B2B hubs in reverse spin as business goes back to basics

Online business-to-business exchanges sounded a great idea. So why are so few buying it?
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It is only a year since "business-to-business exchanges" were tipped as the next big internet idea. These online marketplaces, or B2B "hubs", were supposed to transform big companies' costs by establishing a closer, quicker and cheaper relationship with key suppliers.

It is only a year since "business-to-business exchanges" were tipped as the next big internet idea. These online marketplaces, or B2B "hubs", were supposed to transform big companies' costs by establishing a closer, quicker and cheaper relationship with key suppliers.

Another part of the concept was that "reverse auctions" could be staged, where a company would put an order out to tender and wait for eager suppliers to bid each other down on the price.

As huge consortia developed, some with combined buying power of up to $200bn (£136bn), there was talk of cartels and regulatory action. Some companies even said they would float the exchanges as separately quoted entities.

But just as the steam has gone out of the business-to-consumer internet engine, these B2B exchanges have been facing a more challenging period too. Just2Clicks, an AIM-listed operator of several industry trading platforms, yesterday put three of its seven hubs up for sale as part of a wider review that could lead to the sale of the whole company.

It is selling webfreight, pulp&paper.net and Granite Rock in an effort to halve its monthly cash-burn to £325,000, and will concentrate instead on those of its exchanges that have managed to generate more significant sales volumes, such as e-cement, translinx (road transport) and Best Value Zone (local authorities). E-Cement achieved $700m of online transactions between June and September.

Elsewhere the pace of development has slowed as the big corporates feel a reduction in the "fear factor" of last year when they were worried about "pure play" internet companies grabbing market share and a slice of their margins.

Robin Tye, head of e-business consultancy at PricewaterhouseCoopers, said: "There has been a change in attitudes in the corporate sector. A year ago they were worried about the internet start-ups coming in and eating their lunch. But you need three things to success in business exchanges - liquidity (sales volumes), cash and a brand. The pure plays often lack two of these and sometimes all three."

Mr Pye said large companies were now simply taking a "more measured" approach to these trading platforms, rather than giving up completely.

Karl Watkin, chief executive of Just2clicks, is more critical: "Eventually companies will get online and use these services, but at the moment the incentives are just not good enough."

His view is that last year corporate boardrooms were attracted to business exchanges, as any Net-related strategy would drive up their shares. Now, he said, this view has turned full circle despite potential cost savings of 12 to 13 per cent. For multi-billion turnover businesses, the potential benefits are huge.

Mr Watkin's views were echoed by many Old Economy business leaders at the World Economic Forum in Davos, Switzerland, last week. There, the view was that a year ago B2B was about getting your share price up. Now it is about back to basics.

Also at Davos, Phil Condit, chairman and chief executive of Boeing, said half its costs were transaction-related and that the IT revolution provided an immense opportunity to cut them. With 32,000 suppliers, the chance to shave just a few points off the cost base would represent a huge saving, he said.

So, while it is true that an internet strategy will no longer put a rocket under a company's share price, many of the world's biggest corporations are still pushing ahead with their business exchange ideas as margins come under pressure and cost control becomes all important.

Virtually every industry sector has its own exchange, or hub. In the leisure sector, Bass, Whitbread, Accor and Granada-Compass have grouped to form an as-yet-unnamed hub to buy food, drink and travel. In aerospace, BAE Systems, Boeing and Lockheed Martin have formed a huge $71bn joint portal. There are exchanges in food manufacturing, retailing, oil and cars.

But progress has been slow. For example, the leisure industry announced its e-hub last August, but so far it has no name and has not begun trading, and one of its five founding members, Hilton, has dropped out. Other hubs are also failing to make much headway, with only a handful of online auctions so far.

J Sainsbury is one UK company that is keen to push ahead. Sainsbury's is a founder member of GlobalNetExchange, a food retailing hub that also includes Carrefour of France.

Patrick McHugh, Sainsbury's head of e-commerce, admits that software problems have slowed the development of GlobalNetExchange. He said typical cost savings in auctions have been 5 to 10 per cent, but have been as high as 40 per cent. So far the exchange has held an online tendering exercise for a three-month supply of Cheddar cheese, and one for new tyres for a vehicle fleet. It is also using the hub to speed up response to customer complaints.

Sainsbury's hopes to route up to 70 per cent of its product sourcing through the exchange within two to three years.

Meanwhile, Tesco, Sainsbury's rival, is a member of the Worldwide Retail Exchange. Tesco has held an online auction for the supply of corned beef. It said the increased accuracy of internet tendering, as opposed to verbal exchanges that are then transferred on to written forms, represents as big a gain as lower prices.

Barry Knichel, Tesco's supply-chain development director, said the online auctions would produce a one-off benefit by helping the group establish a base price for certain items. But the longer term gains will be in developing closer relationships with those suppliers. "It will be about collaborative planning with suppliers enabling us to manage our distribution chain better," he said. "You can only squeeze things so far."