B2G, take two

Earlier this year, Tony Bansal had maneuvered his business-to- government

e-commerce company into what seemed to be the perfect position. Not long

after, the company's can't-miss strategy was a little off the mark.

FedCenter.com, the Web-based B2G marketplace operated by Bansal's Digital

Commerce Corp., was flush with $50 million in privately raised cash, and

it was in the midst of a multimillion-dollar ramp-up and advertising campaign.

The company was on a tear — one that's still going — signing hun-dreds of

new vendors, from suppliers of PCs to pencils and toilet paper, and attracting

government buyers by the thousands.

Digital Commerce was also preparing for an initial public stock offering

that company officials hoped would raise an-other $100 million. That, they

figured, would catapult Herndon, Va.-based Fed-Center.com onto the radar

screens of countless more federal procurement officials, not to mention

possibly enrich the company's biggest shareholders.

But as spring turned to summer, Bansal, the firm's president and chief

executive officer, watched with his colleagues as Internet stocks continued

in a free fall. "We waited because we thought it might just be a market

hiccup," Bansal said.

But in September — rather than throw years and millions of dollars into

building one of the most recognized brands in the young B2G market to the

mercy of a still-sobering Wall Street — Bansal and company decided to postpone

their plan to go public.

That decision was the easy part. Now, the company will have to scare

up a new round of money to finance operations until it can turn multimillion-dollar

losses into profits (which may happen by the end of next year) or until

stock market conditions improve enough for another go at an IPO.

Whether the company succeeds — and that depends on its ability to keep

pace with a rapidly changing B2G market — its fate will affect far more

than just the wallets of employees and financial backers. It will play a

central role in shaping the emerging Web-based government procurement market,

which market-research firm IDC estimates will handle a staggering $70 billion

worth of transactions by 2003.

Matching up Buyers and Sellers

Digital Commerce earns its revenue through vendor subscription, site

construction and transaction fees. Industry analysts say getting a critical

mass of vendors is the key to attracting buyers and making the electronic

marketplace model work.

Once federal procurement man-agers register at Fed-Center.com, they

can pick from about 18 million products, about one-third of them IT-related.

They can purchase products with agen-cy credit cards or purchase orders,

using a variety of government contract vehicles. They can also use FedCenter.com

to issue requests for proposals and price quotes.

Signing up vendors for the standard one-year contracts and getting their

products on the FedCenter Web site has been one of Digital Commerce's biggest

challenges.

At the beginning of 2000, the company was more successful at signing

vendors than it was at getting the vendors' product information onto the

Web site — due in part to the difficulties of finding and training technical

staff members. The company's backlog of vendors that had signed up but had

not been added to the site went from 145 as of Dec. 31, 1999, to 420 as

of March 31, according to Bansal. And as of that later date, only 260 vendors

had product information up on the site.

Since then, the company has streamlined its site construction operation,

requiring fewer people to do the work. More than 900 vendors have products

on the site, and the backlog is down to 350. Meanwhile, thanks to a vigorous

and expensive marketing campaign, the number of registered government users

has nearly doubled, from about 13,000 at the end of March to about 25,000

now.

More importantly, all the new buyers and sellers are actually doing

business together. "We've had exponential growth in the amount of transactions,"

Bansal said. "We've gone from tens of thousands of dollars per month in

01/to millions of dollars per month now."

Of course, a good part of that increase had to do with the government's

traditional fourth-quarter spending spree. But because government buyers

seldom run short of places to spend their money, part of the credit goes

to the effectiveness of the FedCenter.com site itself.

For example, Faye Yates, a base operation systems analyst at the Army's

Redstone Arsenal in Alabama, likes to use FedCenter.com because it provides

good deals, plenty of products and an easy-to-use interface.

Yates has used the site — and several others — for more than a year

to buy goods ranging from PCs to storage devices to network cards. "Ninety

percent of our year-end spending was done through Web-based services,"

she said.

Besides FedCenter.com, she also uses the General Services Administration's

GSA Advantage Web site, the distributor CDW-G's e-commerce site, and sites

from computer manufacturers Dell Computer Corp. and Hewlett-Packard Co.

But when shopping for the best deal on a given product, she often prefers

FedCenter.com because it lets her compare different vendor offers.

"For a specific printer, I found that FedCenter had more vendors with

a better price than GSA Advantage did," Yates said. She said FedCenter would

be better if it provided more of the information that her office's internal

systems require her to collect, such as the GSA schedule number and the

end date of a contract.

What sets FedCenter.com apart, Ban-sal said, is the variety of products

and contract vehicles it offers. "GSA Advantage is mainly for items on the

GSA schedule," he said. "We offer many different kinds of contracts." Because

FedCenter.com only acts as a broker between buyers and sellers and does

not take title to products as traditional resellers and distributors do,

it can afford to offer more products and suppliers.

Digital Commerce officials believe some upcoming changes will make FedCenter.com

even more attractive. Plans on the drawing board include integrating FedCenter.com

with vendor inventory systems so buyers can see if products are available

before ordering and with selected internal purchasing systems at government

agencies, which will make purchasing more efficient.

Rich Roellig, vice president and general manager of FedCenter.com, said

the company also wants to offer more packaged services for sale on the Web

site, ranging from simple services such as setting up office furniture to

sophisticated IT technical services such as customizing enterprise software.

Of course it takes money — and lots of it — to make these ideas a reality,

and Digital Commerce soon will have to go back to the well for more funds.

"It's become a much tougher market recently for raising venture capital,"

said Thomas Meagher, vice president of equity research at BB&T Capital

Marketing.

Bansal said he is not concerned and that the company's main backers

are still committed. "Our expenses are on the decline, and our revenues

are increasing," he said. "With all that is happening in the dot-com world,

I think we are positioned well."

Digital Commerce Corp. at a glance

Primary Businesses: The FedCenter.com business-to-government Web-based marketplace

helps federal purchasing managers find and buy information technology, medical

products and general office products. The StateGovCenter.com e-market helps

state and local officials buy products.

History: In 1996, Digital Commerce acquired FedCenter.com, which at

the time was an information-only Web site for government vendors. In January

1999, the site was relaunched in its current form as a transaction-oriented

marketplace that brings together buyers and sellers.

Operations: The company posted a net loss of $16.1 million in 1999 on

$1.4 million of revenue. Calendar year 2000 revenue is expected to increase

tenfold, but expenses are expected to triple as well, according to the company.

The company currently has just more than 200 employees, down from a peak

of 285 in March.

Competition: Who in the government IT market isn't a competitor? Even

the publisher of this magazine entered the market briefly, via a demand-aggregation

service on the FCW Web site. Others include online catalogs from government

entities such as the General Services Administration's GSA Advantage and

from commercial providers such as eFederal Inc.'s eFederal.com. Also, providers

of custom procurement systems such as American Management Systems Inc. and

ProcureNet Inc. want a piece of the action.

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