E-market leaders

The online marketplaces that survived this year’s rash of closures did so because of their business focus: operating in niche markets but with a global outlook.

By the end of 2000, so many business-to-business online marketplaces had appeared that they became, in the words of one US commentator, ‘a dime a dozen.’

They were so numerous it was difficult to count them – most estimates put the peak figure anywhere between 1,500 and 2,000. This is now largely academic, because many of them have vanished in a wave of closures and consolidation that surprised even the most sceptical B2B observer with its ferocity.

The steel and metals industry provides a vivid example. Last year barely a week went by without a new marketplace promising to help users buy and sell their steel products more efficiently and cost-effectively.

In a market worth $60bn a year in Europe alone, an online exchange would need to capture just a tiny percentage of the total to turn a profit.

So the theory went. Now the internet is littered with the shells of burned out marketplaces which proved rather more fragile than the steel they hoped to trade. MetalSite, MetalSpectrum, aluminium.com and Metal-x are just a few of the names that had a walk-on part in the internet revolution.

Most of the failed sites were professionally run, employed sound technology and delivered what they promised for the buyers and sellers that used them. Unfortunately, those users were far too few to drag the marketplaces into profitability.

Struggling to survive on a turnover lower than they needed, by mid-2001 the fledgling exchanges then found the tap of venture funding turned off to all but a select few. By that stage there was nothing left but to seek a merger or turn off the lights.

It is now apparent that there were just too many marketplaces. But they also seemed to be running way ahead of the very people they were relying on to make them work. The army of buyers and sellers who trade goods and services on behalf of the world’s businesses were far more cautious than anticipated.

Helen Mannion, e-practice development officer at the Chartered Institute of Purchasing & Supply (CIPS) – the body representing procurement professionals – says that while the case for online marketplaces looks good on paper, suppliers in particular still need convincing.

‘There are two main areas of objection for suppliers,’ says Mannion. ‘One is that they are concerned that marketplaces are highly price focused – in other words a mechanism for purchasers to drive down costs at their suppliers’ expense.’

And Mannion points out a frequently overlooked financial cost to suppliers, who are expected to make details of their products and services available on multiple marketplaces. This comes in the form of the content formatting charges they need to pay in order to make their data available on each site. ‘This is a big disincentive to suppliers, who feel they are paying many times over to achieve the same result,’ says Mannion.

CIPS believes a solution to the problem currently being considered in Europe, under which suppliers pay a one-off fee to an independent, non-profit-making body for multiple content formatting, is worth further exploration in the UK. ‘It would have to be an organisation not associated with the marketplaces themselves or the software industry,’ she says.

If suppliers are still suspicious of what they can get out of trading online, the concept of an e-marketplace is more immediately attractive for purchasers.

‘There are advantages for buyers in being able to compare products and prices, including those of suppliers they have not dealt with before,’ says Mannion. ‘They can see the big picture.’

Despite these benefits, she says purchasers recognise that effective e-marketplaces rely on both sides of the buy/sell equation coming on board, and in too many cases that isn’t happening.

‘The use of e-marketplaces isn’t as great as was predicted last year,’ says Mannion. ‘That doesn’t make them a bad idea, but we now have further to go.’

One factor regularly cited by online market makers as a barrier to success is the reluctance of purchasing and supply professionals to embrace change, often because they see new ways of doing business as a threat to their own positions.

According to Mannion, the procurement community is getting used to the idea of e-marketplaces, and increasingly sees them as a way to free purchasing departments from the more labour-intensive, low value-added aspects of their role.

It appears then that buyers and sellers are not against e-marketplaces in principle, a point proved by the fact that amidst the carnage, some are surviving and even thriving.

When it comes to spotting which exchanges will stay the course, a pattern does seem to be emerging. A niche market, global potential and some knowledge of – and link with – the ‘real world’ increasingly look like valuable assets.

Of course, money helps, and the B2B marketplace sector is not a level playing field.

Instead, it rather resembles the social structure of 18th Century England. Some e-marketplaces are of noble birth, and as long as they can keep their parents happy and avoid disinheritance their future looks bright. Covisint – born of GM, Ford and DaimlerChrysler – and Exostar, child of among others BAE Systems and Boeing, are examples of the e-marketplace aristocracy.

At the bottom of the social ladder are the small, independent marketplaces, mostly unloved and under-funded and likely to be doomed to an early death.

Somewhere in the middle sit a group of B2B operations that have found a niche market, are global in their ambitions and enjoy the continuing patronage of the venture capitalists who hold the fate of many a dotcom in their hands.

GoIndustry – a trading platform for used and surplus industrial equipment – appears distinctly upwardly mobile. It can point to real business done on its site, and places a high premium on seeing the internet as a piece in the jigsaw rather than the answer to the puzzle.

Head of marketing Armin Seheuer says GoIndustry realised early on that a purely ‘virtual’ business model would be shaky: ‘We are a real company with real offices, not a collection of IT equipment.’

Alongside its online trading platform, GoIndustry has made acquisitions and forged partnerships in the ‘offline’ world. Karner & Co – a major European industrial agent based in Germany – merged with GoIndustry last year, creating a group with a foothold in both the ‘old’ and ‘new’ economies.

GoIndustry has also been aggressively global in its outlook. It has offices in the UK, France, Germany, Poland and Turkey and agents in Spain, Norway and Iran.

The next step, says Seheuer, is to tie up partnership arrangements in other regions, notably the US and Asia. Despite widespread scepticism surrounding online auctions, GoIndustry says it has the evidence they can work. In April the marketplace arranged to auction 143 lots comprising surplus plastics machinery belonging to Kent-based FWM Plastics. It staged the auction on its website in an attempt to encourage global bids.

During the two-week auction process more than 1,600 offers came in from 50 companies as far afield as Turkey and Slovenia, many of them new to trading via the internet.

When the bidding closed, 137 of the original lots had been sold, with all reserve prices met and some items doubling the starting price.

Seheuer claims the GoIndustry formula of real-world knowledge and global reach is helping it not only to survive, but stay on target for profitability.

He also admits a global downturn is not a bad time to be trading in used equipment. ‘For us, rationalisation and relocation by companies mean more, not less, business,’ says Seheuer.

Other B2B online ventures are carving out a niche for themselves short of the full trading exchange model, and instead concentrating on the internet’s undoubted strength as a promotional tool.

One such is webOrator, set up last year by UK engineers Rod Shears and Trevor Money as a platform for promoting products and services.

For a monthly or annual subscription fee, webOrator gives members five web pages on which to set out all the relevant details of their company for inspection by potential customers.

In itself, this is hardly revolutionary – any business could create its own web pages using a standard package from an internet service provider. But according to webOrator, the trick is not just to be on the internet but to be found by the people you want to promote yourself to.

To this end webOrator has set itself up as a ‘structured information system’ which allows companies to be searched for and profiled by the products and services they offer, their specific areas of expertise and the geographical areas where they do business.

The webOrator.com site splits industries into ‘World Markets’ as a starting point for users. Below these are ‘Trade Centres’ reflecting the sub-divisions within each industry.

The founders’ background dictated that engineering would be the focus of its launch. The Engineering World Market sub-divides into a couple of dozen Trade Centres, including electrical, mechanical and civil engineering, manufacturing and specialist areas such as safety.

Visitors can search their chosen area by the particular product or service they require, and then use web links contained on the webOrator pages to transfer to a company’s own website.

Few would argue that web-Orator’s effort to bring order to the chaos of the internet looks good on paper. But in common with all e-commerce ventures, its challenge is to establish itself as commercially viable.

Co-founder Shears, the business’s managing director, admits the climate for web-based companies has turned distinctly stormy this year. ‘It’s been a difficult period for the sector, but unlike some of the other B2B services we believe we have a sound business model,’ he says.

The webOrator business is listed on the Ofex share market, and by September had seen its shares drop from a year high of 47p to 18.5p. But the share price fall is not the meltdown experienced by many dotcom start-ups.

For webOrator, the key to success is attracting enough members to underpin its long-term survival.

It now has more than 600 members and wants to increase that to 1,400. Shears says the venture can be into profit ‘with a relatively small number’ of users, but steers clear of naming a figure which would tip webOrator into the black.

Instead he points out that amid the stampede of venture capital out of web-based businesses, webOrator was one of the few this year to receive a new tranche of funding.

Shears and Money have ambitions to roll out the webOrator concept beyond engineering into other ‘World Markets’ including IT, financial services and the media.If this happens they will hire specialists to develop web-Orator’s presence. The two engineers do not plan to enter alien markets unaided, but feel the model is transferable. ‘There isn’t a company in the world that cannot be distilled into five web pages,’ says Shears.

Shears makes a persuasive case for webOrator’s business model. Like everyone in the B2B sector, he will be hoping enough users come along for the ride.

Sidebar: Offline marketplace: how Metal-x went to the wall

When steel industry veterans Ian Hilditch and Rob Carloss launched Metal-x.com at the end of last year, they did things by the book.

The two founders brought their experience as purchasers of steel products for the Hilson Group and allied it with a user-friendly website using state-of-the-art marketplace technology.

Hilditch and Carloss were determined to be more than just a faceless digital interface. Instead they set out to convince their target market of small and medium-sized companies that their marketplace really could make purchasing steel wire, tube and sheet products easier and cheaper.

But visit Metal-x.com now and the message, ‘This website is no longer available’ tells its own sorry tale.

Hilditch – who says he lost ‘quite a lot of money’ when Metal-x went under – insists that its fundamental business model was sound. He says the venture’s demise was a result of an unhappy combination of factors, some within the founders’ control and some not.

Hilditch now believes the December 2000 launch date was too late. Metal-x was originally due to begin trading earlier, but a desire to get the technology right meant it appeared on the B2B scene at almost the exact moment when the tide of sentiment began to turn against it.

‘We probably got the whole thing going about six months too late,’ says Hilditch. ‘By the time we were up and running, the window for funding was closing.’

A lack of extra funding might not have proved fatal if Metal-x had attracted the volume of users needed to make it viable.

But Hilditch and Carloss found they were all too often knocking at a locked door. ‘We were friendly people to do business with,’ says Hilditch, ‘not the impersonal face of the internet.’

Above all, he says, they had a good service to offer. ‘We were delivering huge savings, often in excess of 25%, which for small companies can be the difference between profit and loss,’ says Hilditch.

But he admits: ‘We just couldn’t fire up enough people. We needed to get about three times the volumes we were getting to be sustainable.’

The overwhelming problem was, Hilditch believes, a resistance to change within the industry. ‘We could demonstrate benefits, and point to real companies using the service. But I don’t think a lot of people could get their minds around it.’

Despite his experience with Metal-x, Hilditch remains convinced that e-marketplaces have a role – ‘but only if the users are more open minded.’ And he admits it might be a decade or more before their real value is appreciated.