Can regional hubs anchored by utilities overcome the liquidity problem of other B2B procurement exchanges?
Electronic commerce, until now, has been limited to use mostly by techno-geeks as a new way to match sellers in Boise with buyers in Bhutan. But some people are realizing that the Internet offers a means for old-line businesses like utilities to make real money in ways they couldn't previously-and right in their own backyards.
Only recently defined by single-seller websites targeted to consumers, the e-commerce landscape is increasingly populated with business-to-business ventures. Early B2B ventures have been vertical, with goods and services targeted to a particular industry, but the latest slice of the market is horizontal, involving buyers across industries. Utilities stand to reap big profits and recast their stock valuations from a variation of these horizontal hubs, the "regional horizontal hub."
The regional hub business model, which was developed by my firm, energyLeader.Com, is a group of buyers within a geographical area banding together to purchase all types of goods and services. It sounds like something that could have been done in the 1920s. And, driven by the potential savings of mass procurement, businesses probably would have made it a common practice if not for the paperwork blizzard generated by multiple ordering, shipping, and billing. What makes the regional hub concept new, and will make it work now, is that all transactions will take place online using customized Internet platforms. The basic platform to be used in these regional hubs is used already in about 100 electronic exchanges.
For suppliers, e-commerce offers a natural advantage over traditional sales because online transactions do not require salesmen, showrooms, or heavy marketing budgets. That is particularly advantageous for small businesses that have less money to invest in facilities, staff, advertising, and expediting payment of receivables.
Another advantage of electronic commerce, for buyers and suppliers alike, would seem to be that it erases geographic limits. A buyer can find the best product and price halfway around the world, and a seller can tap new markets quickly and easily. However, many buyers that have a stake in the strength of the local economy prefer to buy locally. Institutions such as universities and hospitals, state and local governments, and school districts have an interest in buying close to home, especially for services. But marketing clutter in a region can be difficult to overcome even for motivated buyers, so it can be as hard to make the right deal nearby as at a distance. The regional hub will help to cut through that clutter. Local buying also saves time and money in shipping.
Energy utilities are particularly suited to anchor regional hubs. Most have been in business for the better part of a century, and have developed reputations for community service and reliability. Utilities also have believed in buying locally when possible, and have developed good connections with area businesses, both as vendors and energy customers.
Regional hubs may provide one of the new revenue streams that utilities are seeking as competition increases. The unregulated business units most utilities have formed can be a big asset in this line of business. Their ability to move more quickly than the regulated units is especially crucial in e-commerce, where imitators are quick to seize on any good idea.
Will Local Focus Make for Winning Model?
The regional hub is a natural progression of e-commerce, which began with single-seller B2C efforts such as Victoria's Secret and Amazon. Sellers such as Dell and broad retailers such as Grainger easily adapted the single-seller model for B2B markets.
Other companies, such as Ariba and Commerce One, soon flipped that one-seller-many-buyers concept into a single-buyer model. These single-buyer pioneers exploited a crucial innovation in technology, the emergence of the XML data standard. XML, or extensible markup language, in its several variations makes it practical for systems using diverse data formats to exchange information. The technology makes feasible broad electronic exchanges involving aggregations of buyers and sellers.
Consumers have resisted aggregation, although Priceline and other vehicles are trying to discover the magic formula. The B2B world has been much more receptive, as businesses seek the lower unit prices that can be negotiated with a large-volume buy. Several models for B2B multi-buyer exchanges have emerged.
Independent Vertical. The first B2B multi-buyer exchange to develop involves a dot-com company that matches buyers and sellers of a relatively narrow range of industry-specific goods, such as chemicals or scientific equipment. These hubs have trouble getting off the ground because their bargaining power is limited until they attract large numbers of buyers and sellers, so early participants do not realize much benefit.
Buyer Vertical. In a second vertical form that has emerged, buyers combine to purchase a range of industry-specific goods. Automobile manufacturers, major petroleum companies, and, recently, a group of utilities (Pantellos) have formed buyer vertical groups. The members of these groups may be competitors, but they aim to coordinate closely enough to operate at Internet speed.
Universal Horizontal. The third B2B model aims to serve any business, anywhere, that wants to buy any type of good or service. That is a massive undertaking, but AOL and PurchasePro are jointly developing a universal horizontal, as are others. The critical mass of buyers and sellers necessary for profitability is difficult to attain.
Regional Horizontal. The regional horizontal hub quickly achieves critical mass and profitability, because it is anchored by a utility with a service ethic and image in its regional business community and a century of experience in large-scale purchasing. The "liquidity problem" of so many B2B exchanges is avoided.
Regional horizontals in large markets do not require much market penetration to be profitable, and can catch on quickly. Our model offers incentives such as equity in the hub and rebates to attract a core of large "charter buyers," major commercial and industrial customers of the utility. Most companies and non-profits throughout the country have not yet embraced the Internet as a means of reducing purchasing costs. Joining a hub is a good way to take their purchasing online with little or no outlay and the prospect of not only lowering their purchasing costs, but also profiting through their equity in the hub. After five to 10 charter buyers are recruited and "enabled," the hub recruits other regional buyers and sellers to participate.
First Utility Anchor
Because energyLeader.com is a Washington, D.C.-based startup, it was natural for us to turn to the hometown electric utility, Potomac Electric Power Co., as a first regional anchor. The utility quickly realized the potential of this new e-commerce model, and joined in developing the first hub. The Pepco-anchored regional hub will be operating by the end of the year. Our firm is working with Andersen Consulting to recruit utilities for other regional hubs, and expects to announce an agreement with a second utility shortly.
The regional hub's revenues will come through transaction fees, advertising, and fees from preferred providers of value-added services, such as shippers, banks, and insurers. Penetration of just 1 percent of a major market would yield over $25 million annually in transaction fees. At this level, the regional hub would become one of the largest Internet exchanges in operation, and get into the black quickly.
The prototype hub will offer many services, such as installation of an e-procurement system for buyers and suppliers, training, and customer care. Among other special features, it will also enable buyers to give preference to businesses owned by local minorities. The regional hub's operating software will allow smooth and organized completion of all types of transactions, from single purchases to complex procurement orders. It also includes a mechanism for pre-qualified vendors to respond to requests for quotes and requests for proposals.
As the B2B market matures, no one model is expected to predominate. If experience has shown anything, it is that there is more than one winning formula, and a wealth of good ideas. It is clear, however, that as buyers see others- in some cases, their competitors-realizing savings, they will demand the same deals or better, and quickly. Aggressive players will thrive, whether in the forms in which they started, or through the consolidation that is inevitable in e-procurement.
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