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Differences in Complexity between B2C and B2B E-commerce

Written By: Predrag Jakovljevic
Published On: November 6 2004

Introduction

The concept behind a business-to-business (B2B) exchange or marketplace, which was to bring together (aggregate) multiple buyers and sellers via the Internet to save money, expand markets, improve supply chain efficiency, and whatnot to all involved parties, had seemed obviously straightforward and too good to be true. However, it has since turned out to be much more painful to achieve those grandiose promises, which far outweighed the number of benefits received. Namely, creating the technology to operate such a marketplace turned out to be far more difficult than originally envisioned; and suppliers remained hesitant if not resentful of competing for business on-line while watching their margins erode during the cutthroat bidding process.

Namely, joining an Internet-based trading exchange requires integration not only between a company's own systems and applications, but between those of its trading partners and community members, which has largely made system integrators the only profit-making benefactors from B2B exchanges. Many early enthusiasts initially failed to realize the complexity of the above undertaking, which was perhaps affordable to a Fortune 500 company, but prohibitively expensive for small and midsize companies and their suppliers. On the other hand, the initial idea of saving buyers money by enabling them to aggregate their purchasing and select the least expensive supplier at a given moment has hardly impressed anyone—suppliers hated to be hammered with heavy expectations for discounts during their bidding races and buyers also concluded that phones and faxes are still good business enablers of these elusive exchanges, if not better because phones and faxes are inexpensive.

At one point, it dawned on a number of people that Internet exchanges had to do more than just expand their existing indirect materials by procuring direct ones. It also had to move from mere commodity procurement into product design, financial settlement, fulfillment, resellers and channel management, logistics, and many other value-adding collaborative trading functions, in addition to integrating all that functionality into a corporation's back-office systems, which could potentially be the most value-adding proposition. The fact was also that many business-to-consumer (B2C) e-commerce providers had rushed into a then seemingly more prosperous B2B space after the B2C functionality's inevitable quick commoditization.

B2B More Complex than B2C

B2B selling has, however, proven to be much more intricate than B2C, as it involves dealing with longer-term contracts and complex products with specific requirements that one does not need in the consumer world. Also, because of all the data involved, B2B transactions and interactions are more complex than those in B2C, which tend to be very standardized and typically without a lot of custom pricing and listings of available parts.

Thus, a mere window dressing of B2C platforms has not worked for complex B2B requirements like the following:

  • Contract management—i.e., instead of a mere spot-sourcing that gives a flat retail price for every item sold in B2C model, the B2B world rotates around the direct-sourcing model, where negotiated terms dictate the price that incorporate factors like warranty coverage, volume-based pricing, carrier, and logistics preferences, etc.

  • Business-focused personalization—i.e., rather than B2C-sufficient user-defined profiles and e-mail promotions, B2B personalization needs to handle complex preferences of trading partners based on order history, payment records, location, industry, etc., which requires a strong rules engine and underlying programming effort

  • Content and application syndication—i.e., the seller's site must be able to incorporate product catalog information with pictures and descriptions, while the exchange must be able to syndicate catalog content from multiple suppliers, apply the proper logic for formatting and pricing, and present the information in a consolidated fashion to buyers

  • Reporting that involves intricate business intelligence (BI) and analytics—such as average sale per granular market segments, profitability per product, product group, or market, etc.

  • Back-office connectivity, and invoice presentment and payment—i.e., payment methods based on letters of credit, purchase orders, or cost center codes, rather than mere payments via third-party payment processors like CyberCash that works for B2C

Although the buy-side workflow can be very complicated, involving procurement authorizations from specific suppliers for certain purchasers and particular dollar amounts, still, sell-side solutions are typically more complex, including importing catalogs that involve hundreds or even thousands of parts into e-commerce environments, and customized pricing models for individual customers.

Thus, at the most tactical level, very few of these public Internet marketplaces could have provided some savings in prices by aggregating suppliers, or by reducing time to market by finding available inventory of commodity components through spot markets. However, those benefits have been limited and often short-lived causing thousands of these exchanges to disappear almost overnight.

The Real Benefit

The real potential benefit from Internet exchanges only comes at the level where they provide collaborative facilities to help suppliers and buyers work closely to improve key supply chain processes (including inventory management; collaborative planning; forecasting and replenishment [CPFR]; manufacturing capacity planning; transportation planning, etc.) or aspects of a product lifecycle management (PLM), such as design, creation, servicing, retirement, and so on. All the above require close relationships along the supply chain, and which is far from electronic connectivity. For that reason, private trading exchanges (PTX) have optimized buy- and sell-side activities among certain known groups of suppliers and customers. Consortium exchanges (such as Covisint, Pantellos or the now defunct Chemdex), though additionally challenged by antitrust law and regulations in addition to technological hurdles like interfacing with legacy systems and protocols, have offered some domain-specific value-added services to their respective industry, while only a small number of independent public exchanges have survived by owning and providing vertically or regionally specific content, applications, and services.

For the reasons depicted above, many ill-fated Internet upstarts will have had a rude awakening to realize that B2B e-commerce is very complex and that it requires enormous labor investment. The building of a trading community is a difficult and time-consuming process hung up on organizational, behavioral, and technical issues. The trouble with many now defunct exchanges lay in their aggressive over-hype without much actual delivery, bundled with burning their cash fast during the salad days of the late 1990s on upfront marketing and unjustifiably expensive technology buys rather than on meticulous value proposition, trading community, and infrastructure building.

While we still find it hard to see how small vendors can survive in the face of competitors like Global eXchange Services (GXS), (a B2B e-commerce software, services, and solutions pioneer, which operates one of the largest B2B e-commerce networks in the world, managing one billion transactions annually for more than 100,000 trading partners) or IBM, which should be easily capable of commoditizing its infrastructure work to serve smaller and midsize companies and can certainly attract the large enterprises as customers. Smaller players deserve commendation for raising the bar within the B2B e-commerce arena. Namely, although the connectivity remains important, the value proposition of collaboration and improved planning drives efficiencies and improvements on both sides of the relationship. Those complex relationships require a great deal of face-to-face discussion and this, rather than the actual transaction, is the real expense in B2B trading. This is why technologies that enable collaboration and interaction are often more critical in B2B e-commerce situations than simply technologies that enable basic transactions.

 
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