UK plc's board gets down to e-business

Nick Ross (chairman): Good morning ladies and gentlemen. Welcome to this board meeting of UK plc. Today’s meeting is going to focus on how the e-model can be integrated into our traditional business. Personally, I am less than impressed with the Internet just now, after spending three hours trying to cleanse my PC of the I Love You virus.

It seems to me there is a clear analogy between what is happening now and the railway age over a hundred years ago. Then, rail-related share prices went through the roof. For many years people predicted there would be a crunch and that people would lose a lot of money, and yet still the railway age steamed on. Eventually though, most people who invested did lose their money.

Yet the railways transformed society – the fact that there was a bubble for investors didn’t mean there was a bubble for the economy as a whole. Through the railways, many industries were able to hugely increase their profitability and their operational span. I suspect that’s what we are seeing now, so that rather than being fearful of the e-economy, perhaps traditional companies should look to it as a fantastic opportunity.

I think it is pretty obvious what is happening: e-business is removing cost from the equation. But how do companies which don’t feel secure in this area apply these technologies? How can they capitalise on all this? How can the new e-business models be blended with traditional business to create sustainable competitive advantage for a hypothetical company we will call UK plc? Let me introduce the IT director Martin Mackay.

Martin Mackay (IT director): Thank you very much Mr Chairman. I am glad to report that some five months into the year 2000 we have had no major problems – our work paid off. We had discussed that my team would be able to take something of a breather after Y2K. Sadly that hasn’t been possible.

When we implemented our ERP system, the focus was on internal processes within the enterprise. Now we find that we have to do business in a new way, we have to integrate with customers and suppliers. Reporting used to be about producing the monthly financial reports from our major systems. We now have to move to a world where business intelligence is key and pushing information out to the front line is absolutely critical – and that requires a new layer of applications and a review of how we process information within the organisation.

Chairman: Martin, it seems to me that we are being driven by technology changes, rather than setting out our strategy as a board and then getting the technology to support it.

IT: New business models have to be driven by the business and supported by IT. One of the things we have to achieve is much closer collaboration between IT and other areas.

Paul Harris (operations director): Are we doing enough to make the functional management in the business understand the art of the possible from an IT point of view?

IT: Alignment of IT and business is absolutely fundamental – in the past we’ve probably paid lip service to it with the notion of business managers within the IT function. But technology and new competitors are changing our business model, and we have to understand how we are going to transform our business to respond. Within the IT department we need a project-based approach. We must define a vision then get there in incremental steps. And a point for the FD: the days of preparing a five-year business plan to justify IT investment are over.

Andrew Sawers (finance director): True.

IT: I believe the maximum planning horizon to estimate return on investment is two years or less; and within that we need to have a culture of more risk-taking, allowing people to experiment more. Increasingly, the initial contact that our customers have with UK plc is through our technology. And that may either be through a call centre, through our interactive voice response (IVR) system or through the Web. We have to ensure that those applications are simple, easy to use, and rapidly deployed to meet the new demands of customers. Collaborative commerce really tries to take this to the next level. It focuses on relationships, on interacting with suppliers and our customers not as the enemy, but much more as business partners in the value chain. What that means is taking a certain level of risk in exposing our processes, exposing information to business partners and in moving away from a closed world. That has implications in terms of security and our overall company philosophy.

Chairman: I would be very worried if our competitors could see how high or low we were in inventory or sales, because they might take advantage of our weaknesses.

Toby Detter (sales & marketing): I am not worried if sales and marketing show the competition what our stocks are and how we are doing in operations, as long as we do our job well. It is how we do it, not what we do, it’s how we do our work that is difficult to copy. That is never going to be on the Internet.

IT: So some key recommendations. The next level of investment in ERP must pull the data into an analytical layer to enable complex analysis to take place around profitability and performance. Secondly, I want to change the culture of risk taking within the organisation – I want to be able to invest in projects that perhaps will be of benefit and perhaps won’t. Thirdly, I want to host a trading exchange and potentially invite competitor organisations to participate in our value chain.

Chairman: Thank you very much indeed. Let’s look at sales and marketing. Toby.

S&M: Mr Chairman, our way forward basically revolves around three points: changing our culture; changing our IT systems, so we have one view of our customers; and streamlining those who are facing our customers, because it is time that we actually delivered on our promises and that we do it cheaper, faster and better. My indications talking to a number of companies is that they are seeking cost savings, but they are also improving margins through better, focused selling.

Customers are confused when doing business with us. We are seeing an increasing difficulty in managing our customers depending on which channel they are coming in on. We sometimes take two or three days just to confirm delivery, while our new competitors can deliver a confirmation within minutes. That is something we need to solve on the IT front.

The customer decides how they make contact with us, especially today when the number of channels is growing. What we can do is to make it easier for some customers to use some channels more efficiently. So we will focus our sales force on the most valuable customers where they can see the best return on their effort. Also, we would like the most valuable customers to use all our channels, but we would like our low-value customers to use the call centre or the Internet.

FD: But how are we actually going to migrate these people who are getting a gold level of service down to call centres?

S&M: Let me be up front about this. We are going to lose some customers in this exercise. Some of our customers who insist on having visits and are not prepared to pay – we need to make a decision whether we should stay with them and it is going to be very painful. But there is a lot of evidence that the sales force will like this new system because they are going to be focusing on what they are really good at, on what gets them good commissions, the really valuable customers.

With the new technology, everybody is able to produce products as good as we can. Product differentiation is over. We may improve our services, but that is quite easy to copy as well. What is really going to be the future of differentiation is building lasting relationships. Its about giving customers the feeling that no matter whether they come in via the Web, the telephone or the sales person, they will always be recognised for exactly who they are and what they need.

IT: Toby, does that mean a CRM database not only with sales, but with all the touch points a customer has with us, such as finance?

Chairman: What Toby is saying, Martin, is that next time you come to us with any recommendation for investment, our first question to you should be: ‘How well is all this new computer kit going to integrate?’

S&M: When any of our people visit a customer, they must enter the information about the customer into the system. We must tell marketing managers to put their evaluation of their campaigns into the system. Information is vital to the success of sales and marketing in the Internet economy. We can’t fight any more whether knowledge is ‘mine or yours’. We must change that culture – because that helps us keep our promises to our customers.

Chairman: Thank you very much, Toby. Martin and Toby have told us we can’t afford not to do these things. Let’s hear from the FD to see if we can afford to do them. Andrew.

FD: Gentlemen – originally, the first part of my draft strategy was to change the name of the company to e-UK.com plc. Part two was to give all employees a bucket-load of share options. And part three was to figure out how to turn our profits into massive losses. It’s e-everything these days – e-commerce, e-business – the only ‘e’ we don’t seem to have is the ‘e’ in p/e ratio. Seriously, though, those comments highlight the issues we have to contend with: how we become a real, substantial e-business, how we reward people, and what our performance metric is.

In devising our e-business strategy we have an enormous range of choices. For example: when we are developing B2C (business-to-consumer) web operations we can follow what all the other dot.coms are doing and advertise the hell out of it, or we can actually divert some of that ad spend into getting the systems, logistics and distribution right, and perhaps let superlative service be a part of our advertising and marketing strategy.

As FD I am obviously interested in costs, but we are going to be talking a lot about opportunity costs – the cost of not doing something. But I am not going to be suckered in every time I hear the immortal phrase ‘Our business will be dead in two years if we don’t…’ For example, as the chairman said, the railways lost money, but the steel companies didn’t, the hotels didn’t. We don’t necessarily have to be in the railway business in order to benefit from the railway boom.

Look at all the new technology businesses that are jumping into bed with old tech businesses: AOL and Time Warner, Amazon.com recently bought Ottakar’s bookshop chain, Scoot is rumoured to be buying Loot. That says something about the value of the businesses we already have, and also about the kind of deals that maybe we should do with new economy businesses, rather than trying to transform all of UK plc by ourselves.

We have to talk very seriously about how people are rewarded for delivering performance in this company. There is obviously no point in asking people to meet performance criteria X if we are going to reward them on the basis of performance criteria Y. We’ve been rewarding our salesmen for the past 75 years on the basis of the revenue that they bring in, rather than on the basis of the profits they bring in. The upshot is that we have some pretty unprofitable customers.

I would like to suggest that we implement a system called EVA, economic value added. We want to maximise the cash return after we subtract the cost of capital employed to generate that return. We will then have a bottom line figure which statistically is much more closely aligned with total shareholder returns than growth in earnings per share, or anything else, for that matter.

Chairman: Frank, what is HR’s view of EVA?

Frank Douglas (human resources): With due respect, I believe it will destroy the fabric of this organisation. The issues we are dealing with are not just about money – our people are frustrated and the best way to unlock value is to unlock their talent.

FD: If you are going to be rewarding people on the basis of EVA performance then they are going to be knocking at your door saying, ‘I have a really good idea. I want to do this.’

The speed of entrepreneurialism has to match that of technological change. I’d like to go round this company and find out how hard everybody is working. I don’t believe for one minute that our people are shirking. I think they are working too hard. We have to find out if they have time to think and be creative and prepare to do the things that we need them to be doing in six or 12 months.

Chairman: Frank, let’s hear HR’s priorities.

HR: Chairman, our war for customers and industry leadership hinges totally on our ability to succeed in the war for talent. The ability to excite, motivate and create a passion in our workforce is the only sustainable competitive advantage we at UK plc have. The issue is not simply about rewards. The road map is complicated and will require the commitment of this entire board. We will need to challenge every assumption that this corporation is based on.

With the blurring of business, industry and organisational boundaries, many of our customers are, in fact, our competitors. Many of our competitors may be allies in the future. Retailers are now into banking, retailers are into telecoms: they will be into our space very quickly. This has a profound effect in terms of our people, our organisation and our ability to succeed in this new world.

As you know, I am critical about internal processes because I think they are based on the old economy: the business case process is a six-to-nine month process. By that time the marketplace has moved on. From the time we identify a recruitment candidate it takes about three months to make the offer. That is no longer acceptable. Candidates can go online and get a job within a week. We need to make the benchmark for recruitment two weeks; two weeks from identification to offer.

We already have telemarketers who work from home. But that creates its own challenges: how do we inspire, how do we coordinate an organisation that is dispersed globally. I believe the term ’employee’ is one of our constraints. In Silicon Valley, they use the title ‘free agent in residence’: we need to realise that people will come and go as they see fit. There is a Web site called Bid-for-geeks, where you can auction off your talent. It’s not as silly as it sounds.

Chairman: Frank, the board is structured along old-style functional responsibilities. How should we be thinking of organising ourselves and what would be the line responsibility for managing those projects?

HR: I would agree that we are organised inappropriately for this new world. Right now we are a functional organisation. The dot.com phenomenon is not just about share options, it is as much about enthusiasm and passion and leadership. Do our people see in a transparent way what we are going to do, how we are going to do it, and why we are going to do it. Do we have a method for allocating resources? The e-business strategy that we are looking to undertake is not a department, not a delegation to a team. It is a total commitment that needs to run through the fabric of this board and this company.

Chairman: Thank you, Frank. Looking back over old board meeting minutes, operational considerations dominated. After all the marketing, technology and HR issues, I hope Paul doesn’t feel like an afterthought.

Ops: Well, what are the operational opportunities for UK plc? First of all we need a clear strategy for Web-enabling the business’s operations. Essentially, I think there are three areas where UK plc should focus in the coming year: e-procurement, supply-chain and knowledge management.

E-procurement is recognised as one of the key opportunities for us. About 36% of our operational spend is on indirect goods and services. If you want to be effective as a business you have to buy at competitive prices. And in contrast to the proprietary EDI systems that will inevitably be phased out, the Internet is more open and cheaper. Look at the recent collaboration between Ford, GM and Daimler Chrysler,who are mortal enemies in the marketplace, yet are creating the world’s largest Internet-based market.

A survey published in June of last year estimated that the financial benefits of using Web enabled e-procurement were as follows: price of materials and services down between 5% and 10%, fulfilment cycles reduced, admin costs down from $107 to $30 per transaction and inventory costs down by 25% to 50%. But we have to bring our suppliers along with us. They will gain reduced sales processing costs, they will gain much better sales forecasting, so they can organise themselves to supply us better.

Chairman: Paul, is there a danger in reducing the number of suppliers for any given item down to just two or three?

Ops: It can be extremely profitable for the suppliers when they are working closely, hand in glove, on a collaborative model with a customer. We should have a policy of having suppliers with whom we have a close collaborative relationship who are volume suppliers. To prevent them from becoming fat and lazy, we also need an open policy whereby we constantly see and evaluate new potential suppliers, and in the same way that the organisation needs to go out to the coal face and talk to its staff and talk to its customers it also needs to talk to its suppliers because very often the suppliers have got a much better view of the way the organisation is really run than the management.

If we look inside our company, we have many supply chains, and we have allowed many of these supply chains to become buried. This means that we don’t understand the full costs and what we really don’t understand is where the non-added-value activities are. What will differentiate companies in future is their ability to effectively create and deliver to customers’ requirements, in other words, the effectiveness of their supply chains. That is the killing ground. Where I want to excel is in execution. Not clever Web sites, but delivering what the customer wants – so at UK plc we must ensure that our supply chain can turn on a sixpence.

How do we improve the other internal processes? Probably the answer is through better information flow and enablement of our people. The ability to capture and continuously update the intellectual capital of the organisation and to share it to the benefit of both internal and external customers is absolutely vital. We need to energise the intelligence that is our most valuable asset, because our knowledge of our customers’ products, our competitors and our processes is probably our most vital resource.

Have we still got a culture where knowledge is the power base for the individual? The point is that the whole culture and speed of response of the organisation can be transformed, leading to other less quantifiable benefits such as greater innovation and better staff retention. So my proposal as the operational member of the board is that we should fully Web-enable the business, enriching the experience of our customers, creating good business partnerships and enabling our staff to concentrate on adding value, as well as enriching their own lives.

The winners in the e-commerce world have been those who have understood the art of the possible, especially in information technology, and then applied that understanding to old, traditional business models. The question for us is: do we understand in our business what the art of the possible is?

Nick Ross (chairman),

one of the UK’s best known broadcasters, is the presenter of a number of factual programmes including Crimewatch UK and The Commission on Radio 4. In 1999 he was awarded a best documentary prize for a controversial account of the troubles in Northern Ireland. He has served on several government committees and has also chaired large

policy-making forums for the European Commission

and the European Patent Office.

Martin Mackay (IT director) is vice president at PeopleSoft. He says that if UK plc is to blend new and old business models it must also blend new and old technology. After all, it makes no sense to scrap the systems and applications which have been serving it well. He says: ‘It all comes back to ensuring we have alignment between the business and IT functions – and that requires board level cooperation.’

Toby Detter (sales & marketing director) is the customer service director at Shell Europe. He looks at how UK plc can use its existing market leading position, with a respected and well-known brand, to develop stronger relationships with its customers and explore the opportunities for using different channels to market, without conflicting with those already in existence. He also looks at how to take on young Internet-enabled competitors. ‘The biggest barrier is the need to start communicating,’ he says.

Andrew Sawers (finance director) is the editor of Financial Director magazine. He says there are three key issues facing UK plc’s finance staff as they attempt to plot a successful e-enabled course. They are: cost, staff remuneration and the measurement of success. He assesses the options and explains that the one thing we can’t do is forget about profits. However, he says that everything else in the rulebook might have to go. ‘You can tell how important the Internet revolution is by walking into WH Smith and counting the number of magazines devoted to it,’ he adds.

Frank Douglas (HR director), HR manager at BT New Wave Solutions, says that

e-businesses have a different mindset to traditional companies. They are faster moving, take greater risks, and reward staff differently. He examines the culture clashes this can create and addresses how UK plc might reconcile them with its organisation. The key difference for ‘old economy’ companies is thinking of their value creators as ’employees’, he says. ‘People want to be involved in projects with clear deliverables, then move on,’ he warns.

Paul Harris (operations director), the former CEO of Great Universal Stores’ home shopping business, says that the media tends to focus on consumer-facing Web retailers such as Amazon.com, but adds that there are many other opportunities to use e-business to gain competitive advantage, most importantly through

e-procurement, e-supply chain, and Internet-enabled processes that can cut across the entire enterprise. He says that UK plc can re-invent its operations by employing new technology at every level.

Return to the Financial Director website