Why B2B Has Been a Bust - So Far

According to a report released by GartnerG2, moving business processes online turned out to be harder than it seemed initially.

Creating and implementing the technology needed for B2B e-commerce was the easy part. The difficult element of the equation was moving the buyer-supplier relationship onto the Web.

Snafus and Holdups

Since the beginning of the Internet boom, some business-to-consumer (B2C) e-tailers have managed to gain consumer trust and break away from the pack. But according to GartnerG2 analyst Gale Daikoku, developing a relationship with potential customers is more complicated for B2B companies.

In addition, many B2B companies discovered that there was no money in transaction-based e-marketplaces, so they are now refocusing their business plans on developing software and infrastructure.

B2B also has been hampered by a lack of industry standardization for e-commerce technology, and global B2B has been impeded by disparate languages, taxes and currencies.

Different Interests

Yet another problem that has plagued B2B is what Giga Information Group analyst Andrew Bartels calls an "asymmetry of interests."

Large companies have been very interested in B2B e-commerce because of potential cost savings, he said, but small and mid-sized companies have been reluctant to go online because they have fewer resources and tend to be more conservative.

Asymmetry also exists between buyers and sellers, he noted. Whereas buyers are in favor of using the Web for sales transactions, sellers are worried that B2B e-commerce will force them to compete purely on the basis of price.

"Small companies know they do not have the scale to be the low-cost provider -- they focus on better service, quality and reliability," Bartels told the E-Commerce Times.

"They are afraid that as their larger brethren start buying online aggressively ... the sellers will be forced to play a price competition game and lose."

B2B Comeback

According to Bartels, in order for B2B to rise again, three things need to happen. First, the cost of entry must come down through the revival of the ASP (application service provider) model.

Because companies must wait a year or two to receive their money under the ASP model, when investors started looking for immediate profits, a lot of ASPs went back to licensing in order to get their money up front, Bartels said.

A return to ASPs, which have expertise and credibility in outsourcing , will bring down the price of B2B e-commerce.

"Another factor is that while suppliers are nervous about selling online, pressure from buyers will increasingly force them to," Bartels said.

Last, there must be a shift from online transactions to online collaboration -- including planning, product development and marketing -- which will create more incentives for sellers to use the Web.

Natural Cycle

Although B2B e-commerce has had difficulty overcoming a number of obstacles, it also has slowed down as part of a natural cycle, according to GartnerG2. When the dot-com phenomenon began, there was a huge surge of what turned out to be unrealistic expectations for B2B, which peaked in 1999 and 2000.

Expectations later fell to earth, and in early 2001, B2B entered what GartnerG2 called the "trough of disillusionment." The situation was further aggravated by the September 11th attacks and the resulting slowdown in the economy.

But just because B2B has fallen short of the hype that surrounded it does not mean it is dead. "It seems like it failed now, but a lot of innovation is happening today behind the scenes," Daikoku told the E-Commerce Times.

Bartels agreed, saying, "Large companies have been doing lots of stuff electronically for a long time. It's not as visible because it's often one company to another, but it's there."

GartnerG2 still expects B2B e-commerce to reach US$8.5 trillion by 2005, up from $433 billion in 2000, but Daikoku said she expects it will take five to 10 years for B2B to hit its stride.