B2B Survivors

Imagine you have been dating someone for years. The relationship is blossoming, but one day your sweetheart informs you that instead of calling, you should communicate by e-mail. And if you want to get together, you should arrange that through an online dating service, where you will be competing with other suitors. That, in essence, is the message that suppliers of everything from paper clips to maintenance services got a couple of years ago from manufacturers eager to try business-to-business, or B2B, exchanges on the Internet. The suppliers' partners were suddenly asking them to sign up for anonymous public online exchanges and bid for contracts. Feeling jilted, many refused to sign up. That's one reason so many companies selling B2B services have fallen on their face.

But just as the talk of a B2B revolution was exaggerated, so are reports of the sector's demise. By carefully choosing which products to buy and sell on which exchanges, more and more businesses continue to find the Internet can save them money. Meanwhile, a few smart B2B firms are surviving and even thriving by transforming themselves into auctioneers, brokers and software designers. Late last month, for instance, shares in FreeMarkets, based in Pittsburgh, Pa., jumped 34% in a day after it announced that strong sales to existing customers would push its fourth-quarter revenue up 10% to 15%.

Most of today's B2B survivors have learned key lessons from the flameouts of firms like Ventro of Mountain View, Calif. Born in 1997, the dotcom promised to become the premier marketplace for laboratory tools and chemicals and attracted bushels of investor capital. That inspired it to build other exchanges for medical supplies, packaged foods and everything in between. Its stock soared to $244 a share in February 2000. But it ran up enormous costs trying to create online catalogs that could interface with the wide variety of purchasing programs already used by its clients. And those costs would have taken years to recoup with the tiny transaction fees it charged. "The technology was lagging," says CEO David Perry. Ventro's share price plunged to less than $1. The company has yet to turn a profit.

A B2B index compiled by U.S. Bancorp Piper Jaffray sank 95% in the two years following its peak in December 1999. Meanwhile, though, business executives have quietly kept their modems switched on. In a survey early this year of 686 large and mid-size companies, AMR Research of Boston found that about one-third were using some form of online exchange. Another third expected to get involved in the next few years. The businesses investing most heavily in B2B were the largest ones, with the clout to compel smaller partners to follow them into cyberspace. Says AMR's John Bermudez: "Companies have been looking for a long time to see if they could do anything to streamline the supply chain. And there's absolutely no way of doing it without the Internet."

One B2B winner is ChemConnect of San Francisco, which has become "close to the NASDAQ of chemicals," says Stanford economics professor Bob Hall, author of Digital Dealing. ChemConnect has offices in seven countries and offers to bring together buyers and sellers worldwide. But rather than try to hook the computers of all participants into one online catalog, it started with a simple electronic bulletin board where buyers and sellers could post what they had or were seeking. From there the company worked up to more sophisticated auctions.

And whereas Ventro sold laboratory chemicals in beaker quantities, ChemConnect focused on industrial chemicals sold by the railcar--a market in which there are fewer transactions but much more money involved. "I've spoken to suppliers who had a corporate edict that they were not going to participate in this type of auction because it would only drive prices down," says Michele Hincks, ChemConnect's marketing vice president. "They regretted it because they lost a market."

Some of the savings offered by independent exchanges are negated by extra costs--including commissions and membership fees. Some firms have eliminated the middleman by forging industry consortiums, such as Covisint, an automotive-supply exchange owned by six of the world's largest carmakers. But participants in consortiums run the risk of giving away buying and selling secrets to competitors.

As a result, many companies are building private exchanges, through which they can buy or sell on their own terms. Eastman Chemical, based in Kingsport, Tenn., is doing more than $400 million a year in business through its eastmanmarketplace.com website, established in November 1999. "Thanks to e-commerce, I now enjoy my job again," says sales rep Geri Mitchell.

That job is selling polyethylene to makers of such products as buckets and food packaging. Until Eastman set up its website, Mitchell fielded 40 to 50 calls a day from potential buyers and haggled over prices for hours. "I was getting cauliflower ear," she says. Now she simply tells the buyers when to log on to the website for an auction. Within 15 minutes, it's all over, with an e-mail message going out automatically to the winner. But when supplies of polyethylene are scarce, Mitchell stops doing auctions and doles it out to select buyers with whom the company has long-term relationships. It's one way she has kept favored customers from stalking off when asked to participate in auctions.