this period.

Some of the most hyped B2B sites went under during the shakeout, including the premier life science materials exchange, Chemdex.com.[4]

There are technology issues with B2B portals as well. Frictionless B2B transactions depend upon seamless interchange of information and that has never been easy to do when each corporation has their own formats for databases and applications. Electronic Data Interchange (EDI) has been facilitated by a set of complex standards and processes for exchanging information. Each interface is difficult to implement and usually must be done on a case-by-case basis.

XML is widely viewed as the technology that will make EDI easy, or alternately the technology that will make EDI obsolete! By tagging documents with XML tags that are agreed upon by industry standards groups or made a defacto standard by a powerful player, organizations will be able to exchange data far more easily.

B2B Technology Leaders
Company	1999 Revenues ($ millions)	2000 Revenues ($millions)
ARIBA Leader in online-purchasing software wants to become a programming honcho for online exchanges	61.9	243
COMMERCE ONE Online-marketplace manager and software maker aims to dominate B2B by stitching customers into a global Web-trading network	33.5	267*
i2 TECHNOLOGIES: Maker of supply-chain- optimization software is moving into B2B through deals with Ariba and IBM	571.1	1,000*
ORACLE: The database king is adding B2B software trying to be all things to all people	9,329.0	10,600**
Estimates *Fiscal year ended in June
Business Week: July 31, 2000. http://www.businessweek.com/2000/00_31/b3692062.htm

Many expect that B2B eCommerce will completely reengineer the supply chain and restructure the value chain. If B2C systems are linked into B2B supply chain applications then a customer order may propagate all the way up the supply chain to suppliers. Eventually the automobile industry expects to be able to implement a build-to-order system in which a customer order on the Internet triggers the manufacturing process for the automobile and notifies the suppliers that the manufacturer will need four more leather seats, four tires, a particular windshield, more paint, and so on. These linked systems can reduce inventories, and help to avoid shortages of parts and supplies. For the suppliers, the advantage is in being better able to project manufacturing runs, supply needs, and financial resources.

The portals may also implement an auction approach that will let manufacturers obtain the supplies at the least cost. Portals controlled by manufacturers can lower the barriers of entry to alternative suppliers who now may have the information and access that was so hard to obtain through traditional contacts. Portals controlled by manufacturers can also be used to raise the barriers to entry for those who would like to compete with the manufacturers.

B2B portals raise many concerns about industry collusions and we will discuss this further in the antitrust section of the Law and Ethics Chapter. If industry groups gather together to form industry wide portals, will those be used to fix prices; extract price concessions from suppliers, or raise barriers to entry? This is an area closely watched by government and this scrutiny will surely be applied to business-to-business portals.

Enron

Enron was a large established player in the energy market, and, like many established enterprises, they were slow to get on-line. Their first web-trading site was not established until Nov. 29, 1999.[5] Over the next seven months, the site handled $80 Billion in transactions. By August of 2000 that had grown to over $125 billion. The size and growth speed of this site is impressive in spite of the fact that the commodities that it trades, gas and electricity, are inherently expensive and traded in large quantities.

Jeffrey Skilling, the architect of the Enron story feels that Enron was ideally suited for becoming an eBusiness. “All good ideas are simple. This one's real simple.... You look for something that's inefficient and ask why is it staying that way? There are lots of markets that are really, really inefficient;” he noted. He points out that Enron’s trading model is a natural outgrowth of the business model. “All it's doing is taking what was a radical business model for the industry and making it a lot better.[6]”

Only a small part of each transaction becomes revenue for Enron, but the sheer volume and growth makes management optimistic. In the first quarter of 2000, revenues grew 72% to $13 billion and profits grew 34% to $338 million. The volume of gas that Enron traded increased by 39%. Real growth was partially obscured by the run up in the costs of oil and gas over the same period.

Enron’s metamorphosis in networks began with the unlikely event of an acquisition of a northwestern utility, Portland General. The utility was in the process of laying a fiber optic network around Portland Oregon. Enron later sold the utility, but made the Portland network the nucleus of a much larger venture. Enron now proudly boasts of an infrastructure of 14,000 miles of fiber optics, as well as the former infrastructure of 32,000 miles of gas pipes! Soon they were trading bandwidth as just another commodity on their networks. Thus far the returns are small ($150 million in Q2 of 2000) in comparison to Enron’s other trading markets, but the potential for growth was seen as large. In November of 1999, the CEO Jeff Skilling launched a commodities trading platform and eventually began trading metals and wood products.

This audacious move into a new area is unusual for most companies, but Enron had done it once before, when they decided that they could trade electricity in much the same way that they traded gas up until that time. Many in the electrical utility industry were dismissive of Enron’s efforts in that regard. They no longer are. Many in the networking business are dismissive of their efforts to enter bandwidth trading. Others were not quite so ready to bet against Enron. Investors must have bought the story, since Enron's stock ran up to $90 before collapsing in late 2001 to under a dollar in a cloud of allegations of financial misdeeds. During 2000 Enron's stock soared over 87%, but by March of 2001, they were being investigated by California for price gouging. In August Skilling quit unexpectadly and the whole enterprise began to unravel as the stock price declined and the company was burdened under debt that quickly swamped their rapidly shrinking ability to raise capital. On December 2, 2001, Enron filed the largest Chapter 11 bankruptcy in history. The story of Enron's rise and fall will become a must read study for all corporate strategists. [7]

Covisint

Ford, like GM before it, also expected to see huge cost savings based upon control of inventories, automating the supply chain, and providing a market for suppliers and consumers of automotive parts. Ford projected that they could save $8.9 billion in the supply chain and generate $3 billion in transaction fees by the end of 2000. Through a “build to order” philosophy they felt they could reduce wasteful dealer inventories, save working capital, and reduce the use of rebates used to sell slow moving vehicles in the inventory. They expected that the latter could save $650 per car, with an overall savings of up to 25% of the cost of each car.

After a brief start in which each of the automakers announced individual plans, the three major us automakers (Ford, GM, and Daimler Chrysler), teamed up to create Covisint.[7] Later they were joined by Renault and Nissan. Covisint was built on the earlier effort by Ford called AutoXchange mart, which would have been an on-line trading mart involving 30,000 of Ford’s suppliers as well as those of the other companies. Ford was originally the majority owner with Cisco and Oracle holding smaller stakes.

The suppliers to the big three have been, perhaps understandably, nervous about the formation of Covisint. For example: Dennis F. Wilke, a Motorola Inc worried that: ''So much of the talk is about auctions and cutting costs.'' Some suppliers have indicated a readiness to band together and perhaps form a competing exchange.[8] Others may have raised the issue of anticompetitive behavior with the Federal Trade Commission who took up the investigation and rendered a decision unexpectedly early on September 11, 2000.[9] The story is not yet complete as the exchange is still awaiting the result of an investigation by the Bundeskartellamt (BKA), the German government's antitrust regulatory agency.

Neither have other automakers rushed to join the group. Volkswagen explicitly declined to join in favor of creating their own exchange, while Toyota suggested that they may participate, but would not be a financial backer of the venture.

The obstacles to such industry consortial portals are huge. Egos, law, culture, and business issues may make it just too hard to pull this off. Covisint will be an interesting test case in this regard.

Consolidation and Shakeout in B2B

Whether the new technology is railroads, cars, radios, television, or B2B business models, the pattern of growth seems to exhibit similarities. In the early stages the barriers to entry are low, the availability of capital is good, “branding” is less important, and the number of entrants is large. As the new model develops a brutal consolidation period leads to a shakeout of the industry leaving only the strongest, best financed competitors who grow by acquiring the less successful or at least picking through the rubble of the failed competitors. This process began in earnest in late 2000 for the B2B world.[10]