CONNECTING WITH CUSTOMERS.

EVERYONE'S SEEKING AN E-COMMERCE EDGE--and channel management may be one way of reinventing the rules of the game. When Michael Dell bypassed dealers in selling PCs directly to people, he could afford to sell more cheaply because he wasn't hostage to resellers and wasn't burdened with large inventories. "Having a direct relationship with customers gave us valuable access to information," he once explained. "It also gave us an opportunity to leverage our relationships with both suppliers and customers."

Amazon.com is the upstart turned mega-player that proved that people will happily buy known products such as books and CDs on the Net. This doesn't mean that Borders or Barnes & Noble, which now offer Starbucks coffee and a lounge-like reading room atmosphere, can't pursue an intimate hands-on relationship with their customers.

Taking care of your customers, wherever they are, in the manner they prefer, during times they prefer, is becoming the new competitive dimension. It requires that you identify your most important customers and how they wish to have a relationship with you. The new economy is not one in which the Internet replaces old channels with new, but adds a new one to those that will continue to exist albeit in reduced form. Companies that have established successful e-businesses are not just concerned with Internet applications, but with managing and coordinating all the customer touch points, such as the Web, the call center, the field sales force, resellers, and partners. It's a multi-tiered distribution world that demands a unified database of customer information that integrates front and back office functions. This certainly ups the ante for any company hoping to stay customer focused because it taxes the provider's organization to be everywhere at once with full throttle capability. Is this realistic?

In the following roundtable discussion held in partnership with Siebel Systems and Andersen Consulting, CEOs explored ways to get beyond the channel conflict posed by e-commerce. It became clear that, in the future, the world will belong to those who place the customers at the center and even allow them to configure their own products or services. Although the Internet dominates the changes these CEOs examine, some, like Siebel's Tom Siebel, insist "this is not a technology issue." As Andersen Consulting's James Hall points out: "Nothing goes away, because customers will jump channels at any given time."

The Internet is but one of many customer interaction points. Shrewd firms like Charles Schwab are adopting a blended distribution model in which the Internet reinforces existing channels such as call centers and its sales force. The financial services company has 5,900 agents in 240 locations, but it is also an on-line broker with 2.4 million of its six million customers using the Web to gather information and conduct trades.

So is product-based differentiation giving way to channel-based differentiation? What are the implications for companies in terms of dealing with customers and suppliers? CEOs will need to ask themselves, how do my customers want to be served as opposed to how is it convenient for me to serve them? In much of the following discussion CEO participants argued how best to institutionalize this process.

J.P. Donlon

ADDING TO THE MIX

James Hall (Andersen Consulting): We all know that an enormous shift in power from producers to consumers is happening. Whether it's a result of globalization, excess production capacity, consumer affluence, or technology, the combined effect is that we are creating enormous opportunities for those businesses that can respond most effectively. We're also adding new dimensions of complexity, because we're dealing with increasingly multiple channels with which to deal with our consumers.

Of course, as we add new ones, no one is able to dispose of the old channels. They are having to run them all in parallel and the problem with that is, unless you're greatly increasing the net volume of customers, all you're doing is spreading the increased cost across the same number of consumers. It's also bringing the potential for channel conflicts, one of the most complex issues that businesses are having to deal with.

How do you deal with all of these things? The first thing is to recognize that this isn't a technology issue requiring a technology solution or a strategy issue requiring a strategy solution; it's actually a combination. The companies that deal successfully with this will be the ones that can rake a very holistic approach, tying together strategies with effective technology.

People talk about customer relationship management, but as we go forward we're going to need to talk about customer-managed relationships. The organizations that are successful will not be those which are effective in managing relationships that they choose to have with their customers, but those which will be effective in allowing their customers to drive the relationship. Dell is a great example of a company that has allowed the customer to configure the product and then makes what the customer has configured.

J.P. Donlan (CE): Tom, Siebel Systems is noted for its technology solutions, but you probably have seen over and over again companies or CEOs who fumble as they try to come to grips with it. Perhaps you can relate your observation of what companies, or CEOs more particularly, can best do in trying to become customer-centric.

Tom Siebel (Siebel Systems): I would like to amplify James' comments about this e-business phenomenon that we see going on around the world today. The general problem of e-business is the problem of applying information technology and communication technology, the problem of establishing and maintaining customer relationships. Siebel Systems is an information technology company, the second largest application software company in the world and the largest provider of sales automation, customer service, call center, and field service systems. This market for sales and marketing customer-service systems was a $2.2 billion market in 1999, growing at a 54 percent compound annual rate. It's the fastest-growing market that we've seen in the history of the information technology business.

Life used to be simple, because we would sit around a board room and decide what our distribution channel was going to be. Maybe we're Daimler or Ford, going to distribute through our captive dealer network, and in so doing we would define the universe of possible experience between us and the customer. We would define the nature of the relationship and our customer could do business with us any way they wanted as long as it was through our dealer network. Once we chose our distribution channel we would put in place our guys who knew about distribution channels, our distributors, whole-salers, and retailers. When we were done hopefully we'd hear the sucking sound of product moving through our channel.

Our distribution channel generally operated within a geographic boundary. So, if we were Thompson we sold our TVs through retail in France. And we did business in francs, nine to five, Monday through Friday. Now everything changes. The industries are deregulated, the Economic Union comes along, the currency barriers and trade barriers go away, and at the same time, the Internet comes along.

So, now we have the information technology guru of your choice coming from Silicon Valley or Seattle, talking about this Internet phenomenon. Unless we get there we're out of business. Many of us are thinking about this as an e-business problem and we're thinking about it as a technology problem. But it's not a technology problem and I think labeling it such fundamentally trivializes the problem.

We're coming from a past in which we managed a distribution channel where we define the relationship with the customer. And it's not simply that the customer is going to choose the channel, because this customer is going to jump channels on us. The Internet represents just another distribution channel in a complex multichannel strategy. How important is the Internet? Well, historically it will be on the same level of importance as the invention of gunpowder or movable type.

Now we have customers doing business with us 24 hours a day/7 days a week, any way they want to, and they are moving from our retail outlet to our mass merchandiser, to our ATM kiosk, to our call center, and back to the Internet. As they move around, these customers are expecting to carry on this same dialogue, this thread of conversation about product selection, just as if it were a one-on-one conversation with a personal banker.

This is the problem we have to solve and if we don't, our competitors will succeed at deploying these multichannel distribution strategies. Those companies that don't make the transition will become consolidated into those companies that do.

Arnie Pollard (CE): Make it real by giving us an example of a company or an enterprise that, on the one hand, understood the multiplicity of channels quickly and is dealing with it well, versus a company that just didn't get it and is suffering because of it.

Siebel: Charles Schwab. These people are legendary in terms of applying a mu1tichannel strategy to consume market share and get incredible levels of customer loyalty. They didn't even think about information technology when they did in. In was a demand chain management problem. Another one is Microsoft. Microsoft today has its own sales organization, call center, field sales people, all unified on the same information system on a 24/7 basis. Microsoft and Charles Schwab are the two most sophisticated examples that I'm aware of.

Donlon: And the one that doesn't?

Siebel: Any company in France. [Laughter]

Hall: An industry which is really struggling to get to grips with it is the automotive industry. Certainly some of the chief executives, including Jac Nasser, understand the issue. But they've got such a complicated situation that managing the relationship in an integrated fashion is a challenge.

Onno Ruding (Citibank): I approach it from a slightly different angle, because what applies at Citibank or Citigroup might not apply to everybody else. But we do have a large, well-known, and trusted brand, Citibank, and we want to extend that to the virtual world. We want to retain that trust, to extend it vigorously to new channels, but we don't want to do it at the expense of the trusts they have. We want to offer our customers all financial services, all products, and all channels in virtually all countries.

Josh Sapan (Rainbow Media Holdings): We're in the media business, so we need to extend our services to the Web and to be multiplatform. Let me offer up, too, the notion of convergence. We operate television channels like American Movie Classics, Bravo, and Fox Sports, or local traffic and weather channels, and they have incarnations on the Web. The new platforms encroach upon our base business, which is not a nice thing to think about. But if customization and personalization of a media property is to occur on the Web it is probably going to encroach upon a base business. It's necessary to not only be prepared for that, but to invite it.

The game doesn't end on two platforms. Our patent company, Cablevision, is rolling out advanced set-top boxes with all sorts of abilities. As one example, we have a traffic and weather channel in New York and a companion on the Web that allow you to drill down and get specific information. There will be other new platforms. We're going to page people when there is something in their daily traffic pattern they need to know about. So there will be a conventional media product, a Web product, and a converged product that sits somewhere between the two.

Hall: The convergence of communications processing is an issue. We've been talking about the Internet as a device principally driven by human beings in a fixed location. In the very near future we will see the Internet driven by human beings on the move. It will not be long before every household device we buy is an Internet device in ins own right, sending and receiving messages. When you start to think about the implications, the mind boggles.

James Orr (Convergys): In gets down to a couple of very simple ideas. One, knowledge is power; and two, it's not too late. Everybody, I suspect, feels as though they are behind. Everybody talks about the revolution in communications, the backbones that are being built, the consolidation, the mergers. What is happening in communications is fascinating because the infrastructure is, in its own way, coming together, yet in is totally unconvergent. True story: I have a house in Florida and in my bill, the communications company tells me they have these new services available. I called from my office in Cincinnati to do business, but the woman I spoke to couldn't help me. Why not? She didn't serve that region. Here's a company that provides all these services, but in the execution, they drop the ball. They can't access my record because it only affects this part of the business, not the relationship I have.

Donlon: Aren't you talking about a certain degree of complexity which has simply overtaxed the organization?

Orr: It's actually a degree of simplicity. It is the inability to bring these things together because there is no single view of the customer. The other idea gets to the point of in not being too late. There was a recent study by Nike Group done on 500 e-commerce and Internet companies. In this survey, they sent an e-mail asking about a product or service. Forty percent of the companies responded within the first 24 hours, but thirty percent never responded at all. And 50 percent of the e-mail responses were incorrect.

These are the people who are leading the charge. So, you may be behind but there is a world of opportunity out there because this is moving faster than companies can deal with, and frankly that's why we're in business, to simplify the process.

Gerard Roche (Hedrick & Struggles): What I have to say may be a function of what I do for a living or it might be generational. But I was most encouraged when I heard Tom say something like, "everybody thinks this is going to happen and that's bunk."

The dean of the Columbia Business School recently told me that education is going to change at warp speed, that the need for students to get together, listen to a professor talk, rake tests and be graded, is gone. They can now do the whole thing through the Internet. Bricks and mortar will be gone; the very nature of graduate schools will be gone. It will all be done through the Internet.

Education, it seems, like the Internet, is moving at warp speed on efficiency and knowledge, and the effect, according to this professor, is that human nature is going to change. The Internet is going to change the way people are, and we're going to have to devise products and services for a changing human nature.

Donlon: Hal, in your merger or your acquisition of BizTravel.com, you are in the midst of redefining who your customer is--is that right?

Hal Rosenbluth (Rosenbluth International): All I can tell you is I've increased my intake of Ibuprofin from 1200 to 1800 milligrams a day. [Laughter] These have been the most exhilarating, exhausting, frightening times I've ever been in. We started years ago profiling every single person that we served--their likes, dislikes, frequent flyer numbers, all the different things necessary to complete a trip. After a time, we figured this information is really important to the corporations that these people are employed by. We started to turn that information into reports and add things like yield management systems. That's the stuff that companies are seeking and what we need to do is further Web-enable the company, go after different aspects of the marketplace. That's why the BizTravel.com deal came about.

GIRDING AGAINST THREATS

Siebel: I'm a primary provider of munitions in the world, in the new economy, where a lot of people do battle. People ask me how we are going to deal with the threat of some company coming up with a purely Internet-based solution, say for sale automation or for customer service. What we did is build two products that are entirely Web-based, and we're spinning them out as separate companies. We've created competitors in our two primary markers, but that's okay because we own them. We just looked at our competitive matrix and there were some big voids, so we decided to fill those voids with companies that we own or control.

Donlon: Ed, how does this compare to your new venture?

Ed Fruchtenbaum (American Greetings): We are in a little different position in that our Internet product is truly an Internet product. We have a unique product to sell, an electronic greeting card. It will sing, it will dance, it's animated. It's interesting, because some 60 percent of our conventional cards are birthday cards, but on the Internet it's Groundhog Day cards and April Fool's Day cards, an entirely different business.

Donlon: Onno, isn't this the challenge of Citibank or Citicorp? You have a degree of complexity, you have multiple customer groups, multiple products in each of those categories, and multiple channels. It's a huge matrix.

I struggled a bit with having to serve multiple channels at once. I think the challenge is going to be not that you will have channel conflict, but how you cross-merchandise across your channels. We theoretically will have a body of information about consumers who are currently buying electronic greeting cards. The question, then, is how do I cross-merchandise to that body of consumers so they also become consumers in the traditional greeting card product. If you're stuck in one channel you're going to be in trouble.

Ruding: You're quite right, but our major challenge is a different one. You want to cross-sell after a merger, products from the one to the customer from the other. But in the U.S. it's rare. Europeans are used to cross-selling insurance and banking products. That was not the case here. That complicates life because we must master all of these new channels at the same time.

Nat Sills (Standard Motor Products): We are a manufacturer of automotive parts with a sales force who call on customers defined in different ways. We sell directly to a warehouse, which, in turn, sells to a jobber. The jobber sells to the installer who fixes the car. I am concerned about finding a way to get much closer to our basic customer, the guy who fixes the car. Now we are two steps removed from him.

Hall: Why can't your end consumer, the installer, order the product directly from you?

Sills: Because it takes too long for him to get it. He needs it immediately. You bring your car to the installer and you want it fixed the same day. He can't wait to get the part from the Internet.

Hall: So, 24 hours is too slow, and the price you pay for that is you carry stock in every level.

Sills: Right. You have three levels of distribution. It's a very expensive way.

Hall: So, the choice question is whether somebody who is able to offer the same service a little bit slower but a great deal cheaper would have a competitive advantage.

Martin Doolan (Value City Department Stores): I served as a CEO of an automotive company and I know what he's talking about. The customer doesn't want to wait for his car to be fixed. So, it does build a whole level of inventory that everybody would like to eliminate.

Donlon: I would like to return to the idea of intermediating or reintermediating. How did you reintermediate yourself with your customers?

Rosenbluth: I guess the word that is commonly used is you transition to becoming an infomediary from an intermediary. An intermediary typically adds a certain degree of value to somebody whose products or service are being sold, as well as to the person who is using it. Travel agencies, for the most part, try to be two things to two people. It's a conflicted industry. So, we looked at everything and said, what's important here is to understand who the client is. Agents went from being agents for airlines to agents for corporations to agents for individuals. But once the industry figured that out, they were then on the right path to understanding what value is being brought by their entity.

THE WORLD OF FINANCE

Pollard: A.D., how is this affecting investment management and asset management?

A.D. Frazier (INVESCO): I think the advent of this channel, or this experience, has led to more intensity in the business management focused on how people want to be served. We've done several surveys of our clients. What we found was, in the institutional business most buyers want to buy from humans in a formal presentation. Less than 1 percent said that they would buy an asset management service indirectly through the Internet.

In the retail environment it's very different. I don't think there has ever been a time when brand identity has mattered more than now and what happens beyond that is the consistency of delivery. The absolute killer where the Internet can help us in the individual personal service business is to improve the consistency of that performance.

Donlon: Andy, do you have an algorithm for this?

Andy Carter (Hyperion Capital Management): About three years ago I attended my first Chief Executive luncheon. The subject was how to profit from the communications revolutions and I asked that group to rank how communication works, using face-to-face as 10, the best, and zero as the worst. There was surprising unanimity around the table: telephone call, one out of 10; video phone where you had the face on a screen, two and a half out of 10.

I don't deal with the public directly, because we sold our funds already. I want an inefficient market in which I can make profits for my customers. I have that now, and I feel sure the Internet is not going to spoil that. The U.S. bond marker is the largest securities market in the world, measured by outstanding or by new issues. You think you can read what happened in the bond market, because the newspaper purports to tell you, but the vast majority of trades are never reported on any exchange, never reported anywhere except between the seller and the buyer.

Now, I far prefer the communication of telephone because I have a direct wire with the dealer. I want to get the best offer or the best bid from Wall Street which, again, is not a bid or an offer which is recorded. A phone call is the best communication because it will convey a real bid or offer.

Jay Novik (Swiss Reinsurance): Is there a general agreement that the Internet makes brand recognition more important? In an Amazon auction I'm buying from all kinds of little sellers who I would never deal with. Essentially what they are getting is brand recognition by proxy, from Amazon. I think that the Internet opens up the opportunity for unrecognized names to market efficiently by using an Amazon or an eBay.

Frazier: How many times have you had a repeat purchase of the same brand that you bought through Amazon? Probably none. The point there is that Onno's business and my business depend on repeat purchases. I couldn't be more convinced that brand identity is essential.

Novik: From my standpoint, I have abandoned the need to deal with only a recognized name because I know that up to a certain limit Amazon will stand behind the product.

Sapan: We've paid some attention to Amazon and their initial business, books, compared to Barnes & Noble with its bricks-and-mortar stores, 90 years in business, a good brand reputation, and lots of repeat customers. When they launch B&N.com on the Web, one would presume that that they would move quickly ahead of Amazon because of all that brand equity. In fact, they did nor, even with their promotions and advertising.

So, that question of brand worries us. How can a name so unrelated to books, with so little history in a category, dominate? The answer that I would come up with is, when you change the nature of the transaction--meaning you're doing it with your fingers on a keyboard as opposed to cruising in a bookstore--that it's such a fundamentally different thing that brand equity has a tough time translating.

One product surfaced that is substantially different in conventional retail from the Web - what Ed is doing, greeting cards. Here's a Web product that is not the same stuff on a different channel, but a different product. It's interesting to think that maybe the biggest invitation is not about methods of distribution, but about some adaptation from your base proposition to take advantage of a different dynamic.

Fruchtenbaum: The business model is very different. For $19.95 you can send all the electronic cards you want for six months. You send one or a thousand and it doesn't cost us any more, because the incremental card costs zero. We were able to develop sort of a sidebar category.

PUTTING IT INTO PRACTICE

Donlon: I would like to get everybody's thoughts on what action are you most likely to take as a result of all the ideas we talked about here.

Hall: Well, I think the big message I've taken out of this is that brand issues around multichannels are absolutely crucial. The answers are not obvious by any means. We have Citigroup over here who are seeking to essentially exploit that core brand in new space. In the U.K. we have Prudential Insurance who decided they wanted to set up a bank, and an organization less like a bank would be hard to imagine. But it has been enormously successful.

Ruding: Even more than before, I'm convinced that we must be able to offer to all our customers all the products that potentially they could want from us. Maybe you cannot do it technically the same way, but that's just a matter of time, not a matter of principal.

Heidi Nauleau (The Aarque Cos.): Our business is slightly different in that every coil of steel processed through our plant already has a customer. So I still see the Internet not yet being able to change our distribution, but as an informational method. It's very difficult when you're selling a very specific product for someone's specific needs. We're not consumer-based so it's bard to imagine where we fit in terms of the distribution.

Doolan: I think we have to find ways to enhance the sales that we get through our bricks and mortar by providing other channels for the customer, and provide them with the same kind of exciting deals that we put in our stores. A customer comes to out store because they're afraid if they don't, next week the deal's not going to be there. We have to find the same way to attract people to a Website, rather than worry about the competition that is may be to our existing organization.

Frazier: I know that I will spend a lot more of my time in the future trying to understand how people want to be served, and adapting to that.

Alan Spitzer (Spitzer Management): I came here very frustrated, so it's reassuring to hear that some of the cutting edge people don't have this whole thing figured out. Automobile retailing is our core business and when we got on the Internet three or four years ago we were one of the first automobile retailers to actually have a Web site. Now I feel like we're getting run over. It's a little bit disconcerting when there are four or five public companies in business strictly to provide leads to our competitors. We've got a database of hundreds of thousands of names, so the first thing I plan to do is find out what it is that we're doing that they don't like, and do less of it, and what it is that they would like us to do, and do more of it.

Orr: For me the big takeaway is a reminder that the old ways of doing business are being challenged. That, in fact, really changes the old paradigm of branding because ultimately it gets at finding ways to enable our clients to differentiate the way in which they manage their relationships.

Richard Vissers (CTS): E-commerce is in its infancy, I think down the road it will also be brick an mortar, because that way you will be able to see products displayed. You might order something over the Internet, but then you can come to a place where you can actually see this product, look at the colors and then it will be delivered to your home. It's an evolving situation.

Rosenbluth: I came here seeking to validate a belief, which is that as more and more companies try to Web-enable themselves, or companies start Web-enabled, there is a void in the customer service aspect. I think companies that can provide the customer service aspect selling through the Internet will do very well, and that is the new line of business we're going to start.

Fruchtenbaum: In these conversations about the Internet we should be asking, what new opportunities does it create? A lot of retailers want to focus on how they can take the things in their store now and deliver it to a consumer. And the reality of the question ought to be how it can be expansive to your business as opposed to how can you simply take what you already have and deliver it more efficiently.

Carol Evans (CE): We are now working on our Website and we'll have fun, but we're not going to have dancing CEOs. We're trying to create something that is different from the magazine and have, for example, the capability for CEOs to conduct surveys of other CEOs. It's very exciting because there's a lot that we just couldn't do in the magazine. I hope you'll log on to www.chiefexecutive.net.

Carter: In the mid-'70s the bond markets were enormously more efficient than they are today. My point is that, while we had an information revolution and everyone now knows much more about the bond market, we have a far more inefficient market. In other words, this is a useful tool but it's not going to change the nature of the prices at which we interchange things, at least not in the securities market.

Roche: I'm taking away a commitment to learning more about what our clients want. But I would hope to leave you with the message that less than ten percent of all retail and consumer sales happen on the Internet so let's not, in our rush, overlook the 90 percent.

Novik: I share some of Nat's frustration with the difficulty of applying this information to a wholesale business. We are also many steps away from the consumer. We don't want to interfere with our customers, and trying to understand what our position should be in e-commerce continues to be difficult. But I can easily see human nature changing. It wasn't very long ago that people lived a much more solitary existence. If you consider living in New York consistent with human nature I think that's a rather recent consistency. As the industrial revolution massively changed the way people lived, I can easily see that this revolution could do the same thing.

A WHO'S WHO OF ROUNDTABLE PARTICIPANTS

ANDY M. CARTER is chairman and chief executive of New York City-based Hyperion Capital Management, an investment management firm.

MARTIN P. DOOLAN is vice chairman of Columbus, OH-based Value City Department Stores, a $780 billion discount department store company.

A.D. FRAZIER, JR., is president and chief executive of Atlanta-based INVESCO, a $327 million provider of investment advisory services.

ED FRUCHTENBAUM is president and COO of Cleveland-based American Greetings, a greeting card company with revenues in excess of $2 billion.

JAMES HALL is global managing partner, Lines of Business, for Andersen Consulting, an $8.3 billion global management and technology consulting firm.

HEIDI NAULEAU is chairman of The Aarque Cos., a $320 million Jamestown, NY-based company involved in the cold finishing of steel shapes.

JAY NOVIK is vice chairman of New York City-based Swiss Re America and Swiss Re New Markets, two divisions of Swiss Reinsurance, a global reinsurer.

JAMES F. ORR is president and chief executive of Cincinnati-based Convergys Corporation, a $1.45 billion outsourced business services company.

GERARD ROCHE is chairman of Chicago-based Heidrick & Struggles International, a $250 million executive search firm.

HAL F. ROSENBLUTH is chairman and chief executive of Philadelphia-based Rosenbluth International, a travel management firm with more than $4 billion in sales.

H. ONNO RUDING is vice chairman of New York City-based Citibank, a financial services company with $500 billion in assets.

JOSHUA SAPAN is president and chief executive of Bethpage, NY-based Rainbow Media Holdings, a $500 million subsidiary of Cablevision Systems Corp. and NBC.

TOM SIEBEL is chairman and chief executive of San Mateo, CA-based Siebel Systems, Inc., a $790 million leading provider of e-Business applications software.

NATHANIEL SILLS is chairman and chief executive of Long Island, NY-based Standard Motor Products, a $649 million engine management and temperature control products company.

ALAN SPITZER is chairman and chief executive of Elyria, OH-based Spitzer Management, an $850 million company with interests in automobile dealerships, residential and commercial real estate, golf course management, insurance, and consumer lending.

RICHARD VISSERS is president and chief executive of Orlando, FL-based CTS Corp., a $560 million software company specializing in bulk fare, business-to-business travel.