Economic Downturn Slows B2B Commerce

The recent slowdown in the economy is not expected to stop the worldwide B2B Internet commerce market, which is on pace to total $8.5 trillion in 2005, according to Gartner, Inc.

The long-term forecast for B2B e-commerce has been impacted by the economic downturn, especially in the United States, which is projected to be the most heavily effected, but it may also be a blessing in disguise for some firms.

“The economic downturn can be viewed as a reprieve for enterprises that weren’t able to keep up with the e-business leaders,” said Lauren Shu, research director for Gartner’s e-Business group. “This is not a time to retrench, but rather an opportunity to get your house in order, work on internal adoption of e-business and associated change management and prepare to take advantage of and profit from the massive changes that will play out by 2005.”

In 2000, the value of worldwide B2B Internet commerce sales transactions surpassed $433 billion, a 189 percent increase over 1999 sales transactions. Worldwide B2B Internet commerce is projected to reach $919 billion in 2001, followed by $1.9 trillion in 2002. In 2003, the market will increase to $3.6 trillion, and at the end of 2004, worldwide B2B Internet sales transactions are forecast to reach $6 trillion. Gartner defines B2B e-commerce as the sale of goods and services for which the order-taking process was completed via the Internet. This includes purchases via Internet EDI, e-marketplaces, extranets and other sell-side initiatives, but excludes activity over proprietary networks.

Gartner lowered its forecast because of the economic downturn, but believes enterprises will turn to cost-saving measures, such as e-procurement and hosted software solutions such as e-marketplaces, rather than in-house solutions. The economic situation will also cause enterprises to be more deliberating and judicious about new IT investments, focussing on where they can get the greatest impact for the lowest cost. Gartner anticipates that some enterprises will continue to rely on legacy EDI systems and delay replacing them.

“B2B commerce over the Internet is in the very early adopter stage, but companies have been doing business electronically for years using proprietary EDI,” Shu said. “These systems work today, have served companies well enough for years and are deeply embedded in the B2B processes of many industries. With the downturn in the economy, the migration away from proprietary EDI to Internet technologies will be slower than earlier anticipated.”

One of the more hyped areas within B2B has been e-marketplaces, but Gartner analysts said it’s important to understand e-marketplaces’ true impact on the overall B2B industry. E-marketplaces, which faced some difficulties in 2000, are a new phenomenon and are just ramping up. Few had substantial revenue in 2000, they accounted for only a small fraction of total Internet commerce in 2000 and are not representative of all B2B Internet commerce, which grew substantially in 2000.

Worldwide B2B Market

“With the proliferation of e-marketplaces that had poorly thought-out business plans and inappropriate revenue models, it should not have been surprising that the cards came tumbling down this soon,” Shu said. “A return to the sanity of fundamental, sound business principles, and the resetting of realistic expectations means that going forward, the market can expand in a more rational way with e-marketplace business plans and participation decisions both more highly scrutinized, and thus more viable and more strategic.”

The emergence of private e-marketplace builders, third-party intermediaries that are building and hosting private e-marketplaces may significantly increase marketplace participation, said Gale Daikoku, senior industry analyst for Gartner’s e-Business group. But in the short term, Daikoku said, their supply chain will be later to drive significant sales transactions than public e-marketplaces. Thus, their impact on Internet commerce won’t be significant until 2003.

Experience may play a significant role in the profitability of B2B Web sites. According to the report “Online Success Strategies in B2B Markets” by ActivMedia Research, 46 percent of B2B businesses that have been online for three or more years are profitable. This compares to only 32 percent across all B2B sites regardless of the number of years online.

ActivMedia also found that, in contrast to the B2C sector, most B2B firms do not expect their online business to ever exceed offline. The most recent arrivals to the Internet are the most likely to believe this. Older firms, however, have established an online presence and have seen what the Internet can do for them.

“Half of all B2B firms that do business both online and offline indicate that their online order size is smaller than offline orders,” said Harry Wolhandler, ActivMedia Research’s vice president of market research. “Another third find that the order size is the same. This provides little incentive for some B2B firms to develop their online business. Instead, cutting costs by conducting business functions such as purchasing online is another way to affect profitability margins. Whether a Web site is increasing revenue or cutting costs, the Internet opens doors to increased profitability.”

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