From Dot-com to Dot-bomb.

We are in the midst of a knowledge revolution. Rules of success and causes of failure are defined and redefined every day. Business may be lost, but learning should not

Hindsight is 20/20. Stories about "what should have happened" or why dreadful mistakes were made in the world of Internet start-ups are in abundant supply on community Web sites like startups.com and, until recently, the ill-fated dotcomfailures.com. Current multimedia content is replete with "lessons learned" from every corner of the new economy.

In a time of constant change, not even the experts have all the answers. However, understanding risk is every business manager's responsibility and an integral part of the e-business process. There are four specific areas that deserve some re-thinking within the context of dot-coms: speed-to-market; innovation; entrepreneur's risk; and due diligence.

The risk of rushing it

Speed is a famous by-word of the new economy and the sacred mantra of many dot-coms. Bill Gates, in his book Business @ the Speed of Thought, devotes an entire chapter to how to get to market first. Lucent Technology's former chairman and CEO Richard McGinn contends that, "You either move with speed or die." These public statements are well-supported by the phenomenal revenue growth in brand names such as Yahoo!, America Online, and Dell Computers, for example. These companies truly enjoyed the rewards of first-mover advantage in the then vast Internet space. That year was 1995! They were among the first to claim the online space and they are quick to execute innovative ideas and still have time to learn as they go.

Shrinking time-to-market requires a digital knowledge system that enables information to flow through an organization quickly and naturally. A proper decision support structure takes time to build. In its race to get its products out first, the eGrocer Webhouse Club of Priceline attempted to develop several technology solutions at the same time, hoping that one of them would be a winner. In doing so, the company accelerated the national rollout from twelve months to four, at the risk of operational integrity and at an unsustainable burn rate of nearly $1 million a day. Webhouse Club has never made money. Racing at all costs to get out of the starting gate does not necessarily pay off. The risk of experimentation and using an unproven business model in uncharted territories may hasten an early demise.

Speed by itself is never the true driver of success. First-mover advantage must be accompanied by an efficient execution of a sound business plan to be powered by an organization that has the ability to learn and quickly translate that learning into action. Online experience has repeatedly demonstrated that speed plays equally in both directions with positive or negative results. The number of customers can grow at Internet speed, but it can also decline as quickly as customers are acquired. A first-mover advantage will soon become a disadvantage once customers find Out advertising is insincere and promises are not kept, giving new meaning to "first in, first Out."

Good ideas are not good enough

Charles Dickens once said that the business of mankind is the inevitable bottom line of business. The greatest business model cannot survive without a viable outlook on profitability. Whether it is a marketing model or a revenue growth model, conventional wisdom still rules -- if it doesn't make sense, it doesn't make cents. We may as well use this simple yardstick to measure the financial risk in the business plan as well as the idea behind it. The notion of profitability is well-reported in an article entitled "E-Performance: The Path to Rational Exuberance," published in The McKinsey Quarterly (No.1, 2001): "The foundation of long-term profitability is lifetime customer value: the revenue customers generate over their lives, less the cost of acquiring, converting and retaining them."

In the Internet world that champions youth culture and excesses of new economy optimism, there is a tendency to overrate bright ideas. The NRG Group Inc., a Toronto Internet incubator that provided financial and technical support to young entrepreneurs with little more than an idea, is rapidly revamping its operations and strategy, which they now admit are too risky.

Like NRG Group, many Internet companies are founded on an abundance of venture capital rather than on a sound business plan. The good news is that the tide is turning in the wake of dot-corn collapses. After many years of expansion and revenue growth, even amazon.com is under pressure to turn a profit. It is easy to form great ideas, but implementing great ideas with the right mix of resources, skills and ingenuity to provide attractive and sustainable returns is still the most difficult to accomplish.

Entrepreneurial risk

Whether it is bricks or clicks, there is an inherent risk in entrepreneur-ship. Entrepreneurs have a greater appetite for taking risks. Embedded in their "fail often to succeed sooner" philosophy is the message that if you don't take risks, odds are you won't succeed.

Studies have confirmed that good companies succeed because they failed in the past, and that entrepreneurs often embrace a culture of "mini-failures." Charles Schwab, the entrepreneur, failed many times before eSchwab was born. We are told that his "noble failures" keep him on the cutting edge and push him to break barriers. In Schwab's case, creating a successful e-business model means cannibalizing existing ones. But the reward for Schwab is huge. By being one of the first powerhouses in online trading, he has also put at risk the traditional business model of those within the industry. This is where a true innovator's dilemma lies. The nature of e-business is more uncertain than traditional business models. When managers have to justify their business case for unproven technology initiatives, how can they fully justify acceptable "mini-failures"? Why can't corporations allow some cautious R&D spending to encourage innovation as a solution to the current evaluation based strictly on net income after the co st of capital (NIACC)?

Due diligence: bridging entrepreneurship and e-business governance

We don't have to look far to get a sense of the risks surrounding e-companies. 724 Solutions Inc., a Canadian Internet infrastructure provider, listed 42 significant risk statements in its initiative public offering (IPO) prospectus. By contrast, the recent IPO prospectus of the Canadian Pro-AMS Trust, a billion-dollar investment trust-structured product, only documented half a page of risk factors. Although risk factors must be disclosed in an IPO prospectus to comply with securities regulatory requirements, the issue here is not that there are bad risks, but whether the risks are worth taking and whether they can be adequately compensated.

One discipline that has not been sufficiently discussed in the wake of dot-com failures is the need for appropriate due diligence. This helps achieve an important balance between entrepreneurship and e-business governance. Emerging trends in e-business also indicates that partnerships will most likely grow in old and new economies alike. Partnerships allow participants to reap benefits such as locking out potential competitors, immediate scale, market reach, relationship network and much more. This trend also emphasizes the need to look before we leap. To assist in the evaluation of prospective partners (whether it's in the form of alliances, mergers or content-sharing deals), it is important that an organization has enterprise-wide, current and robust due diligence processes including guidelines for integration and ongoing relationship management.

The future has an annoying habit of arriving in unexpected ways. We cannot always rely on lessons learned from past mistakes to predict the future. The pace of change in the world of e-business is unprecedented. The historical data on dot-com failures may not be enough to guide us through the coming wave of e-business evolution. To reduce the risk of a hit-and-miss, businesses need to do more due diligence and be satisfied, as a minimum, with answers to the following fundamental risk questions:

* Do we know what incremental risks are being incurred?

* Do we include plans for, and the cost of, managing them?

* If there is a higher level of risk emerging, is the impact fully factored into plans and the risk/reward equation?

Entrepreneurship balanced with due diligence and risk management can open up new opportunities and avenues of success.

In terms of business practices, nothing much has changed since the arrival of dot-coms. As a recent issue of The McKinsey Quarterly (No.1, 2001) points out, "Successful e-commerce companies are following tried-and-true principles from the bricks-and-mortar world." The difference, however, is that there is an even greater need for these companies to focus on making tools, learning and processes readily available across the enterprise for swift decision-making without compromising quality.

Sally Chan, CMA, ([e-mail]) is the senior manager of technology, Internet & e-business risk with Royal Bank's Group Risk Management. The author would like to acknowledge the members of Royal Bank Financial Group's Risk Management team (Pam Pitz, Dave Singer and Joan Carstairs) for their valuable input.