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Bidder beware: How B2B auctions may cripple your business

Tuesday 11th July 2000

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The New Zealand Stock Exchange trading floor used to be fun to watch. Buyers and sellers in a frantic crush, shouting their wares in just-comprehensible jargon, doing huge deals and passing documents to offsiders on the edge of the room to complete the paperwork. That's all gone now, as deals are done by electronic means, buying and selling passing clinically between PCs.

But what goes around comes around. Thanks to all things turning electronic, the thrill of the trading floor is now being extended beyond share markets into all markets: we're not talking just shares, but everything that can be bought and sold will start to be sold in such fierce, real-time conditions. The emergence of electronic trading hubs (or e-markets or vertical portals or horizontal portals - will someone please sort this jargon out) is creating the e-quivalent of thousands of people worldwide bidding or pitching their products and services, all under the same roof, organising delivery dates and then transacting the business right then, right there.

Internet auctions are the most terrifying part of this electronic market place revolution. Buyers can now toss their requirements onto a screen and watch suppliers cut each other's throats on price. And it's not only commodity products that are being auctioned on the Web. US auction site FreeMarkets has a sophisticated categorisation system whereby potential buyers can set down their specifications to three decimal points, including delivery dates, inventory arrangements and payment terms.

Services are under attack, too. In the US, you can even buy elective surgery - face lifts, eye surgery and the like - through an online auction at Medicine-Online.com's Bid for Surgery.

"This is a genuine revolution," comments Fortune columnist, Geoffrey Colvin. "It ought to terrify everyone who sells anything to businesses."

An over-the-top reaction? Howard Frederick, formerly e-commerce professor at Victoria University, now at Auckland's Unitech, doesn't think so. He says e-hubs will have a dramatic effect on the way you do business. "It's not whether a customer's transaction will take place electronically; it's on whose site it will take place that matters," he says. He estimates the number of online trading communities doubled to 300 in the first six months of last year. Gartner Group predicts 7500 to 10,000 business-to-business (B2B) market places will emerge by 2002.

E-hubs (portals, e-markets, whatever you call 'em) are coming to a network near you soon. In early August, SupplyNet will open for e-trading. SupplyNet is a joint venture between Supplycorp (the privatised Government Supply Board), Advantage Group and Eric Watson's investment vehicle, Qixel. Linking the government's 2000 or so buying organisations with about the same number of suppliers and contractors, SupplyNet's initial brief is to channel our $3 billion annual public sector purchasing - from photocopying paper to flak jackets - onto the Internet, hopefully saving the taxpayer a heap of dosh in the process. Soon afterwards, SupplyNet will open its doors to any private sector business, from NZSE40 corporates to Fred's Lawnmowing Ltd, wanting to buy or sell a product or service.

Amazingly, businesses don't have to be ultra e-nabled to sign up, says Advantage Group business development manager Martin Weekes. In fact, Fred could, in theory, access the system by logging on from a cyber café. The more sophisticated your system, the more you can do with it, but there's no expensive connecting software to buy.

One and many
SupplyNet isn't our only electronic market place. New Zealand companies have been trading computers and computer gear through the Quality Direct network (the online arm of Auckland IT distributor Axon Computertime), for nearly three years, with a total of $30 million of orders going through the Web-based system last year. There's also around $750,000 a month going through e://volution, the Web-enabled revamp of the maintenance, repair and operations division of West Auckland printing company Norcross, whose 12 buying clients include Clear Communications, Sky TV and Avis. And the Fashion.co.nz portal brings together over 40 New Zealand fashion labels and 200 retailers in a pseudo-market place - it's more like a catalogue.

SupplyNet will also not be the last. Telecom joint venture Esolutions, for example, this month announced Business-Exchange, in conjunction with US market place specialist Ariba - the main rival of Commerce One. Telecom and its supplier community will be the first to populate the market. This includes the

electronic catalogues OTC Workplace Partners, Moore Gallagher, Eurest New Zealand, Cafe Express, Fuji Xerox, New Zealand Liquor, Marshall Promotions and Wickliffe Press. Esolutions also claims to be working with Baxter (the largest health industry product supplier after the food industry) which it hopes to host on Business-Exchange. Esolutions e-procurement evangelist Steve Hornblow is

predicting the first will be set up late this year or early 2001. WestpacTrust says it will have a market place, powered by US-produced Intelysis software, up-and-running within a year, and will also be selling the Intelysis system in New Zealand.

Another player is Owens Transport, the freight forwarding company. It is toying with the idea of a transport portal. After spending months installing a sophisticated e-commerce system for its own customers to track goods on Owens' trucks, it may now use the same system to control the flow of goods across many different transport businesses. By combining forces with competitors in the business, the portal may become an industry, rather than merely an Owens' initiative, says business development manager Graeme Wilson.

Ones to watch
Esolutions' BusinessExchange and the SupplyNet examples are the ones to watch. The new systems are more sophisticated than those already operating and so should be able to encompass myriad different trading floor formats in the same site - including auctions. SupplyNet uses Commerce One market place software, enabling it to provide a range of business services, from banking to travel, to payroll and human resources, as well as procurement, says Weekes. Even more exciting for New Zealand companies, perhaps, is that the Commerce One software will allow SupplyNet customers to access overseas companies, and be accessed by them. All the Commerce One networks talk to each other through a consortium called the Global Trading Web (GTW), Weekes says, so anyone registered with one Commerce One-enabled market place can potentially have access to other companies registered on any of the other GTW market places.

The system works because of a sophisticated categorising system that minutely classifies every product being offered for sale. Then, when someone is looking to buy a something-or-other, Commerce One gives it a classification, searches through all the registered suppliers and comes up with a list of potential sources. So, for example, a New Zealand food processing company could find itself winning a contract from an Argentinian hotel chain, without ever having had to cross the Pacific for a pitch.

The two big draw cards will be quality of information and cost savings. Research companies Giga and IDC project that B2B market places and exchanges will allow buyer and seller companies to save between $US180 billion and $US480 billion in transaction costs and related expenses by 2003.

Cost savings are there for New Zealand companies, too. By providing economies of scale, and by automating orders, payments and product information and eliminating the mountains of faxes, invoices and labour involved in generating conventional purchases, Internet market places, such as those already provided by Quality Direct, can save big buyers millions of dollars over time.

Internet auctions - in their infancy in New Zealand at present, but likely to be more widely available from next year - have the potential to also slice the price of the goods and services purchased. And that's where the really big money will be saved.

Haggle and save
There are two types of auction. The first are seller auctions, where Joe Brown manufacturer has 200,000 widgets for sale and offers them to the highest bidder on the day.

Then there are reverse auctions, sometimes known as buyer auctions. That's where Mary Smith Inc needs to buy 200,000 widgets. Mary Smith sets the online bidding start price (which could be, for example, the price for which she bought the same products last time) and suppliers work downwards from there. When the e-hammer goes down, the lowest bidder gets the business.

The reverse auction system is potentially devastating for suppliers, who face massive price pressure, increased numbers of potential suppliers and erosion of historical preferred supplier benefits.

New Zealand's fledgling market place developers are keeping pretty coy about the potential savings from Internet auctions. After all, they need suppliers to come on board, and suppliers aren't going to be wooed by a system aiming to cut further percentages off their already squeezed margins. GSB Supplycorp, the biggest purchaser in the country, already gets a pretty good deal from its suppliers, and probably couldn't squeeze them much more, says Weekes, adding that putting suppliers out of business is counter-productive, since it only reduces competition in the market.

Maybe, but given overseas evidence, particularly from the US, it's hard to believe New Zealand suppliers will be saved. It seems big corporates with the sort of buying power (and thereby discount potential) New Zealand companies could only dream about, are still managing to achieve multi-million dollar savings by moving to auctions (see table). For example, US old-economy giant United Technologies used Internet auction service FreeMarkets to buy printed circuit boards. It got the circuit boards for $US42 million, a saving of 43% on the $US74 million it was expecting to pay. In March, a Fortune magazine journalist, Shawn Tully, reported sitting in on a recent auction for plastic car parts (see "Going, Going, Gone!" www.fortune.com). With 25 (anonymous) suppliers competing online in a frenzied 33-minute battle, the buyer got the price down from the $745,000 that he paid in the last, traditional tender for the same parts, to $US518,000 - a saving of 31%. This auction was one of five in which the customer bought parts that day - parts it expected would cost $US6.8 million under the old system. Total price after the auctions: $US4.6 million.

New Zealand's Quality Direct is not so quick to task. It's being held back by the inability of the major computer suppliers in New Zealand - most of them local subsidiaries of big multinationals - to respond in an auction timeframe. It takes days, sometimes weeks, for information and product to get to New Zealand. But that needn't be the case, Kenealy says. "It could be something that customers could force in quickly if they wanted it."

The second barrier to auctions is the reliance many companies have on preferred suppliers. Companies are reluctant to jeopardise a relationship that's been built up on more than just price. But there are ways round this, Weekes says. In the US, auctions are often used for one-off, off-contract spending, he says - furniture for a new office, for example - leaving perennial relationships intact.

"Ultimately, all businesses will buy on a market place, sell on a market place, host a market place, or be marginalised by a market place," says a recent report, "B2B Marketplaces in the New Economy". Okay, so the report is by US-based market place-enabling software company Ariba. But for once, this typical e-hyped prediction could just turn out to be true.

Additional reporting by Russell Brown

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