ECommerce - Hype and Reality

By Colin Gilboy, P.E.

There has been a lot of recent hype about eCommerce for construction. Many people are confused by all the new construction eCommerce web sites, also called portals. What are they offering? How are we going to benefit? How much is it going to cost us? How are they going to make a profit?

Consider this:

"There will be no [pure] Internet companies in the future, only those that use the Internet and those that have been crushed by competitors who do." - Intel chairman Andy Grove, April 2000

Most of the readers of this newsletter are design professionals or facility managers. We see the following impacts of the Internet on your work:
 

I expect that many readers of this newsletter are evaluating web-based management tools - called collaborative software or extranets. I recommend one web site - http://www.extranets.cc (note this is not a dot-com) - as a good resource, as they have a good listing of all the vendors and supplementary information, as well as a seminar.

I do not foresee a widespread purchase of construction materials through the Internet. Most portals are testing auctions and requests for proposals. These methods have not been proven effective before the Internet, and the Internet will not make them work. Most construction products go through a design, bid, value engineer, substitution and purchase cycle that is very complex with multiple buying influences. New suppliers and contractors may not be trusted to be dependable after submitting a low bid, as their products or services are unknown and may create an unacceptable risk for the specific project. There is significant value in trusted relationships during the construction process, if only for financing and local support.

Further complicating the portal's business plan, most products used in commercial construction projects are much more than just the physical material. A "specified product" typically includes the architect and engineer design services, quotations during bidding, submittal preparation, shipping, and field problem resolution. On larger projects, the time line is often 18-36+ months from start of working drawings to sale of materials, installation and acceptance of the materials.

Here is the dilemma.

Many of the web-based management tools are being offered at a very low cost to the user. The portal's hidden business plan calls for the web site to earn its revenues from transaction fees for materials purchased through the web site's auctions and RFQs. Currently the large construction eCommerce portals are spending lots of money, and generating substantial financial losses. They may stress the importance of their online project management systems, but the monthly charges to use these project management systems cannot generate the revenues needed to support a staff of 200 people.

Manufacturers are reluctant to respond to auctions and RFQs and compete with their existing distributors. This is called channel conflict - competing with your customers for the same business. Going around existing channels can quickly destroy a business. Current distributors may switch suppliers if they are not paid for direct sales into their territory through the Internet.

Many construction portals do not appear to address the fundamentals of how products are specified, purchased and distributed on larger construction projects. If the product was not specified or approved as a substitution shortly after bid time, auctions and RFQs are unlikely to persuade the architect or owner to accept a last-minute substitution for products already designed, specified and approved for the project.

I can safely predict that the 200+ construction portals will go through several natural consolidations, probably ending up with only 5 or 10 survivors, certainly no more than 2-3 portals in each type of service, probably one per region. I can also predict major changes in the offerings and solutions as the portals come closer to discovering how to make money and add value.

Let's look at some of the details.

It has been estimated that 600 BILLION dollars are spent for construction materials each year. The venture capitalists have viewed the construction market as a potential source of huge revenues from transaction fees from a highly fragmented market they believe is "ripe" for consolidation - by them!

It has been estimated that $2.5 BILLION has already been invested in 200+ construction-related Internet portals. Several major portals (ie, Buzzsaw, eBricks and Bidcom) have 100-200 employees. This implies that their monthly operating cost is $1-2 million (salaries, facilities and expenses). None of these portals have yet to earn significant revenues. This excess of spending over income is referred to as a "burn rate." None of them have gone public, so financial info can only be estimated.

If a portal has $40 million in venture capital funding and a $2 million burn rate, the portal has a 20-month horizon until it crashes, is purchased, or figures out a strategy for making money. The primary job of the organization's CEO is to convince enough investors and users that their portal is #1 and will succeed. Only in this way will the portal get additional funding and continue to search for the methods and procedures to satisfy their potential customers, justify the investment and produce the required revenues.

There is a fundamental and substantial resistance that must be anticipated with any broad-based transaction fee program. It is one thing to pay a 2% (or even 5%) fee when making first contact with a new supplier or buyer, but a 2% fee adds up quickly when applied to repeated transactions unless there are additional services provided. Given the ease and low cost of developing Internet solutions, a 2% fee on $20 million ($400,000) is a powerful incentive to work around the eCommerce portals and to develop alternative systems to avoid the portal's repetitive fees.

Will There Be A Change?

It is difficult to envision a rapid shift to eCommerce when many manufacturers have had difficulty in making their own web site more than a simple brochure. Unless there are significant advantages to all parties - such as cost savings of 5-10%, local sales support, local architectural support, local delivery, etc. - eCommerce through portals is going to take a long time to become commonplace, if ever.

Here are the steps you can take to use the Internet in your business, starting today, on a low budget. The goal is to reduce costs to everyone's advantage, without necessarily attempting a complete eCommerce solution.

1. Start to use the web for product research. Tell the manufacturers you want more design information online. CSRF is developing a standardized layout for product web site to be released later this year to help manufacturers design useful web sites for construction professionals.

2. Test drive some of the collaborative software available today to understand the differences. Attend seminars and ask questions. Make your decisions based on long-term financial stability of the provider and ease of use. Start to manage the Submittals or RFIs for a project using one of the collaborative web sites.

It will be fascinating to watch and influence how the construction industry's use of the Internet evolves over the coming 5 years. I would appreciate hearing your comments on this.

About the author: Colin Gilboy, PE, CSI, CCPR is a Director of CSRF, and President of 4specs.com, a free Internet directory providing the user with hot links to over 4,000 manufacturers' web sites and 400 trade associations and reference organizations. He can be reached at www.4specs.com/

The CSRF newsletter is published for SPECTEXT® subscribers and others involved in design and construction. To obtain your copy of Creating a Common Language®, please contact the CSRF Support Center by telephone at 1-877- SPECTXT or 410-838-7561 or you may e-mail us at supportcenter@csrf.org

©  Copyright 2007, The Construction Sciences Research Foundation, Inc.  Updated January 12, 2007.