E-trading places.

A recent survey from KPMG Management Consulting reckons that sales of goods and services over the Internet will reach nearly $2,000bn (yes, two thousand billion) by 2001. Yet Amazon.com, widely touted as the paragon of Web commerce, just can’t make money. While it’s true to say that early adoption in Internet commerce can give a company valuable experience for the future, it’s actually a costly business, and getting it wrong can be very damaging. Catalogue retail group Argos had a site on the much-touted BarclaySquare on-line shopping mall. In 18 months, it made less than 50 individual sales. And that’s for a company which is already selling products that its customers can’t see or feel “in the flesh”. But there’s much more to e-commerce than selling products to the general public. There are a number of areas where the same technologies – basically, the Internet’s standard communication protocols – can help companies drive cost out of their processes and increase productivity for reasonably small initial outlays. Broadly, these fall into three categories: streamlining internal company transactions; steamlining or integrating the supply chain; and improving business-to-business communication. In each case, companies have an opportunity to use their existing IT infrastructure to make often substantial savings. The first category is perhaps the most obvious. Even basic requisitions by staff create a huge paper trail in traditional systems. Not only is it possible for several different departments and levels of management to become involved, but the process is generally desperately slow. How complicated can ordering a box of paperclips or even a new PC be? The fact that most companies also have a very strict set of rules for purchasing, taking holidays, booking equipment or meeting space, for example, makes computerisation a natural choice. And now that most companies have some kind of network infrastructure including e-mail, the cost of setting up an automated, electronic version of this internal trade has come right down. More suppliers are also introducing their own electronic ordering systems, so the reasons for introducing e-commerce into corporate purchasing have become even more compelling. Surprisingly, Microsoft only introduced such a system two years ago, but has already made huge savings over and above the cost to roll-out the system (see box, page 46). It’s all too easy to miss opportunities, even when the necessary infrastructure is in place. Financial Director has come across one company which uses Lotus Notes as an e-mail and shared database system. This ought to be perfect for a computerised corporate purchasing application, with orders or requests automatically following an electronic route through the rules-based authorisation procedure. If the amount being spent is within the discretionary budget of the manager, the request should be mailed straight to the approved supplier. If not, the system should request higher authority before making the purchase order and alerting the appropriate department of a change to the asset register. But this company’s database only provides blank forms that have to be printed off the system, filled in manually, then processed through the normal paper-based channels. In other words, the procedure takes just as long as it ever did. There are no manpower savings, the systems are prone to human error and the organisation generates very little intelligence about either its procedures or where future savings might be made. Microsoft actually integrated its corporate purchasing system, MS Market, into its own SAP R/3 accounting system to derive even greater benefits. But the beauty of this route into e-commerce is that it can be done piecemeal. “In many ways, the best systems to fix are the ones right under your nose,” Microsoft’s UK MD Neil Holloway points out. “It’s also a great way to get into e-commerce and learn about the benefits. And as we move forward, integrating the supply chain (into the system electronically) drives even more costs out.” That brings us onto the second area where companies can derive quick savings: integration with the supply chain. This isn’t actually a terribly new idea. Electronic data interchange (EDI) has been around for years, but the problem has always been that there were proprietary systems galore. If you had one version, and a supplier or customer had another, communication problems could often negate the advantages. But with the Internet, standardised protocols have meant that different companies’ set-ups ought to be able to talk to each other. “In a market where the product lifecycles are short, you can’t afford to have a supply chain stocked up in the traditional way,” says Caroline Bilbrough, senior consultant at PricewaterhouseCoopers and editor of Information and Technology in the Supply Chain (Euromoney Publications). “If you succeed in actually linking together different aspects of the supply chain, either using decision support systems or by linking your computer systems with those of your suppliers and customers, and actually finding a way of turning data into information, you suddenly find you’ve got some very powerful tools there. “If you can combine that with an understanding of your cost base and the cost drivers down the supply chain,” she continues, “you can be very smart about how you focus on the most profitable parts of your customer base or how you identify the high-cost areas of your supply chain which are ripe for redesign.” Some companies are far more able to take up these leading-edge positions than others. One of these is Cisco, which makes networking products. The headline story at Cisco is the amount of its revenue it generates from trading over the Web, which now amounts to some 60% of sales – roughly $5.6bn. Some of this is new business, with customers attracted by the ease of buying over the Internet, but it has also allowed Cisco to make the most of its supply chain and drive huge costs out of the business (see box, page 46). “Our suppliers can come straight through and look at our order book, and then manufacture to the appropriate level,” says Cisco vice president Paul Mountford. Cisco doesn’t actually manufacture its own hardware, but by linking in with its suppliers it can react as quickly to market changes as a company with in-house production facilities. As with the internal corporate purchasing systems, rules and regulations remain important, and can easily be incorporated into the automated supply chain system. “When our manufacturers are shipping products for us in our supply chain, we want to make sure they’re meeting the standards we require,” Mountford points out, “so all our testing methodologies and rules are there on the Web for them and before our products can leave their factories, they have to provide digital signatures (certifying quality compliance).” Cisco made a decision to go with Internet standards rather than any proprietary e-commerce solution at the very outset, and this makes it easier to integrate new suppliers and customers with its internal systems. It also means that companies at a low level of technology can also benefit – as with the example of the testing methodologies. This is the lowest level of e-commerce: information sharing with customers and suppliers. “It’s often difficult for the communities that can give you efficiencies – that’s your own employees, customers, partners and suppliers – to actually get in and use information about your company,” explains Mountford. “Usually 90% of your information is hidden from these people.” Indeed, in the recent KPMG survey, security issues remained the number-one concern for companies considering any kind of Internet-enabled commerce. But more and more companies are coming to understand that the hiding away of what has been considered highly confidential information from the people within their companies and their business partners simply prevents the development of new business opportunities. The main lesson is to think of e-commerce not just in terms of the Amazon.coms of this world, but what it can do throughout an organisation. As Caroline Bilbrough explains, “We’ve talked in the past about flexibility in the supply chain as being a way of reducing stock and allowing optimisation. It’s now becoming something that’s critical to a company’s survival, because where the future is uncertain, flexibility in terms of both manufacturing and the logistics of the supply chain is essential. It’s not just about getting payback, it’s also about managing risks.” With Internet standards driving the cost down, it’s imperative to experiment now. Even if the cost savings are marginal in the short-term, what a company can learn about e-commerce from internal activity now will certainly yield big savings in the future. And when selling over the Web really does take off, that experience of what works well might just be invaluable. “After developing a good idea, you must pilot a solution,” says Bilbrough. “The trick is to get there first or so it smarter than your competition.” The Microsoft market Imaginatively titled MS Market, Microsoft’s internal procurement system replaced an unwieldy set-up consisting of dozens of different paper-based forms for corporate purchasing. “The cobbler’s shoes were fairly poorly shod,” says Neil Holloway, MD of Microsoft UK. “70% of (our internal) transactions accounted for 3% of the funds we were spending with a lot of people tied up on the validation side rather than adding value.” With the new intranet-based system, all 25,000 Microsoft employees can make requisitions direct from their desktop. This has reduced headcount in purchase processing from 19 to just two and saved the company $6m. Other savings come from the streamlining of the supplier base leading to higher volume discounts and lower man-hours spent by staff making and following up manual orders. Today, the system, which cost $1m, handles more than 400,000 transactions a year, valued at $3.2bn. “This system was driven by the finance department rather than IT,” says Holloway. KPMG’s survey also noted that board-level support for e-commerce was a feature in 80% of companies leading the field; and that half the companies active in e-commerce think the Internet is a more cost-effective way of purchasing. Cisco isn’t kidding Cisco’s huge Web-generated revenues shouldn’t be taken as an example of what every company can do – after all, its customers are highly technical and have the confidence in e-commerce born of professional experience and most of them are IT or network managers. But it’s in the internal workings of Cisco that the real savings take place. According to VP Paul Mountford, the company has cut its fixed cost base by 25% thanks to internal efficiencies from e-commerce. When competitors access the Cisco Web site, for example, they are taken through a ‘situations vacant’ page, and Mountford reckons the company has saved $8m in recruitment fees by poaching rivals’ staff this way. Being a technology company whose customers are by definition hooked up to the Internet also means that Cisco can cut out a lot of costs associated with software publishing and documentation. And the customer service elements also mean the company can keep headcount lower than its rivals. “We could have kept taking on more people, but we knew that if the market ever stalled, we’d be in a very bad position from a productivity and efficiency point of view,” says Mountford. So much of the low-level customer interaction takes place in cyberspace. Although Cisco is in a prime position to make the most of such savings, imaginative use of the Internet in this way is applicable to most companies. As always, it’s a question of tailoring the solution to individual needs. But as a prime example of what is possible, Cisco claims the following savings thanks to e-commerce: Headcount avoidance: $75m Software distribution: $250m Document publishing (internal and external): $550m Total: $875m Consumers on the web Internet companies are the ultimate speculative investment. It’s not just Amazon.com: Yahoo, Excite, and even Netscape have achieved astronomical valuations based on price/sales ratios (there being no earnings yet) that are simply insane by any conventional metric. If you were to put WHSmith on Amazon.com’s sales multiple of 36, it would be worth £75.6bn, not £1.3bn. BT would be worth £561bn, 12 times its current £47bn. What makes these companies worth so much to their investors is the prospect of huge future earnings from Internet commerce: jam tomorrow. “The bet these investors are making is that their aggregration of a customer base has greater value in the long-term,” says Emily Nagle Green, managing director of Forrester Research BV. “The assumption is that the real value Amazon is creating is in the millions of regular customers it’s developing. The question, is how far will that brand stretch?” Part of the problem is that there just aren’t enough people on-line and who are used to the idea of buying over the Net what is commonly available in shops just around the corner from home or work. Nagle Green points out that the first companies to go on-line in a serious and profitable way will be “bit businesses”, the information and entertainment providers (and, to some extent, the financial services industry) who can sell through the actual wires themselves. Commodity businesses, which can speed up delivery or reduce prices using the Internet, will be next on board. Amazon.com may have something: by learning about Web consumerism, it could steal a march when it moves into other products areas. As Laurence Holt, president of UK-based Web consultancy Quidnunc, says, “A fast-follower strategy probably doesn’t work in e-commerce; there are simply too many advantages to being first.” Of course the other thing about the Web is that it makes it far harder to establish true customer loyalty – if you can rise quickly, you might fall even quicker – and Amazon.com has to be careful it doesn’t fumble the ball. And if it can’t stretch its brand well beyond books, and soon, the investors might start to take notice of that astronomical market cap and ask some serious questions.