March - 2000 - issue > Cover Feature

Some consider the Internet hype too much. Awaiting the burst of the Internet bubble, they prophesize the collapse of the markets. Defending their case, they cite the failure of most Internet companies to generate profits, even after several years in operation. They despise the get-rich-quick mentality of day traders that they feel, to paraphrase Max Beerbohm, are: “A million minds with but one single thought – if that.”
But if the life of the Internet is to last a single day, dawn is just breaking. Most of the world has not yet realized the power this second industrial revolution has to transform our economies.

The potential is global. Yet we sometimes forget that we are biased by our own exposure to the Internet revolution. Readers of this magazine, residents of Silicon Valley, and even US businesses in general are but a small fraction of e-commerce’s potential audience. In the last decade, the world’s sixth billionth person was born; yet the most Net-ready nation on earth, the United States, has only 125 million computers. Being the first goose in the skein, we forget that somewhere at the back of the flight, there are many more who do not yet know where they are going.

The Third Wave

It has been well publicized over recent months that the value of business-to-business (B2B) e-commerce will far outweigh the dollars spent in the headline grabbing business-to-consumer (B2C) trade. A recent study by Boston Consulting Group predicts the transaction volume of B2B e-commerce will reach $2.8 trillion by 2003. Compare that to a Forrester Research forecast of the value of B2C e-commerce of $108 billion. It is not well understood what can account for such an enormous difference. Why will the brand names of the Internet; Amazon, Yahoo, e-Trade and others play such a minor role in the sector they helped define?

The answer lies in the advent of a third wave of Internet commerce. First came the B2C firms, bringing with them the excitement of all things new. Their fundamental promise is connectivity – bringing the purchase decision into the homes of millions. But despite the benefits, they are no more than a new and more efficient distribution channel.

Next, and still nascent in many industries, is the B2B e-commerce wave. Its greater value rests on mathematics; specifically Metcalfe’s law, which states that the value of a network is proportional to the square of the number of users. Bringing buyers and sellers together in the same space makes for a more efficient market. Graphically, B2B hubs can be depicted as a butterfly, where the wings reach out to the participants on either side, while the B2B firm creates the marketplace at the center. Like their close cousins — the consumer-to-consumer (C2C) sites that also benefit from Metcalfe’s law —the B2B players plan their business models around transaction fees. C2C pioneer eBay has been profitable from the start. The higher transaction value of the B2B sites, and the greater scope for the selling of services, will make B2B sites more valuable. The exemplars of the sector will evaluate service provision and provide rankings to encourage firms to invest in and preserve their reputation. That means that the next time your company’s office needs to be re-furnished, you’ll be able to see how other customers’ experience with various decorating firms.

The third wave heralds not just e-commerce, but e-business, a distinction that is not merely semantics. In an e-commerce model, firms trade. In e-business, they reengineer the way they operate to take advantage of Internet based service offerings.

The three enablers of e-business are:

* Business process outsourcing

* Workflow modeling

* Application service hosting

The wings of the butterfly model go out to the firms on either side, making it easier to meet and easier to exchange goods and services. The value of e-business is that butterflies have a body that can house common processes and make them available to the firms out on the wings.

Automating Processes

The value of business process outsourcing comes from several factors. Taking business processes to the “center” enables greater specialization in the economy.

Since firms moved away from the horizontal consolidation that characterized, and marred, the 1970s, effective management has tried to get firms to focus on what they do best: their core competencies. Everything else can be bought from someone who can do it better, quicker or more cheaply. B2B e-business gives companies easy access to firms that specialize in a business process.

Secondly, the automation of processes is more likely to occur in the central hub than at individual firms. There are still millions of pieces of paper being needlessly passed from one place to another in Fortune 1000 firms, often at great processing expense.

Thirdly, butterflies bring a common set of standards to the industries they unite. At the moment, for example, each Fortune 1000 firm has its own master service agreement with each of the staffing firms it uses for supplemental labor. In the future, the entire staffing industry could subscribe to a boilerplate term sheet in advance, cutting down contract negotiation

Fourthly, the body of the butterfly is a natural place to police standards for the industry. Such practices as pre-certification and license verification in each industry will allow the e-business hub to grant its own equivalent of the Good Housekeeping Seal of Approval. Current industry bodies which self-police are always caught between the desire to maintain standards and the strictures of their paymasters. Neutral companies at the heart of the butterfly will earn transaction fees, leaving them beholden to no one.

Lastly, e-businesses will speed adoption and foster growth of more efficient processes by reusing the same learning curve. Each implementation at a stand-alone client runs the risk of reinventing the wheel. Butterflies build the infrastructure at the center only once. In such a continuation model, there are no lost skill sets, and each entrant to the network benefits from the cumulative experience of those who have gone before.

Enhancing Workflow

Firms cannot hope to reap the full value of e-commerce by simply pointing their employees at a Web site. Successful e-businesses will harness the collective power of the many individuals in an organization through workflow, a system representation of the rules by which businesses are governed. In the same way that a team is able to accomplish more than the sum of its members’ individual efforts, workflow links many users in a way more powerful than allowing those same users individual access to a Web site.

In the butterfly, workflow is the series of small veins in the wings that seek input and deliver response. In the B2C world, companies have offered customization in the guise of personalized Web pages that are little more than a filter of all that the site offers. In B2C, the site says: “I have a lot, but I will show you the little you want.” Workflow allows a much stronger capability in B2B: “I know the organization you’re from and what you’re allowed to do. I can therefore give you access to the following, and report to those who control your budget.” Thus the great success of the e-procurement firms, which use workflow to create an personalized online catalogue of products that each employee is entitled to purchase depending on their title and department, varying from stationary to computer hardware.

The final enabler of the third wave is the Application Service Provider (ASP), firms that house a software application and charge a subscription to use it. They put processing power at the center of the butterfly. From there it can serve all users, rather than being dispersed to the extremities where it serves only its near neighbors.

Capital costs are spread across many users and processing capacity is allocated more efficiently. The body of the butterfly serves as a node, collecting data from all points in the network, allowing the ASP to aggregate market data.

The move from e-commerce to e-business makes industries more productive. Take the airline industry, for example.

British Airways has already said it wishes to be a virtual airline, which so far means that the airline will outsource many of its non-core functions, such as in-flight meal provision and cleaning services. It is taking a step in the right direction, and the potential is much greater.

Imagine that the airline has four potential catering suppliers. British Airways will be able to run information on its flight schedules and projected load factors – such as how many people will be on the flight – on an ASP. Software will convert the data into projected meal requirements and allow vendors to bid on supplying the service. The software then assigns a winner, and delivers the details for the delivery and any security documentation required to access the aircraft.

In aggregate, e-business has created a market and completed the supply chain processing for in-flight meal provision. First, it matched supply and demand, and then processed the steps needed to turn a customer’s flight reservation into an order for food service — leaving British Airways free to concentrate on marketing its services and flying its fleet.

In the third Internet wave, firms will not only meet and transact over the Internet, they will depend on distributed processing and shared data for competitive advantage.

The potential of e-business is, through specialization, to more efficiently allocate the world’s economic resources — a culmination of the transformation begun in the first industrial revolution.