Get into e-commerce without betting the store.

How CPAs can contribute to the financial analysis supporting their company's decision to invest in e-commerce

EXECUTIVE SUMMARY

* THE COST OF AN INVESTMENT IN E-COMMERCE can be hard to evaluate. CPAs, always cost conscious, should be aware that e-commerce costs can escalate as the technology is implemented.

* CPAs SHOULD WEIGH THE BENEFITS of an e-commerce investment and the risks associated with making the wrong e-commerce investment, or none at all.

* COMPANIES CAN ENTER E-COMMERCE at several different levels, with enormous variations in cost and risk. Nonetheless, it is still possible for a company to fully embrace e-commerce at all levels for less than $100,000.

* CPAs AND OTHER FINANCIAL EXECUTIVES SHOULD coordinate their company's e-commerce planning closely with information technology and operating staff--especially marketing people, who should have significant influence over Web presentation to customers.

* IMPORTANT COSTS TO CONSIDER INCLUDE Web page design, software purchases and consultants for all phases.

* SMALLER BUSINESSES MAY DO BEST BY PARTNERING with outside suppliers. Existing suppliers may have readymade software suitable to their needs. Some are also willing to share the financial risks and rewards.

E-commerce, as Amazon.com's shareholders Know, is an investment in the future, not a way to make a quick buck. But prudent companies need to be able to see how they will be able to earn a return on their investment before committing to any large capital expenditure. CPAs who try to analyze their company's investment in e-commerce capabilities should not allow themselves to be paralyzed by the seemingly limitless costs of the investment without weighing that against the equally boundless potential return. Here are some examples of how companies have succeeded in their initial investments in e-commerce, and some advice for CPAs at companies that are preparing to make that leap of faith.

In 1998 Amazon.com lost $125 million--twenty cents for every dollar of revenue it generated. Yet Amazon.com is often cited as an e-commerce success story. It has made a fortune for its shareholders, but the company itself has never earned a nickel. The optimists purchasing stock at $125 a share are investing in Amazon.com's potential, not today's money loser. CPAs in business and industry need to be able to look at an investment in e-commerce from the same perspective as Amazon.com's investors if they are to understand the future and help their companies get there.

CPAs and other financial managers working on teams that must make e-commerce decisions can feel very uncomfortable with the degree of uncertainty they must work with. Whether a company is hoping to open an on-line store or something more simple, it can start with a relatively small investment.

David A. Newman, CPA and CFO of Gr8, a Web site designer/provider based in Baltimore, notes that "E-commerce can be intimidating to CPAs." Why? He says that CPAs sometimes exhibit "sticker shock" over high costs. However, forward-looking CPAs should step up to the challenge, using their skills to "optimize the use of financial resources."

The rewards of such an investment can be surprising, though. Darius Vaskelis, Intranet Manager at Inforte, an IT consultancy in Chicago says: "We've had clients who thought a decrease from $100 to $20 per purchase order was great, but e-commerce actually drove [the cost of processing a customer's order] down to five dollars a P.O."

Other consequences of an entry-level e-commerce investment can put an entire business at risk, however. CPAs can't abandon all caution when that happens. Accordingly, CPAs and other financial executives that help manage the costs associated with a new e-commerce installation should examine its overall effect on business strategy. A large risk may pay off, but executives must take it with eyes wide open.

SCHWAB DID IT

Here's one success story. Last year, San Francisco-based discount broker Charles Schwab decided to drop its commission to a flat $29.95 for most online transactions--much less than the average $85 commission generated by a broker transaction at a branch office or over the phone. Schwab's bold move to meet the new competition and embrace e-commerce changed its pricing structure radically, and posed a huge risk to the company, which anticipated losing $125 million of revenues on commissions--over 10% of its top line.

To take that leap, Schwab's decision makers had to balance fairly certain immediate revenue loss against projected strategic gains--not an easy comparison. The venture does seem to have paid off. Schwab now handles portfolios worth $81 billion--up from nothing in a little over a year--over the Internet, while the number of telephone calls to service representatives has remained flat. Schwab CFO Steve Scheid described these savings as "a Web dividend [net increase in revenues] of about $100 million a year." Electronic trading also may have saved the company the cost of building four new call centers and hiring 1,500 more staff, according to Schwab co-CEO David Pottruck.

The CPA or CFO has to look beyond obvious costs and revenues to gauge how an e-commerce application will change each of his or her company's business processes. That requires contemplating how e-commerce will fit into the company's overall strategy. E-commerce allowed Schwab, whose strategy emphasizes a one-to-one relationship with its customers, to convey personalized information to customers in real time at virtually no cost. That radical efficiency more than outweighed the short-term revenue loss.

BUDGET AMPLY FOR REENGINEERING

Philip Bligh, CEO of Inforte, the Chicago IT consultancy that Vaskelis works for, often deals directly with his clients' financial decision makers. He finds that the financial people are often skeptical of the Internet and associated costs, which include (1) reengineering, (2) designing the "graphical user interface"--what someone looking at the page actually sees and (3) integrating back-end operations, such as order processing and inventory. In Bligh's experience the operating people may be just as cowed by the potential costs as the CPAs--and the people from the profit centers usually have more say in the matter.

"What happens is that the business unit head decides what the budget is, and that's what we have to work with" says Bligh. The most common cause of major problems: when the budget isn't big enough to cover the considerable amount of reengineering that an e-commerce solution requires--and that's only the first step. A company must calibrate the scope of each of the three pieces of the project to its budget.

FINDING A STARTER HOME ON THE NET

When companies begin to look for their place on the Web, some dream of on-line stores and other big moves right away (see "www. yourcompany.com", page 65). However, it may be easier to see a return on investment if the company starts with projects that will reduce costs and increase profits rather than generate new revenues by conquering new markets.

E-commerce development can be simple or sophisticated (see exhibit 1, page 59). At the most basic level, a company can get into e-commerce merely by adding communication over the Internet--e-mail--to established forms of communication such as the telephone, the fax or the postal service. Up one level, a company can use the Internet to manage information, including online databases. For example, a company might use the Internet (or an intranet) to put its current and archived newsletters online for staff and customers.

Exhibit 1: The Four Tiers of E-Commerce Development

Enterprise/consumer interactions extend e-commerce beyond a corporation's bounds. That includes reaching external customers in both consumer and business-to-business settings and supporting those contacts with information access distributed through the company. Applications would include on-line purchase orders with selected vendors and Web-deployed customer service.

Business process management involves reengineering processes within the corporation in ways that will reduce costs, improve service or both. For example, a Web-deployed human resource information system will allow employees to look up needed information for themselves instead of playing phone tag with an overburdened human resources staff.

Information access includes recording and managing information such as online databases. These can be mined to find new revenue-generating business opportunities and can reduce costs by speeding up record keeping.

Electronic, communication means upgrading to e-mail in addition to or instead of telephone, fax and postal service.

Up another step, e-commerce is integrated into reengineered business processes within the corporation. For example, the company can post information about its benefit plans and job openings on a Web page accessible to employees. Ready access to that information can reduce the number of calls the human resources department has to field, and speed the dissemination of information. That both reduces costs and improves quality of service.

At the high end, e-commerce can be used to reach customers, potential customers, suppliers and other groups, such as the media and the merely curious. That gives companies an opportunity to sell into a huge new market.

For the financial executive spearheading an e-commerce initiative at a company, one approach is to start small, preferably with a pilot project, before going whole hog. Stuart Rosenberg, CPA, the director of computer information systems at Morrison Brown and Argiz, an 80-accountant CPA firm in Miami, suggests that a company might develop a pilot Web page for as little as $50--or $1,000 if the business wants to splurge--and see how staff, clients and prospects react. That way, the CPA and others organizing the project can get some modest experience with e-commerce vendors and the implementation process, learning how to weigh costs and benefits in an e-commerce environment.

WHAT ONE COMPANY GOT FOR A HUNDRED GRAND

Some companies will want to go a little farther right away. Although e-commerce project costs can grow as expensive as management will let the IT people push them, it doesn't always take a million dollars for a national company to develop a substantial Internet presence. According to David Hochberg, vice-president of Rye, New York-based Lillian Vernon Corp., a $260-million a year mail order firm, his company was able to develop an online presence commensurate with its business size for under $100,000 and in less than eight weeks. His boss is pleased. "We're getting a fabulous response to the Web site. We like it so much that we're now advertising on AOL to draw customers to the site. It's been an excellent move for us" says founder and CEO Lillian Vernon.

The Web site, www.lillianvernon.com, features a directory of outlet stores, an investor relations section, press releases, company history, e-mail links to corporate headquarters and web search engines.

The site also displays many small pictures of catalog items and other themed graphics that can be changed frequently, encouraging impulse buying by steering customers to products grouped together. For instance, there's a link that lists sale items from several categories, another that lists merchandise themed to upcoming holidays, as well as items that are grouped by catalog or themes such as "at home" or "kids." When a customer is placing an order, a pop-up--a question in words, or a picture--may suggest another category of items, such as spring gardening items. If the customer clicks on the pop-up, it will find the relevant catalog. Customers can place orders for more than 6,000 items available in nine different catalog titles and receive automatic e-mail confirmation of the order.

Hochberg accomplished this by rejecting high-priced Web design firms in favor of a local shop. "It's a total misconception that you have to throw millions of dollars at an e-commerce solution. You have to be a very careful shopper among vendors," he says.

One practical suggestion Hochberg offers: "Bring a detailed set of specs to prospective vendors. It makes the process much more efficient." He brought a multipage list of Web site requirements that included how many catalog items the company wanted to list, which of the company's databases should be connected to the Web site, and what links from elsewhere to specific parts of the site would be desirable. He also wanted the site to be easy to update because the company only has one full-time person dedicated to site maintenance, plus another half-time--not enough to maintain anything complex. The standardized specs made cost comparison easier because all vendors responded to the same list of requirements.

Hochberg didn't try to do everything at once, however. When Hochberg was interviewed, Lillian Vernon staffers processed the orders manually after downloading them from the Web site. That is expected to have changed by press time. For an additional $200,000 to $300,000, and using a combination of in-house IT staff and outside vendors, the company is automating the back end of order processing.

KEEP MARKETING IN THE LOOP

Some implementations don't run as smoothly as Lillian Vernon's did. To mitigate the risks of a catastrophic mistake, CPAs and other influential financial executives must work closely with the IT professionals and the operating people involved in the project, standing guard for potentially vulnerable vital corporate functions such as marketing, distribution, purchasing, inventory management and database maintenance. If they don't, the sales and marketing departments may be cut out of the loop even though they are important to decisions about the presentation of information and transaction processing.

Rosenberg gives some commonsense advice. At the outset of an e-commerce sally, he says, "The CIO, CFO and the sales and marketing directors should sit down and delineate who decides what about how electronic transactions are presented and conducted and clarify who will be responsible for integrating this with existing data." They must all work as a team to make the foray into e-commerce pay off.

TEAMWORK PROVED BENEFICIAL

At Merck-Medco Managed Care LLC of Montvale, New Jersey, a pharmacy benefits management company for over 1,000 corporations and government entities serving 51 million customers, e-commerce has drawn the IT and financial/business functions closer together. Steve Gold, Merck-Medco's vice-president of electronic commerce strategy and delivery, explains: "What we do with our internal business partners ultimately reflects on the P&L statement." By making more information available to more people within the company, Merck-Medco was able to reduce the cost of providing information to customers and offer them more information, better customized to their individual needs. That improved profits both by shrinking costs and improving customer service.

Merck-Medco's Internet presence is large: over three million hits (see exhibit 2, this page) per month to the Web site. A site visitor can locate a retail pharmacy near home or while traveling, refill a prescription, check on the status of a prescription, review a company's formulary--its preferred list of drugs, obtain information about Merck-Medco's mail order pharmacy program and obtain patient education material on various diseases. The company's costs are restrained every time a customer gets such information from the Web site instead of relying on a call center or pharmacy visit.

Exhibit 2: Hits and Visits

A visit: Each time someone enters a Web site, stays a while, then exits.

A hit: Each time someone clicks to a particular page of the Web site during a visit.

Since e-commerce is now an integral multimillion-dollar part of Merck-Medco's business, the number of staff committed to some portion of the Internet deployment runs from 12 to 18 team members, many of them CPAs and lawyers. Their role is especially important in the controls on prescription refills, which require a high-level of transaction security. Gold was very active in the design of the controls for the online prescription service. "We have a high level of exposure here" Gold says.

He maintains a close working relationship with the IT staff and its financial partners throughout the organization. As the company's Internet presence grows, a solid core of diverse professionals keeps projects on track and within budget. Together, they decide when the company needs to get help from outside vendors and consultants.

CONSIDER ALL COST COMPONENTS

To better understand the costs and benefits of an e-commerce project, it's helpful to look at the costs and benefits for individual processes and procedures. For example, if a paper purchase order costs $100 to process, while the electronic equivalent costs $20, the cost analysis should consider whether there is enough volume to justify an upfront investment of tens--or hundreds--of thousands of dollars to process purchase orders electronically.

That may seem straightforward enough, but it can be difficult to predict many of the potential costs, let alone allocate them between processes--so much so that many financial decision makers lose their nerve before taking the plunge. Exhibit 3, this page, breaks an e-commerce item into the individual elements that must be paid for. CPAs and others making decisions about what to spend on an e-commerce project should go through exhibit 3 systematically to make sure they've remembered to factor sufficient funds into the overall budget for each item on the list.

Exhibit 3: The Cost Elements of E-Commerce

One way to make sure a company budgets for all the costs associated with an e-commerce investment is to look at each of the components individually:

[] Web page.

[] Internet Service Provider (ISP).

[] Security system.

[] Enterprise/customer interaction suite.

[] Accounting/business management software modules.

[] Marketing plan.

[] Middleware.

The Web site itself should feature a home page that greets visitors and makes them feel welcome. It should download fairly quickly, so visitors don't lose patience before they've even gotten started. The home page should be linked to other pages that offer company information similar to what might be found in the annual report; employment opportunities; departments and subsidiaries; management structure, possibly with bios of top executives; press releases; and a feedback mechanism that facilitates contact with appropriate people at the company. Some may also want to include links to other Web locations.

The Internet service provider (ISP) may act as the "host" of the Web page and may provide other services as well. A security system is important to protect both the site itself and the company's other computers--which a hacker otherwise might be able to access through the Web site. The security system should also protect customer information. Security may include

* Encryption to protect customers' data when they order on-line.

* Firewalls to keep out unwanted visitors.

* A system for providing different levels of access to people within the company.

An enterprise/customer interaction suite is a host of applications that allows a business to conduct e-commerce with consumers or business partners. It includes interactive self-service, Web-based questions, queuing, routing, automatic e-mail response, browser/screen synchronization and computer-telephony callback.

Accounting and business software modules should integrate information from on-line transactions with accounts receivable, purchasing, inventory management and so forth. Middleware is software that links Web-based applications with systems that pre-date e-commerce.

Breaking the project into these building blocks helps those planning the initiative think carefully about the possible costs for each. However, some functions afford a wide variety of choices at different price levels. These include

* Web design.

* Software purchases, especially middleware.

* Consultants for every phase of the process.

Any of these costs may run up after the project starts--it's a little like building a new home.

One cost that sometimes gets overlooked in the planning phase: how to market the site itself. Joseph Michaels, president of Atlanta-based Nexchange Corp. (www.nexchange.com), an e-commerce consultant and aggregator, says that you can design a gorgeous Web page, but "just because you build a Web site doesn't mean they'll come. You need a way to drive traffic to your site--"preferably one that is cost-effective.

SOLUTIONS FOR MIDSIZE FIRMS

Outsourcing may be the most practical route for a small or midsize business wanting to explore the Internet's breadth. Consultants can help identify potential costs and the price ranges of various solutions. Citing the many hidden costs of e-commerce, Michaels' company helps clients band together. "Outsourcing builds on economies of scale, amortizes the costs over multiple merchants and automates the back-office functions effectively" he says.

For example, Queenie Ross, president of Dunwoody Gifts in Dunwoody, Georgia, and a cookbook author, has used Nexchange successfully to gain a foothold on the Web. Ross offers her cookbook Celebrate the Seasons through www.foodies.com. "For a small up-front investment we got a Web site and search engines to bring customers to the site," she says. Nexchange also handles the order processing and credit card security. For several thousand dollars, "It's been a good value proposition and an easy way to open a Web distribution channel for someone like me, who isn't particularly Web savvy," adds Ross.

BUDDY UP

When entering the world of e-commerce, it may pay to partner with others. One way to do that is to finance a large investment by giving the consultants or service providers a piece of the action. The sidebar on page 63 describes one such arrangement.

A partner's experience can also help. Rosenberg says, "It's critically important to find the right IT people, both internal and external to the firm." With the right partner, many of the IT people needed should already be in place. A good partner already knows how to hire and keep good ones. Rosenberg also says that a company should look for a partner that has enough experience to set a realistic "time frame and budget for a project," and also knows how to "get bids and references from outside vendors."

Jim Metzler, CPA and principal of the Buffalo, New York-based Gaines, Metzler, Kriner & Co. LLP, advises companies to turn to their current software vendors first. "Find out what off-the-shelf e-commerce enabling modules they have," says Metzler. Those modules often include order entry and inventory inquiry and sell for between $3,000 and $20,000. Implementation and consulting costs will be a minimum of $15,000 more, according to Metzler.

If a prepackaged solution or outsourcing won't do, some e-commerce vendors will agree to a fixed time/fixed price model--the vendor agrees to deliver a turnkey Internet solution in x months for y dollars. Ashok Santhanam, president of Santa Clara, California-based Inventa, a company that has built applications on such a basis for clients that include Fujitsu and ADR says: "CFOs have to take the time to understand the parameters of the implementation." That involves a road map--something along the lines of a flow chart--outlining the step-by-step process of the project, including possible bottlenecks and obstacles. Some things that might present roadblocks: the wrong consultant, software that is late or delivered way past schedule (known as vaporware), problems integrating the Web with existing databases or the long wait for Microsoft's expected upgrades of its e-commerce platform. It also requires a realistic grasp of the final project and its cost. Design and integration with existing systems may unearth hidden costs, especially endlessly escalating--and very expensive--consultants' fees.

For many accountants, mastering Internet commerce requires new skills and a fresh mindset. To succeed, Metzler advises his professional colleagues to "forget their comfort level with analyzing the general ledger and financial statements. Those are historical documents. "Because e-commerce forces a business to operate in real time, "accountants are thrust into analyzing the business and making process improvements continuously," says Metzler. "By doing so, we develop a better feeling for the back end of the business." That means, for example, getting closer to the concerns of order entry clerks and others who manage inventory. Metzler finds himself doing hands-on analysis of business, processes related to bookkeeping functions.

CPAs and other financial professionals play a crucial role in the development of their company's e-commerce presence. Investors already balance the risks and rewards of an investment in e-commerce, placing a rich premium on their potential value. Accountants and financial executives must learn to imagine the future as well. CPAs typically have much more information to work with than investors do, so they should be able to see the possibilities even more clearly. Says Rosenberg, "E-commerce brings us closer to customers and creates new roles for us. That can be beneficial or frightening, depending on how we handle it."

E-Purchase Everywhere

A survey of 3,000 purchasing executives in manufacturing, government, construction and engineering sponsored jointly by The Thomas Register and Visa USA found that

* 25% purchased between $1,000 and $10,000 worth of goods per month via the Internet.

* 8% purchased more than $10,000 worth of goods per month over the Internet.

Source: American Banker, October 29, 1998

E-Commerce Advice on the Web

To get a glimpse of some helpful Web sites, visit www.se.mediaone.net/~elan/bigsix.html. It links you to a list of the Big Five firms' home pages. These and other helpful sites are listed below. Once there, you can search each for "e-commerce" or "ecommerce."

* Arthur Andersen www.arthurandersen.com. Click on "business consulting."

* The Aberdeen Group www.aberdeen.com.

* Booz Allen Hamilton: www.bah.com. Click on "services at a glance," "technology business services," then "electronic commerce."

* The Center for Research in Electronic Commerce at the University of Texas, Austin cism.bus.utexas.edu/resources/index/html.

* CommerceNet www.commerce.net.

* Deloitte & Touche www.dttus.com.Click on "publications."

* EC/EDI Jumpstation www.harbinger.com/resource/organization.

* Electronic Commerce Resource Centre www.allec.com/allec/ ecrc/resource.htm.

* Ernst & Young www.ey.com. Search for "technology enablement."

* The Gartner Group www.gartner.com. Click on "e-commerce pricing."

* KPMG www.us.kpmg.com. Click on "consulting."

* PricewaterhouseCoopers www.pwcglobal.com/us. Click on "insights and solutions," then "online solutions."

* Wilson Internet Services www.wilsonweb.com.

Sharing the Risks and Rewards

When a company makes a strategic decision to enter the world of e-commerce, the costs can seem overwhelming, particularly if they balloon beyond expectations. To spread the risks and finance the investment for its clients and prospects, Gr8, a Web site designer/provider based in Baltimore, is funding e-commerce initiatives from a private $220-million investment pool. Investors cover the bulk of the start-up costs for the Web site in exchange for a small percentage of revenues once the site goes live. David Newman, CPA, the company's CFO, says: "This turns us into strategic partners rather than vendors for hire."

Expovision, Inc., of Falls Church, Virginia, has formed such a relationship with Gr8 to create virtual conventions. Expovision helps trade show buyers meet sellers electronically before, during and after trade shows by matching buyers and sellers and supplying them with information that can eliminate the need to physically navigate cavernous convention centers.

Expovision's electronic presence is complicated, though. In addition to supplying navigational aids at actual conventions--with up to 45 computer

setups at a convention site, generating customized maps for prospects to find their ways to selected vendors--it has set up a Web site allowing buyers and sellers to network electronically. "We figure that a three-day trade show is a $100,000 proposition for vendors. If it generates 100 good leads, that's considered very respectable. We feel the electronic version of this is much cheaper," says Stuart Strafman, CEO of Expovision.

Before hooking up with Gr8, Strafman had found ecommerce applications to be financially draining. "There's a beginning and a middle but never an end to the project. If you're paying $150 an hour for IT consulting or hiring bodies in-house, that's a true money sucker," he says. When the vendor shares the financial risk, the value equation changes and there's a strong incentive to finish the project on time and on budget.

MARLENE PITURRO, PhD, MBA, is a business journalist and organizational consultant in Hastings-on-Hudson, New York. Her stories have appeared in The New York Times, Managed Healthcare News, CFO, PWC'S BEAN (online) and Public Issues.