InformationWeek

Even with so much attention on the business-to-business marketplace space, the market makers themselves are falling short of replicating the sophisticated relationships that exist among trading partners in the "old" economy. Most business-to-business marketplaces today are really just spot markets or clearinghouses for excess inventory. Consequently, sellers will have little incentive to put more of an effort into selling through marketplaces until those marketplaces are able to truly support their needs.

None of this has dampened the interest in business-to-business marketplaces. Pick an industry, and there's probably an E-marketplace for it. There's Bid.com for construction materials, Equilynx for ship replacement parts and maritime procurement, and Chemdex for chemicals. Some marketplaces, such as Vertical Net and Dovebid, are trying to address the needs of dozens of markets and industries.

But for marketplaces to reach their full potential, they need greater ability to manage the complex contract relationships that are common among trading partners. In order for business-to-business marketplaces to support such relationships, they must provide capabilities in areas such as these:

• Up-front contract negotiation: It's common for sellers and buyers to negotiate contracts with pricing terms based on anticipated purchasing volumes for a year or more. For example, a pharmaceutical distributor may establish a different contract price for aspirin with different pharmacies and retailers, depending on their size, location, and anticipated sales volume. Large drugstore chains with hundreds or thousands of outlets can negotiate more-favorable prices than mom-and-pop pharmacies. Sellers may want to allow multiple buyers to form consolidated buying groups to let them combine their purchasing volume for better contract pricing.
• Pricing adjustments: Many contracts stipulate that prices change if certain purchasing volume thresholds are not met or exceeded. For example, if a buyer negotiates one price for office paper based on anticipated usage of 10,000 boxes per year, but winds up ordering only 7,000 boxes, a higher price will apply--and the seller needs the ability to resolve the discrepancy and bill the buyer.
• Pass-through discounts: Contracts may stipulate that if list prices for specific items drop below the contract price, the seller must honor the lower price and pass the savings along to the buyer. This is typical for goods such as computer hardware in which prices may decline quickly in a period of months.
• Substitutes and upgrades: Sellers may want to provide incentives or rebates for their customers to upgrade products already purchased once new models become available. For example, printer or copier providers would prefer to get customers to upgrade to new equipment and need a way to support pre-negotiated rebates for equipment exchanges that can be applied toward the upgrade.
• Credit memos: When a seller needs to give the buyer a credit for a pricing adjustment or rebate, the seller generally issues a credit memo that can be applied only to the same product line, rather than to the customer's general account. For example, a printer and print-supplies provider could issue a credit for returned equipment that could be applied only to purchasing more equipment, not to office supplies or consumables. This allows sellers to protect their profits on higher-margin items, while underwriting their loss leaders.
• Renegotiating contracts and service levels: Sellers and buyers often renegotiate contracts or change terms based on usage or other data. In the printer example, meter readings from the print device may tell the supplier that a customer would be better off with a larger or smaller printer, or with a different click-charge rate or service plan.

One factor holding the business-to-business market back is the E-commerce software that the marketplace providers use to build their sites. Vendors are aggressively adding the capabilities that marketplaces are demanding. For example, vendors such as Ariba, Commerce One, and IBM have developed strong capabilities for auctions and bid management, but they haven't yet devoted significant energies to providing the ability for sophisticated contract management among multiple buyers and sellers.

Once capabilities such as auction support and content management approach parity, we fully expect E-commerce platform vendors to start incorporating more-robust contract-management features. In fact, tight integration throughout the supply chain is the key to enticing sellers to participate in marketplaces. It's one thing to have another outlet for sales or exposure, but sellers will have more incentive to participate in marketplaces--and pay for the service--if they know they will gain measurable benefits in terms of time to market, customer service, and reduction of costly errors.

For now, vertical business-to-business E-marketplaces will remain mostly auction sites, bidding sites, and comparison-shopping sites for spot purchases. The approach is viable, but only for commodity items or for low-value items such as office and maintenance supplies. In the short term, the differentiated sites will be those that provide any level of business-to-business functionality, such as the ability to provide different prices to different buyers or to offer volume discounts. Some sites, such as E-Steel, have recognized this and are incorporating these capabilities into their sites. Rather than wait for a marketplace to serve them, some large sellers are simply building their own marketplaces, such as maintenance and operating supplies distributor W.W. Grainger Inc., or GE Plastics and its GEPolymerland.com site.

Sophisticated relationship and contract management is the next frontier of competitive differentiation for both E-marketplaces and E-commerce software providers. Within the next year, expect E-marketplaces to begin supporting complex, ongoing trading relationships and buyer-seller interactions, including capabilities such as contract management and supply-chain integration. And expect vendors such as Blue Martini, BroadVision, Commerce One, IBM, Intershop, and Oracle to strengthen the business-to-business capabilities of their products or to form partnerships that round out their offerings. These sell-side vendors already have relationships with the sellers and are natural candidates to extend their offerings to marketplace providers.

Once such capabilities become widely available, electronic marketplaces will become key channels for procurement of noncommodity goods and services, materials used in manufacturing, and retail items with sometimes unpredictable replenishment requirements and highly complex pricing arrangements. But until this happens, many sellers will continue to view E-marketplaces as third-party dot-coms that stand between the sellers and their customers, with-out offering value to address the seller's needs.