Benefits of the E-Commerce Market

The letter “e” lost much of its language-domineering swagger with the fall of the dot-com economy. Technology marketers, journalists, and analysts now cringe at “e”-inspired products and concepts. Venture capitalists hide their money-stuffed mattresses when Silicon Valley experts drop by with business plans. Yet, electronic commerce veterans in some of the largest companies in the United States, companies such as Ford, Cisco, Wal-Mart, Procter and Gamble, McKesson, and Compaq, see opportunity in the midst of e-commerce turmoil.

Increasing Interest in Interfacing Technologies

Transaction management market (TMM) technologies automate machine-to-machine information exchange between organizations. The share of IT budget dedicated to solutions that interface with customers, suppliers, and service providers is increasing. This trend is evidenced by continued demand for CRM, order management, demand forecasting, sourcing, and procurement solutions despite difficult economic conditions. And, Web services market hype provides an almost deafening statement about the value of interfacing technologies. Therefore, as economic conditions improve and as eXtensible Markup Language (XML) standards begin to reduce intersystems integration costs, there will be an increased demand for transaction management technologies.

Nevertheless, although interfacing technology demand is consistent across most industry segments, the business conditions generating interest vary considerably. Ever-tightening electronic relationships between consumer packaged goods (CPG) manufacturers and larger retailers are driven by the need to accurately track and forecast demand for billions of fast-moving products through a low-margin, geographically dispersed network. High-tech manufacturers continue to invest in interfacing technologies to regain some of the control relinquished with business process outsourcing contracts. Cash-strapped wholesalers invest in any technology, including TMM solutions, that can reduce the order to cash cycle. Despite differing business concerns, interest in technologies that improve interbusiness process efficiency is high.

Demand Analysis

TMM technology interest is strong, but demand is constrained. Interest is driven by a number of market dynamics including:

Transaction management systems meet many of the investment conditions that gain significance in a slow-growth economy.

• The technology provides a clear and calculable return on investment (ROI), is amenable to incremental deployment, and helps control costs.

• TMM investment is becoming more compelling as innovative deployments enabling VMI, After Tax Profit (ATP), contract manufacturing, and demand planning gain attention and generate competitive pressure.

• Machine-to-machine communication costs are falling as process standards from organizations like RossettaNet, OAG, and CIDX develop, and as technology standards like J2EE, SOAP, AS1/AS2, and WSDL gain popularity ^[2].

However, strong market forces continue to inhibit new TMM investment. Important inhibitors include:

Economic uncertainty continues to limit capital resource availability and risk tolerance.

• Standards are immature. Lack of standards correlates to high incremental e-commerce deployment cost.

• The entry cost for innovative, multienterprise solutions remains high. Entry costs are driven by change management and experience development needs, not by technology product costs.

• Web services and XML marketing hype generates interest and uncertainty in near equal doses.

• E-marketplace failures continue to haunt many large organizations and inhibit TMM investment^[2].

Drivers of Change

Several important technology developments are driving change in the TMM market. First and foremost is the emergence of the Internet as an effective, low-cost means of transporting mission-critical business information between systems. Although the Internet alone does not provide the network quality of service (QoS) demanded for mission-critical data communications, software and service providers have built solutions on top of this nearly free transport network. Data transport cost declines have fundamentally altered the way companies interact.

The second major force of change in the TMM market is the emergence of new technology standards, such as Java™, XML, and Web services. Overcoming communication barriers, which come in many forms, is often expensive. Java, XML, and other technology standards remove a number of machine-to-machine communication barriers and reduce partner integration costs.

Falling integration costs will affect the TMM market in two ways: first, the addressable market for TMM solutions will continue to expand as solution price points fall into ranges acceptable to small and midsized businesses. Second, reducing the cost and complexity involved in deploying and maintaining a TMM system will release corporate resources to other higher-value automation efforts. Many experienced users that bought TMM solutions to control order processing costs have since evolved their systems to manage a demand forecasting process, complex pricing data, and Just-in-Time (JIT) inventory strategies.

TMM Business Benefits

TMM solutions provide organizations with the ability to effectively process heavy order volumes and with the ability to better manage very close, codependent partner relations. Most TMM deployments address one or both of these business objectives.

Now, let’s look at how companies can use TMM technology to process millions of orders a week with just a few support staff. Others may move a few files a day, but the information in those files affects millions of dollars of production costs. For example (according to a recent study by the Yankee Group), Figure 1.1 summarizes values that are delivered by TMM technologies ^[2].

Figure 1.1: The value transaction management technology rate for an organization by category.

Processing Heavy Order Volumes

TMM solutions can quickly and accurately process thousands, even millions, of orders a week. Consumer packaged goods manufacturers, apparel manufacturers, retailers, wholesalers, and companies in similar industries manage high order volumes for fast-moving, made-to-stock products. In industries such as pharmaceuticals, health products, and electronic components, where both order volumes and per-SKU prices are high, fast and accurate order processing is essential to staying in business. Companies facing these conditions leverage TMM technology to scale business without scaling operational costs.

Combining on-site translation software with electronic trading network service has proven a very effective means of managing order volume growth without scaling order processing head count. By working with a network service provider, transaction volume growth (and related corporate expansion) is not encumbered by technology skill and staff development needs.

It is difficult to compare manual and automated order processing costs. The comparison would be interesting, but is not necessary. In a high-growth, heavy order volume industry, TMM technology is not a cost-savings option, but a business requirement. Therefore, despite TMM’s mission-critical nature in heavy order volume industries, many companies use innovative forecasting, direct shipment, and customer service capabilities, as the most significant advantage to their organization’s gains from TMM service usage today.

Managing Codependent Relationships and Complex Products

In industries with less demanding order volumes, but more complicated products and relationships, transaction management systems are used for equally valuable but very different business reasons. In the high-tech, automotive, and chemicals manufacturing industries, products are complex, highly engineered, and often expensive. Companies in these industries are highly dependent on partners to produce high-value, high-complex products. In these industries and others, dependencies are becoming stronger and products are becoming more complex. TMM systems support codependent relationships, allowing companies to play an effective role in complex production processes.

Companies using TMM technology to manage codependent relations move complex products through the supply chain, and require robust process management capabilities and timely access to information. Developing a JIT inventory management program demands near-real-time information exchange and complex business rules management. Providing a single available-to-promise date for a solution bundle, including multiple vendor products, requires similar functional capabilities.

Best Practices

Today, companies are extending, or planning to extend, their TMM systems into interesting new business automation scenarios. Several of these best-practice examples are described next.

Speed and Competitive Advantage

Speeding business process and improving customer service to gain competitive advantage is not cheap. A company could spend nearly $5 million annually to support its machine-to-machine order processing system. But, business benefits and competitive distinction greatly outweigh the costs of the system.

For example, in the food-and-beverage industry, paper and mail are slow. Money makes money. Anything that slows down money or products costs money. Companies usually tackle banking communications first to speed the processing of thousands of small monthly order volumes. Most companies usually tackle logistics management challenges next, which is followed by an incremental deployment with a supplier connectivity solution. In addition, most companies claim to have achieved a positive ROI in less than 12 months after going live with the banking stage of their implementation.

Managing Outsourced Business Relationships

Most high-tech companies shift their business strategies as the economy begins to slow. With cost control pressures mounting and shareholders demanding improved returns, the companies choose to outsource production and certain support services to contract manufacturers (CMs). To support the outsourcing strategy, the firms identify and implement TMM technology. The solution manages the mission-critical information flowing between a company and its new CM partners. A system could cost less than $400,000 to deploy (including hardware, software, and services). Ongoing costs run approximately $230,000 annually.

It is difficult to measure the value a solution provides a company, but, an outsourcing business strategy would not be possible without the TMM solution. Because of difficult economic conditions and financial turmoil in the industry it services, firms have limited visibility into future demand. Companies expect demand to increase as the economy recovers. Their new CM relationships should allow them to react rapidly to changing demand and avoid losing sales through lack of production capability.

Expansion Strategy Support

Companies are using TMM technology to support complex operational strategies, as displayed in Figure 1.2^[2]. The role of TMM technology will continue to expand as costs fall, as standards develop, and as innovative best-practice use cases emerge from the fog of the current recession.

Figure 1.2: The role of the TMM solution in the organization.

The Service Provider Advantage

Value added network (VAN) service charges have gained an onerous reputation since the emergence of the Internet as a corporate communications tool. The idea of charging per-transaction fees to move data across a network (which is how VAN service charges accrue) riles free-spirited Internet enthusiasts. But the Internet’s greatest strength (ubiquity) is also its fatal flaw.

The last thing a company wants is ubiquitous access to its data traffic, nor are companies interested in the lack of control inherent in a ubiquitously managed network. Absent the addition of robust technology, the Internet is insecure, unreliable, and unworthy of mission-critical corporate data. VAN service providers offer subscription-based technology services that meet corporate data communication needs. VANs ensure that data gets from point A to point B securely, reliably, and with an audit trail. Companies pay usage-based subscription charges for access to VAN bandwidth.

Accessing network QoS functionality from a third party also helps separate business objectives from technology plumbing. Companies interested in deepening partner collaboration or automating more complex business processes are faced with a myriad of business challenges. One-time partners become next-project competitors. Partners are contracted to ship to a production plan, regardless of the status provided by a real-time system. Processes, which vary by both company and division, need to be reviewed and aligned. Obstacles abound in a value chain integration scenario. VAN and electronic trading network service providers remove the interenterprise communication obstacle, allowing staff to focus on business, not technology problems.

TMM Costs

It is expensive to build and maintain a TMM system. The business benefits can be impressive.

Ongoing costs are more easily captured and measured. The average annual cost to operate a TMM solution is a hefty $2.05 million. Average annual VAN cost is approximately $650,000 per year, and the average annual internal operational cost (business and IT support and management labor) totals $2.5 million. These figures capture the bulk of ongoing costs associated with operating a TMM solution. Software maintenance costs, which were difficult to capture, are not usually included in this costs assessment.

As the $2 million per year in operational costs indicate, TMM systems are expensive to run. When considered as a percentage of IT budget or total revenue, the figures are much less daunting. When considering the business strategies TMM systems support, operational costs are well within acceptable ROI and total cost of ownership (TCO) calculation boundaries.

Finally, let’s look at possible roadblocks to e-commerce. Is e-commerce alive and well and feeling fine? Recently, e-commerce has been associated with some fairly humiliating phrases: “dot gone” and “dot bomb” being just two of them. At times, e-commerce has become almost worthy of a snicker when the term comes up in conversation, and lately it’s hard to open a newspaper without reading about “pink slip parties,” which former dot-com employees attend to network, write resumes (which they didn’t need during the venture capital boom), learn that flip-flops and cutoff jeans are not appropriate work attire in the real world and, finally, come to accept that the fairy-tale employment they have experienced in recent years has disappeared as spectacularly as Cinderella’s royal ball accessories at midnight.

Roadblocks to E-Commerce

From the sounds of the media, you would think that e-commerce was a landscape of post-Armageddon. That must be why eBay experienced a 260% growth in 2002.

Want to know a secret? Total e-commerce sales have been predicted to grow somewhere in the area of 60% in 2003. A study by the National Association of Purchasing Management and Forrester Research indicates that business-to-business e-commerce is still in its infancy, with nearly unlimited potential to grow. A recent survey conducted by both organizations revealed that 95 percent of companies polled indicated they would be moving forward to implement e-procurement sometime in 2003. This growth is modest compared to what’s happening offshore. Boston Consulting Group recently reported that Asian e-commerce continues to triple annually.

With the preceding in mind, e-business has taken a major hit to the collective solar plexus. Amazon seems to be hanging on moderately well, though probably not flourishing. It is generally acknowledged that the implosion of many players on the e-commerce stage, most notably the ones headed by 24-year-old CEOs, has enabled the companies left standing to reap more profits due to Web-enabled natural selection.

Old Dogs Have Learned New Tricks

Research firm McKinsey & Company recently unearthed a fascinating statistic: 86 percent of the most successful e-tailers are online channels of existing, established brick-and-mortar companies. Someone a long time ago put forth the radical theory that a company needs a business plan to survive in the long-term. Web-based companies slapped together on a Saturday afternoon in someone’s home office are not likely to have as sound business plans as a company such as Eddie Bauer that has been around for generations. In 1998, the retail giants were laughed at for their hesitant and puny efforts to join the e-commerce party. Today, they are the ones left standing. It’s obvious that there’s a lesson to be learned from that.

Here’s another interesting trend. In the days of yore (1999 to 2000), many Internet-savvy consumers indicated that when it came to shopping for larger ticket items, such as audio, video, and computers, they would do their research online before heading down to a large electronics superstore such as Circuit City to make a purchase. Today, many people have taken to wandering the aisles of the large electronics stores to see and touch items, and then return home to make their purchases from online electronics e-tailers. Why not? Online return policies have improved about 2,000 percent since the early days of e-commerce and in many instances, there is no sales tax on items purchased from e-tailers. Not to mention the fact that buying online enables you to spend the time you would have dedicated to getting to the mall on some vital task such as sleeping late or reminding yourself what your family looks like.

Trying Not to Antagonize Your Customers Helps Immensely

E-commerce companies that continue to grow seem to be the ones that better understand CRM and what it means to their firms. There’s no question, purchasing over the Internet is as popular as ever and will continue to grow. What many e-tailers didn’t foresee is that the Internet business model enables customers to be fantastically fickle, and all it takes is one misstep to lose a customer forever. Good self-service is worth its weight in diamonds, but it should never entirely replace human interaction. As a result, it becomes fairly safe to conclude that the e-businesses still standing today are the ones that screwed up CRM the least.

The survivors have another thing in common: easily navigable Web sites. Remember some of the disastrous Web sites that first appeared in 1997 and 1998? The designers sacrificed ease-of-use for art and profundity, with the result that many potential buyers arrived on the site, admiringly commented, “Ooooh, pretty” and logged off to find a site that was easier to use. Part and parcel of ease-of-use is a friendly and comprehensive search engine, and this is another element you will find on the sites of the little e-tailers who could. Search engines driven by natural language processing are rapidly gaining in popularity as they allow shoppers to pose questions in much the same manner they would to a live store representative. For instance, compare brands of digital cameras in the mid-price range. Not only do searches conducted with natural language processing help the customer, but the technology can also help the e-tailer understand what its customers want and how they want it.

Privacy, Please

Yet another element that has helped some e-tailers remain strong is the issue of privacy. Many companies with Web channels have had some decisions to make recently: collect customer data and e-mail addresses and sell the information for a price to boost sagging profits, or prominently reassure customers that their information is private and will remain so in the future? The former choice represents a short-term fix and the latter choice is the ticket to the long-term payoff. Many companies that sold customer data from the get-go or made a decision later to sell information seemed to think that their activities would not be noticed, or that the average consumer wouldn’t care if they received a few extra spams brought on by the sale of their personal information. This was a serious miscalculation. In a crowded information age of little free time and space to breathe, most consumers are becoming rabidly protective of the little privacy they have. More importantly, e-tailers and Web marketers that chose to collect information from children not only earned the ire of parents, they began to draw fire from federal and state regulators.

Finally, the vast majority of companies that made a go at succeeding in e-commerce only to fail a year or two later are like kids who begin playing with a complex toy and give up in a huff when they can’t operate the toy based on the fact that they didn’t read the instructions. All’s well and it ends well. The toy becomes available to the kid who values it and knows how to use it.

^[2]“E-Business Evolution: Transaction Management Costs, Benefits, and Market Development,” Copyright 2002 Yankee Group, Yankee Group, 31 St. James Avenue, Boston, Massachusetts 02116 [Sterling Commerce, 4600 Lakehurst Court, Dublin, OH 43016-2000, USA], 2002.