B2B exchanges that failed to deliver

Siobhan Kennedy

NEW YORK: Of all the over-hyped e-buzzwords, online business-to-business

exchanges of (B2B) takes the cake for generating the most excitement while

delivering the least returns on investments. Though the concept of saving

billions in terms of costs by executing business transactions with suppliers and

partners over the Web quickly gained popularity, it is of little surprise that

when alarm bells began ringing, many were taken aback by the turn of events.

This was what exactly happened when last week executives from Ariba Inc., a

pioneer of the B2B software market, shocked Wall Street by announcing that sales

of its online exchange software amounted to a shocking ‘near zero’ in the

first quarter. The decline in sales led the once high-flying Ariba to cut a

third of its workforce and declare it would make a loss in the quarter, a

complete reversal of what profit analysts were expecting.

A day later its biggest rival, Commerce One Inc., also warned it would also

miss the Wall Street's profit estimates.

So what’s wrong?



"There was a general perception that since all applications were Web-based,
somehow the software could be designed, debugged and implemented in these 90 day

time frames and work, when it had never been proven and tested," said Bruce

Richardson, an analyst at industry research firm AMR Research in Boston.

International Data Corp's Leo Lipis agreed. "They're certainly not even

meeting the expectations that were set for them a year ago," he added.

Of the thousands of online exchanges set up within the last year and a half,

hundreds never made it off the pages of the news release, and of those that did,

a huge number have either gone bust or are teetering on the brink of bankruptcy.

Last month, Ventro Corp., which owns and operates B2B exchanges, closed two

of its key marketplaces, chemical exchange Chemdex and medical industry exchange

Promedix, resulting in a loss of $382.5 million. Year-end losses totaled $618.1

million, 11 times greater than the $48.6 million loss for 1999.

Dell Computer Corp. quietly closed its exchange, Dellmarketplace.com, which

connected its customers with third-party suppliers of office goods and services,

in February. Earlier this month, in Washington, DC, and Delaware electric

utility Potomac Electric Power Co. (PEPCO) said it was closing its office

supplies and services exchange due a lack of uptake from buyers and suppliers.

Only the large, public marketplaces - Covisint in the automotive industry,

Transora in consumer packaging goods and Exostar in aerospace and defense, for

example - are still visible. But try to eke out hard data about transaction

volume, or actual savings, and it's like trying to penetrate a heavily guarded

fortress.

No participants



But the biggest factor holding back exchanges is the lack of suppliers, analysts
said. "Nobody, not one of the big vendors nor any of the public exchanges

has really made a concerted effort to bring in the small and medium

suppliers," said Joshua Greenbaum of Daly City, Calif.-based Enterprise

Applications Consulting. This apart less than 1 percent of the world's suppliers

are connected to online exchanges. "But if they don't get every supplier

involved they won't get critical mass and the exchanges will just remain a bunch

of press releases."

Down but not out



Nevertheless, analysts still believe there is a place for online exchanges

in business-to-business commerce. "There is no question that expectations

outpaced reality," said Morgan Stanley's Digital Transformation Group Peter

Pashigian, vice president of Morgan Stanley's Digital Transformation Group,

which invested in e2open, among others.

"If you think of it as a pendulum, it swung too much to one side last

year, but now it's swung too much to the other. The answer is it should be

somewhere in the middle, because the same business problems still exist,"

Pashigian said. According to AMR's Joan Harbin, author of a new report on

exchanges, due out this week, electronic marketplaces are here to stay.

Harbin's team reviewed data from the top exchanges in 10 industries from a

list of more than 1,400 survey recipients. "Though money is changing hands,

no one's profitable yet," Harbin said, adding that AMR saw revenues

crossing exchanges in retail, chemical, utilities and some in aerospace.

For example, CheMatch.com, an online exchange in the chemical industry,

completed more than $450 million in transactions in 2000. And since going live

in October 2000, $9 billion worth of electricity has been traded via Tradespark,

an exchange in the utilities sector.

All of which supports an important point. Exchanges that automate buying and

selling of commodity goods, such as plastic or electricity, are taking off

fastest because the transaction is simpler than the more complex collaborative

planning and design processes required for other products, such as cars.

"But broader-scoped exchanges are floundering in their attempts to deliver

capability," Harbin said, pointing to companies like Covisint and Transora.

B2B not B2C



To succeed, AMR's Harbin said B2B exchanges need to stop thinking they can just
be a wholesale version of retail, or business-to-consumer, sites like Amazon.com,

eBay and Priceline.com. "The transaction between a business and a consumer

is not that complex. But when we're talking about collaborative planning and

design between buyers and suppliers, those are complex processes and they take

time to build out."

But even Harbin, who was more optimistic than most analysts, was somewhat

skeptical that the exchanges could implement such collaborative procedures.

"It just remains to be seen where those processes will be supported. We'll

have to look at it again in another 12 to 18 months to find out," Harbin

said.

(C) Reuters Limited 2001.