How NPOs Can Use Internet Technology to Earn Revenue, Part 3

4. B2B Commerce and Services

What It Is

Shorthand for "business-to-business," B2B commerce describes the process of one business selling products and services to other businesses, or, in this case, to nonprofits.

Commercial Models and Market Opportunity

Analysts estimate that the value of all goods and services exchanged between businesses as a result of orders made via the Internet will be $919 billion in 2001, twice the total for 2000. By 2004 that figure will reach up to $5.9 trillion, or 6 percent of all trade. This gigantic figure is far larger than the online market for goods sold directly to consumers. Beginning around 1998, it seemed for a time that every industry imaginable--fishing, plastics, construction, etc.--had several e-commerce companies vying to eliminate the inefficiencies in their market through an online exchange. These businesses take two forms: vertical portals listing information along with prices, and more sophisticated B2B exchanges, which resemble online auction sites. Vertical Net and Freemarkets, for example, run B2B exchanges for several different industries. Both seem to have some staying power though neither is profitable. While analysts are sticking to their numbers, many of these online exchanges and the companies supporting them with software and services say only 200 of 1000 online marketplaces doing business in 2000 will survive to 2003.

What does appear to be profitable, though not as profitable as venture capitalists once hoped, is selling the software and services that power B2B commerce. The market for e-procurement software alone was thought to be $2.1 billion in 2000, and the market is expected to grow to $9.7 billion in 2004. Industry leaders include older software companies like Oracle and Microsoft, as well as newer public businesses like Web Methods, Ariba, i2, and Commerce One.

A notable exception to the uncertainty about the B2B market can be found in the information syndication field. Companies like the Associated Press and Reuters have been successful for decades syndicating content first to newspapers, then to radio. Now with the emergence of the Internet, every media company with any proprietary content whatsoever is trying to re-sell their content to Internet portals like Yahoo! and smaller niche sites like sports sites that want to carry deep content without the costs of hiring an editorial staff.

Nonprofit Innovators

The size of the nonprofit sector market is estimated at $621 billion, comprising 1.14 million total independent sector organizations--654,000 501c3's, 140,000 advocacy related 501 c4's, and 341,000 religious organizations. While universities and hospitals account for most of this market's revenue, most nonprofits have budgets of under $1 million and fewer than 15 employees. All told, nonprofits constitute a staggeringly large and complex market--6.2 percent of the total economy.

Some companies are already targeting the sector. Blackbaud's Raiser's Edge is a fundraising software program designed specifically for nonprofits, and some other products, like Quickbooks, are readily adaptable to nonprofits' needs. The market's diversity, however, has discouraged many companies from designing products specifically tailored to the independent sector's needs. (Early B2B plays, commercial online donation tools for nonprofits, failed miserably. Most of these sites disappeared swiftly (CharitableWay) or changed into sites that provide back-end services (4Charity) to other nonprofits for workplace giving or other kinds of services. ) While there are opportunities to sell to big, scalable, high-revenue products to large institutions like the Red Cross, universities, and hospitals, few products target the millions of smaller 501c3's. A few smaller firms, like B2P Commerce, have begun to resell niche products and services--such as web site builders, nonprofit insurance, and accounting services--to nonprofits, but they are relatively small plays. B2P Commerce does show a great of promise as a commercial entity. They recently cut potentially lucrative deals to customize Intuit's Quickbooks and Microsoft's small business tools for nonprofits, as well as having several other web based products on sale or in development for the sector.

It would make sense that the same B2B efficiencies being realized by commercial businesses through online procurement of products and services should be available to the independent sector, though no enterprise--for-profit or nonprofit--has tested this theory. An exception is Compumentor's Tech Soup recently launched a new online platform called Discount Tech as a one stop shop for nonprofits looking to acquire donated or steeply discounted products and services from technology providers like Microsoft (software) to Cisco (hardware) to Smartforce (Online Training). The platform builds on an existing relationship of several years duration with Microsoft. It will enable Tech Soup, which already has a proven track record of generating revenues through product and service sales, to generate further earned revenues. As has been the case with the Microsoft relationship, Techsoup will take a small administrative fee of 5-10% of the retail cost of the new products on the site and expects to earn several hundred thousand dollars of revenue from the new platform in support of their budget of more than $5 million.

Information syndication is perhaps the most vibrant B2B service currently being offered by nonprofit organizations. Alternet syndicates a mix of alternative news, content, and investigative journalism through a subscription service and is adapting its model to the online environment. Guidestar, a publisher of information about charities, grossed $755,450 out of a $2.8 million budget in 2000, mostly by licensing and upgrading its content to 3rd parties. NYPIRG's (New York Public Interest Research Group) pioneering Community Mapping Assistance Project creates and licenses complex data maps that inform citizen action and nonprofit advocacy groups on public policy issues. What was once a small offline business is now a growing source of earned-revenue, thanks largely to the Internet's scaling capabilities.

The Upside

There is huge untapped potential in the B2B nonprofit market. Vendors that specialize in the nonprofit sector--accountants, consultants, and other service providers--would benefit from doing business online. Another business might take technology products in areas like human resources, accounting, databases, knowledge management, and corporate intranets, and customize them to meet the needs of the sector as a whole. There is also an opportunity to create products for nonprofit niche markets--affordable housing, advocacy, youth services, etc.--and sell them as ASPs (ASPs are Application Service Providers and will be examined in detail in the next section) or through a B2B web site for nonprofits. But information syndication may have the biggest upside, since many nonprofits have specialized knowledge or access to unique information that could be adapted, licensed, and resold to a broader market.

The Risks

B2B business models, though promising, are still largely unproven, and the nonprofit market is highly segmented. The costs of developing a good B2B site are significant precisely because of the complex mix of products and services required by this fragmented market. For information syndication, risks include limiting free information to constituencies that can't afford it and the potentially high costs of information technology management.

The Bottom Line

Lots of potential, very little competition. A B2B vertical marketplace or exchange for nonprofits could pay off handsomely, as could a variety of Internet-based niche products and services. A $621 billion market is too big to ignore--although a handful of ill-advised charity portals have chastened entrepreneurs and funders alike.

5. Internet Software for the Independent Sector (Application Service Providers)

What It Is

Application Service Providers (ASPs) deliver business applications--databases, office applications, accounting--over the Internet. Customers access the application through their web browser.

Who's Doing It?

ASPs take software products and make them available over the Internet. Instead of having a word processing or human resource software reside on a computer desktop or a corporate network, ASPs place programs on a remote server, and customers access the program through their web browser. Instead of paying for ASP software with a one-time purchase, ASPs commonly charge a monthly subscription fee. ASP software can theoretically reduce information technology costs since customers effectively outsource the costs of maintenance and upgrading computer systems and reduce dependence on internal IT staff.

The market research firm IDC once projected that ASP revenues would grow from $296 million in 1999 to $7.7 billion in 2004, but as with many Internet businesses the potential has yet to be realized. IDC now estimates that ASPs will generate only $600 million in revenues, less than 1 percent of all IT spending, and Gartner Group predicts 60 percent of all commercial ASPs will go under in the next year. Nevertheless, it appears that ASP pioneers like Curio and U.S. Internetworking are learning from their mistakes. The next generation of single application ASPs have learned their lessons well, too, and are now building applications from the ground up while keeping enough money in the bank to wait out what has been a much slower adoption curve by large and small companies alike.

Nonprofit Innovators

While technically any software that is offered online can be called an ASP, there are almost no nonprofit ASPs and very few ASPs targeting the nonprofit sector.

There are several notable nonprofit success stories. Volunteer Match, an online database that matches volunteers with volunteer opportunities, is run by the nonprofit Impact Online. Volunteer Match earned more than half a million dollars in revenue from about a dozen clients last year. Changeframe, a pilot project of the nonprofit technology provider NPower, provides basic applications like Microsoft Office, Intuit QuickBooks, and TechRocks ebase (a nonprofit-specific database) to approximately 20 nonprofits in Detroit and Seattle. And ebase itself is one of the best examples of a niche software product that can be made more effective as an ASP. Although TechRocks does not charge for ebase, the organization does earn revenue for providing some technical assistance to support and customize ebase and to run advocacy campaigns using the software. ASPiration is a new nonprofit seeking to build and support nonprofit ASP services, starting with the legal services and human rights communities. It anticipates many of these services will have some kind of earned-revenue model.

There are two for-profit spin-outs worth mentioning. Foothold Technology created an ASP technology for managing clients in a social service context by licensing a program that was initially developed by a trio of housing groups. Environmental Defense used its Action Network technology to spin-out the for-profit Get Active, which provides mobilization tools for legislative and community campaigns.

The Upside

Smart niche ASPs have a real chance of developing into profitable, high-margin enterprises. Some might even be viable as stand-alone businesses. As increasing numbers of business applications run online rather than on desktops, both aggregator ASPs--those that bundle together a range of business applications--and specialized niche software applications have potential if pitched at small- and medium-sized nonprofits that are under the radar screen of major commercial ASP providers. The relative success of niche applications like Salesforce.com and Employease bode well for nonprofits taking similar approaches.

The Risks

ASPs are capital intensive to build, and nonprofits will have a tough time competing if there are well-capitalized for-profit companies vying for the same group of customers. The ASP business model is still unproven.

The Bottom Line

Rather than adapting existing products to the web, nonprofits should seek to identify niche markets and address unmet information technology needs with new ASPs. Customer Relationship Management (which we will examine in the next section), human resources management, and e-learning (also to be examined in an upcoming section) are all intriguing opportunities. Two of the few ASPs that have spun out of nonprofits actually look promising commercially.

Continue to Part 4: How NPOs Can Use Internet Technology to Earn Revenue, Part 4