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IT STRATEGY REVIEW – E-commerce: reach out and sell to someone.

For 135 years, Elizabeth Botham & Sons has baked exceedingly good cakes. More recently, the North Yorkshire-based, family-owned firm has picked up a drawerful of gongs for its electronic commerce (e-commerce). Winner of the BT Business Connections and the British Chambers of Commerce Enterprise Award for 1997, “the local bakery with global customers” has turned its plum bread, Yorkshire Brack, biscuits and cakes into a reliable Internet money-spinner. At the other end of the business scale, British Airways is shutting down 17 ticket shops in the US handling sales of $10m a year because American customers are now booking their flights over the Internet. Also in the US, Hewlett-Packard kicked off this February with additional discounts of 5% for computer dealers ordering stock through its e-commerce system – an enormous discount in a sector which is used to dealing in low-teen margins. HP reckons on recouping its outlay through increased efficiencies in supply-chain management – all dealers have to link up to the company’s electronic data interchange (EDI) system. Welcome to the brave new world of e-commerce, a world where sales increase, overheads plummet and profits shoot up. Well, that’s the theory; and in practice, it doesn’t look so very different, either. PC vendor Dell, currently operating possibly the world’s biggest Internet merchant site with $4m worth of business daily, estimates sales transaction costs are half those of machines ordered through the firm’s call centres. On Dell’s Internet site, customers do all the donkey work specifying their own machines. Dell’s e-commerce venture is also successful because it publishes its best prices on the Internet – so customers have nothing to gain by haggling over the telephone. E-commerce has become the business mantra of the late 1990s. The concept is nothing new – EDI, a key component in many e-commerce solutions, has been around since the 1970s. EDI lowers order processing costs by automating transactions between businesses and their suppliers. The technology is well-proven, but relatively expensive to implement – typically private networks or VANs (value added networks) are needed. EDI is also bedevilled by a clutch of competing and non-compatible-versions. With the Internet, e-commerce has moved into the mainstream. But web-based e-commerce poses a new set of problems, revolving around security and – for companies trading with the consumer and small business sectors – speed of access. The concern over security is something of a canard: so-called SET3 standards introduced last year by Visa and Mastercard, ensure the security of web-based transactions is already far superior to transactions conducted over the telephone. But it will take the wholehearted participation of financial institutions in guaranteeing the integrity of transactions before residual fears will disappear completely. Speed – or lack of it – poses an altogether more formidable barrier to e-commerce trading in the SME and home markets. Small businesses and consumers are turned off by the World Wide Wait. Most rely on modems and most modems are too slow. Web sites – especially those that carry advertising – are too unwieldy. Even the latest generation of 56K modems will fail to overcome this. The answer, ISDN, is readily available – but prices and minimum contract periods are too burdensome for most small businesses, let alone home users. Increased ISDN take-up lies largely in the hands of the telephone companies. E-commerce is set to change the business landscape beyond all recognition. According to research firm IDC, the “wired marketplace” will include one billion IT users by the year 2005. Their IT spending alone will be more than $5,000bn a year. Frank Gens, senior VP of Internet research at IDC, says companies do not need to adopt an all-or-nothing approach to Internet commerce – “but there is no question the margin leverage (of e-commerce) is tremendous. If you are able to drive 5%, 10% even 20% of your sales through the web, you are going to make much more profit.” Gens maps out a future of “Internet leapfrog”, with companies and countries basing their competition strategies around e-commerce. According to IDC, European businesses are lagging woefully behind their US and Japanese counterparts – in thought and deed, so far as the Internet is concerned. UK companies are failing to earn money from their web sites, according to a study of the top 250 prominent commercial UK web sites – including all 78 FTSE-100 companies with web sites. The report from Fletcher Research show that only 35% of surveyed sites are trying to generate revenue on the web. The rest have ‘no commercial aspect’ – they simply display companies’ information, targeted mainly at investors and customers. These companies are often placing web sites just to keep up with investors, with no clear revenue-enhancing aspects or clear strategy. Even worse, the survey finds, there is little evidence of business-to-business commerce – which it describes as a “major opportunity”. It compares GEC’s UK web site, dubbed a “professional glossy corporate brochure”, with US giant General Electric, which uses its site as the sole way for companies to tender for supply contracts. Major opportunity for UK business also translates to “significant threat”, according to Dan Wagner, chief executive of Dialog Corporation (formerly MAID). Expressing astonishment at the complacency of most UK businesses towards the Internet, he attacked British retailers who refused to make their complete product line available for sale over the Internet – “because there’s no demand for it”. Speaking at this year’s Regent Conference, an annual gathering of the UK IT investment community, he warned: “The information revolution is the next Big Bang. And it will deliver significant competitive advantage – to the US. This will potentially smother British businesses.” Wagner puts his money where is mouth is: these days he buys all his CDs over the Internet – from a US retailer – “they arrive three days later by Fedex.” The Internet is the best-known and the most used element of e-commerce, according to KPMG. It also notes that marketing departments are the most likely main fundholder and sponsor of Internet projects in 31% of companies, compared with 23% where the IT department ran the show and 15% where the board took the lead. This demonstrates just how immature the UK e-commerce market is. The average marketing budget devoted to the Internet has almost doubled since 1996 – from £37,000 to £68,000. While recognising that companies are – as Roger Till, chairman of the Electronic Commerce Association says – spending according to their means, £68,000 is a piffling amount of money. Prem Gyani is the divisional manager of Academia, the services arm of distributor CHS Electronics which sells off-the-shelf web sites through computer dealers. He argues that there has to be a better way to reach our customers: “Primarily, people are putting together web sites on a shoestring,” he says. “They’ve got a pet engineer to set it up. Then it rots, while the engineer gets back to doing real work. Or the companies write it themselves. Maybe they have done a reasonable job – but they never update it – and so it quickly becomes a bad job.” A full-blown e-commerce solution, in which a company and its inventory are linked seamlessly and in real time to all its customers and all its suppliers, will cost a minimum of £1.5m. Probably even a lot more, according to Thomas Power, group MD of TDS, a High Wycombe-based computer services firm running e-commerce pilots for two FTSE-250 firms – a brewer and a high-street retailer. Such a system does not exist any where in the world, except in 30 or so test sites, he claims. “Holistic” e-commerce systems are relatively new and unproven. To date, much of the Internet-based e-commerce software has been flaky. However, this is changing. Power is something of an evangelist for e-commerce, delivering speeches on the subject two or three times a month at seminars, exhibitions and conferences. Audiences “just don’t get it,” he says. “The world shifted from agricultural commerce to industrial commerce. Now we are shifting from industrial to e-commerce. There’s a revolution going on – and we’re caught in the middle of it.” Till says all businesses should now “be thinking about doing business electronically”. Representing 500 UK organisations, he notes an upswing in interest in membership especially since Tony Blair said 25% of government transactions would be conducted electronically by the year 2002. But how much does this interest translate into action? KPMG recommends that companies should drive their e-commerce strategies centrally from board level. Currently, most companies are approaching these developments piecemeal and from department level. It also says that companies that fail to organise properly for e-commerce “may fail to survive”. But it also points out that the rewards for companies capable of adapting to the information age “promise to be considerable”. According to the KPMG survey, the majority of respondents expected to have most of the technologies defined as being part of e-commerce – in five years’ time. These technologies include web sites, Internet access and Internet e-mail – which all respondents expect to have installed – within three years. Implementation of intranets, extranets and (possibly) smart card use will take even longer. This looks altogether too leisurely. As KPMG notes, “there is still an air of complacency” with more than a quarter of respondents (27%) believing that the Internet posed no threats to their sector. Worse than complacent, such attitudes are suicidal, according to Power. “You can adapt and thrive – or you can end up as roadkill on the information super-highway. The choice is yours.” Wickes: A study in electronic data interchange Electronic data interchange (EDI) remains an essential ingredient in many e-commerce solutions, according to the Electronic Commerce Association. It cites DIY chain, Wickes, as an outstanding example of EDI-enabled commerce. Through EDI, the £500m turnover retailer communicates all ordering, stock and financial procedures electronically with its trading partners. Following a “six-figure investment over two years – and with a low ongoing cost”, the company has streamlined, automated and integrated procedures including goods receipt, invoice matching and issue of credit notes. These are based on the automated processing of incoming and outgoing EDI messages. Tony Duggan, Wickes financial systems development controller, says the company chose the EDI approach because “the one thing we didn’t see with any other technology was the existence of a mature support infrastructure. EDI excelled in terms of reliability and it was secure. These were the main reasons for venturing down the EDI route.” The system has delivered Wickes a 48-hour cycle from the time an order is placed with the suppliers to the time that goods are delivered. “Previously, that cycle was more like four to five days,” says Duggan. “With paper-based transactions you just didn’t have the speed of transactions with which to ship orders around fast enough.” In 1996, the first year of EDI, Wickes saw 200,000 EDI messages exchanged and, last year, three million business documents. In 1997-98 it expects to process between four and six million. The company says it is now moving into phase two of its e-commerce initiatives – moving the goalposts beyond keeping its own costs and inventory under control – and into the wider supply chain. In the next stage, Wickes will pull together the electronic point-of-sale data and inventory data from both its own outlets and those of its suppliers. “The impact on inventory management could be phenomenal,” Duggan says. Wickes thinks there could be some scope for using the Internet or setting up an extranet in the future. But currently it is happy with the pure EDI route. It considers its EDI costs manageable, and claims the assurance on delivery of mission-critical information using EDI over a value added network is a key factor. E-regulation: Commerce sans frontiers E-commerce could be the worst nightmare of tax-raising governments made flesh. The UK government has already expressed concerns over the implication of e-commerce on VAT revenues. How does it track the £20,000 piece of software – or the £20m film – transferred by telephone line from computer to computer? In the US, states which ban gaming, are powerless to stop citizens gambling online on sites run by businesses incorporated in the Cayman Islands. The state of Massachusetts last year scrapped sales tax on Internet-based transactions. The alternative was to see businesses move elsewhere. With the Internet, physical location is unimportant – any country with a dial tone, a low tax regime and light – or non-existent – regulation will do. Which is why e-commerce will replace banking as the major money spinner for tax havens. According to the KPMG Management Consulting 1997 survey on e-commerce, just 26% of respondents were concerned with regulatory constraint and 20% with the regulatory regime. But maybe more should be worried. The European Union and the US government are both jockeying to regulate business on the Internet. Last year, US president Bill Clinton published a framework on e-commerce, based around the principle of self-regulation. High on the agenda was a controversial proposal to “privatise” Internet governance. The European Union prefers a more structured approach. In February, the European Commission unveiled plans for an international communications charter designed to co-ordinate regulations world-wide on issues such as data protection, copyright, taxation and control of pornography. According to the EC, other issues raised include global online advertising of trademarks, and limitations in the Internet domain-name system, with companies squabbling over addresses (last year’s legal battle between Prince, the US sports goods manufacturer, and Prince, a UK helpdesk company, which happens to own the domain name, is a case in point). Differences in data protection laws could “hinder” electronic cross-border trade, the EC says. A new European Union law comes into effect on 1 October, which bans the export of personal data for commercial purposes to countries lacking comparable data protection laws. This includes the US. But can anyone imagine e-commerce between the US and Europe grinding to a halt on 1 October – because of this diktat?

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