B2B exchanges failed because they got their business model backwardJust two years ago, business-to-business trading exchanges were the rage. Experts, including myself, waxed eloquent about the potential of B2B exchanges to act as hubs, connecting buyers and sellers in electronic marketplaces.
Of course, we were all very wrong. The B2B boom quickly went bust as investors started asking inconvenient questions about the viability of the business model. Now, most B2B exchanges are either dead or on life support. One might conclude from the evidence that the idea of a B2B exchange is fundamentally flawed. However, it's not the concept of the exchange that is flawed but the execution of that concept.
At the root of the failure of B2B exchanges is the fact that their founders put the cart before the horse. Their logic seemed elegant: create marketplaces that would match buyers and sellers, bringing improved liquidity, efficiency and transparency to B2B transactions, and make money through transaction fees from the trades. Once the buyers and sellers were on board to conduct transactions, the exchanges could augment that core functionality with value-added services such as logistics management, credit and settlement, and supplier verification.
But getting an exchange off the ground requires a minimum level of liquidity, and getting that liquidity requires solving the classic chicken-and-egg problem. If you don't have a critical mass of buyers, how do you attract suppliers? And if you don't have most of the suppliers, why would buyers participate? Most B2B exchanges failed because they could not get past that first hurdle. Suppliers resisted joining the exchanges because they feared direct comparison with competitors would erode their margins. And buyers as well as sellers were loath to pay transaction fees for what they felt was a simple matchmaking function.
But the struggle for liquidity is merely a symptom of the real problem, which is that the creation of exchanges to match buyers and sellers preceded the creation of software and services that would make exchanges truly useful. That amounted to putting the cart before the horse. B2B exchanges should have begun by solving a focused business problem one customer at a time. That approach means that exchanges will need to do much more than merely facilitating transactions, which, after all, involve far more than a simple purchase or sale.
Most B2B interactions involve intense collaboration on planning, forecasting, design and problem solving. The real problem that enterprises face is not in finding new suppliers or buyers. Rather, it is in improving the efficiency and effectiveness of the processes by which they interact with existing suppliers and partners. Those processes start deep within the enterprise and extend outward to customers, suppliers and channel partners.
In time, a new breed of software and solutions companies will emerge to automate and redesign specific inter-enterprise business processes. As these new companies develop a solid base of customers, they can then start connecting those customers with suppliers to create a marketplace. By that point, most of the suppliers and buyers would be on the same platform, and it would be easy and useful to connect them.
Solving the Right Problem
Some B2B exchange companies are getting the message and have repositioned themselves as enterprise software and services companies. They are de-emphasising their market-making functions and strengthening their process-enablement functions. Consider Celarix, a Boston-based start-up founded in 1998 by two of my former students. Celarix operates in the area of collaborative logistics. In its early days, the founders debated what Celarix should look like when it grew up. They realised that the company could emphasise two general areas in its business: an exchange that would match logistics vendors with their Global 2000 customers, and software that would allow enterprises to streamline their global logistics by monitoring all their transportation vendors and shipments in one place.
Two years ago, Celarix felt that the logistics marketplace was the more attractive opportunity. But reality lay in the other direction. The company now focuses on selling software and services like systems integration, trading partner verification and transportation contract administration. Celarix now sees the logistics marketplace as a by-product of the software and solutions business, and not its main focus.
Instill, a California-based B2B start-up, which I advise, learned the same lesson. Instill provides supply chain solutions for food service industry giants like Sodexho Marriott, Subway and Tricon. Two years ago, Instill felt that it could create a lucrative purchasing hub called Foodscape that would allow transactions between food service providers and suppliers. Today, Instill sells supply chain management software and related services to food service providers. Its software solution includes procurement management, analytics for purchasing management, contract management and collaborative planning. Instill looks a lot more like a software company than a marketplace.
There are business processes besides procurement that can be enabled by B2B software. Consider marketing and new product development, which have been largely untouched by the enterprise software revolution. A host of exciting new companies are creating software and services for improving these processes. In the area of enterprise marketing automation, companies such as Aprimo, Emmperative, Kickfire and Notara are building platforms that allow marketing executives to plan and analyse the results of their marketing programs, allocate budgets and implement campaigns.
In the area of new product development, companies such as MS2 are helping product management teams automate the process of defining, designing and marketing new products. Like the companies that focus on supply chain management and procurement, these start-ups are tackling a specific business process to enable collaboration - not transactions - and selling their products to individual enterprises - not entire industries.
Amid the gloom and doom that permeates the B2B technology world, I see rays of light from a new generation of companies that has learned a basic lesson: the future of B2B e-commerce lies not in exchanges but in software and solutions that bring real efficiencies to specific business processes. The business of trading exchanges populated by anonymous buyers and sellers is best left to financial exchanges and commodities traders because only pure commodities can be bought and sold in marketplaces. As the founder of Dean Witter used to say: "We build success one investor at a time." Similarly, B2B companies will build their business one customer at a time, instead of building marketplaces with no customers.
Mohanbir Sawhney is the McCormick Tribune professor of e-commerce and technology at Northwestern University's Kellogg School of Management and a fellow at Diamond-Cluster International.
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