Marketplace Service Providers Mine Gold Behind the E-Commerce Scenes

Even in the brave new world of business-to-business e-commerce, the devil still lives in the details. And B2B marketplaces are turning to a new breed of companies to give the devil his due.

These companies, known as marketplace service providers, or MSPs, offer services the business-to-business Internet marketplaces need but don't want to deal with themselves, hawking everything from credit services to derivatives.

Few of these MSPs are public, though that could change if the IPO market recovers and these companies prove viable. They definitely have potential. MSPs could generate $30 billion to $40 billion in annual revenue within three years, says Charles Rutstein, a senior analyst at Forrester Research.

"Those numbers are in some cases bigger than the transaction fees that the marketplaces themselves may collect in a given industry," Rutstein says. "The sum of these other services -- the logistics and financing and credit and other services -- might be more important than the exchange itself."

Just Like 1849

Carl Lenz, research director at the Gartner Group, resurrects the analogy used time and time again for Cisco Systems when the Internet was first being built out.

"It's the gold rush again, and these companies are trying to provide the picks and shovels right now," Lenz says. "You're going to see a tremendous amount of push into all sorts of marketplaces from all types of service providers." In essence, these MSPs will help the B2B marketplaces lay the foundation for this new trading world.

MSPs are often invisible to the end-user. Instead, they make the exchanges look good.

That means a seller at CommerxPlasticsNet.com could run a credit check on a potential buyer without ever leaving the site -- or opening a musty tome from Dun & Bradstreet -- even though PlasticsNet doesn't do credit queries. But eCredit.com, a Westwood, Mass.-based technology company, sits inside PlasticsNet's site, providing the service.

"Sellers want to make sure their buyers are qualified, that they can afford what they're buying," says Peter McKay, eCredit.com's president. "We verify that the businesses are who they say they are, and that they can afford what they're buying."

Providing the Edge

That seemingly obvious task is actually a very big deal. As exchanges fight for survival, the extras that MSPs provide -- often common-sense applications -- could help separate the winners from the losers.

"The key value-added services that are required to finish the transaction are of paramount importance," says Edward McCabe, B2B analyst at Merrill Lynch. "The cut you can take on simply matching buyers and sellers comes down over time. To the extent that you can provide value-added services is where you add money in the long run."

It can also add completely new transactions to the business process.

Take onExchange, a Waltham, Mass., company that wants to offer digital derivatives on everything from plastic pellets to newsprint. If it has its way, it will become the one-stop shop for marketplaces offering risk-reduction strategies.

"If I want buy 100,000 widgets from you next summer -- and have you commit some of your factory's capacity now -- I'm going to need to determine a price for those widgets now," says Richard Jaycobs, onExchange's co-founder and CEO. "Where do I get that price? We create a whole new cast of market participants, people who are experts at trying to price out the forward-risk management contracts."

It's All About Logistics

Other MSPs aren't breaking such new ground. Instead, they're concentrating on age-old issues like logistics.

Descartes Systems Group (DSGX), based in Waterloo, Ontario, concentrates on getting products to customers once a deal has been struck. In May, e-commerce software maker Ariba tapped Descartes to integrate its network of 500 transportation contractors into Ariba's B2B e-commerce platform. Each time an Ariba user completes a transaction and chooses one of those carriers to deliver the goods, Descartes will get a small fee, even though the user will likely never see the Descartes name.

The minutia of business provides numerous opportunities. New York-based Clear Cross is banking on providing "landed," or all-inclusive, cost estimates to B2B exchanges for international buying, once things like shipping, tariffs, exchange rates and other items are taken into account. Other companies, like i2i simply provide technology to make marketplaces work. i2i President and CEO Michael Fix calls it the "Intel inside" of B2B exchanges. And Contiva, formerly Clarity Systems, concentrates on what it calls "business-document mapping," which makes things like electronic purchase orders readable across different systems.

Of course, with all of these companies looking to B2B exchanges for sales, their fates will be closely linked to any shakeout in the sector. Which means MSPs, like the marketplaces themselves, need to act quickly, but choose selectively, when seeking customers. The rewards, then, will be reaped by those who get the details right.

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