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Contemporary developments in B2B e-commerce
1 . Contemporary Developments in B2B E-Commerce
Introduction
The e-commerce market has seen significant changes over the last 18 months. Since the crash in technology stocks on the NASDAQ in April 2000 the initial e-commerce hype has dissipated. There is evidence that firms are returning to the business basics of working together to explore the development of market-based solutions.
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Box1.1 What is B2B e-commerce?
NOIE has adopted a broad definition of e-commerce to be independent of whatever technology we are operating with next year or next decade. E-commerce is defined as every type of business transaction or interaction in which the participants prepare or conduct business electronically (NOIE, Australia's E-commerce Report Card, April 1999). The scope of e-commerce is wide, covering all forms of electronic processes with the Internet or online technologies currently the most significant facets. Business-to-business (B2B) e-commerce is considered to have larger impacts across the economy than business-to-consumer e-commerce. Typically, B2B e-commerce is about transforming the back office functions of firms to make them more efficient and impacts along the entire value chain of an industry. Therefore B2B e-commerce is the subject of this report. |
During the last 18 months the benefits attributed to B2B e-commerce have become more realistic. The challenges of implementation have been realised and there is acknowledgment that underlying business principles remain important in the electronic age.
B2B e-commerce is now recognised as offering greater scope for incremental improvements on existing business practises. This includes dealing with practical and down-to-earth issues such as demand forecasting, replenishment of stock and value network management. B2B e-commerce is now about making existing processes more efficient, leading to a process of reducing costs on an ongoing basis, rather than the singular and unrealistic focus on major new revenue streams that early e-marketplaces envisaged.
These issues are explored further in this chapter on contemporary developments in B2B e-commerce before providing a perspective on likely future issues for B2B e-commerce.
Advancing with E-commerce (NOIE's cost benefit case study analysis released in October 2001) has shown that the bulk of the early gross benefit from e-commerce has been in efficiency savings rather than revenue generation. Efficiency savings generally came from leveraging electronic communications, using the website as a mass marketing tool, and using the Internet to conduct financial transactions online.
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Box1.2 Gross benefit from e-commerce in efficiency savings-two case studies from Advancing with E-commerce
Innovative Business Resources (IBR) offers training publications and management resources for small businesses. IBR pursued e-commerce as it offers a cost-effective sales and marketing tool (customers could independently gain product information), allows staff to work from home but stay in communication, and provides a platform for streamlining ordering processes. Indeed, e-commerce has reduced costs associated with travel for internal and client meetings, reduced time spend in client correspondence, and sped up order fulfilment and marketing functions. IBR's initial investment was $18 781 for the production of a website plus ongoing costs of $2 961. IBR estimates that annual cost savings through e-commerce will be $37 295 with additional revenue estimated at $7 415. As a result, IBR expects to generate a net benefit of $22 968 for the first year from its e-commerce investment. Texcel provides specialist technical advice on the use of explosives for mining and engineering companies. Texcel decided to invest in e-commerce to streamline business processes like internal and external communications and payroll. Prior to going online, Texcel incurred printing costs of about $30 000 a year; these costs have fallen to $15 000 as people seeking product information are referred to the website. The use of email has saved Texcel about $12 000 per year in telecommunication costs. In addition, time and effort is saved through online banking and electronic funds transfer for payroll and supplier payments. Monthly payroll takes just one hour to perform online compared to the full day required to process cheques. Online banking and bill paying has equated to savings of $11 680 per year. All these efficiencies have allowed staff to focus on other, more productive tasks. Texcel invested $42 360 to set up its website and train staff plus ongoing costs per year of $14 400 in staff time and $9 600 in telephony charges. In 2000, Texcel estimates that cost savings and additional revenues generated a net benefit of $93 360. |
State of play in B2B e-commerce
This section covers only a small snapshot of data on B2B e-commerce to provide a background to contemporary market developments.
Australia is now amongst the most intensive and sophisticated users of new technology in the world, with recent OECD estimates ranking Australian spending on information technology as a percentage of GDP amongst the highest in the OECD. The OECD also noted that Australia trails only the USA and Iceland in the density and rate of growth of secure servers, which is a measure of preparedness for encrypted e-commerce.
E-business readiness
In May 2001 the USA based Economist Intelligence Unit published its second set of e-business readiness rankings for over 60 nations. Australia was placed second to the USA, up from its sixteenth place in May 2000, the main factor being Australia's regulatory regime geared to e-business (such as a competitive telecommunications market).
Business use of the Internet
From June 1998 to June 2000 the proportion of Australian businesses accessing the Internet increased from 29 per cent to 56 per cent, while those with a website rose from 6 per cent to 16 per cent (Australian Bureau of Statistics, Business Use of Information Technology, Catalogue No. 8129).
The small business sector has achieved the highest growth rate in terms of business going online with an increase from 48 per cent in February 1999 to 75 per cent in May 2001 (Yellow Pages Business Index, E-commerce and Computer Technology in Australian Small and Medium Business, July 2001). Business connection to the Internet was highest in the financial and business services sector of the economy and lower than average in retail trade, transport and in the building and construction sector.
Built for Business: Australia's Internet Economy (The Allen Consulting Group, June 2001) found that companies using and developing Internet business tools generated revenues of $28 billion in 2000 to 2001, which represents around 4.3 per cent of Australia's GDP. The report, commissioned by Cisco Systems, demonstrates Australia is only marginally below the USA where Internet economy revenue equates to 5.6 per cent of GDP. The Internet is also becoming a pervasive tool within Australian business as 95 per cent of firms online use the Internet to communicate, 67 per cent use it to research, 59 per cent use it to receive orders and 55 per cent to purchase.
E-marketplaces
An e-marketplace is an electronic exchange where firms register as sellers or buyers to communicate and conduct business over the Internet. The terms e-marketplace or electronic exchange are used synonymously throughout this report. Consolidation has dominated the marketplace in 2001. Recent closures of e-marketplaces have included Shell closing Optibuy in April, the mySAP.com site in May and Telstra's Business eXchange in July where the plug was pulled because of the immature market. Further consolidation, in the number of marketplaces, is likely.
Research from ACNielsen.consult identifies the bulk of trading through B2B online exchanges in Australia is occurring through industry-specific verticals rather than the larger horizontal marketplaces. More than 20 per cent of firms in the food, beverage and tobacco sector had participated in e-marketplaces in 2000-01.
Australian buyers and sellers dominate the trading in local e-marketplaces as very few transactions are processed from overseas participants. This finding from ACNielson.consult indicates that Australian e-marketplaces tend not to be participants in global value chains. A study has been conducted for NOIE, the Department of Industry, Science and Resources and the Department of Transport and Regional Services to analyse the impediments to Australian firms participating in global supply chains. A report is expected to be released before the end of 2001.
E-commerce uptake in relation to productivity and growth
In the second half of the 1990s Australia experienced strong economic growth combined with low inflation and falling unemployment. This period of growth appears to have largely reflected structural reforms in the economy. More recently, the Government's macroeconomic framework has encouraged competition and provided an incentive to apply productivity-enhancing technology throughout industries. The material in the previous section on the state of play in B2B e-commerce demonstrated that Australia is now among the most intensive users of technology in the world.
Commonwealth Treasury analysis (Budget Paper 1: Budget Strategy Outlook, Commonwealth of Australia Budget Papers 2001-02) notes that new technologies that permitted the personal computer, cheaper telecommunications and the Internet have been available for several decades. However, it was only in the 1990s that diffusion of the Internet, accelerating falls in prices of information technology and the emergence of user-friendly software, have allowed ordinary people and small business to use them productively.
Australia's rapid adoption of new technology, combined with our capacity to innovate and Government support for innovation, makes Australia well placed to experience a second wave of productivity growth as e-commerce infiltrates all sectors of the economy. The broad uptake of e-commerce will underpin further productive growth in the economy.
Built for Business: Australia's Internet Economy (The Allen Consulting Group, June 2001) demonstrates that business use of e-commerce in Australia is widespread and beneficial. The report reveals that 55 per cent of firms surveyed are complementing their traditional activities by actively participating in e-commerce. Also, 62 per cent of Australian businesses are reporting cost savings of between one to five per cent resulting from using the Internet, demonstrating that Australian businesses are benefiting from going online in terms of cost savings and greater efficiencies.
The report supports the comments in this chapter that e-commerce is alive and well in Australia despite the rise and fall of 'dot com' companies and the associated difficulties in the information technology sector. This has only been a distraction from the more important picture of efficiency gains from adopting B2B e-commerce and its role in raising the underlying capacity of the economy.
Overview of market changes
Table 1.1 outlines some of the major developments in the market over the last 18 months from an over-hyped market to a more realistic market.
| Table1.1:Market Developments in B2B E-Commerce | ||
| Over-hyped market | More realistic market | |
| Transformation | 'Dot-com' hype based on a premise that only new economy firms will succeed to the detriment of established businesses. | Transformation of traditional 'bricks and mortar' companies where e-commerce is used as a business tool to forge savings through the value network. |
| Redefined intermediaries | The loss of all intermediaries in the economy. | Redefining the roles of established intermediaries and the introduction of new intermediaries. |
| Electronic exchanges | Large electronic business exchanges based on 'horizontal' business relationships and the conglomeration of buying across power a range of industry sectors. | Smaller exchanges based on industry 'verticals' and existing business relationships with the new challenge of developing open standards and interoperability to facilitate interaction with other exchanges. Some 'horizontal' exchanges based on broad functions such as payments. |
| Relationship- focussed business models | Electronic business models driven by unrealistic projections of web -based advertising revenue and based on purchasing transactions. | Business models based on what the customer wants and building business relationships. |
| Collaborative value network models | Electronic business models from a buyer-centric perspective where terms and conditions are dictated to suppliers. | A more even spread of benefits and power (not dominated by specific groups). Greater collaboration between participants in a value network so suppliers can share equally in the benefits accruing from electronic business models. |
NOIE will continue to build on this commentary of market developments with an assessment of where markets and different business models are heading. A first attempt at this is made in Chapter 2. The following text explores the contemporary developments in greater detail.
Transformation
B2B e-commerce is a case of evolution as firms grow accustomed to doing business electronically and the realisation from investors that e-commerce ventures, operating across whole industry sectors, take a lot longer to get off the ground than originally estimated. E-marketplaces, where attempts have been made to bring together competitors and their common suppliers, have faced challenges because in many cases suppliers were not ready technologically or culturally for the change.
Also, with the hype surrounding new economy firms there was significant emphasis on developing 'front-office' systems, such as web pages and selling to consumers online. This was not integrated with developing the 'back office' to support e-commerce strategies. An example of real e-commerce is integrating orders received by a firm with their back-office processing, fulfilment and invoicing so that front-office functions and back-end systems can operate seamlessly. That is, 'straight through processing' where inbound and outbound business functions are integrated. This results in more easily achievable and often greater savings, as the efficiency of value chains is improved. It is also about business operational effectiveness and is a true reflection of firms engaged in B2B e-commerce and new economy activities.
Getting value chains functioning well is the best way for firms to prepare for future participation and integration in e-marketplaces. What we are seeing now is the entry of new participants to B2B e-commerce who are transforming their business operations with their established trading partners from paper-based systems to electronic systems to remove costs in their business and improve efficiencies. This is helping firms become more comfortable with the process of B2B e-commerce and the realisation of its real business value in removing costs out of the value chain.
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Box1.3 Back office transformation in conveyancing
An innovative Victorian e-business initiative looks set to provide the framework for a national Internet-based electronic conveyancing system. Victorian e-business initiative Electronic Conveyancing Victoria is offering proof-of-concept for a generalised trading system in which electronic evidence of property title are exchanged for electronic funds. The model uses a distributed system to maintain control of the transaction in the hands of the users. Australian Land Registries are now working on establishing a national Internet-based conveyancing system using the Electronic Conveyancing Victoria model. Stakeholders from the conveyancing, legal, financial, property, identification and software development industries have already provided 'in principle' endorsement of the model. The current paper-based conveyancing system involves time-consuming preparation of documents, requiring repetitive information to be entered on a number of different forms. This can lead to errors in information transcription and unnecessary delays in the approval process. A typical property transaction can take several months to complete. The new Electronic Conveyancing system will allow for the remote identification of parties (portable LandCard), role-based differential access to authenticated data (single CoverSheet) and the simultaneous electronic exchange of data and clearance of funds. Under Electronic Conveyancing, people wishing to buy, sell or otherwise deal in land would have their identity verified by a certifying authority and would then be provided with access to a single electronic CoverSheet. The CoverSheet is progressively updated with authenticated data, throughout the transaction, from the various parties. At each stage, the data is verified by each of the relevant parties. Access to sections of the CoverSheet would be restricted to those parties who require it at that particular point of the transaction. When all the required data has been collected and agreement reached on settlement, electronic funds transfer can then occur. This new system will deliver process efficiencies across the national conveyancing market, which has an annual turnover of approximately $100 billion and comprises thousands of small to medium sized enterprises. The establishment of a national conveyancing system where parties lodge electronic data instead of documents will allow for faster, easier and accurate dealings in land, irrespective of location or jurisdiction. The full Electronic Conveyancing Victoria system is expected to be introduced in 2003, following endorsement by key stakeholder groups and the successful running of a pilot to test the new system. |
Redefined intermediaries
An intermediary is typically a middle person or organisation that provides a value-added role to business processes such as connecting buyers and sellers. Part of the build-up associated with the growth in new economy firms was that intermediaries throughout the economy would go out of business. Instead, while there has been some rationalisation, intermediaries that have redefined their roles have remained. There has also been the introduction of new intermediaries, which have moved beyond generic portals-'infomediaries' consolidating the plethora of web-based information for clients and brokers providing a service to bring together electronic trading partnerships.
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Box 1.4 Tradegate-an intermediary establishing electronic trading partnerships
Messaging guidelines enabling Shipping Lines and Freight Forwarders to electronically present invoices to their customers for freight charges via Tradegate's ImportNet and Payments service are now available. The widespread use of electronic invoices provides significant benefits including the elimination of inaccuracies and inefficiencies associated with the current high level of rekeying of paper-based charging information into computerised systems, as well as doing away with reams of paper cheques. Tradegate's ECA's ImportNet and Payments Project Manager, Henry Scott, said that a fully integrated electronic delivery order process including presentation of invoices and electronic payments would provide benefits to all industry participants. It could work as follows:
As these transactions are electronic, an audit trail is created which is accessible within TradeGate Payments, making bank statement and payment reconciliation faster and less costly. Everyone benefits from this. Customs Brokers and Freight Forwarders will no longer have to leave their office to obtain Import Delivery orders. Shipping Lines (releasing partners) will be able to gain maximum efficiencies by automating their back-office processes. This is a very exciting development for industry participants looking to address laborious and inefficient back-office procedures and will lead to the industry finally enjoying a fully integrated electronic delivery order process. The electronic messages involved are the IFTMCS message and the associated remittance advice (REMADV) message. (Article republished from EC Edge (Winter 2001 edition) with permission from Tradegate Australia Ltd.) |
Electronic exchanges
As already discussed, there has been some consolidation in e-marketplaces or electronic exchanges. During 2000 the growth of large independent public e-marketplaces, based on 'horizontal' business relationships across industry sectors, played a significant part in raising awareness in firms of the processes involved in doing business electronically. Many firms, while not actively participating in these marketplaces, have used this time to fix their 'back-end' business processes and prepare and educate themselves about e-commerce. Now, firms are tending to enter into arrangements that encompass existing business relationships, such as private e-marketplaces. However, some 'horizontal' exchanges are playing an effective role particularly where they focus on broad functions such as payments.
Private e-marketplaces
Given a higher comfort level with e-commerce, firms are now entering into smaller electronic exchanges revolving around existing business relationships within their sector. These exchanges could be termed private e-marketplaces and are part of the natural evolution of the electronic exchange business model. The value proposition of the private e-marketplace is to provide customers with buy and sell services to enhance their current way of doing business, grow their efficiency and therefore stay competitive. This involves companies taking their existing processes and trading networks online to gain the connectivity and speed of the Internet, within a secure environment. Therefore sensitive information and processes are not exposed to the world.
A Virtual Private Network (VPN) is an enabling technology that allows companies to build cost-effective private e-marketplaces or extranets that can typically operate within a sector. The Australian Automotive Network Exchange is an example of a VPN.
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Box 1.5 An industry funded community of interest (virtual private network) -Australian Automotive Network eXchange (AANX)
The automotive industry relies on Just In Time (JIT) manufacturing, in which the production of goods occurs with the minimum amount of waste in both time and resources. JIT puts pressure on all points of the supply chain to reduce inefficiencies in transportation, processing, inventory and other business processes. To facilitate JIT, the automotive industry is developing a fast and reliable based communications network so that the key stakeholders-manufacturers, suppliers, importers, dealers-can share information. This is called the Australian Automotive Network eXchange (AANX). It is an industry driven initiative supported by the Federal Chamber of Automotive Industries, Federation of Automotive Products Manufacturers and the Motor Trades Association of Australia. The four major car manufacturers-Ford, Holden, Mitsubishi, Toyota-are also engaged. AANX operates as a VPN, an Internet-based infrastructure that allows users to send data to each other in a reliable and confidential manner. A VPN requires collaboration across company boundaries on standards and protocols, in particular those concerning security, as the network will be used to transmit business critical and competitive information. At present, AANX is used to send computer-aided design data files, but in the future it will be able to cope with a range of media such as product management systems, electronic data interchange, file sharing and information feeds. Combining resources to create a single automotive industry network for Australia will reduce efforts and complexity on all sides. It also delivers shared benefits such as lower costs, consolidated network links, reduced operating costs, lower acquisition/ maintenance costs, faster business cycles, pervasive supply chain communications, rapid application deployment, simpler roll-out of future technologies, service quality levels and standards-based technology. A pilot project commenced in September 2000 with part funding from NOIE's Information Technology Online program and this has now been completed. AANX is satisfied that the network has reached sufficient stability to serve the needs of the Australian automotive industry for the secure exchange of confidential, high volume and time-critical data. AANX is now being moved into pre-production. AANX will also enable Australian companies to tap into the global automotive networks and thus boost export opportunities and import efficiencies. These networks include North America, Europe, Japan and Korea. Global connectivity between these networks is under discussion. The chief obstacle is incompatibility of business models, with the North American Network Exchange evolving into a commercial venture while the other networks currently remain industry funded communities of interest. In the meantime, AANX is working to achieve critical mass within its domestic market and to position the Australian automotive industry to take advantage of the potential offered by e-commerce. |
The current trend is towards the private e-marketplace rather than the larger third party or intermediary public e-marketplaces. This allows players to have more effective management of their value network. The challenge for B2B e-commerce will be to enable interoperability between these multiple smaller electronic exchanges so firms can continue to do business across sectors.
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Box 1.6 Tasmania Logistics Online (TLO) project
NOIE concluded in its Trucks Online report: 'The transport industry is a horizontal link in the Australian economy and stands to benefit considerably from the uptake of e-commerce. These benefits can also accrue to the customers of the industry who span most sectors of the Australian economy including exports and permeate through the entire economy as transport brings all of these vertical sectors together.' The TLO Project is a response by the Tasmanian Electronic Commerce Centre to this conclusion. Tasmanian businesses face additional costs in transport and logistics due to the State's isolation from the Australian mainland. Any improvement in this industry would benefit Tasmanian businesses by reducing their operating expenses and, as a result, enhance the competitiveness of the Tasmanian economy. The TLO is a consortium involving transport and logistics companies, technology providers, and customers (suppliers and manufacturers). The TLO's core objectives are to:
The TLO needs to cater for intra-State, inter-state and international logistics. Key functional requirements include:
The TLO will allow Tasmanian businesses to reduce paper-based processes and cut administrative costs, increase efficiency in the supply chain, and create flow-on benefits to the State's economy by facilitating quicker turnaround times at ports and for freight forwarders. It is therefore a good example of an electronic exchange that is facilitating interoperability and allowing players more effective management of their value chains. In the first three months of operation, TLO developed to process in excess of 10 000 transactions per month. |
Relationship-focused business models
There has been a change in electronic business models involving a return to the basics of doing business. Electronic exchanges in 2000 were based on the premise that price was the most important component, whether that be through unrealistic assumptions about online advertising revenue or through reverse auctions that cut margins to the extent of alienating suppliers. A focus on price produces a one-off benefit, where firms join the next level of cost reduction but this still does not necessarily reform business processes and take costs out of the value chain.
A return to basics involves acknowledging the importance of existing business relationships and real customer service, so benefits can be forged through collaborating to cut process costs. Generally, firms are now focusing on process efficiencies and the need to use resources in developing and fostering business relationships.
Collaborative value-chain models
The core value to business of B2B e-commerce, particularly e-marketplaces, has undergone some change over the last 18 months. The presence of buyers in an e-marketplace has not been sufficient reason enough to induce suppliers to embrace B2B e-commerce. Suppliers have been wary of e-marketplaces that brought a group of buyers together to dictate terms and conditions to suppliers.
A trend is emerging from which new business models are developing. This involves a more collaborative process, which will electronically enable the supplier community.
Research from Jupiter Metrix Inc. identifies closer supplier relationships as the prevailing advantage of participating in B2B e-commerce. The business case for the supplier community to participate in e-exchanges is enhanced when it is clear they are not entering a buyer-centric model where benefits are focused on the buyer. The fact that many e-marketplaces have been buyer-centric means that suppliers across the economy, especially small to medium sized enterprises, haven't seen the value to them of potential cost reduction and value chain management.
The importance of collaborative arrangements is increasingly being recognised in conducting B2B e-commerce, such as collaboration between buyers and suppliers to achieve efficiencies through scale and common infrastructure. B2B e-commerce thrives on collaborative uses of open technological platforms and business processes because it relies on partnerships. E-commerce is now far more about working with groups of suppliers to facilitate their involvement, so power (as well as benefits) is more evenly spread and not dominated by specific groups.
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Box 1.7 A collabortive value chain model-Pharmaceutical Extranet Gateway (PEG)
PEG is an industry-led initiative to curb costs associated with ordering and managing pharmaceutical supplies. The pharmaceutical industry believes it can use e-commerce to generate savings by lowering transaction costs and improving supply chain efficiency, savings that could be redirected to the primary function of healthcare. PEG- an excellent example of collaboration along the value chain-aims to engage the 700 small-to-medium suppliers. It allows the wholesalers and suppliers to transact over the Internet, using common EAN-based barcoding to identify trading documents and business processes. The Internet is a cheaper channel to send and receive purchase orders than Electronic Data Interchange. Although a proven communications technology, Electronic Data Interchange is not affordable for most medical suppliers who are small operations. PEG will help overcome problems of disparate databases and the current inefficiencies related to value chain ordering via fax (for example, re-keying orders, lack of confirmation order, multiple transmission orders, time delays). PEG believes that full implementation will reduce a transaction cost from its current $50-$70 range to an estimated $2-$5 range. Given the current purchase order transaction volume of 3.8 million per year, this equates to savings in the order of $200 million per year. PEG hopes that uptake will accelerate as suppliers become attuned to Internet technology and can cooperate in implementing industry-wide standards. Market developments, such as the Department of Defence requiring its medical/healthcare suppliers to be EAN compliant, will also act as catalyst for PEG by providing a demonstration model for the large-scale adoption of e-commerce practices. |
Conclusions
The development of e-marketplaces and B2B e-commerce more generally has generated several challenges. These include supplier participation, the number of e-marketplaces in Australia, cultural changes involved in doing business electronically, standards, demonstration of the business case, technology integration and the presence of many legacy systems.
Australian firms will continue to benefit from B2B e-commerce on the back of a competitive and flexible economy long after the obsession with 'dot com' startups has faded. The real impact of e-commerce will be its capacity to underpin sustainable productive growth in the economy. Participation in B2B e-commerce through the transformation of 'back-end' processes will be a true reflection of a so-called new economy and in the long run Australia is in an excellent position to compete in this new global arena.