Productivity, Not Profit, Key to B2B

While a report released Monday by the Boston Consulting Group (BCG) predicts that revenue from business-to-business (B2B) e-marketplaces will approach $9 billion (US$) in 2005, the research firm suggests that the greatest benefits of B2B exchanges lie in increased productivity, not in the revenues they generate.

BCG predicts that by 2004, B2B e-commerce will bring about productivity gains equivalent to 1 to 2 percent of sales. By 2010, that figure could grow to 6 percent.

More to Value Than Revenue

“While our projections show that e-marketplaces will grow rapidly, they won’t generate the kind of blockbuster revenues that many may have expected,” BCG vice president Paul Orlander said.

“Most of the value created by B2B e-commerce will be captured by the buyers and sellers that participate in these e-marketplaces,” Orlander added.

The report also predicts that in five years, e-marketplaces serving the largest industries in the United States could be generating $350 million to $450 million in annual revenues. E-marketplaces in other industries will generate revenues of much less than $100 million.

Survival of the Fittest

Despite the benefits to be gained from B2B exchanges, each industry segment will only be able to support one to three major e-marketplaces, BCG predicted.

“Today, there are more than 700 e-marketplaces currently in operation. Most of them face an uphill battle to survive,” BCG vice president Matt Holland said.

“Ultimately, the U.S. B2B market will be characterized by a handful of e-marketplace giants that serve the overall needs of an industry and scores of niche players serving a special segment within an industry or providing a specialized function across many industries,” Holland added.

BCG’s research echoes the findings in a report issued in August by Forrester Research which found that the recent enthusiasm for online markets has created an “unsustainable profusion” of business-to-business (B2B) sites. Forrester predicted a B2B shakeout would ensue, leaving fewer than 200 companies in business.

Recent developments suggest that the B2B shakeout is already beginning. For example, AirNewco, an online trading exchange backed by several major airlines, announced last week it was joining forces with a similar exchange, MyAircraft.com.

Surviving the Shakeout

To survive the coming shakeout, e-marketplaces will need to bridge the gap between lost revenues and a rising demand for such collaborative services as supply chain forecasting and planning tools.

Those services are critical to the long-term sustainability of B2B exchanges and could eventually account for up to half of total e-marketplace revenue. Yet because collaborative services are costly to implement, they are not expected to be widely available for at least four to five years.

According to BCG, the surviving e-marketplaces will be those that offer vendors a way to differentiate themselves from the competition and enhance customer relationships, rather than just another channel for selling products.

Recipe for Success

BCG has established five factors they believe are critical for e-marketplaces to “create the critical mass or liquidity required” of a viable business:

• Leave room for companies to differentiate themselves.
• Stay cost-effective and focused on execution.
• Clearly communicate to buyers and sellers the value that the e-marketplace creates.
• Extend the offering to small and mid-sized companies.
• Be flexible about changing the business model.

“The e-marketplaces that are able to create a network effect within an industry — delivering greater value as increasing numbers of participants join and collaborate online — will outlast the short-term pressure on revenues and break out from the pack,” said BCG vice president Tom King.

The findings of the report, “The B2B Opportunity: Creating Advantage Through E-Marketplaces,” are based on a three-month survey of nearly 500 executives of major buyers, sellers and e-marketplaces, as well as in-depth interviews with more than 30 executives of companies active in B2B e-commerce.