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SCIQUEST.COM's B2B E-MARKETPLACE

Case code- ITSY008Published-2002

"Making scientists more efficient benefits everyone. More research time leads tomore scientific break throughs, and more innovative treatments and products for

people all around the world."

- Scott Andrews, co-founder and CEO, SciQuest.com

THE NEED

In the mid 1990s, scientific products industry experts began realizing that the

traditional supply chain had not been addressing the needs of scientists, purchasingprofessionals and suppliers. Scientists had to continuously develop new applications

and test new theories. This required forecasting of the quantities of chemicals andother supplies and the kind of equipment they would need. They sometimes had an

immediate need for critical items that were highly technical, which they had neverpurchased before. Most of the time, they had to purchase them from new and

different suppliers. This involved going through several catalogs of the size of hugetelephone directories.

Purchasing professionals were alsofrustrated with the traditional paper-based

product ordering process that requiredmanual preparation of purchase orders

and order tracking. Scientists sent theirrequisitions to purchasing professionals,

who placed their orders with severalsuppliers by phone, fax and e-mail. Thismulti-step manual process was highly

susceptible to errors. According to a

survey[1], each requisition cost $107 fororders processed manually, while

processing an order through an onlineprocurement system cost only $30 in

1999.Suppliers used two sales channels -traditional distributors and direct sales.

While traditional distributors gavesuppliers access to a wider market, they

kept the suppliers away from the ultimatecustomer.

Most distributors also lacked the ability to provide the technical assistance associatedwith specialty scientific products and instruments. Direct sales gave suppliers'

greater control and the direct customer contacts that were essential for specialtyproducts. However, this sales channel was often expensive and inefficient. Many

suppliers had web sites that were online versions of their catalogs, but these sitesdidn't remove the primary cause of inefficiency for buyers - the inability to find


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products and consolidate orders from different suppliers quickly and easily through asingle service. Moreover, small companies could not afford to upgrade the site

constantly.To overcome these limitations of the traditional supply chain for scientific products

and to meet the information needs of scientists' e-commerce seemed to offer thebest solution. Realizing this, Sciquest.com (SciQuest), a web site offering a wide

range of services to scientists and purchasing professionals, launched a business-to-business (B2B) e-marketplace in 1998. The B2B e-marketplace offered scientific and

laboratory products used by pharmaceutical, clinical, biotechnology, industrial andeducational organizations worldwide.

THE BACKGROUND

SciQuest was founded by Peyton Anderson (Anderson), Scott Andrews and KeithGunter in Research Triangle Park, North Carolina in 1995. Before opening its online

store, SciQuest conducted a survey of the audience its web site planned to target.The company first launched an informational web site and product-sourcing service

in 1995. The web site allowed users to access a comprehensive online database ofscientific products and suppliers with a powerful search engine. SciQuest generated

its revenues from scientific vendors who paid an annual subscription fee for inclusionin the database. By 1999, about 25,000 of the 150,000 research laboratories in the

US used SciQuest for research and browsing and 50,000 unique visitors[1] logged onto the site every month.

Although the web site was becomingincreasingly popular, the founders had

much bigger plans for it. All of them were

former sales professionals for BaxterScientific Products, which sold beakers,

test tubes and chemicals to scientist, and

they were well aware that manycompanies encouraged their scientists to

procure specialized equipment, productsand high precision tools, on their own.

Commenting on the 4-6 hours spent byscientists for procuring supplies, Anderson

said, "If you multiply that across 100,000scientists, and we save them five percent

of their time, it's equivalent to having5,000 more researchers looking for new

drugs and new cures.Our role is to be the

facilitator of that information-gatheringand communications, an honest broker inthe middle - we are simply the medium

that allows scientists and suppliers tocommunicate efficiently with one

another."

SciQuest wanted to develop an e-commerce web site to make it easy for researchers

to find and purchase the equipment they needed. They also wanted to transform the


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site from being just an information provider to an e-commerce B2B marketplace.Work on this project started in 1997-98. SciQuest entered into technological

partnerships with leading software solution providers such as IBM, Oracle, Ariba andCommerce One.

SciQuest decided to begin transforming its website by implementing a robust e-

commerce solution that could integrate powerful search capabilities with easy-to-useonline shopping functions. The company needed to build the e-marketplace from

scratch, including back-end transaction processes such as fulfillment and accounting.The company evaluated many major e-commerce products in the market, finally

settling for IBM's offerings in 1998. David Skowron, vice president of technology atSciQuest said, "Our final decision was based on an evaluation of product scalability,

flexibility and price. This decision was reconfirmed when we recently re-evaluatedour burgeoning business needs and opted to migrate to Web Sphere Commerce

Suite[2], which we believe is the most comprehensive, robust e-marketplace solutiontoday."

THE TECHNOLOGY

In September 1998, SciQuest implemented the OBI[1] compliant Net. commerce

solution. The B2B e-marketplace (See Exhibit I) was developed using Web SphereCommerce Suite and DB2 Universal Database for AIX[2] . A Web Sphere Application

Server[3] was used to develop applications that supported the company's back-endbusiness processes. According to Andrews, "In our industry, you need the ability to

handle a high volume of new information quickly. Web Sphere Commerce Suite andDB2 Universal Database enabled us to do just that, making it possible for us to open

our doors to millions of potential customers within weeks."

At the heart of SciQuest's online catalogwas DB2, which consolidated and stored

information on more than one million

items from approximately 600 vendors.DB2 stored all of SciQuest's business-

critical information, vendor informationand customer purchase histories for

tracking orders. This enabled SciQuest toeliminate much of its customers'

procurement paperwork and to give thecustomers a one-stop solution for all of

their laboratory supply needs. Rob Fusillo,chief information officer at SciQuest.com

said, "From the outset, our goal was to

utilize the Web to both reduce transactioncosts and increase the value of theaverage order by allowing customers to

purchase from a single vendor."To hostthe e-marketplace, SciQuest used

RS/6000 Enterprise Server Model H70servers and the HTTP[4] server. Front-end

web queries and transactions wereconnected to enterprise wide information


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using Net.Data and Java servlets[5] .

Net.Data macros[6] and JavaServer Pages (JSP)[7] delivered the results to the

user's Web browser. The WebSphere Commerce Suite gave SciQuest the flexibility toemploy more advanced technologies, such as JSPs and Enterprise JavaBeans (EJBs)

[8] , while simultaneously supporting existing technology applications such as thosedeveloped using Net.Data. This helped the company to deploy new applications and

build more functionality without replacing existing infrastructure.

The WebSphere Commerce Suite solution was connected to SciQuest's back-office

order processing and financial reporting applications using the MQSeries[9] . The

MQSeries helped SciQuest to dramatically reduce development time, integrating itsinternal enterprise-wide applications as well as supplier back-end systems with front-

end web transactions. To protect its critical information from unauthorized accessover the web, SciQuest used an eNetwork firewall[10] .

Once the B2B e-marketplace was fully in place, customers could, by logging on to

the site with a user name and password, conduct product searches, compare pricesand make purchases (See Exhibit II). Individual purchase orders were made for each

vendor, the customer's credit status was checked and the account history wasupdated. Soon, SciQuest user sessions increased significantly, reaching more than

100,000 per month in October 1999. As the order management system was notdesigned to handle this kind of traffic, SciQuest began facing problems in handling

the orders. Explaining the problem, Anthony Francis, VP of global operations atSciQuest said, "Our buyers fill their shopping carts with multiple line items and you

have to manage each one of them and know their individual status, whether it's onback order or consolidated into one shipment. This needs a very robust order

management platform, especially when you consider we have no warehouses buthave to connect to our suppliers' warehouses."

[1] Open buying on the Internet (OBI) is an industry standard outlining a common

set of business requirements for purchasing transactions in B2B electroniccommerce.

[2] DB2 Universal Database is a Web-ready relational database managementsystem. Together with Internet technology it makes information easily accessible to

companies implementing e-commerce, ERP, SCM and CRM solutions.

[3] It handles all application operations between users and an organization's

backend business applications or databases. Application servers are typically used

for complex transaction-based applications. To support high-end needs, an

application server has to have built-in redundancy, monitors for high-availability,high-performance distributed application services and support for complex database

access.

[4]HyperText Transfer Protocol (HTTP) servers utilize the underlying protocol used

by the Internet, which defines how messages are formatted and transmitted, andwhat actions Web servers and browsers should take in response to various

commands.


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[5]A form of server-based Java programs that operates in conjunction with a webserver and offers an alternative to using Common Gateway Interface (CGI) and

server application programming interfaces (SAPIs) to communicate with web serverprocesses.

[6]Net.Data macros aid real-time transaction processing.

[7]JSP helps in separating the HTML coding from the business logic in the Web

pages. It can also be used to access reusable components, such as servlets,JavaBeans, and Java-based Web applications.

[8]Java beans are portable, reusable Java software components. EJBs extend theJava bean concept from the client domain to the server domain. EJBs enable the

usage of Java technology into a robust, scalable environment that can supportmission-critical enterprise information systems.

[9]MQ Series provides the base messaging service for servers and clients.

[10]A system designed to prevent unauthorized access to or from a private network.Firewalls can be implemented in both hardware and software, or a combination ofboth. They are frequently used to prevent unauthorized Internet users from

accessing private networks connected to the Internet, especially intranets. Allmessages entering or leaving the intranet pass through the firewall, which examines

each message and blocks those that do not meet the specified security criteria.

THE FUTURE

SciQuest attempted to position itself as a vendor neutral partner for both buyers andsuppliers. It secured over 100 enterprise customers and contracts with 850 suppliers

around the world by March 2001. The company had more than 1.5 million stock-

keeping units, ranging from reagent and antibodies and latex gloves costing 50cents, to high-end, $20,000 spectrometers. About 300 transactions were handledthrough the exchange each day, involving approximately 700 orders to suppliers.

SciQuest had the capability to customize its marketplace and integrate it with itscustomers' enterprise systems, internal inventory systems and libraries. The

company's catalogue had increased to one million products in 2000 and its serviceshad received the approval of major global product suppliers and research

organizations, including Dow Chemicals, Du Pont pharmaceuticals, Glaxo Wellcome,Merck and Monsanto.

SciQuest derived its revenues throughcommissions from auctions & e-commerce

transactions and from advertising and saleof information on its site. The increase in

SciQuest's revenues from $0.48 million in1998 to $3.88 million in 1999 and $51.7

million in 2000, was largely attributed tothe establishment of the e-marketplace,

since 90% of the revenues was generatedthrough e-commerce transactions. Though


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SciQuest benefited from its relationshipswith large buyers and suppliers through

transaction volumes, it found itselfworking on very thin margins. This was

reflected in its bottomline, with the

company consistently posting net lossesduring the 1998-2001 period. While thenet loss was $4.22 million in 1998, it

increased to $84.35 million in 2000. For2001, while revenues declined almost

55%, the loss remained almost the same,

at $82.84 million

According to analysts, SciQuest's losses were expected to go up further in the futureas spending on sales and marketing, content development, technology and operating

infrastructure increased. The global slowdown in the InfoTech business in the earlyyears of the 21st century, coupled with the fact that SciQuest's business model was

new and unproven, did not augur well for the company.

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