E-Commerce equals empowerment. (Cover Story).
E-Commerce: Beyond the Hype, Real Hope
E-commerce and dot-coms are inextricably linked together. Yet, their business results are quite different. For the dot-coms, much has been lost: Six trillion dollars worth of stock market wealth has evaporated. Hundreds of companies have shut down, leaving millions of employees jobless. Venture capital -- fuel to the dot-com boom -- suffered its worst year since 1969, with negative average returns of minus 32 percent for the 12 months ending September 2001. American consumer and business bankruptcy filings jumped 19 percent in 2001, hitting a record high of 1.5 million. And a wave of bankruptcies in related industries -- particularly telecommunications, laden with $1.3 trillion in debt -- is just getting started. That's the bad news.
For e-commerce, however, there is good news: it's paying off. During the dot-com boom, e-commerce was a strategic imperative -- driven by the dual fears of being "Amazoned" and missing out on the gold rush. In the current "dot-dead" era, e-commerce is an operational initiative whose survival depends on its ability to fund itself through cost cuts or (tougher to realize) revenue increases.
While most dot-coms failed miserably to deliver short-term returns, the promise of e-commerce is in its infancy, and examples of profitable e-commerce initiatives are emerging. There is now history that provides lessons on what to do and what to avoid. Now, initiatives can be planned with more knowledge, purpose and direction. It's time to give e-commerce a serious look, because it is improving companies' financial results.
Effective e-commerce creates competitively superior value for a firm's stakeholders -- its customers, suppliers, partners, employees and shareholders -- by using the Internet and its technology capabilities to change the way business is conducted. Hesitancy to spend substantially on technology and an uncertain future is understandable in an uncertain economic environment. Yet, spending is imperative; the key is to recognize where to -- and where not to -- commit finances. Those who delay spending may be focusing on the wrong priorities that, in the long run, may impede rather than invigorate their business growth.
CFOs seeking to understand and profit from the evolution of e-commerce need to ask the following questions: How should companies evaluate their initiatives? Which initiatives are delivering profits? Which companies are leading the way? What general principles can be applied?
With several concurrent e-commerce initiatives underway, a tempting response to the global economic contraction is to cut off funding for all non-critical programs. The danger of such an approach is that it may stop programs that could generate meaningful payoffs. A more appropriate strategy would be for firms to devote senior management time to rigorous analysis of their e-commerce projects, and then to fund only those best-suited to their objectives and capabilities.
Hard-learned experience suggests at least four specific types of e-commerce initiatives do, in fact, deliver those high payoffs:
1. Electronic procurement. Firms using the Internet for purchasing operating resources have achieved significant cost reductions, streamlined purchasing overhead and enhanced purchaser satisfaction. A recent survey of 40 Fortune 1000 companies found that electronic procurement cut 5 percent to 10 percent from the costs of maintenance, repair and operating (MRO) items, such as office supplies. The companies benefited by centralizing MRO purchasing; negotiating tougher deals with fewer suppliers; reducing by 51 percent the share of employees who do not purchase from preferred suppliers; streamlining employee shopping, approval and ordering; integrating vendor payment with accounting; and streamlining purchasing overhead by 27 percent.
2. Employee payments. Firms using the Internet to process travel and entertainment reimbursements that allow employees to make benefit selections and to share internal knowledge, cut costs and enhanced employee satisfaction. For example, International Business Machines Corp. has saved $1 billion through a series of Web-enabled initiatives that streamline employee salary payments and T&E reimbursement, and enable employees to make benefit selections.
3. Online customer self-service. Firms using the Internet to maintain a comprehensive and easy-to-navigate database of technical problems and solutions have saved millions of dollars in technical service costs while helping customers solve individual problems more quickly and effectively. Cisco Systems Inc. estimates that it has saved roughly $200 million through the online self-service part of its Web site, while improving its customer satisfaction scores. Cisco's customers can access a database of the cumulative experience of all its worldwide customers, and can apply solutions devised for other customers to get their own networks up and running faster.
4. Online ordering. Firms using the Internet to enable customers to place orders, particularly for complex technical products, have saved hundreds of millions of dollars by reducing the rate of erroneous customer orders. Cisco estimates that its online ordering system has added $280 million to its profits by streamlining the product configuration process that precedes manufacturing and delivery of its products to customers.
E-commerce: It's Alive and Profitable E-commerce success stories suggest that companies large and small across a variety of industries are earning high payoffs -- often due to a combination of revenue increases and cost cuts.
* Southwest Airlines Co. booked 35 percent of its 2001 passenger revenue online, through a simple Web site that gives customers information and control. Southwest has the largest proportion of online booking in the industry, and building on its lead, has added an online tool that lets corporate travel managers track employees' business travel on Southwest, effectively stimulating that revenue source. By avoiding travel agents and its own phone agents, online booking saved Southwest $100 million in 2001; its online cost per booking is about $1, versus $10 through a travel agent.
* Cutler-Hammer Business Unit, a $1.4 billion-a-year division of Eaton Corp., uses an online ordering system called "Bid Manager" that enables customers to customize its complex product offerings. Cutler-Hammer's market share for configured products -- motor control centers and control panels -- has increased by 15 percent, and sales of the larger assemblies grew by 20 percent, effectively doubling its profits. Productivity increased by 35 percent, and quality-control costs fell by 26 percent.
* Ford Motor Credit Co. has developed several Web-based applications, and has saved $15.5 million between 1999 and 2001. By streamlining the processing of applications for auto loans, Ford Credit's CreditWeb, UVIS and other applications lets computer systems process 250,000 credit applications monthly, and handle hundreds of concurrent users, processing transactions for 100,000 cars per month. The applications shorten vehicle-processing time by providing real-time system updates during the day and reducing the nightly batch update cycle by 80 percent.
* DaimlerChrysler AG's Mopar Parts in 1999 launched a supply-chain performance improvement project to reduce inventory costs and improve dealer order flow. Mopar Parts' distribution process involves 3,000 suppliers that interact with third-party providers, four national parts distribution centers (PDCs), 16 field PDCs and 4,500 Dodge and Chrysler dealerships. In the first six months, Mopar saved $7.2 million from reduced safety stock, and improved order fulfillment by 0.7 percent, which, in turn, cut $10 million in transportation costs. Mopar also reduced decision cycles from months to days and established collaboration among suppliers. And, finally by the close of 2001, Mopar Parts' supply chain project reduced its inventory by $20.2 million.
E-commerce Payoff Principles
Financial executives, rightfully, seek the best returns with the least risk. Achieving these goals can result from understanding what has and has not worked, from the cumulative experience of companies using e-commerce. Based on such analysis, are nine e-commerce payoff principles (the first three relate to strategy, the second three to organizational process, and three to operations):
1. Raise stakeholders' profits. Internet technology will create value for an organization and superior value for stakeholders only if it enables a change in the work itself and how it is done. As companies created dot-coin spin-offs hoping to take them public in lucrative initial public offerings -- many of the spin-offs, thinly disguised as get-rich-quick efforts -- it was no surprise that they were separated from parent core business processes. With the Nasdaq crash, the spin-offs were exposed as money-losing subsidiaries that could easily be shut down to save money.
By contrast -- and as detailed in e-Profit: High Payoff Strategies for Capturing the E-Commerce Edge (AMACOM, 2000) by this author -- Charles Schwab & Co. Inc. created an online stock trading capability at a competitive price. While in the short term, its financial and stock market performance has suffered, Schwab added so many new online trading customers that its revenues and stock price ultimately soared. The company's use of the Web to create stakeholder value is a helpful case study, even as the business itself has fallen victim to the bear market that began in 2000.
2. Benchmark the best and the worst. Benchmark both successful and unsuccessful e-commerce initiatives to learn which opportunities will likely yield the best results, and which potential pitfalls to avoid. In developing its online recruiting capability, an Asian publishing group developed detailed case studies and critical assessments of the world's leading online recruiting services. With this analysis, the client's online recruiting site was able to sidestep major pitfalls, incorporate aspects of the best sites and tailor its site to its target customers' specific needs.
3. Make it hard to copy. If an e-engineered process is easy for competitors to replicate, it may not be worth doing. Dell Computer Corp.'s e-commerce capability is well known -- Michael Dell has even written a book about it. Nevertheless, competitors have struggled and failed to replicate its strategy. Dell cuts time and cost out of its ordering and fulfillment processes, then passes its lower costs on to customers. Dell continues to take market share from competitors whose retail distribution heritage blocks their efforts to effectively compete.
4. Build cross-functional teams. It is critically important to include in the development stage representatives from all the groups that will be using the e-commerce system. In 1993, a global insurance company developed a Web-based cash forecasting system that is still in use today. The key to its success was involving, starting from the design phase, representatives from all the departments that would use the system. As actual monthly cash reports were compared to forecasts, the cash forecasting team analyzed forecast misses and refined the processes -- thus embedding the process in the corporate DNA.
5. Quick wins build momentum. Sequence e-commerce initiatives to generate quick wins; this will help generate internal momentum and financing for future initiatives that may be more ambitious and take longer to complete. Cisco's Web site was initiated in 1994 after marketing staffer Chris Sinton came up with the idea of selling materials like coffee mugs, golf tees and baseball caps online. Sinton convinced CEO John Chambers that the site would save money, satisfy customers and demonstrate the power of the Internet to sell more Cisco products. The quick success of Sinton's site helped build internal support for other e-commerce initiatives, such as online ordering and online customer service.
6. Communicate, communicate, communicate. Throughout the design and implementation of e-commerce initiatives, senior management must overcome resistance to change through repeated communication with key stakeholders. While technology drives change, change causes fear among employees. To overcome resistance, leaders address these fears in open forums, and discuss the costs and benefits of change. This will help employees choose to participate in the new initiative or simply get out of the way. Such communication helps employees embrace new ways, because they help create them.
7. Justify through process cost cuts. Conduct detailed analysis of current processes and e-engineered processes to assure cost savings or revenue enhancements, especially for skeptical financial executives. A global insurance company funded nine e-commerce initiatives and justified the related spending by demonstrating a significant return on investment, with activity-based costing applied to quantify the cost savings for each initiative.
8. Vendor selection is key. For hardware, software and services, be meticulous in evaluating a potential vendor's financial strength and customer references before committing to contracts. A major reason for failed e-commerce initiatives is unpleasant surprises from unqualified vendors. One advantage of the current, less frenetic e-cornmerce culture is that vendors, too, have inched up the learning curve and are less overwhelmed by the challenges.
9. Link vendor pay to performance. Establish clear performance criteria and tie compensation to vendor performance on these criteria -- often called service level agreements (SLAs). SLAs define specific levels of performance and map the magnitude and timing of compensation. To make SLAs useful, there must be a relatively objective way to measure actual vendor performance. Useful SLAs vary, depending on the product or service being provided. For example, a Web-hosting firm SLA might include items such as uptime percentage (say 99.999 percent), service response time (answer phone within two rings) and frequency of data backup (twice a day). Periodically -- say monthly -- a company should meet and compare actual and contracted performance. These conversations help identify and resolve problems early on, and form the basis of vendor compensation.
In stark contrast to the business environment of the dot-corn era, today's financial executives are in the driver's seat when it comes to e-commerce. The case studies presented here suggest that it is well worth the time to plan before executing initiatives. Using their analytical mindset, financial executives should weigh carefully the benefits and costs of such initiatives and take appropriate actions. To disregard the potential e-commerce benefits and payoffs now would be as big a mistake as it was during the dot-corn era to leap blindly onto the Internet bandwagon!
RELATED ARTICLE: 9 E-commerce Payoff Principles
1 Raise stakeholders' profits
2 Benchmark the best and the worst
3 Make it hard to copy
4 Build cross-functional teams
5 Quick wins build momentum
6 Communicate, communicate, communicate
7 Justify through process costs cuts
8 Vendor selection is key
9 Link vendor pay to performance
Peter S. Cohan is president of Peter S. Cohan & Associates (petercohan.com), a management consulting and private equity-investing firm. Cohan is the author of six books, including e-Stocks: Finding the Hidden Blue Chips Among the Internet Impostors (HarperBusiness, 2001).
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|Author:||Cohan, Peter S.|
|Article Type:||Cover Story|
|Date:||May 1, 2002|
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