Interview: e-Business Strategies for the Enterprise

• 11/29/1999

Developing a Jeweler's Eye for e-Business

If you're still trying to make sense of this e-business stuff, don't panic. You're not alone. But now isn't the time to just stand by and watch it all happen either. Get educated; Get your feet wet; Do something. Then adjust your course along the way. At least that's the plan of action recommended by one of IT's leading e-business consulting organizations, Deloitte and Touche, LLP.

In an interview with MIDRANGE Systems, Steve Riordan, Deloitte Consulting (New York) principal and e-business services leader offered his insights and recommendations concerning the e-business movement--where it is today, where it's headed and what companies can do to best prepare themselves to do battle in the emerging global e-business marketplace.

"The Internet has set the global economy on a new course. And the journey has just begun. In fact, if the Internet's ultimate impact on the global economy is compared to a 100-mile journey, we've traveled a mere 10 feet." -- Deloitte Consulting

MRS: With this 100-mile journey in mind, what can companies do to prepare themselves? What can they expect to accomplish in their first steps?

SR: Fundamentally, the Internet is the latest of a number of mega-innovations that have taken place over the past several hundred years. In this sense, the Internet belongs in the same category as major technological innovations like electricity and the telephone. Every time one of these innovations hits, they're very destabilizing--that is, when they happen, they create incredible opportunities and incredible threats.

The analogy I like to use is the elevated highway that collapsed in the San Francisco earthquake 10 years ago. The day that happened, the businesses that relied on that highway for getting around and getting their goods transported had an incredible problem. But on that same day, those businesses that were a hundred feet past the highway suddenly had some of the most valuable real estate in the world. This particular event quickly created both incredible opportunities and incredible risks. That's the way it is with the Internet.

So, companies first and foremost need to understand what kinds of opportunities and risks the Internet presents for their business. If they've explored this question, then they've taken a major step forward. The companies that haven't thought about this are getting blindsided by new business models and new innovations that may fundamentally threaten the future of their business.

MRS: Do you find that there are still a lot of companies struggling with this transition to e-business?

SR: Yes. For all the hype--there still are a ton of companies that really aren't doing much yet--a lot of discussion, and a lot of debate but they're still trying to determine what their e-business strategy ought to be.

We also find a lot of companies in the consumer vertical focused on whether they should sell over the Internet, what the greater cause for concern might be on the supply side, employee self-service side, or on even some other facet of the business.

At the end of the day, companies still need to ask themselves some basic questions like, "Why are we in business? What's our mission? What are our sources of competitive advantage?" And if none of these factors are threatened because of the Internet and its effects, then there's not a lot of cause for immediate concern. In time, these companies will tactically adopt Internet technologies and apply them to their business. It's not an "Oh, my God!" kind of situation.

MRS: Let's say a company's gone through an evaluation process and has determined that it's ready to explore its e-business options. What's the next step?

SR: One of the things we've discovered is that in order for an e-business initiative to be effective, it has to be senior management that's driving it, and for the most part, senior management is still in the "trying to figure it out" phase. So one of the places we like to start is literally with education--from something as simple as a two-day workshop, to something as extensive as a full-blown project to help get senior management up to speed.

Several of our competitors have done a fabulous job of marketing the concept of e-business. I would argue though, that as you peel the onion down even one layer, e-business suddenly becomes a much more complex topic. The only thing common to all of these discussions is that the Internet has triggered everything.

Essentially, the e-business world is evolving so rapidly that to stay in the fast part of the stream involves an investment. What we find most effective is to help executives get a head start by guiding them to important resources, e.g., "Here are the top 10 Web sites you ought to be surfing, here are the top 10 books you ought to be reading, here are the top 10 publications you ought to be keeping up with," and so on. Kind of arming them with an injection of content as well as tools they can use on their own to continue to learn about e-business.

MRS: Could you provide some examples here?

SR: For one, there's a Web site called CNET that you really ought to know about if you're in the technology sector, because there's so much great information out there. And there are definitely some key books that you should get your hands on--"Net Worth" by John Hagel and Marc Singer (Harvard Business School, 1999), and "Net Gain: Expanding Markets through Virtual Economies" by John Hagel and Arthur G. Armstrong (Harvard Business School, 1997). Then there's "Unleashing the Killer App: Digital Strategies for the Market Dominance" by Larry Downes (Harvard Business School, 1998), and "Crossing the Chasm" by Geoffrey Moore and Regis McKenna (Harperbusiness, 1999). And in terms of publications, folks ought to be reading "The Industry Standard," "Fast Company," and "Business 2.0," just for starters.

There's a different sort of being-in-the-stream education element that's really, really critical here. What you want to develop is what I call a jeweler's eye for e-business so that you can recognize the cut, clarity and color that you want as you go to make investments around e-business.

MRS: What other guidelines can you offer companies as they prepare to rollout their e-business strategies?

SR: Companies can organize any number of ways to prepare to execute an e-business strategy. This can range from having a task force with representatives from different functional groups--which may be appropriate for a more tactical effort--to laying responsibility on a CIO with a set of cross-functional advisors, to appointing a VP of e-business, to having a separate organization but not a separate financial entity, to having a completely separate financial entity.

Basically, a company's e-business strategy is dictated by whether it's strategic or tactical, by the CEO's point of view, by the impact on the overall strategy of the business and by the culture of the company. The basic question is, "What change levers does the company need to apply to get where they want to go?"

MRS: OK. Let's say we've educated ourselves and organized ourselves and now we're ready to go. What are some of the common pitfalls that e-businesses often fall prey to and what steps can be taken to avoid these?

SR: Well, first of all I would separate e-business ventures into a couple of different categories--there are issues common to all of them and there are issues specific to each. First, there are the start-ups and they have a unique set of issues; then there are companies in what I'll call the middle market--maybe 50 million up to a billion dollars in revenue--and then there are companies that have revenues in the billion and above range.

One of the mistakes common to all of these groups is trying to go it alone. There's this increasing notion of codependency--because the opportunities are moving so fast, any one company's ability to internally build every capability is folly. So, now more than ever, companies are increasingly depending on other companies to get things done. And that's why you see so much alliance activity.

Actually, even for companies like ours--we've recognized the same thing--we can't be everything to all people and even if we wanted to, we couldn't get there fast enough. So, firms that have traditionally been organic in everything they do are going to have a hard time being fast enough to compete in the e-business marketplace.

A second big mistake is choosing the wrong people--relying on folks that have functional or industry expertise and assuming that this is e-business expertise. It may not be one and the same. I'll give you a great example--Webvan, the online grocery startup, has very few food industry or grocery industry people. You'd think that they would reach out to the retail and food industry to pull people in, when in fact, their new CEO is from Andersen Consulting and they also have a number of people from General Electric. They recognized that they wanted people who would know the e-business space and have given that a higher priority than hiring people from the food industry.

A third mistake is that a lot of people confuse the pursuit of financial gain with the right business opportunity, and that's true for startups as well as established companies. We think the best approach is to pursue what's right for your customer, and then everything else will take care of itself. This kind of thinking can get clouded by talk that centers on, "What does this mean to me financially over the next 18 months?"

MRS: What about the sorts of challenges that are specific to startups? To more well established firms?

SR: One issue that's specific to startups is being under funded. Let's talk about the business-to-consumer side. Last Christmas was the first round, and this Christmas is going to be another huge determinant of who's going to be first to market and who's going to be successful. There might be one more chance next Christmas--kind of the final round of a three-round prizefight. E-businesses in this category basically have two shots left. Those companies that aren't funded well enough to get done what they need to get done in that timeframe may not make it out to market.

Another issue that relates more to established companies involves getting caught in legacy thinking and worrying about the installed base. A good example here is Toys "R" Us. One of the reasons that they cite for their .com spin-off falling apart was the pricing between the online store and their established stores. They basically decided that pricing had to be the same everywhere, which is kind of an old mindset--pricing really comes down to what your consumer is willing to pay wherever they're interfacing with you.

Slow decision-making is another trouble spot in big companies. A lot of times there may be processes in place that follow a predictable path in a predictable timeframe that may not be relevant here. There's much more emphasis today on getting a first cut of a solution up and out, and then planning to rapidly iterate and evolve it with subsequent, frequent releases.

Finally, perfectionism can just kill an organization. At one large consumer goods company, for example, even today external e-mails have to be reviewed before they go out. I know that even in our firm, we'll slap an e-mail out even if it's going to a client. It may have a few typos, but the idea is to respond quickly and provide the information that our client needs.

So, a company that's still locked into editing e-mails, that kind of perfectionism is going to kill them. In fact, at this particular company, they've actually decided that the way that they're going to pursue their e-business solution is to do a spin-off because of issues like that.

MRS: So, what's the most effective e-business model for these companies? Are you finding that in an established firm, a separate group that can offer a whole new way of thinking manages e-business best?

SR: On the business-to-consumer side, we believe the right model is a heavily branded consumer goods company that goes to market through multiple channels--including an online store, catalog and kiosk--and one that's also very, very consumer focused. So how do you get there? Different companies take different approaches. Over the next couple of years, we think that you're going to see temporary organizational structures that will ultimately lead to the model that I just described.

At Nordstrom, for example, they decided to pull out of the family-run business mindset and have a separate .com funded by venture capital to do what they needed to do. Dan Nordstrom has actually come out and said, "Look, I'm just going to say it, we're going to cannibalize sales. That's a fact. That's what we're going to do and by creating this sort of protected environment of .com, we can deal with it."

Another company might have the kind of culture that says, "We're just going to become an e-business from day one," and integrate this throughout all aspects of its business. There's not a one-size-fits-all kind of solution.

MRS: Could you comment on where seamless integration fits into a company's e-business strategy, and what the implications are to IT managers?

SR: Well first of all--let me talk in general terms--I strongly believe that the consumer will dictate the needs and requirements and they will punish those that don't meet those needs and requirements. Companies like Eddie Bauer and others that have already been out there for a couple years have presented that seamless front--integrating their retail stores with their online stores, for example. So, from a consumer's point of view, a seamless interface and relationship is now a firm expectation.

In fact, a lot of our work on the business to consumer side this year has been companies saying, "We put something together last Christmas, and we know we're going to have to improve on it for this Christmas. Can you help us?"

That seamless integration is an absolute must have here. Online transactions have to be seamlessly integrated with call centers, they have to be seamlessly integrated with inbound e-mail management, (and there's an expectation of 24-hour turnaround on that), they have to be seamlessly integrated with pick-pack-and-ship, and returns have to be seamless. And if all that isn't clicking operationally, then there's going to be problems.

Basically, throughout the enterprise you should always be in sync on important things like pricing and inventory levels. You know those are two things that get out of sync when you don't have an integrated Web site and back end system.

So, of course the implication to the IT folks is that the quicker you can get to those business functions being deployed in an integrated fashion, the better off you're going to be. As recently as a year ago, many of these issues were handled by custom-built applications. Today, there's clearly movement toward providing integrated solutions.

MRS: Can you cite some examples here?

SR: Sure. One that comes to mind in the AS/400 community is a retail software vendor called JDA out of Phoenix, Ariz. They have both an AS/400 product and a client/server product. Their AS/400 product is called MMS, Merchandise Management System, which is a retail merchandising system that would be installed at most retailers.

Well they've now added a product called MMS.com. MMS.com is designed to provide a link from the Web site to their Merchandise Management System. And they've just come out in the last month and announced an agreement with Blue Martini Software (San Mateo, Calif.) to provide more of that front-end capability. A year ago, you may not have been able to satisfy this need through software vendors. Now you've got companies working together to provide a solution.

MRS: We've spoken fairly extensively about business-to-consumer strategies, but can you offer any recommendations concerning business-to-business strategies? Forrester Research (Cambridge, Mass.) predicts that business-to-business Internet commerce for the United States will reach $842 billion by the year 2002. What can companies do to capitalize on this?

SR: We actually believe that the real remarkable business opportunities are on the business-to-business side. If there were one thing that I'd leave your readers to think about, it would be that companies have alternatives in how they deploy their technology today. Three years ago, when ERP came down the path, it was pretty simple. A company could go out, pick an ERP system, and that package came with a couple of platform options. Then they either picked someone like us to help them implement the package, or they did it alone.

Now, they have the option of deciding whether to implement the package, or whether they want to subscribe to that package through an Application Service Provider (ASP). An ASP is almost like a service bureau. And now, there are even Full Service Providers (FSP). The FSP model means that a company can now not only outsource the application but also outsource the people that run it. So an FSP might provide an application like J.D. Edwards (Denver) and also provide the accounting people that are experienced in running the accounts payable portion of the product.

So from a business-to-business standpoint, there are increasingly newer and more options for how to deploy technology that may change the game in terms of how those things are priced and serviced.

MRS: It seems that the Internet has served as a catalyst for change in many areas of business. What other kinds of changes are on the horizon? Where is e-business headed next?

SR: We feel that in very short order that e-business will just become business. In fact, I like to tell clients that when you're talking about e-business, the e is silent--that very soon the e will just go away.

I think the second thing is that we're going to see a complete redefinition of what industries mean--the SIC code listings will no longer apply. Let me give you an example. Should E*Trade be considered a financial services company or a .com high-tech start up?

Perhaps an even better example is Sports Authority. You would call them a retailer, right? Well they don't define themselves that way now. They've done a couple of different things. First of all they've teamed with an organization called Global Sports. Global Sports is teaming with six or seven different sporting goods companies and is going to provide the back end direct-to-consumer operations to support the Web site for all of these different sporting goods companies.

So if you go into the Sports Authority Web site, they will have decided what merchandise is on there, and what the look and feel is, and what the pricing ought to be, but the back end operations will be outsourced to Global Sports. And Global Sports will be able to create economies of scale by doing that with six or seven sporting goods chains.

Another thing that Sports Authority is doing is they're teaming with WebMD and HealthSouth and between the three of them they're trying to create a sort of topical or lifestyle or information synergy around sports therapy. So, in that world then, how do you define Sports Authority? Are they a retailer, a direct marketer, in the healthcare business, or all of the above? I think you're going to see the definition of industries being completely transformed in this and other ways.

The next thing you're going to see is dramatic consolidation. So, all these e-business startups--dominant players like Amazon.com and Webvan--they're so far out in front that they're going to become big companies. Then, I think you're going to have a second set of successful startups that will be gobbled up by the big companies, and then you'll have start ups that will fail. We think the majority will fall in the last two categories, so with that you're going to see more and more companies looking to acquire, integrate and consolidate.

MRS: So, what will separate the winners from the losers in this space? Is success measured differently in the e-business world?

SR: The end measures will still be the same, but where the leading indicators at one time might have been inventory turnover, margin, shipments and receivables, the leading indicators today are really all about customer acquisition and customer retention. And if you're tracking those, those are the leading indicators of what's going to happen in terms of ROI and market share.

So, when you look at the leading .com start ups, that's what they're focusing on. You hear people questioning, "How can Amazon.com be doing what they're doing?" Well, their plow back ratio is actually greater than 100 percent, so they're spending more than they're making, but they're plowing it back into customer retention areas.

MRS: At what point is that model likely to fall apart? Or is this the new model?

SR: I think this notion of new metrics is wrong. What we're looking at are different leading indicators to get to the traditional metrics. Market share is being measured among newly defined industries. You can't be in business over the long term without making money. There's plenty of venture money out there, but these portfolios are based on one out of 10 [e-business ventures] making money. So, for the ones that really want to survive, the end game is still all about being profitable.

Steve Riordan leads the e-Business Service Line Portfolio as a principal in the Management Solutions & Services practice of Deloitte and Touche LLP. He is also leader of the cross-functional e-business task force for Deloitte and Touche.