Notes of Note from John F. Ince

B2B Enters a New and Critical Phase As Pragmatism Defines Its Evolving Character

B2B Enters a New and Critical Phase As Pragmatism Defines Its Evolving Character

(3599 words)

 by John F. Ince

B2B is entering a critical and decidedly pragmatic phase of it’s evolution.  Says Bob Calderoni, CEO of Ariba (See accompanying sidebar), “All the stuff about B2B and the global trade revolution was a lot of talk from brash, young executives who were heavy on marketing and hype.  What we’re about today is providing very pragmatic solutions to real business problems.”  Indeed, the revolutionary rhetoric and the  heady B2B valuations  are now distant memories of what once commanded out attention.  What is left is an industry that is seeking to regroup and focus on cost control and profitability.   Says Dennis Jones, Vice Chairman and President of Commerce One, “During the dotcom frenzy, companies were trying to dotcom themselves as quickly as they could.  But after the implosion of the dotcom bubble,  we now have a return to normalized and focused approach in IT spending, with greater controls so that it grows more consistently with the bottom line.”

As a result of these new market and financial realities, many B2B companies have been through a fairly dramatic rebuilding process, often with wholesale redefinitions of their business models. Says Scott Belser, co-founder of Live Capital (See accompanying sidebar), a company that has been through such a transition. “One of the fortunate advantages we had in making our transition is that the technology that we perfected and the understanding our customers needs that we acquired are very valuable to us now, even with our adjusted business model.  We now have the ability to stand on the shoulders of what we had done before, from a technology perspective.”  But as with any reconstruction effort, the challenges ahead are daunting, especially in this uncertain spending environment.  Those challenges facing B2B, as it enters this new phase, are not only technological, but now increasingly  cultural and behavioral.  Indeed, B2B’s greatest challenge today may be to rebuild the credibility of the sector amongst investors and IT managers and to demonstrate that the savings are real.

Although the buzz surrounding B2B is officially over,  the new phase of B2B’s evolution is founded securely upon a host of collaborative commerce technologies that are, on the whole, more robust than those that were being tested during the heady days of the Internet boom.  But rather than being deployed in the context of netmarketplaces as was originally envisioned, many of these technologies are being deployed by Fortune 1000 companies in private portals.  Says David Yockelson Senior Analyst with the Meta Group, “Portal frameworks continue to be very big areas of spend.  And they continue to be areas where organizations are making very large very strategic decisions, and they’re doing so as integration exercises in disguise.  Companies have spent a lot of money on a variety of applications and now have silos and content all over the place.  And the portal is a way to repair that and get some value out of what people have done.”

Sadly, however, many of these impressive applications  may never be fully executed or realize their full market potential because the pendulum has swung so far back in the opposite direction.  Says Minahan, of The Aberdeen Group, “Today, there is negativity associated with B2B, as there is associated with anything “e”.”  Punctuating the point, Yockelson of the Meta Group says, “I talk with venture capitalists all the time and few are interested in B2B these days.”   Some firms, take LiveCapital for example, (See sidebar) have even dropped the dotcom from their name.

Revolutionary Rhetoric Toned Down

So B2B providers no longer talk about changing the world.  Instead they walk the talk of hard cold numbers along the straight and narrow path to profitability. But before we dismiss all that revolutionary rhetoric, let’s give credit for something profound that was accomplished: today e-commerce technologies have become so widely adopted that it is now an integral part of virtually any serious commercialization strategy, especially for Fortune 1000 companies.  But today, instead of noisily heralding a new era of business with the advent of the  e-procurement, or e-sourcing or “e” anything, business executives are quietly doing e-business, but simply calling it business.  That, in and of itself, is noteworthy.

Yes, many B2B dotbombs were based on hairbrained schemes, and few were able to execute their ambitious plans.  But many other B2B companies are beginning to gain traction as we learn what works and what doesn’t.  In 1999 and 2000, the rising tide that raised all ships, raised a lot of boats that had leaky bottoms that have now sunk.  This winnowing out process is natural in any rapid growth environment.  On balance, the failure rate of B2B firms must be kept in the perspective of any other startup environment, where the rate of attrition is always high.

Integration Packages Spur Collaboration Through CPC

A key challenge for B2B in this new phase will be for  integration at different levels. Most of the action has been in B2B (Business to Employees), KM (Knowledge Management), Collaboration and data integration.  But B2B is also a fertile area for process integration which focuses on better communication with partners, customers and suppliers. Companies like i2, Oracle, SAP are now offering end-to-end buying and selling to marketplaces, and collaboration capabilities.  Their ultimate goal is to figure out what demand is and then to make it so simple a company can push a few buttons and out comes the manufacturing instructions, sourcing instructions, pricing and all that other stuff.

This so called Collaborative Product Commerce (CPC) enables all the potential partners in the value chain to receive the right information at the right time so that they can make more educated decisions, reduce costs and time to market.  Through CPC, the long held hope of creating communities of trading partners who, through B2B business processes, are able to collaborate on process design, inventory, forecasting, insurance, procurement and other business functions is now becoming real.  Says, Mark O’Connell, CEO of  MatrixOne, a provider of product collaboration solutions, “In the electronics industry today, the product development cycle is less than 30 days.  The services that are offered by your cellphone company  change about as fast as clothes in a Gap store. Nokia is one of our large customers, and they have taken the cellphone business to the point where they are essentially in the fashion business.  When you’re compressing cycles to that degree you have to have technologies and security that will enable that linking of the supply chain.”

In a sense CPC is a next iteration of the Virtual Private Network (VPN), concept, a time-tested idea that used to connect just two two parties in a secure one-to-one relationship.  With CPC, however, it’s being done over the Internet with multiple participants and secure communication. CPC moves beyond simple point to point technologies and helps make the networking concept more universal,  flexible and integral to a company’s strategy by including multiple points in the value chain.  But the real action is coming in  with inter-enterprise software solutions and EAI (Enterprise Application Integration).  This was formerly well-established for product lines within a company, and is now being extended across enterprises. This, however, involves a whole new set of challenges in an exchange type environment, because it involves not only the integration of systems, but also involves the integration of other procurement related activities, such as collaborative product planning and design.  This takes the power of the Internet well beyond price advantages. Mega players like IBM and many others are betting big on this.

Capturing Value From Change

What has come into much clearer focus is the distinction between those who can actually capture the value from this change and those who can’t.  Increasingly it is becoming apparent that most of the value is going to be captured by existing businesses–the GEs of the world who are accelerating their supply chains and the John Deeres of the world who are improving the way they handle their distribution networks. And companies like Oracle, SAP, PeopleSoft and Siebel are now entering the space in major way capturing value in B2B software packages that can be added to their existing product offerings.

Troubled Times For the NetMarketplaces

The companies who are increasingly having trouble capturing that value are the netmarketplaces who have discovered the hard way that it takes a lot more to achieve scale and achieve liquidity than simply by dangling the promise of automating transactions or shaving a few points off of each purchase. Successful implementation of a B2B strategy, requires requires significantly more process change than many providers were able to offer.  The sales equation must also include the ability to improve existing supplier relationships, by providing a vehicle for reaching farther down the supply chain and collaborate in areas like as planning, inventory visibility, design and development. Many of the netmarketplaces, even with their hoards of venture capital, simply didn’t have the wherewithal to to accomplish this. And they also lacked the muscle that the companies at the top of the food chain have.  Take for example the recent success of the automakers consortium, Covisint.  They have achieved notable traction in a little over two years, largely because of all of clout the participating automakers have with their preferred suppliers. Ford and GM each got a major stake in the Covisint holding company. Commerce One provides Covisint eprocurement capability and Oracle provides the ERP  infrastructure.

Most other marketplaces, especially those without major brick and mortar partners, haven’t been as fortunate. Yesterday’s high flyer, Ventro’s stock is now a fraction of what it was 24 months ago.   Like Ventro, many other emarketplace startups discovered that there is no easy way to build up transaction volume. David Yockelson of the Meta Group suggests, “Of the approximately 1000 emarketplaces that existed two years ago, less only 5-10% are doing any significant volume and less than that one in ten will be around much longer.”

This is not for lack of  demand, but rather  because the mechanics of the market militate against multiple emarketplaces.  The more people who use a emarketplace the more people will want to use it.  The smart ones have now leveraged the initial connectivity of the emarketplace and added collaborative tools all along the value chain.  In most emarketplaces, the issue of small cost saving tends to be less important than finding the best possible partner.  In the most viable emarketplaces, partnering process leads to relationships in strategic sourcing, fulfillment, quality-based selection, and speed of delivery.

B2B Players Redefine Themselves

In light of these new realities, several of B2Bs most prominent players are seeking to redefine themselves to reflect perceived new market opportunities. (See Accompanying Sidebars). Take for example Freemarkets, which initially was largely involved with the service side of the business in emarketplaces, but now has moved increasingly into software components.  As a result, Freemarkets CEO Glen Meakem has been able to stabilize the company, and begin to turn it around.  But in this increasingly skeptical B2B investment climate, the turnaround is easier said than done.

Commerce One and Ariba have both had a tough time convincing people that their revenue models would fly because competition from large ERP players such as SAP, Oracle and Peoplesoft is greater and because Ariba had been focused on commodity-type purchases. Also their key strategic relationships have either gone by the wayside or are on shakey ground.  Ariba’s relationship with i2 and IBM fell apart in early 2001 and according to Jon Ekoniak with Piper Jaffray, “Commerce One’s relationship with SAP has been cooling as Commerce One has been developing products, especially on the procurement side that will be competitive with SAP.  As a result the relationship has changed.  The relationship on the procurement side has been scaled back and the relationship on the marketplace side really was the strong part of the relationship continues, but terms aren’t quite as friendly as they once were.”

If Commerce One is struggling, it’s largely because the procurement side of their business is very competitive and their netmarkets side is declining.  Players like PeopleSoft, i2, SAP, Oracle and Ariba all have products in the procurement space, and have the ability to upsell to existing customers.  Also  Commerce One was late to the game in e-procurement.  According to Ekoniak,  “They were swinging for the fences trying to hit a home run with B2B marketplaces.  But B2B marketplaces have not taken off.  We’re not seeing new marketplaces come up and that’s hurting revenues.   But the other component of Commerce One’s revenue model was a recurring revenue, where they would take a piece of each transaction.  There aren’t many transaction and their revenue line from that part of the business is declining.”

But the real problem facing both Ariba and Commerce One is that there was a fundamental shift in the marketplace between 2000 and today.  Says, Ram Gupta, Executive Vice President for Products and Technology of PeopleSoft. “ It is no longer enough to just have a piece of the puzzle.  At the end of the day you have to implement a real time business process all the way from the customer to the enterprise to the supplier.  Ariba and Commerce One did an outstanding job of having a piece of that puzzle known as e-procurement.  But an e-procurement system without a purchasing system, general ledger or field system, is not very useful.”

Another another key lesson that seems to have to be learned again and again is the B2B version of the old “garbage in, garbage out” adage:   information supplied to the system has to be right in the first place.    Says Sean Rollings, Senior Director Product Marketing of Oracle,  “B2B should not be seen as a stand alone capability, but it needs to be integrated better with your enterprise flows.  It has to be an inside-outside game.  In order to share information efficiently with your partners, you’ve got to get the information right on the inside.”

The challenge of integrating information flows and applications is a key one for Ariba.  Partially as a result of increased competition from the bigger boys in the ERP space, Ariba’s revenues are off sharply from a year ago (Q1 2002 revenues of $55 million versus $170 million in Q1 2001).  But analysts suggest that new CEO Bob Calderoni has recognized this challenge and confronted it head on.  It appears that Calderoni has stabilized operations, and unless the economy tanks, is in a good position to stage a rebound in revenues and a push to profitability in June 2000. According to Jon Ekoniak of Piper Jaffray, “We’re hearing from systems integrators that the procurement space, which is Ariba’s strength is holding up fairly nicely.  There is a lot a demand from Fortune 2000 companies for procurement products, so Ariba, which is a pure play in this space is benefiting.  The market has hit the bottom in this space and their starting to rebound.”

According to Ariba’s Calderoni, they are also expanding their product offerings into Enterprise Spend Management (ESM), “When I took over, Ariba was a one product e-procurement company, and I recognized that e-procurement wasn’t all that the customers needed.  They really did need help in managing “spend” in their organization.  We have expanded from an IT solution to a much broader suite of solutions.”   Ram Gupta, Executive Vice President of PeopleSoft, for one, isn’t impressed with Ariba’s recent product announcement in ESM.  According to Gupta,  “You can choose a fancy term like Enterprise Spend Management, but what is that?  It is having complete visibility into your spending, with some analytics included.  For the rest of the world, that is called SRM, Supply Relationship Management.  PeopleSoft has always had SRM.  I2 bought a company called Rightworks to do exactly that, and SAP will have it soon.  Ariba is trying to spin it, by using a different term.”

Hot Areas of B2B

But the areas of B2B that are gaining the most traction right now are those that can deliver on promises of cost control, containment or reduction. Now that we’re officially in recession, companies are reluctantly accepting the reality that they’re not growing revenues. Says Dennis Jones, Vice Chairman and President of Commerce One, “For the foreseeable future, the focus will be on cost control and containment, because that’s what companies can predict.”    Cost control will alway remain important, but as the economy starts to turn itself around, and companies get greater visibility on revenues, containing costs will become a less significant growth driver for B2B.

Another hot area of B2B is CRM (Customer Relationship Management).  The breakaway leaders in this space are Siebel Systems and PeopleSoft.  CRM, at it’s core, involves the ability of companies to develop deeper and stronger relationships with their customers.   Says, Jon Ekoniak, “CRM is hot now because, once companies get good control over their internal organizations, they then look for ways to differentiate themselves externally.  Product differentiation is getting more difficult, so companies are looking to differentiate themselves based on the services they provide.  That’s what CRM is all about.”

Siebel’s strength lies in their historical and singleminded focus on the CRM space.  As a result they’ve built deep products and understand the requirements.  PeopleSoft’s December of 1999 acquisition of Vantave was key because it brought them the capabilities of one of the early stage CRM players, and their existing customer base.

Web Services Attracts Investor Interest

Web Services is another area of B2B (See accompanying Sidebar) attracting a lot of media attention and investor interest.  Says Jon Ekoniak of Piper Jaffray, “Web service is about building software components to specific standards, so one application can access a specific module of another application and they can share information seamlessly.  Therefore software functionality can be mixed and matched from various vendors, making software integration issues a thing of the past.”

Web services used to be the domain of SAP, i2 and other large ERP providers, but there are now opportunities opening here for niche players to hit it big by developing a robust application tailored to specific use.  In essence, Web services, enables the sharing information between different software products, so, in the ideal, B2B  trading communities can communicate with each other.  In such a world, a component of Siebel software would work on the fly with a software component from PeopleSoft.  This is important for potential users who later might want to switch from a PeopleSoft application to a Siebel application.  Today, that is a difficult process, and generally involves hiring a system integrator such as Anderson Consulting or KPMG.  With Web services, EAI  (Enterprise Application Integration)  companies like WebMethods and SeeBeyond are selling software to automate that process so that the people from the system integrator firms don’t have to do it.  The EAI players are, however, doing it with using proprietary technology, while web services offers the promise of open standards.

For the application software vendors, Web services is about building software to standards to make it possible for companies to easily connect their applications and enterprises across the network using open protocols, so that they could have real-time interaction.  Investor interest grows out of the realization that the potential market is huge, since most Global 2000 companies operate with a patchwork quilt of applications, some some running on Unix systems, some back office functions running on SAP, some front office systems running on Seibel, and legacy applications running on the mainframe.  Says WebMethods CEO Merrick, “Our customers were asking for a common integration platform that would allow them to tie together business process reaching all the way back to all those applications.”

Rebuilding Investor Confidence After The Bursting of the Internet Bubble

Despite the psychological shock of the bursting of the Internet bubble,  we may yet see B2B fully live up to its transformational potential.  Why? Because most of foundational principles of the B2B revolution are still valid. The Internet remains the cheapest and simplest form of communication that history has seen. The Internet is transforming the way businesses operate together.  If anything these precepts more valid today as adoption continues towards ubiquity, especially in the enterprise in areas like supply chain management, (See June issue of Upside for a follow up story on Supply Chain) Web services, back end technologies, in B2E (Business to Employees) and CRM.  Major players like Cisco, GE, John Deere, Dell and Wal-Mart are already reaping tremendous rewards from better inventory management, greater employee efficiency and many others companies are closely following suit.

So B2B is certainly not dead.  According to Sean Rollings of Oracle, “The exciting thing is that B2B is alive and well. There have been a lot of lessons learned along the way as the revolution raged.  One of the key lessons is that there is money to be made with B2B, but not necessarily off B2B, as was tried in the netmarketplaces.   If you have your eye on the ball,  the ability to create efficiencies and become more competitive, than you can be successful in B2B.”

So the reality of B2B  is that despite the current downturn and the reluctance of investors to pony up for new investments in this space, we’ve barely even even scratched the surface of its potential in terms of savings of cost, time and the efficiencies that they bring.   According to David Yockelson of The Meta Group,   “It’s not that the B2B spigot has been entirely turned off, but people are becoming much more realistic about where and when to spend those dollars. There’s still a lot of technology to be selected and bought.”

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