B2B.2?

E-procurement can potentially help companies reduce costs and increase efficiencies, but corporate Middle East has been slow to embrace e-business practices, especially in the small and medium business sector

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By  Massoud Derhally Published  March 10, 2002

|~||~||~|As companies tighten their belts in light of the current economic slowdown, the potential cost saving benefits of online procurement and business to business (B2B) e-commerce are back on the agenda. The arguments in favour of doing business online are all familiar: E-procurement automates manual buying and selling processes, and encourages price transparency, which can mean reduced purchasing costs that directly benefit the bottom line. Plus, as more and more companies embrace online procurement, competitors will inevitably be forced to follow if they want to achieve similar cost efficiencies.
At least this is the theory that proponents of B2B marketplaces (Web sites that act as virtual trading hubs) focus on when pushing the idea of online trading exchanges in the Middle East.

However, while there may be cost savings to be had and cost savings can of course lead to better profitability, are companies locally adopting B2B solutions? Globally, the stocks of B2B companies have taken a pounding, amidst a general cooling towards technology stocks. In the Middle East, the only B2B marketplaces of note are Tejari.com, the government of Dubai's procurement portal, and Aregon, a horizontal procurement exchange focused on the private sector. A recent spot poll on ITP.net also showed that only 30% of 86 companies that responded to the poll use e-procurement.

At a recent UN Trade and Development Session for small and medium businesses (SMBs), Sankar Krishnan, the regional head of e-business for Citibank, argued that while the value proposition of e-commerce remains unknown to most regional SMBs, they could benefit the most from online procurement. However, although the internet can offer them the potential to reduce their procurement costs, many companies are unsure of how to go about doing this.

One company that promised a lot was Commerce One, which entered the region around two years ago. Its plan was to set up a number of e-marketplaces around the Middle East focused on general procurement. The marketplaces would act as virtual exchanges, where buyers and sellers could meet to do business. Commerce One would sit in the middle, acting as a facilitator and taking a cut on each transaction.
However, it was October 2001 before anything related to Commerce One surfaced and that was Aregon, which uses Commerce One technology but is managed by Aramex. Many would therefore say that a lot of talking has been going on but not much walking.

"Absolutely," says Simon McIver, director of sales and marketing, Commerce One UAE. "In the Middle East it takes a while to establish yourself. We have two offices in the region and two more are planned. It has taken us 12 to 18 months to get the value proposition across to people."

But why is it taking so long to launch Commerce One's procurement exchanges? McIver says that Commerce One, like everyone else, suffered from a change in market conditions. Commerce One, he argues, came to market in 2000 when people were witnessing a dip in technology stocks and a collapse in IT spending.

McIver believes that Commerce One has learned a lot between the time of its arrival and the launch of Argeon. That experience, he says, has enabled it to avoid the mistakes of Western counterparts operating in the same field.

Does that mean, however, that e-business is still alive in the Middle East and that e-marketplaces are a viable commercial proposition? McIver says 'Yes' and that there is plenty of desire from companies to make business processes more automated and more efficient. In that case, what does the company have to show for the past two years?
"Aregon is up and running. We have a market site and deployment in Kuwait and an announcement that we will be talking about in Saudi Arabia shortly," says McIver. While McIver declined to comment on the Saudi venture, he said that the yet to be announced site in Kuwait is backed by a consortium of local entrepreneurs who want a procurement exchange dedicated to the Kuwaiti market.
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These developments, McIver argues, will overcome some of the scepticism surrounding e-marketplaces in the Middle Eat. "The Middle East is a tough market: people say 'I'll see if you're here in a year and then I'll continue to buy from you', because they see so many people drop in and out of the market. We put our time in here and we made our mistakes along the way; we don't dispute that," explains McIver.

Commerce One is primarily focused on creating horizontal marketplaces that can be used for general procurement, but it has also looked at vertical exchanges for specific industries. However, having an idea is one thing, but is there enough demand to make B2B marketplaces commercially viable in the Middle East?

"Having a value proposition that addresses and enthuses the small to medium enterprise marketplace is what will drive exchanges," argues McIver. The reason, he says, is that SMEs create volume and demand 'value added services', such as secure document transmission and delivery, that larger corporations can take care of for themselves.

However, even Aregon, founded two years ago by Aramex and Citibank, was cautious in coming to market. It tried to study the market and formed strategic alliances to provide what it says are 'best-of-breed' services. "From the very early stages of the project, our core competencies in logistics and the supply chain were the main drivers of our e-commerce strategy," says Hazem Malhas, CEO of Aregon. Aramex, of course, is a major courier and fulfilment company.
The platform also uses methodologies from PwC Consulting, another of Aregon's business partners, and Citibank's CitiConnect payment solution, which enables users to deal with cross border trade requirements, and customs and shipping charges at the payment gateway level. Aregon also includes Click 'n' Deliver, an online catalogue containing a wide range of items, such as MRO (maintenance, repair and operations) materials, office supplies and furniture, computers and electronic equipment.

Having Aramex sitting behind the platform is a big potential benefit for everyone that uses Aregon, since Aramex can take care of issues such as delivery, returns and cancellations. Citibank deals with payment and credit related issues.

By using the internet to buy and sell, companies can potentially save costs in many areas. For example, catalogues can be posted online instead of being printed out and sent. On the back office level, there is less need for faxing and ringing, and orders can be keyed directly into a purchasing system instead of having to be typed and faxed.
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One real life example of cost savings that Malhas gives is of what he terms as 'cross-strategic re-sourcing.' A conglomerate in Saudi Arabia owned 1,200 trucks and decided to standardise the procurement of tyres online. It was reportedly able to save 45% on its tyre procurement costs.

Aregon aims to be the link in the middle of this chain, connecting the buyer and the seller, and taking a small cut on the transaction. "Studies have shown that a 5% reduction in the cost of procured goods and services can result in a more than 50% increase in operating profit," says Malhas.

When all is said and done, however, is there enough demand or interest for Aregon to be a viable business model? "Of course! Otherwise, I would not have committed to this business," replies Malhas. "The business model itself is built precisely to address the countless obstacles and gaps in a region known all too well for its high barriers to entry, fragmented markets and low level of technology infrastructure and experience-obstacles that severely limit trade within, from and to the region, and invariably inhibit company growth.

"We know there is need and there is interest. The key is to nurture sustainable demand. The business model is being put to the test, but early indications are quite encouraging," explains Malhas.
Since going live in October 2001, Aregon has successfully acquired one of the region's largest construction companies, Consolidated Contractors Company (CCC), as a user of its e-procurement initiative. Malhas says that using Aregon will allow CCC to centralise and improve its existing purchasing processes. The government of Jordan's commitment to launch a pilot procurement project with Aregon, as well as several other prospective e-procurement initiatives for several large organisations, further validates the vision of Aregon and increases the chances of commercial success, insists Malhas.

Marketplaces like Aregon and the government of Dubai's Tejari.com provide a platform for companies to do business with each other online. However, getting them there is, of course, no easy task. Tejari.com has had to spend a decent chunk of its time educating the market, say Tejari.com's Saleh Al Shunnar, marketing director and Saqib Iqbal, chief operating officer.

The company's primary business is online tenders, which, according to Iqbal, are growing at a healthy pace month on month. "Some organisations that we did not expect to do such tenders have come on board," says Iqbal. "Private sector companies that initially joined up as suppliers to large organisations have started to do their procurement on Tejari. Another potential [growth] area is catalogue purchases and we are still doing a lot of cataloguing work. Once we have the critical mass of catalogues and items I think trade will pick up," he adds.

Tejari.com has been operational for one and a half years and for the year 2001 it had close to US $100 million worth of business transacted through its marketplace. The key to success is how you present yourself an plan your business strategy, according to Iqbal.
"One of the concerns that people always air is the burst of the Internet bubble. What they fail to see is that companies with a solid business model have been successful," says Iqbal. "I believe we have a solid business model, and this is very important," says Iqbal.
Like other players in this market, Tejari says that it would like to see more B2B marketplaces in the region because it would help in the process of educating the potential user base, a difficult and time-consuming task for Tejari. "One of the biggest jobs we have is educating people and it is this area where a lot of resources from Tejari are directed," says Al Shunnar. "Having other B2B platforms helps us in this respect."

But again you may ask, is there enough demand for a platform like Tejari's ? Will people in the Middle East want to change established buying processes and do more of their procurement on the internet?
"As far as demand is concerned, yes there is more realisation of the benefits of a B2B marketplace than before. Initially, there was a lot of hype, but as we saw with dot-coms, you had to come down to earth to realise what the real business was," says Iqbal. "The real B2B marketplace operators that have a solid business model are growing, with more organisations joining them. We see our business growing and more companies joining Tejari. Demand is something you create with education and awareness."

Awareness alone will not facilitate the migration of procurement processes to the Web. Convincing companies that they can save money by doing business online is what it's all about. "I think there is value for a buying organisation as well as value for a selling organisation in being part of a B2B marketplace," says Iqbal.
"These values are different because the nature of the way they each use B2B is different. But in the end everyone can benefit," he adds. Whether this is true or not, a major driver for the continued growth of B2B e-commerce and e-procurement marketplaces will be how well the concept is sold to companies, particularly those in the SME sector. Massoud Derhally
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