BCG Study: BTB Exchanges Are on Fast Track

Most business-to-business exchanges will grow rapidly, but they won't generate the hyped returns, according to a new study released yesterday by The Boston Consulting Group Inc.

Pressure will build on these BTB marketplaces mainly due to rivalry between consortia-backed players and individual companies that attempt to streamline the supply-chain process on their own, BCG said in its report, titled “The B2B Opportunity: Creating Advantage Through E-Marketplaces.”

As opposed to solo players, the consortia comprise major industry-leading companies more interested in setting industry standards in the online procurement process. These consortia also add layers of functionality as they forge ahead.

“I think the pressure comes from that basic dynamic as opposed to purely competition among marketplaces,” said Andy Blackburn, San Francisco-based vice president and head of BCG's BTB e-commerce practice.

“It really is between what we'd call private and public marketplaces. And the consequence is a lot of pressure on transaction pricing.”

Still, total BTB exchange revenue over the next four to five years will reach $9 billion, BCG said.

BCG polled 500 U.S. buyers and sellers and interviewed another 36 marketplaces and technology companies between July and September to put together the survey results.

Based on this research, exchanges serving the largest U.S. industries should generate $350 million to $450 million in annual revenue. Smaller marketplaces should generate annual revenue of less than $100 million.

Companies in industries such as automotive, aerospace, defense and electronics, as well as retailers specializing in general merchandise, apparel and food processing, will lead in revenue generation.

Smaller exchanges, on the other hand, typically will be in niche areas of the chemicals, medical supplies, small manufacturing and construction industries.

Yet only the top performers will be able to cross those marks, BCG said.

“In some cases, marketplaces aren't even able to charge for transactions if they're dealing with highly commoditized catalog items,” Blackburn said.

“On the one hand, you'll see commoditization of pricing, and on the other hand, strategic pressure to do it not in a totally public way.”

But on balance, participants in BTB exchanges will benefit more than equity investors will in such ventures, BCG said.

“Everyone talks about, `Gee, I'm going to generate 20 percent margins by being a matchmaker in a business that generates 5 percent,' which just can't be true,” Blackburn said.

There's a lot of rosy thinking among the BTB exchange players, he said. Not many industries have the super-high margins to save costs.

“If you look at the opportunity to save in the short term, you can save a percent or two, cost savings as a function of sales in a typical manufacturing-oriented industry,” Blackburn said.

“Long term, you start rearranging the supply chain and making it more efficient and moving it in some cases from build-to-stock to build-to-order, kind of production-oriented, and you might save 5 percent to 6 percent in sales.”

BCG forecasts that BTB e-commerce will generate productivity gains equivalent to 1 percent to 2 percent of sales by 2004. This will rise to 6 percent, or $1 trillion in sales, by 2010.

In the end, despite a robust U.S. economy, the local market will support only one to three major exchanges in any one segment. There are more than 700 e-marketplaces today, according to BCG.

“What you'll see is a scale game,” Blackburn said, “because it costs a fair amount to build and operate [a BTB exchange] and there's going to be pricing pressure.”

Broad-line exchanges — collaborative or transaction marketplaces, as opposed to smaller, niche players — that represent industries with more than $50 billion in annual revenue are likely to rank among the major survivors of any shakeout.

The key challenge for buyers and sellers, however, is to back the right horse.

In its report, BCG recommended that successful exchanges should allow participants to differentiate themselves, be cost-efficient and focus on execution.

Exchanges also should clearly communicate their value to buyers and sellers and extend their services to medium-sized and small companies.

Besides, exchanges should be open to changing the business model.

“The problem you're really trying to solve is, how do you suck inventory out of the system? How do you reconfigure your supply chain so that you build a build-to-order supply chain instead of a forecast-oriented, push-driven, build-to-stock [model]?” Blackburn said.

“That's where a lot of the value comes in. You need to do what Dell does in the computer industry, where you can go from the end-customer all the way into components, into the box and you don't even procure the components till they order it.”

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