Internet service providers and software companies are now providing business-to-business trading systems for small to medium sized companies, by Geoffrey Nairn

E-business has traditionally been reserved for big business but now smaller companies are also turning to internet-based trading to compete in the global marketplace.

any small and medium-sized (SMEs) enterprises remain suspicious of e-commerce. This scepticism is, in part, due to the first generation of e-commerce systems, based on electronic data interchange (EDI) networks, which were designed to benefit the procurement function of big buying organisations.

Smaller companies balked at the cost and technical complexities associated with proprietary EDI networks and, if they could, chose not to use them. But many SMEs had little choice because big carmakers and retailers insisted their suppliers use EDI.

Tesco, the UK's biggest retailer, uses EDI to send purchase orders to 1,300 suppliers, who account for 96 per cent of the goods sold in Tesco stores. Barry Knichel, Tesco's supply chain director, says it was difficult - at first - to convince smaller suppliers to use the system. "People just could not see the value of doing it, if it was only for Tesco, but as more retailers started to use EDI, the suppliers realised they had to use it."

The first generation of internet business-to-business (B2B) trading systems in many ways reinforce the EDI model and create exchanges that, like EDI, were designed primarily to help large organisations improve their procurement processes.

These "buyer-managed" B2B systems let large buyers create their own exchanges, most of them private extranets, and usually in conjunction with technology partners such as Commerce One, which pioneered this market with its Buy Site application.

Some industries are now seeing a few big buyers join forces to create supposedly "neutral" internet exchanges. These aim to operate independently of their backers and so attract other buyers, so creating a critical mass of purchasing power that suppliers outside the existing supplier base will also sign up.

A good example is the proposed internet exchange for the automotive industry, which is backed by General Motors, Ford and DaimlerChrysler. This is fast building momentum and last month, Renault and Nissan Motor also agreed to join.

The automotive industry is unusual because it is dominated by a few large buyers.

In most other industries, buying power is much more fragmented and so it is more difficult for smaller buyers to achieve a critical mass of liquidity that will encourage suppliers to actively participate by bidding for contracts.

"In the US, there are lots of systems that have a large number of traders registered but very few actually trade," says Tony de Luca, European director of the internet markets division of CSC, the US-based IT services company. In the US, CSC has created internet markets for industries such as steel (E-steel.com), chemicals (Chematch.com), and plastics (Plasticsnet.com). It is also behind PaperX.com, a new exchange being set up to cater for the European paper industry.

"The paper industry is very fragmented on the buying side and PaperX aims to make it easier for buyers to find suppliers and to increase their purchasing power," says Mr de Luca.

SMEs looking to buy goods or a service over the internet have been poorly served to date. Most e-commerce sites are aimed at consumers and, typically, only accept credit card payments. That is fine for the occasional purchase, but clearly unsatisfactory for businesses who are used to negotiating payment terms, asking for discounts and building closer relationships with their suppliers.

Some of the big internet service providers have realised this shortcoming and have announced e-commerce initiatives for SMEs. Amer ica Online recently signed a deal with PurchasePro.com, a specialist in online procurement software, to provide SMEs with a business exchange platform.

The exchange is designed for business users of AOL's branded communities, which include AOL.com CompuServe and Netscape Netcenter. The PurchasePro.com technology will allow SMEs to buy and sell their products and also to make bids and negotiate terms. A key feature is the use of AOLInstant Messenger technology to create a two-way communications between participants.

E-bay, the online auction specialist, also recently added a business exchange to its site. The service is aimed at businesses with fewer than 100 employees and allows them to buy and sell products in 34 business-related categories.

Other IT companies have also realised that e-business is not just for big buying organisations. For example, SAP, the German enterprise software vendor, has designed its new e-commerce strategy, called mySAP.com, with SMEs in mind.

Using the mySAP.com Marketplace product, they can buy and sell goods and services, form partnerships and participate in e-communities within their vertical industries. The marketplace is hosted remotely by SAP.

Intelisys, a US-based B2B commerce vendor, is also focusing on SME marketplaces. Its most recent customer is First Union, a leading provider of financial services, which will use the Intelisys software to create an online commerce marketplace for SMEs.

"This online marketplace will provide access to purchasing benefits previously available to only the largest corporations," says Lloyd O'Connor, chief executive of Intelisys.

The internet marketplace will be powered by Intelisys' IEC-Portal technology and it seeks to build an online purchasing community that aggregates the buying power of SMEs and allows them to secure community-wide savings on a range of supplies and services, including industrial products, office supplies, computer equipment and software.

First Union sees the creation of this internet marketplace within its wider commitment to provide financial services to SMEs. But it also sees the net-based market as a part of an e-commerce strategy that will help First Union stand out from the crowd. Along with many financial services companies, First Union is desperately trying to find an e-business strategy that goes beyond the now standard offerings of company web site and online banking.

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