B2B Primer

Good evening, Fools. Every column presents topic-choice angst, and this one is no exception. Following my first two B2B Breaker articles, I've received two kinds of feedback. First, many Fools participating in B2B-related pursuits have been very generous in providing insights and links to excellent resources. The second class of feedback has been of the "get to the point" variety. Not everyone appreciated the Fool stump speech that soaked up most of the last column.

Like every good business-guy, I like to please my customers. So I'd really like to write a column tonight that starts with lots of high-tech insight and ends with a short list of Rule Breaker B2B candidates. But I'm not ready.

And I'm guessing that the majority of my audience isn't ready either. My first attempt to break down the hopelessly broad B2B arena into some manageable sub-industries led me to employ a lot of industry techno-babble in my column, most of which I didn't really understand well enough to use. I've learned my lesson: when leading a group learning exercise, the worst thing to do is to worry about ego. It doesn't help anyone.

So, as the next step in the quest, I'm going to take a giant step backwards tonight. I want to pass along everything I've learned over the last few weeks, in plain English. I want to do this for two reasons. First, it'll be easier now, before I become so hopelessly immersed in the world of B2B-speak that I can no longer remember what it all means in plain English. And second, I think it will set the stage for a far more useful industry breakdown than my first effort.

In this spirit, then, I present...

The world's most condensed, plain-language B2B Primer:

Companies buy lots of stuff. Of course in business, big words make for big image, and "buy" is just way too pedestrian to qualify. People "buy" stuff. Businesses procure goods and services.

There are two types of procurement -- direct and indirect. Direct refers to raw materials that go into a company's final products. The simplest examples are from manufacturing. Direct procurement for a candy bar maker, for example, might include chocolate, sugar, peanuts, printed wrappers, and those little cardboard thingies that the bar rests in.

Indirect refers to the stuff ordered, for the most part, by the swank folks in the front office -- like travel services, computers, and other office supplies. If this stuff shows up in the final product, we get on the red phone with the lawyers and the PR people.

Businesses have always procured their direct and indirect goods in marketplaces. Nothing new here. In fact, for many years, businesses have been using computers to automate all the drudgery associated with these business-to-business transactions. The premier old technology for business marketplace connections is called Electronic Data Interchange (EDI).

In fact, even within a company (oops, company = enterprise in B2B-speak) there is nothing at all new about automated enterprise processes. For example, no less than the two largest application software companies in the world, Oracle (Nasdaq: ORCL) and SAP AG (NYSE: SAP), are the leading solutions providers in the enterprise back-office automation game. (Here come the acronyms!). Two big sub-sections of the back-office are ERP (Enterprise Resource Planning) and SCM (Supply Chain Management). On the front-end of the enterprise, the side that interacts directly with customers, we encounter just one dominant acronym -- CRM (Customer Relationship Management). Siebel Systems (Nasdaq: SEBL) is the emerging CRM gorilla.

Finally, the idea of getting all these acronyms -- EDI, ERP, SCM, CRM -- to communicate with one another isn't even new. The integrators, in the form of software solutions companies and the IT consultants that peddle them, have been around since the dawn of the business computing age.

So what's new? Why all the fuss about B2B?

As usual, it's that Al Gore creation, the Internet. In short, the Internet represents a mega-integrator. Instead of closed, one-to-one EDI markets, the Internet provides the infrastructure for many-buyers-to-many-sellers marketplaces. It allows for totally open, global markets that essentially any enterprise can join, regardless of its geographical location or historical affiliations.

There are two ways to classify this new breed of Internet marketplace. First, private marketplaces are usually controlled by one (or a few) dominant buyers (typically manufacturing companies) that aren't interested in buying critical raw materials from the lowest bidder. They spend inordinate amounts of time and money qualifying one or two vendors with a fine-tooth comb, right down to individual supplier production lines. Their customers and manufacturing processes can't tolerate the raw material variability that comes with a wide open marketplace. Such private marketplaces are really just a means for increasing efficiency in existing supply chains. Public marketplaces, on the other hand, are creating open exchanges that, in many cases, didn't exist before. Buyers and sellers worldwide are free to join in.

If we don our over-generalization goggles for the next few paragraphs, we can draw parallels between the second way to classify marketplaces and the first, as well as bring in the earlier direct/indirect procurement distinction. Goggles on...

Most private marketplaces are for direct procurement (remember, think "raw materials"). These markets lie wholly within a particular industry. If they spread out, it's usually up and down the supply chain. In other words, the company that supplies chocolate, in our candy bar example, buys from a company that grinds and roasts cacao seeds who, in turn, buys the seeds from another supplier. You get the idea. This type of within-industry market broadening is termed vertical. So, from this overly general viewpoint, we can lump direct, private, and vertical together.

On the other hand, it's tempting to lump indirect and public with horizontal. Markets broaden horizontally when they stay at one "level" (focus on a certain type of good or service), but take in buyers and sellers across many industries. Travel services is the easy example. Almost every company in every industry (horizontal) procures plane tickets, hotel reservations, and rental cars, but not many feed their travel itineraries into their production processes (indirect) and most are more than willing to open the marketplace to as many agents as it takes to get a good deal (public).

Now, goggles off. There are, of course, lots of exceptions to this general clustering. Otherwise, we'd only need one level of distinctions, instead of three. For example, the Big Three auto parts exchange is a great example of a vertical market for direct goods, but it will be public -- open to any supplier that qualifies and subscribes. This is just the tip of the exception iceberg, but I still think it's useful, as a mental starting point, to group these markets into the two clustered stereotypes.

Finally, every market has buyers and sellers. In B2B jargon, we think in terms of buy-side and sell-side. Let's start by looking at this distinction from the standpoint of a major manufacturer of consumer products. You plug yourself into a raw material exchange as a buyer. Sell-side goes with your consumer interface. You want to create a slick Web interface that draws in individual consumers and personalizes their experience and, potentially, their order.

This buy-side/sell-side thing can get confusing, however. For example, if you are a supplier of raw materials to a major manufacturer, and you want to participate in an Internet marketplace, your fundamental challenge is moving your product catalog to the Net. This is your sell-side. But it is very different from building a slick consumer interface and demands a different set of Web tools.

When thinking about buy-side and sell-side, then, it helps to have context. Identify which company or type of company you are talking about and identify its customers. This will lead you to the front-office, the sell-side. Likewise for suppliers, the back-office and buy-side.

Next Steps:
With this simple primer as a starting point, I recommend the FREE Motley Fool Internet Report on B2B Commerce. It fleshes out this spare skeleton. Finally, here are some further thoughts on the Rule Breaker B2B quest that I couldn't jam into tonight's report: