Written with Jay Srinivasan, Director at Siemens. Before Siemens, Mr. Srinivasan was the Director of eBusiness Strategy at PricewaterHouse Coopers and Director of eCommerce at Compaq and Digital Equipment Corporation. A modified version of this article has also been published in the Global Finance Magazine.
Recently we volunteered our time to help organize a conference for entrepreneurs. When we needed to print a brochure for the attendees, instead of running around to find if anyone knew a printer, we just went to PrintIndustry.com (operated by Printing Industry Exchange, LLC, Ashburn, VA). In a matter of hours, we had several bids from all over North America, and as we later found out, from printers outside North America, but who were working through their agents here. Similarly, when we needed a new logo design, we posted a bid on Elance.com (Mountain View, CA). Again the bids poured from all over including Romania, Bulgaria, India, and Pakistan.
But what happened to all those e-markets and exchanges that were supposed to become the hub of buying and selling like eBay? They either filed for bankruptcy (e.g. CommerceOne), got acquired (e.g. FreeMarkets), or transformed their business model (e.g. Covisint, VerticalNet, Ariba, Onvia, etc.). Others, like Elemica, are struggling to survive. In summary, no business-to-business (B2B) online marketplace could become the business equivalent of eBay. On the other hand, eBay was able to attract a lot of business customers.
During last few years, though, as we wrote above, a number of bid-based online resources have emerged that provide excellent service to corporate customers of all sizes, and particularly to small business owners. A small business owner that had to literally beg suppliers of many high-value products and services can now watch silently as suppliers fight among themselves virtually driving down prices in real time. That is what happened to us for our logo design project. Even the design firms based in North America had to lower their bids to match with those of the Pakistani firms to get our business.
So what went wrong?
MRO e-procurement is no big deal according to many CIOs or supply-chain executives. Any MRP/ERP system can handle MRO e-procurement as long as a customer creates a part master data for the item, whether it is a paper or a simple coolant. Any MRP/ERP consultant who knows the fundamentals of the system knows this. We are not aware of any companies, which give part numbers for paper and pencil unless they are in the business of manufacturing or selling paper and pencil. Many companies found clever ways of introducing the dummy part numbers and using the existing system to do the MRO e-procurement.
While many companies want to empower their employees to make decisions related to purchase of office supplies, there is also the issue of how to implement control systems. Purchasing managers are generally afraid of losing the so-called perceived sense of control.
Most of these applications (or in reality application tool kits) were priced in the $400,000 to $500,000 range and by the time they added the customization of the application and back office integration, the total bill easily climbed to around $1 Million. This was a sticker shock for most of the CIOs since they just implemented or were in the process of implementing a multi-million dollar ERP system. Imagine a CIO going to the CEO and board and telling them that the 10+ million dollar ERP system they just approved last year will do everything except for buying paper and pencil and they needed additional budget for $1 million plus. This became even trickier when most of them were still implementing and going through the learning/growing pains of ERP systems.
Small and mid-sized companies were not really interested in making commitment to such a large investment in terms of MRO e-procurement since ROI took much longer. In any case, their MRO e-procurement expense was not as significant as bigger companies.
Then there was the issue with system compatibility. As new vendors emerged rapidly, they tried to differentiate themselves by developing their own systems without any industry standards in place. No surprise then that those customers who did sign up with the B2B marketplaces spent months trying to make the disparate systems work with each other, not only adding to the costs but also frustrating the users.
The new paradigm in B2B marketplace
It is fairly obvious that those online marketplaces that did survive learned from the mistakes during the early years. In fact the concept of large companies using online trading hubs for big-ticket products is no longer viable. As Elemica customers have realized, there are more efficient ways to conduct business when you do business with only a handful of companies. However, when the supplier base is fragmented, as in the case of print shops, online marketplaces provide an excellent choice for buyers. That is why apart from PrintIndustry.com and Elance, there are others that do something similar, sometimes specializing in certain product/service categories or industries (e.g. BuyerZone.com, eWork, Guru.com, etc.).
And customers couldn’t be happier since the level of competition is intense. The intermediary, while it might appear as a nuisance, actually creates a lot of value for buyers by standardizing the terms and conditions, providing a system of open feedback, and facilitating disputes, if they do arise. Like eBay, even a single dissatisfied customer can lower your ratings, which can have disastrous effects.
What does it mean for you?
- A marketplace makes perfect sense only if there are too many sellers. In other words, there should be an opportunity to eliminate inefficiencies from the procurement process. A handful of buyers and sellers can deal directly with each other relatively efficiently.
- The process of procurement has to be simple. Now that web services are much more developed, it is possible to provide most procurement services without requiring any software purchases and maintenance.
- The procurement process has to be transparent to make the competitive forces work in a fair manner.
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