Part One: Networks are Dead…Long Live the Networks
GXS was formed in September 2002 when GE spun off its Global eXchange Services division into a separate private company. The majority of GXS’s revenue at the time was derived from operating a large EDI Value Added Network (VAN). EDI VANs were the primary conduit for electronic commerce around the world throughout the 1980s and 1990s before the Internet was deemed a commercially viable network to conduct business upon. The world’s largest retailers, automakers, transportation providers, commercial banks and health care companies were amongst the biggest users of EDI, primarily to communicate with the business partners in their supply chain. But the Internet quickly brought an end to the reign of the VANs…or so it seemed.
In the late 1990s, a series of dot coms called B2B e-marketplaces emerged promising to fundamentally change the way businesses conducted commerce. There were over 1600 B2B e-marketplaces in the spring of 2000 many of which aimed to eradicate EDI with new, shiny web interfaces. However, most of these startups failed to establish a viable business model and shut their doors. Shortly thereafter a new threat emerged. In 2002, major US retailers such as Walmart began to shift their EDI traffic away from VANs. These companies had discovered that they could leverage Internet technologies to send messages directly, “point-to-point,” to their business partners without having to pay a VAN.
If you could put the text of an email into an SMTP message and send it half way around the world, why couldn’t you do the same with an EDI document? In fact, an Internet protocol called AS1 enabled you to do exactly that by bundling an EDI document into an SMTP wrapper. As it turns out you could also put an EDI message into the HTTP messages that are typically used to send web pages back and forth between web browsers and web servers. And so a protocol called AS2 was invented to enable the exchange of EDI and XML via HTTP. You may be wondering what the “AS” in AS1 and AS2 stands for—“Applicability Statement No. 1” and “No. 2” respectively.
In the years 2002-2004 the idea of point-to-point Internet connections spread virally. Companies in the automotive, high tech, aerospace, health care and financial services industries began to leverage AS2 or similar FTP (file transfer protocol) standards to exchange traffic directly over the Internet. In a classic case of disruptive technology, the Internet threatened to eliminate the need for VANs. And it seemed almost certain that EDI VANs would take their place in history along with all the other casualties of the Internet era—record stores, book shops, dial-up ISPs and film manufacturers.
Part Two: When Software Was King
Facing potential extinction, we at GXS decided we needed to reinvent our business. The easy choice would have been to jump on the software bandwagon. Most of the other companies in the B2B integration sector had decided to focus on selling licensed software to big companies. They had decided that there was no money to be made in network or hosted services for B2B integration back in 2005. The concept of cloud computing did not exist. And the SaaS model was viewed as an unproven strategy pursued by only a handful of CRM vendors. The mantra of B2B integration vendors became save millions of pounds in VAN fees by insourcing your B2B network to run on our licensed software platform.
But we had a different view. Having been one of the pioneers in the early computer time-sharing models of the 1960s, and having been one of the leading proponents of the application service provider (ASP) model during the dot com boom, we were not ready to abandon the idea of hosted and network-based services. So we took a step back and looked at the situation that had emerged, hoping to identify a new opportunity for us to add value. And we were surprised at what we found.
Most of the big companies that had rushed quickly into direct exchange of transactions over the Internet had hit a wall. They were able to quickly move the transaction volumes from the top 20% of their business partners over to direct Internet connections. But the remaining 80% proved challenging to migrate. As it turned out managing hundreds (or thousands) of Internet-based connections was actually quite time-consuming and challenging for IT organisations. In fact, many companies discovered that they had ended up building their own VANs, in effect. IT organisations had promised their CIOs cost reductions from moving away from VANs, but were struggling to achieve the expected ROI.
The problems extended well beyond shifting transactions away from VANs. We were surprised to find out how many Global 500 companies had purchased millions of pounds of licenses that were being run at 10-15% utilisation levels. Many of the largest companies we evaluated still had hundreds, if not thousands, of business partners that were not connected to a VAN, web portal or the Internet. These organisations were exchanging information using email, spreadsheets and faxes. The problem was compounding as organisations were rushing to outsource more and more business processes such as manufacturing, logistics, distribution and customer support to third parties. The more dependent upon outside business partners the organisations became, the more critical it became to integrate electronically with them.
Reflecting on what we had learned, we came to the conclusion that the real challenge in the B2B integration sector was no longer the need for connectivity, but the inability of IT organisations to effectively gain ROI from their investments in software. B2B integration software was simply too complex for most IT organisations to effectively manage and widely deploy. The idea of insourcing and establishing direct connections to thousands of business partners around the world sounded appealing. However, it proved too complex for even some of the largest companies to achieve. This shouldn’t be too surprising if you are familiar with the CRM and ERP software segments which have struggled to manage large, complex implementation of enterprise software applications.
Part Three: Rise of Managed Services—Our Blue Ocean
So we decided to change our value proposition to focus on the real challenge in B2B integration. And we introduced a concept called Managed Services to the market. In this model, companies would no longer need to purchase B2B Integration software licenses. Instead, we would host and operate the technology in our own data centres. Furthermore, we would perform all of the day-to-day tactical activities associated with managing the software thereby ensuring that the customer received 100% of the potential value available.
With the Managed Services model, GXS, rather than the customer, would map data from the native formats of enterprise applications such as SAP and Oracle to industry standards such as EDI and XML. We would perform the onboarding of new business partners whether they were customers, suppliers, banks, logistics providers, insurers or government agencies. We would monitor transactions flowing back and forth between business partners to identify exception scenarios. We would answer the phones to provide technical support for companies when problems arose. And finally, we would keep current with the latest versions of AS2, FTP, EDI and XML to ensure our customers had access to the latest technology.
As it turned out, we had developed the right value proposition at the right time. And many of the world’s large multi-national corporations began decommissioning the B2B integration software running in their own corporate data centres. These companies transferred their B2B connections to our hosted platform instead. And they began shifting responsibility for new projects from their in-house IT organisations towards our teams of B2B integration experts.
Since 2007, the B2B Managed Services sector has been growing 15-20% per year. The overall sector passed the £1 billion mark in 2010 and is poised to break £2 billion in 2014. In fact, the B2B Managed Services sector is now larger and growing faster than the traditional B2B software sector. This phenomenon is not unique to B2B integration. SaaS and cloud computing models such as our B2B Managed Services model have become very popular over the past five years as software has fallen out of fashion.
Networks are cool again too. A number of startups have emerged in recent years with ambitions of building “business networks” or “supplier networks.” Not surprisingly, our VAN service is more popular than ever. In 2012, we maintained more connections and processed higher transaction volumes than any year in our history. However, the GXS VAN hardly resembles the service offered in the 1990s. Mainframes, COBOL applications and dial-up connections have been replaced with blade servers, Java applications and web services.
Looking back Managed Services proved to be our “Blue Ocean” strategy. At the time we introduced the model to the market in 2005, the concepts of cloud did not exist and the term SaaS was just becoming popular. No other providers were focused on providing Managed Services for B2B. Large IT Outsourcers would take on B2B integration programs as part of a traditional “your-mess-for-less” model. But these companies had no dedicated teams focused specifically on B2B, nor had they developed any unique toolsets to more efficiently operate B2B programmes.
Read more about GXS Managed Services.