SAN MATEO (04/03/2000) - After three years of tracking the phenomenal growth of electronic business, brick-and-mortar companies are ready to make their Internet move. By now, the e-business drivers at these traditional companies have a good grasp of the problems they'll face when making the transition to a business model driven by Internet dynamics with business partners and customers.
"The big brick-and-mortar companies have been discrete as far as publicly announcing what their play is because they had the most to lose," says Richard Arns, executive director at Chicago Research and Planning Group, the largest CIO organization in the country. "After all, they are the ones who own the market -- at least [up] to this point."
Perhaps exhibiting a bit of overconfidence in their ability to remain market leaders, these established enterprises have held back, believing time was a safe harbor insulating them from the boardroom and the shareholders until after the Y2K rollover. But the emerging dot-coms, not held back by the same Y2K issues as companies with older infrastructures, seized the window of opportunity and went for broke.
"It appeared as if the dot-coms came out of the wild blue yonder, opened a storefront, and competed with the likes of Sears, ToysRUs, and Barnes and Noble. They cannibalized the [brick-and-mortar] market share," Arns says.
Unfortunately for the technology organizations at brick-and-mortar companies, although the problems in adding an e-commerce component are now easily understood, the business issues remain a challenge. Major obstacles for the transition include resolving channel conflicts, creating a Web presence quickly, downsizing margins to compete with pure-play Internet companies, re-engineering business processes, and re-creating customer service online.
Nevertheless, shedding Y2K restraints has allowed brick-and-mortars to start leveling the playing field, and now they're totally focused on what they need to do to remain in charge of their own destiny.
Fundamental business shift
"Changing the flow of information changes the business model," explains Raj Desai, director of Worldwide Automotive Solutions in the industrial sector at IBM, in Charlotte, N.C. "The way you leverage that information means that the previous structures, procedures, and processes have to change."
For example, in the good old days, manufacturers did their shipping from the warehouse backdoor and only worried about how many palettes got out, says Steve Tonissen, executive vice president at McHugh Software, an $80 million company and developer of Logistics Management Suite, which helps companies such as Compaq, Sony, Timex, Hershey, and Procter & Gamble track their products. At that time, the business process was there to help a manufacturer build truckloads.
Manufacturers used to selling via distribution had a single or "monolithic" solution, as Tonissen calls it. But companies that were only handling and tracking palettes are now tracking what the industry calls "broken cases" -- less than a palette full of products. Once the pallete is broken, it goes to multiple sites that all need to be tracked individually.
Although the number of cases or palettes shipped used to matter, the new metrics focus more on the so-called "perfect order," so manufacturers need to know more than just when an order was shipped. They need to consider the cost of value-added services that are now integrated into the logistics equation, such as how it is packed, labeled, and perhaps gift wrapped during the holidays.
Even before so-called broken cases are shipped, the process of picking the items that are packed needs to change at the point of assembly for shipping.
With smaller packages going to more types of customers, instead of tractor trailers, the major shipper might become UPS. Now, figuring out who the best shipper is, finding out if that shipper has accepted the load, scheduling pick-up times, and knowing where your shipment is at all times ( called "visibility") complicates the process.
If Internet-enabled companies can create what logistics experts call a "continuous move" where shippers pick up goods along their routes, those companies can enjoy reduced shipping costs.
Load brokering to make sure trailers are moving at capacity and warehouses are filled is also part of the solution to the problems created by Internet-based logistics. Many of these issues are, in fact, spawning new online logistics trade exchanges.
Leonard Tenner, formerly the CIO of 50-year-old financial services giant Hewitt Associates, in Lincolnshire, Ill., is now CIO of Sagio.com, a Hewitt dot-com start-up. His unique perspective cuts through the technology right to the heart of the problem.
At the end of the day, two issues face brick-and-mortars moving to a brick-and-click economy, Tenner says. Because of new competitors, companies need to change processes so that they have the ability to move at a more rapid pace than they are used to, and companies need to reinvent themselves even if it means jettisoning the way things have been done for years, Tenner adds.
"As new competitors come forward, existing people need to be able to react in a rapid fashion. That kind of speed has not been seen in the past," Tenner says.
"Changing software is easy, the hard part is to tear down the thinking and habits accumulated over the years."
Redefining business relationships
The business-to-business metrics have also changed. With their "just in time" philosophy, e-commerce companies no longer want to carry inventory -- and companies don't assemble finished products until all the collaborating partners make their contribution. Manufacturers may still have to ship palettes, but now the ability to collaborate and track status becomes essential.
"The same truck may be picking up part of a truckload from one manufacturer and another part of the load from one of its partners," Tonissen says.
As the products themselves become less differentiated via online exchanges, transparent pricing, and the commoditization of products, the difference will be value-added --such as getting something at the right cost and the right time.
Tonissen has some specific views on the business benefits of getting logistics right.
"In business-to-business [transactions], the benefit comes from collaborating more effectively with your ultimate supplier. The greater the information you can share, the less friction," Tonissen says.
Reverse logistics, as the industry calls it, or simply handling returns, as consumers view it, is another Internet nightmare. According to industry experts, the Internet may have as a return rate as much as much as 10 times higher than that of the traditional storefront. One reason may be that because shoppers can't touch and see it, they may order two different color shirts or two different size sweaters, analysts say.
So although an Internet economy allows manufacturers and distributors to maintain a virtual inventory that which brings prices down, the return rate can drive up the price of goods. Currently, the only real solution is to create a solid system for decision support to monitor how well your company is doing according to its own metrics, Tonissen says.
Seizing the day
Despite such challenges, David Bluemke, the national account manager at Rich Products, a $1.2 billion privately held food manufacturer in Buffalo, N.Y., sees the Internet as an opportunity to create new channels. But he still worries about upsetting the current broker and distribution channel.
"They don't understand the challenges of doing business in the Net way," Bluemke says.
However, Bluemke says he is not about to give up the opportunity to tap into new channels for Rich Products, as well as to reduce distribution costs.
"If a competitor has a great site and is generating sales leads, instead of me doing it alone, I would be open to partnering," says Bluemke, who believes the line between competitor and supplier is blurring.
Sometimes the best way for a Fortune 500 company to grab Internet stock valuations is to create a dot-com division out of its own intellectual property.
Clayton-Dublier and Rice (CDR), a $20 billion holding company with Kinkos and Allied WorldWide in its portfolio, did that with one of its companies, Alliant Food Services, a food distributor.
Using Alliant's e-commerce engine, database structure, and source code, CDR invested $25 million in funding a start-up called theSauce.com, targeted at the estimated $120 billion services market for approximately 250,000 independent restaurateurs, according to Peer Munck, CEO at theSauce.com.
"Using Alliant's technology gave us about a four-to five-month head start," says Munck.
Last October, theSauce.com launched as an open exchange with its first iteration focusing on labor, from hiring to employee benefit programs. And FlyInTheSoup.com allows employees to post resumes where restaurateurs might find, for example, the perfect sous chef.
Internet on-ramps: Digital exchanges
Although CDR was quick to identify an e-commerce space they could fill, Munck warns that time is running out for the Fortune 500.
"In the business-to-business space, a land grab is going on. If you haven't started an exchange, most of the space is taken by now," says Munck.
Within the next year, Munck expects almost every industry segment to have its own exchange. He advises that time to market is more critical then getting it 100 percent right out of the starting gate.
"To get into this space, you need a lot of money and you need to go at a super pace. Get employees on fast. If you make some mistakes, that's OK because if you take your time to plan and go easy, you are going to lose out," Munck says.
As Alliant and theSauce.com exhibit, the intellectual property of a company is not so much about the products it produces but the market-segment knowledge it possesses. Fortune 500 companies -- rather than being disintermediated by competitors -- are using that knowledge as a base to wrest market control from the dot-coms as they re-intermediate themselves by building a set of services to solve customer problems.
"TheSauce is a 'metamediary' that allows restaurateurs to concentrate on their core competency -- let's say, creating great menus -- while we automate ordering, delivery, inventory, and reduce what took four hours three times a week to 30 minutes," Munck says.
For those brick-and-mortars that don't want to go at it alone, partnerships with existing dot-coms is another solution. In a two-week period at the end of last month, Sears announced a partnership to sell its products on AOL; Chase Manhattan Bank, Bank of America, and Microsoft agreed to form a new dot-com for financial services; NBC invested in the iSyndicate news service; and Best Buy agreed to put kiosks in its stores where customers can go online to buy Micron PCs.
This trend shows no signs of slowing.
"Chevron has one foot in the oil fields and one in Silicon Valley," says Erica Rugullies, a director at research company Giga Information Group, in Cambridge, Mass.
Chevron, working with Oracle and McLane, a division of Wal-Mart, launched a Retailers Market Exchange that will enable convenience stores -- of which Chevron owns 8,000 as part of its gas stations -- and small retailers to streamline supply-chain processes. Chevron is also on Ariba's e-procurement network for companies that want to order such items as promotional hats or T-shirts with a company logo.
"Traditional companies know their core competency, but they should not be limited by that. They need to embrace the Internet," Rugullies says.
Ride out the tide
Although Rugullies sees the need for brick-and-mortars to adopt an Internet business model, there are those who believe that it is the dot-coms that will be forced to adopt traditional business models in order to survive.
One IT executive in a Fortune 500 company that sells products to supermarkets believes it is the pure-play Internet companies that will have to change.
"We have manufacturing plants around the world. If Webvan wants to succeed, it has to build facilities, going from dot-com to bricks-and-mortar. When the reality of this sinks in, the value [to shareholders] begins to plummet," says the executive, who requested anonymity.
Some dot-coms will have staying power, but many believe there will be a correction.
"The smart money is going to get out first," the executive says.
"The dot-coms have 14 months to prove themselves, or they are down," Arns adds.
According to Arns, the dot-coms -- similar to their brick-and-mortar counterparts -- are equally embroiled in logistical issues: They're just starting to realize they don't have the infrastructure to sustain the customer.
"Amazon realized it takes billions, and you are still not going to become a logistics expert overnight," Arns says.
Whereas dot-coms typically have a lower overhead and can survive on smaller margins, in the long run, brick-and-mortars have what dot-coms don't: customer loyalty. And this is a critical component in maintaining market share. Loyalty is built through person-to-person relationships with customers before and after sales, according to Arns.
"Brick-and-mortar companies have a physical sales force to sustain the market beyond 14 months," Arns says.
The solution for brick-and-mortars is partnering not only with dot-coms but with other traditional companies in order to move across vertical to more horizontal markets -- and to form new entities. At this month's Spring Comdex in Chicago, Arns' organization will launch its Bricks 'n Clicks Partnering Summit to foster such partnerships.
When a company is making the transition from the traditional to an e-commerce model, a lot of business and technology issues have changed; and it reaches right into the boardroom. The CIO is taking a large role in becoming the chief marketing officer, and the chief marketing officer is becoming the chief operating officer, according to Arns. Well-defined roles have changed, so what each contributes is evolving.
Carl Dill, CIO at Time Warner, in New York, couldn't agree more. "It doesn't matter what the initials are," he says.
CIOs have seats at the boardroom table and are now included in the management circle.
"When I was hired, it was to help develop the Internet technology and strategy, while five years ago I would have had to do payroll systems and re-engineering the supply chain," Dill adds.
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Time Warner CIO talks transition after dot-com mergerIf there is any one event emblematic of the transition from the old economy to the new it is the merger of America Online and Time Warner, which becomes effective October 1. With one handshake, a business-world newcomer and dot-com, AOL, took control of a publishing empire that includes names considered American traditions: in periodicals, Time Magazine, Sports Illustrated, and Fortune; in film, movie giant Warner Bros.; in book publishing, Little Brown and Company; and on the small screen, CNN, the 24-hour news channel that has literally become a news service for planet Earth.
One of the key figures behind leveraging this vast empire of information -- something the new economists unceremoniously call "content" -- for the Internet is Carl Dill, CIO at Time Warner, in New York. For example, personal finance is one of the killer apps online and among the most hit by AOL subscribers; Time Warner owns Money and Fortune magazines.
"We have been thinking about how to leverage those financial properties on the Internet, for example with online CNNfn," Dill says. "We now have access to 22 million subscribers; that can have a huge impact on our business."
However, there are areas where merging the two corporate cultures will mean overcoming different mind sets, according to Dill.
"We have to blend the best of both kinds of thinking. In an Internet culture, the focus is on specific consumer offerings. And at Time Warner, we have a culture where creative content is the most important thing, but not Internet speed to market," Dill says.
Dill is also close to the efforts under way on the back end, in which various technologies deployed by both companies must start to talk to each other.
Although Dill says that some back-end applications will always remain unique to each company, others are definitely going to merge.
"The finance departments have to get together. We are figuring out how to do financial reporting and a single fiscal calendar," Dill says.
Others cited by Dill include common shared-stock systems, Web hosting using AOL's infrastructure, and human resources environments. Of course, with all the changes, Dill's job has also changed.
"Today CIOs are players in terms of where the business is going rather than just back-office business providers. The senior manager at CNN, for example has both the CTO and CIO titles," Dill says. "Some people would say it is not normal, but he's both because he evaluates equity deals, is involved in technical architecture, but also looks at how it affects strategy for the future."
Dill says AOL and Time Warner represent a truly convergent picture of the future: "Why do people pay $22 per month for AOL? Because there is content you can get [from Time Warner] that is of interest to the general public."
B-TO-C companies aim to rise above dot-com noiseBusiness-to-consumer Internet initiatives present additional challenges to CTOs helping their companies make the transition from a brick-and-mortar to click-and-mortar operation. The challenges of customer service, brand-name recognition, disintermediation, IT resources, product fulfillment, and effectively employing communication channels impact b-to-c e-commerce operations in a way that forces the role of technology to be redefined in the commerce process.
In a brick-and-mortar company, the role of CTO is fairly well defined, but "when you move onto the Internet ... now you have a whole realm of technology [that supports] the marketing message and the customer service -- a whole bunch of additional elements that never had to be considered before technically," says Jim Ruggiero, Novo's vice president of delivery, the consulting firm's answer to the role of CTO in the e-commerce space.
According to Tyler Jason, a consultant at Chicago Consulting Partners, concentrating purely on technology can limit a company's ability to serve its customers. This makes the dual role of CTOs -- one foot in business issues and the other in technology solutions -- even more critical.
"[If] you're so focused on the technology, you lose your focus with customers and brick-and-mortar processes because you want to automate everything. You must integrate all the variables that got you where you are," Jason says.
Those variables are made even more challenging by underestimating the technical complexity required to bring those offline processes into the online space, according to Ruggiero.
"One of the biggest [challenges that many brick-and-mortars faced] was the underestimation of the degree of [additional] technical complexity that they'd have to deal with when they're making the transition from brick-and-mortar to a click-and-mortar scenario," Ruggiero says. "Things that are taken for granted in the brick-and-mortar realm; things like customer service, which in a regular store, they have a whole program with sales reps, a training program, [and] customer service is provided by the actual agents in the store."
For example, when Toyota put up its Web site, company leaders were astonished by the volume of e-mail they received from people who suddenly had a direct line to speak with the company, Ruggiero says.
"I think [Toyota] underestimated the degree with which customers would use the direct channel to speak with them," Ruggiero explains.
Incorporating call centers for resolving online fulfillment and processing questions into the regular channels are also essential, according to Ruggiero.
"Basically they have the idea that if they go out and move to the Internet, it'll solve a lot of problems and make a lot of things more efficient. But in fact, there's a real need to make sure the customer service is as incorporated to the channel as to the regular one," Ruggiero adds.
While brick-and-mortars are racing to implement Internet initiatives, one of the biggest problems they face is that they don't identify their e-commerce objective, Jason says.
"Strategy itself is a big problem," Jason says. "A lot of these companies want in, but they don't know where they want to go. They're looking for a cookie-cutter answer."
One such brick-and-mortar company simply added a Web interface to its mail-order catalog distribution system, Ruggiero says.
"That was just a disaster. The metaphor of the catalog is not really a relevant one when you're looking online. It's a whole other set of behavior that the customer isn't used to, using features in navigation, and a whole experience they are expecting that was not met by the use of a catalog direct-mail system running it," Ruggiero explains.
The company's Band-Aid solution meant having to re-create the Web site, which resulted in a whole new set of problems: the costs associated with retooling, catching up with the competitors, and creating the new site while maintaining and protecting the old one -- all substantial costs that can be avoided by doing it right the first time, according to Ruggiero.
"I think there's a lot of expectations that moving to the Internet saves a lot of time and solves a lot of problems in terms of complexity when in fact there's a lot of other initial technical elements that need to be added to make this thing happen well. So coming to terms with all those new things that need to be done technically that used to be done non-technically is probably the biggest challenge to the CTO," says Ruggiero.
Mike Pynch, a consultant at Chicago Consulting Partners, thinks that although many pure Internet plays are in the lead, it will just be a matter of time before the evolving click-and-mortars catch up, due to their established relationship with customers.
"People are going to know ToysRUs from their brick-and-mortar days," says Pynch; this gives them them an advantage over eToys, for example, he says.
However, the threat to brick-and-mortar traditional companies that don't make the transition goes beyond simply missing out on the explosive Internet economy, according to Erica Rugullies, a director at the Giga Information Group, in Cambridge, Mass. With the stock market valuations of e-businesses, Internet start-ups pose a definite threat to those who choose not to compete in the e-commerce space.
"If traditional companies don't embrace e-commerce, Internet start-ups will buy them and throw away the parts they don't want," Rugullies says.