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Old wine in new bottle

Kausik Rajgopal

Remember ERP? Those once-exciting companies (SAP, PeopleSoft, Oracle, JD Edwards, Baan) that sold software to enterprises before the commercial Internet exploded onto the horizon? Now go back and perform this exercise with their valuations, beginning in 1991.

If you index the stock of each of the above companies to the same starting point, you will observe a remarkable phenomenon -- the stock growth of these companies actually track each other very closely, for about 3-4 years. Then, they separate very quickly. And today, we have winners (SAP, Oracle), also-rans (PeopleSoft), and losers (JD Edwards, Baan).

This remarkable phenomenon is actually a simple one. The valuations of these ERP companies were in fact non-valuations. The market was not telling us how much they were worth; it was telling us that it had no clue.

History, fortunately for us, usually repeats itself.

Now fast-forward to mid-1999, before the business-to-business craze hit Wall Street, and before the Commerce One (CMRC), Ariba (ARBA) and Internet Capital Group (ICGE) run-ups.

In December 1999, the market was telling us (as with ERP) that it was merely attempting to value these companies, not that it actually had. (If you had bought ICGE stock in early January, you would be sitting on a 90 per cent loss right now.) As w ith ERP, companies of this ilk will separate out into winners, losers, and also-rans. The pace of the market may accelerate, so we may not have to wait 4-5 years to find out this time.

The ERP story is instructive in another way for B2B.

The ERP shops, whether winners or losers, have built the capability to deliver complex back-end systems to clients. And as we know, the days of the ``let's put up a Web site and drive traffic and sell something'' are gone. Going forward, success in the B 2B area will depend on designing, delivering and maintaining complex back-end systems.

Back-end systems (unexciting things such as logistics

management, order fulfilment, supply chain rationalisation) are where the big revenue dollars lie. Even if a new B2B player has defensible technology (once you get past the hype, this is usually unlikely), it still needs to understand more complex back-e nd systems -- for the simple reason that companies it will sell to have them and need to use them. Building and scaling such a back-end capability is extremely difficult. Which is why the real B2B winners may be ERP companies such as Oracle.

Why? There are two compelling reasons. First, the core of B2B marketplaces is software; all the invisible connections at the back end that ensure that auctions work and prices update.

Second, ERP companies with significant back-end capability can capitalise on a huge unfair advantage: Knowing how to sell and to manage relationships with large enterprises. This is important because unlike the consumer space, businesses are typically le ss price-sensitive to the items they are buying.

If you are Boeing, for instance, you are not just looking for the cheapest wing or a value play on an engine component. You are (hopefully) seriously concerned about quality, and need to work with your suppliers on a long-term basis to nego tiate on different product parameters.

As an intermediary connecting enterprises with their suppliers (for example), you need to not just provide the platform for the two parties to communicate, but also be sensitive to their long-term needs. This implies a relationship among the inter mediary, buyer, and seller.

Not surprisingly, the B2B models of last year are now mutating towards another one: B2E (business-to-enterprise). (In some emerging literature, B2E is referred to as business-to-employee, which is a distinct model -- these acronyms are new eno ugh that confusion will prevail for a while longer). Instead of promoting the B2B auction or many-to-many approach, this model seeks to build long-term relationships with large enterprises to not just meet their purchasing needs, but also facilit ate more complex, ongoing transactions and relationships.

If we think of the B2B opportunity as a one-day cricket match, we are still in the early overs. There will be a rash of new players on the scene (such as xTransact and b2emarkets.com) whom most of us have never heard of. They will be the pioneers for wh at is the next big software opportunity: Rationalising how businesses buy and sell online.

If you consider the crowded vertical spaces in the B2B

world and the problems it poses for buyers and sellers, it is not difficult to realise how big this opportunity may be. Many of the winners will be entirely new companies with emerging business models. But many others may be familiar names.

As Oracle's chief, Mr. Larry Ellison, is fond of saying: ``The Internet changes everything.'' So do not be surprised if the old ERP players change with it.

The author is consultant to B2B start-ups and entrepreneurs on business plan refinement and presentation. He can be reached at ulticat@stanfordalumni.org