Article on business-to-business supplying

Irwin, Neil

English

Washburn University Institutional Repository

Subr Surviving the 828 Shakeout Date: 10/8/00 2:26:28 AM Eastern Day light Time From· GHLll To: AArtFletch Surviving the 828 Shakeout By Neil Irwin Washington Post Staff W ri ter Monday , October 2, 2000; Page F20 In 2004, onl ine commerce between bus inesses will be either $2.4 trillion, $5. 7 tri ll ion or $7 trill ion , depending on whether you believe Forrester Research, AMR Research or the Gartner Group. Eye-popping numbers like those fed a new conventional wisdom that trickled through Internet start-up circles in the spring. People can buy only so many books online or \/is it a search engine so many times , went the logic, but there's some real money to be made in the less glamorous behind-the-scenes bus iness of supplying businesses with the stuff they need. Not business-to-consumer, or B2C. Business-to-bus iness. B2B. And , said the enthusiasts , if a company could ha1.e just 1 tiny percent of that $2. 7 ri ll ion market, why , it could be the next Amazon.com. Not surpri singly, many of these enthus iasts came from the Washington area, ripe as it is with consultants and industry execs who see the Internet as a better way to do whatever it is that they do. They were hyped-and the stocks soared and \.€nture money poured in. But in recent months, the markets collect ively said, "Hey , wait a minute !" and pummeled the prices of many Internet companies , hitt ing B2B firms part icularly hard. "Right now, B2B companies are being hounded," said Jean-Gabriel Henry , a senior analyst with Jupiter Communicat ions . They're being hounded tor a simple, bas ic reason, say analysts : Many markets for raw materials such as chemicals and metals are saturated beyond any reasonable le1.el , with dozens of competitors in each. And while multitri ll ion-dollar project ions are impressive, they can also mislead. The total value of goods exchanged is likely to hit those levels, but in general , B2B exchanges don't produce and sell those goods ; they merely take a cut of a few percent for matching buyers and sellers-and with so many competitors , the size of that cut, already razor-thin , will shrink . "There's a lot of people out there who probably shouldn't be," said John Bourne, chief executi\.€ of Ultraprise.com , a Frederick company tha operates an online secondary mortgage marke . But amid the shakeout, bus iness-to-bus iness companies throughout the nation are learning from the high-profile fail ings of their B2B brethren, and a rough , potential model for how B2B online exchanges might thrive is beginning to jell. Se-..eral companies in the Washington area are at the forefront of the trend, feeling their way toward- they hope- eventual profitability . For example, Versura Inc. offic ially launched just three weeks ago. The Arlington company , with a staff of 17, hopes to be the place education loans are exchanged. EqualFooting Inc., in Sterling, founded in June 1999, is cons iderably more established, with 60,000 small bus inesses using the site to purchase industrial and construction suppl ies . And Ultrapri se.com , which began operating in February 1999, is a marketplace through which financ ial ins itut ions trade mortgages. The three firms are different in many ways , but each is grappling with ways to make the transfer of goods and ser\/ices among institutions quicker and cheaper-and trying to make a buck for themselves in the process. And they are looking to some of the fallen stars of the Internet economy as guides to what does and doesn't work for a business exchange. Formula for Success Among the lessons they are sift ing out of the B2B rubble: Sunday, October 22, 2000 America Online: AArlFletch Page: 1 * Don't try to eliminate the middleman, but make the middleman more effect i\€. Some B2B start-ups ha\€ debuted with ambitions of elim inating the traditional networks by which bus inesses learn about suppliers-trade conferences , brokers and the like, replacing them (in theory ) with a Web exchange. Many analysts and B2B executi\es now say that a more realist ic approach is to prollide efficient tools for, say , brokers to get information. This is a particularly sensiti\€ issue for long-established industries that employ sprawling buy-sell networks , such as mortgage banking and mortgage in\esting. "We are not trying to disintermediate anyone," Bourne said. "We're moi.,ing information." * Ha\€ a strong knowledge of the market you're sell ing to and what the players in that market need. Many of the B2B companies that struggled were run by people with a background in technology-but not enough knowledge of the industry they are trying to ser\€. Many of the current crop of start-ups are run by people intimately connected with their markets. Both the chief executi\€ and the chief operating officer of Versura were prelliously executi\es at Sallie Mae, the education financing corporation that prollides funding for millions of student loans. "We ha\€ hat special ized knowledge o focus on the interests of our customers ," said Lydia Micheaux Marshall, chief executi\€ of Versura. * Offer seri.,ices , not just an exchange. Anyone can offer a place for companies to pos and auction merchandise; the way to make money is to facil itate the transaction, say analysts . EqualFooting.com , for example, combines equipment offerings , financing operations and shipping in a single site. "You can't just hook up the buyer and seller and say, 'I'm done, can I ha\€ my commission now?' " said chief executi\€ Jim Fox. Targeting Small Business That same goal dro\€ the founders of EqualFooting, which started when co-founder (and now CEO) Fox, who worked in the industrial supply business, saw inefficiency in the ways industrial and construct ion concerns bought their goods. For example, he found that smaller businesses often lack access to goods , because informat ion is available to them mainly through catalogues and llisit ing sales representati\es , which are haphazardly deployed. EqualFooting's strategy has been to gi\€ small businesses access to the whole gamut of suppliers . It now has 60,000 firms signed up. But as Fox sees it, the real potential for a B2B bus iness lies in being more than a giant bulletin board. Equal Footing wants to help small bus iness find, order, finance, pay for and deli\er goods "so that they get that whole "'1ew of the supply chain ," he said. By doing that, an exchange can help a customer sa\€ not only on straight cost but also on soft costs , such as how much time and effort it takes to order something. "It's a one-stop shop from the small bus iness's standpoint , which is great," added Fox. "If you aren't doing things like helping them facilitate payment and financing , and helping them manage logistics and deli\ery, you're not adding very much." Doing What They Know Best Those approaches are no guarantee of success , but Ultraprise and EqualFooting- and, to a degree, even three-week-old Versura-are further along in building effic ient markets in their respective areas than many of the innumerable wanna-B2Bs. By some estimates , only 10 percent or so of B2B exchanges have resulted in sales. Versura hasn't cleared that hurdle yet, but its founders are confident that that milestone will come sooner rather than later. Marshall , who was an executi\€ "'1ce president in marketing for Sallie Mae until 1997, teamed with fellow Sallie Mae exec Jeffrey Salinger to join a technology start-up. They considered buy ing an existing company . Then they considered a variety of start-up ideas, mostly in financial seri.,ices. In the end, they decided they were most likely to build a i.,iable business in he indus ry they knew bes -student-loan exchange. Sunday, October 22, 2000 America Online: AArtFletch Page: 2 They secured seed funding mostly from individuals, including Fritz Hobbs, the retired chairman and chief executi-.e of Warburg Dillon Reed. Colleges and unh.ersities across the country generally select preferred lenders from which students borrow money. Sorting out who those lenders will be is a complicated business, with the colleges often preparing elaborate lists of qualifications, and banks hiring sales forces to sell to the schools. It in~l-.es high stakes, though, with $60 billion in loans issued each year. Versura's system puts all that information on one site so banks can make offers to financial aid departments without the customary but Byzantine courting process. When a bank that has made a set of education loans wants to sell them to a secondary buyer, they can be sold through Versura as well. Versura's officers belie-.e their expertise in what both lenders and schools want is essential to the company's prospects. "The technology can make complex decision-making much easier," Marshall said. They don't envision putting those sales forces out of work but rather making the ways they trade information more effecti-.e. "This is an industry in which big names ha-.e not done terribly well," she said. "Fortune 100 companies ha-.e had an interest, attempted to mo-.e in and stumbled badly. This market has peculiarities." A Sharp Eye on Cost Versura is still in a decidedly start-up mode. Marshall and Salinger began work almost a year ago but just launched the company and site publicly on Sept. 11. On their office walls are posters of Paris and Amsterdam, left o-.er from the tra-.el agency from which they sublet the office space. Of their 17 employees, only a few are to be seen on a Wednesday morning; most are out in the field, selling the site to schools and lenders. The staff sometimes complains that they ha-.e to plan their sales trips two weeks in advance to sa-.e on air fare. Versura has an advisory board with representati-.es from Yale, Georgetown, the Uni-.ersity of Maryland and other schools. There is no direct competition in this segment of the education loan market, Marshall and Salinger say. And they ha-.e se-.eral customers already in place at the start of the season in which lenders make preferred lender agreements. But questions remain. Can they ultimately make a profit on exchanging mere information, e-.en if they package it better than anyone else? They currently project positi-.e cash flow by the end of 2001-an eternity, in Internet time. Will their expertise be enough to fend off any competitors? And will enough lenders and uni-.ersities sign up for their system that the Versura site has critical mass as 'a viable marketplace? After all, people don't like shopping in empty malls. They might look to Ultraprise, which is also in the financial services B2B market, to see where things could lead. Ultraprise is an exchange for the secondary mortgage market-the place where your lender sells your home loan to other institutions, where mortgages are consolidated and bought and sold like any other form of debt. This market has $5 trillion is total outstanding loans, with new loans a-.eraging $1 trillion a year. Typically, the whole process remains almost invisible to the homeowner; These exchanges are labor-intensi-.e. Each loan has a package of supporting materials, in a computer or on paper, such as the homeowner's credit report, appraisals, and state and federal regulatory paperwork. Any time the sale of a mortgage is to take place, the buyer sends personnel to inspect all those records, which often must be reentered into the buyer's computer system when the sale is completed. That inefficiency made the situation ripe for a high-tech solution, to the mind of Ultraprise chief executi-.e Bourne, but exploiting the opportunity wasn't easy. "The mortgage loan file is probably the most complicated transaction made for any business," Bourne said. "It includes much more information than a credit card file or auto loan." Ultraprise chose not to try to eliminate the traders who, by doing all that work, bring liquidity to the secondary mortgage market; instead, Ultraprise software is used by 500 institutions to V.ew mortgage information on their desktops, far more easily Sunday, October 22, 2000 America Online; AArtFletch Page: 3 and consistently than through traditional methods. Moreo-.er, like Ultraprise, EqualFooting keeps purchasing managers and sales forces from feeling threatened-and they're the ones actually using the site. Or, as Jupiter analyst Henry puts it: "Some of the B2Bs thought they could get buyers to come together by taking away the middleman. Now, most are coming to realize that in fact you cannot take away the middleman. But the middleman is the one who understands the market." Neil Irwin co-.ers the Washington area Internet content industry for The Post. Sunday, October 22, 2000 America Online: AArtFletch Page: 4 

Surviving the B2B Shakeout

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Surviving the B2B Shakeout

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