How to Do B2B

How two digital exchanges help sellers find buyers in the exploding business-to-business marketplace.

Analysts' forecasts may vary by billions of dollars, but they all point to the same thing: an enormous business-to-business e-commerce market.

Forrester Research Inc. in Cambridge, Mass., pegs last year's business-to-business Internet trade at $109 billion. It expects that figure to reach $2.7 trillion by 2004. Gartner Group Inc. in Stamford, Conn., also predicts skyrocketing growth, from $145 billion last year to $7.29 trillion worldwide by 2004.

Analysts expect the bulk of this trade to take place on vertical industry exchanges, the online trading communities where multiple buyers and sellers come together to buy, sell and conduct a wide range of other activities, from posting requests for proposals and comparing pricing to auctioning off excess inventory.

In the past few months alone, the number of these trading communities has nearly doubled -- from about 200 to 400 -- according to Vernon Keenan, founder of San Francisco-based Internet consultancy Keenan Vision Inc.

"We're seeing a general movement (toward exchanges) in every industry you can think of," Keenan says.

For now, the great majority of these exchanges are busy wooing buyers and sellers in the new digital marketplaces. But before long, wooing won't be necessary, analysts say.

"Economic factors will compel everybody to participate," says Keenan. Those who don't, as well as latecomers, "will be wounded in their economic underbellies," not unlike the mom-and-pop hardware stores that went belly-up with the advent of mega-home improvement stores.

But not all exchanges operate the same way. Some link buyers with sellers, while others operate with a middleman at the center of the process. Still others offer auction capabilities. Some charge only sellers, while others provide users with the information technology infrastructure, software and implementation services to get up and running on their exchanges.

Here's a look at two exchanges with different approaches.

The Seller's Agent:

Business-to-business e-commerce isn't new to Buffalo Hospital Supply Co. For more than a decade, the $50 million, Buffalo, N.Y.-based distributor has been using electronic data interchange (EDI) to buy and then sell its line of health care products and equipment, primarily to hospitals and long-term-care nursing homes in New York and Pennsylvania.

But now, the company is taking a giant step onto the Internet. After being courted by at least a half-dozen online exchanges that cater to the $100 billion-plus medical supplies market, the distributor is making its product catalog available online via Inc., a San Diego-based business-to-business health care exchange.

"What Medibuy allows us to do is put our catalog on their site for anybody to use. It tears down the geographic barriers and makes us much more of a global company," says Buffalo Hospital Supply CEO Gary Skura. "It also lets us branch out to sell beyond hospitals and nursing homes."

Since November, when the medical supplier established a beta site, only a few new orders have trickled in from the exchange. But Skura says he isn't worried. He's still ahead of the competition. "We've done more (on the Internet) than most distributors have done," he says.

"It's still the early adopters and pioneers who are doing this stuff," says Gartner analyst Mike Davis. In general, Davis notes, health care companies are slow to adopt new technologies. But in three to five years, he says, business will be thriving on the digital exchanges, which have the potential to pare industry transaction costs of $24 to $100 per order today to between $5 and $10. Eventually, those numbers should drop to less than $1 per order, Davis says.

Meanwhile, as a beta site, Buffalo Hospital Supply hasn't spent a nickel on technology or professional services to begin selling its products on the Internet. has done all the systems integration work, including customizing contract pricing data for Buffalo's various customers. Before it signed on with, Buffalo Hospital Supply had been developing its own Web site. But it dropped the project in favor of moving to the Internet via the industry exchange.

The company's customers can also access real-time availability and shipping information because the site transparently connects customers to the supplier's in-house enterprise systems.

"We have seamless integration, so the buyer doesn't feel they have left the Medibuy site, but they're actually using the (supplier's) price files. The advantage of that is the likelihood of much higher accuracy," says Robert Witt, chief technology officer at also does much of the systems integration work necessary to hook up buyers and suppliers to the Web site. "We have a very robust implementation methodology, under which we send in an integration manager with a series of tools that identifies which suppliers a hospital needs to deal with to conduct business," Witt explains. Because it has this information, also knows what kind of traffic volumes to anticipate, and that helps with its own planning of network and Web site capacity, he says.

Buyers need only minimal IT expertise. provides a turnkey service "where buyers can come onto our site with very little in the way of internal systems to support their work (online). We'll provide them access to the Internet through our business intelligence systems, and we'll also provide them with all the reports they need," Witt says. also furnishes the buyers with detailed monthly reports of all of their purchasing activity. This can pinpoint high-volume suppliers, which hospitals can then target as candidates for contract renegotiation.

Now, in contrast, hospitals "often won't realize the number of times their own (purchasing group) goes off (prenegotiated) contracts for the same items," notes Witt. "This way, they can aggregate their buying potential and go out and negotiate better contracts."'s pricing model calls for free use by buyers, while suppliers like Buffalo Hospital Supply pay a transaction fee of less than 1% of the total for each order that comes in over the exchange. One of the biggest ways a supplier can recoup these costs is in the significant savings achieved by processing orders electronically, rather than by phone or fax.

But pricing is also where things may get sticky. Skura, for example, says he's willing to pay a fee for new business that comes in via the Web site, but he doesn't want to ante up for Web-based orders from existing customers who now use EDI (about 55% to 60% of Buffalo's incoming orders) or do business with the company manually.

"I'm not keen on giving ( money for that," Skura says. "We're still negotiating."

Grain Middleman:

The Internet may be global, but is using it to create regional networks of grain buyers and sellers with a traditional twist: middlemen.

Rather than cut out brokers and link buyers and sellers directly, Calgary, Alberta-based has positioned them as service providers. Grain brokers, who sell on behalf of farmers, continue to match buyers with sellers, arrange for transporting crops and help set up credit terms. What's different is that they carry out these tasks on the Internet at a central digital marketplace, rather than by phone or fax.

"If there's 500 tons of barley, and the farmer wants $75 a ton for it, we can put that (on, and it goes out to more than 100 buyers," says Blair Pfeil, a trader at Western Commodities Trading Inc., a grain broker and beta site in Spalding, Saskatchewan. The advantage here: Brokers can more quickly reach a wider audience of potential buyers.

"Instead of phoning up every one of them to see if they want to buy this 500 tons, it goes out on-screen, and everybody can see it. And they all get a chance to bid on it," he says.

It wasn't always this way. In its debut -- as an online trading exchange called Agrilink -- buyers and farmers could do business online directly. But they didn't.

"The technology was built with the view that you could displace the middleman, but the strategy was not largely successful," says President Greg Lore.

The reason had to do with one of the market's most critical players: the farmers themselves. They value long-standing relationships and weren't willing to sell their crops without a broker's guidance, Lore says.

"We find that computers scare most producers, except the younger ones," says Pfeil. "They don't want to use computers to do business. They want to have a one-to-one relationship, which is a big thing. They want to put a name and a face together."

So reworked its strategy and last year launched a site that includes brokers, who use the exchange to contact a broader group of buyers whom they can reach via phone or fax.

Here's how it works: Brokers post a list of available crops on the exchange for buyers to view. Once a bid is placed and accepted, immediately executes the transaction online and then collects a percentage of each deal -- between 0.25% and 1.25% of the value of the commodity.

Since its beta-test launch in September, has hosted trades totaling more than 2.5 million bushels of grain. The exchange has signed up three brokerages and about 600 farmers so far. Compared with other industries, that's a slow start on the Internet, analysts say. But looking ahead, the pace is sure to pick up rapidly, as younger, more technology-savvy farmers take over family-run operations.

"The average age of farmers today is close to 50 years old. This is a person who isn't likely to trust his entire livelihood to somebody he has no idea of on the other (side of) a screen," says Shawn McCambridge, a grain analyst at Prudential Securities Inc. in Chicago.

It won't be until the next generation comes up that farmers will be likely "to grasp all of the efficiencies of the new (Internet) technologies," he says.

Copyright © 2000 IDG Communications, Inc.

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