Measuring your online profitability

What comes to mind when you hear the word e-business? Speed? Intuition? Daring? Seat-of-the-pants? | How about metrics? Bottom line? ROI? Value? | For all the attention that's been paid to the first set of words, you don't hear much about the second. In fact, few Fortune 500 retailers and manufacturers that are steeped in the thrill of the Internet are willing to talk about measuring the real value of their e-business ventures. "Many companies seem to be just doing e-business and not measuring at all," says Jim Highsmith, director of the e-project management advisory service at Cutter Consortium in Arlington, Mass.

"We worry about people just throwing up their hands and saying, 'We can't measure this, and anyway, we just have to do it,'" says Tom Bugnitz, managing director of the E-Business Forum and president of The Beta Group, a St. Louis consulting firm.

But metrics are crucial. "If you can't describe something in business numerically, you're not doing your job properly," says Eric Singleton, director of global e-business at Raytheon Co. in Lexington, Mass. "How can you communicate success, failure or the gaps that need to be closed?"

Part of the problem may be that people feel overwhelmed by the abstractness - the "virtualness" - of e-business as well as by the breadth of applications, but it's not really that difficult if you think less about the e and more about the business, says Bugnitz. "People put e-business into one big block of stuff, and, really, there are a lot of different blocks," he says. "How you're going to measure depends on where you're doing this."

At Deere & Co. in Moline, Ill., for example, Jim Harl looked at a bunch of e-business metrics to establish the value of an e-business supply-chain project before Deere committed to it. "Everybody gets excited about doing e-business, but if you get caught up in it, you may put in some neat, great technology that doesn't touch your bottom line," says Harl, Deere's manager of e-business for supply management. "Don't lose sight of the fact that it's a tool in the context of a larger business plan."

Deere spends US$1.5 billion annually on indirect materials and services - from office supplies to drill bits to travel - that don't go into products. Harl's challenge was to use technology to manage that expense, and he felt that the Internet might be the tool to drive those procurement costs down.

He started by measuring the existing indirect materials procurement process. "We looked at everything you do - all the people, all the time on computers, putting [the purchase order] in an envelope - we mapped that out in excruciating detail," he says. Then he determined which steps would go away with an Internet system and how that translated into driving down cycle time and costs.

The company estimated that a Web-based system could save tens of millions of dollars. Only then did Deere purchase Ariba Buyer software, which it plans to implement with a select group of indirect material suppliers to execute that part of the supply chain more efficiently. "If it's done right, it should reduce the suppliers' costs, too," Harl says.

The preproject metrics proved to Harl that there was business value in the Internet tool he envisioned. "It's not e-commerce for its own sake," he says. "It's, How do I use these tools to bring greater value to our supply chain?"

As the project moves forward, Deere will see whether expected savings materialize, Harl says, "and if not, why not."

Sheila Beauchesne is using e-business metrics to fine-tune an existing e-commerce retail site. "No two ways about it: We are in the e-business world to make a profit," says the CIO at Martha Stewart Living Omnimedia Inc. in New York. "Profit drives the decisions we make."

And you can't see the profits without metrics, she says. "So many dot-com businesses have gone under because they're focused on the top line and not the bottom line," she explains. "You've got to have a plan for becoming profitable, and you've got to base it on metrics."

Beauchesne says e-business metrics are the same as traditional IT metrics in some ways. "The bottom line is still what matters," she says. That means not just getting customers to the site but also completing a transaction and getting the product to their doorsteps on time and cost effectively.

But e-business metrics have to track user behavior, not just results, and that's different from traditional IT metrics. "We have to look at where customers are coming from, what's driving them to hit the Buy button, which content is compelling them, why they abandon the shopping transaction," she says. "User behavior is a lot more critical and difficult to track. So coming up with metrics is an evolving science."

The Martha Stewart site includes information on how to make decorative projects, and the content for each project is directly linked to a shopping area where users can buy the specific materials they need. Every link, from content to an e-commerce opportunity, is a unique, trackable item, Beauchesne explains.

Among the metrics the company is attempting to track are what drives traffic and sales, what converts users to buyers and what affects dollars per order. Meanwhile, on the cost end, Martha Stewart tracks Web production, imaging and operations expenses with a view toward developing efficient, repeatable processes at the lowest possible cost. "We're not perfect yet, but we're getting better at it," Beauchesne says.

She says these metrics are helping to hone the profitability and operational excellence of the site. "We've learned that you have to provide an individual experience," tailoring the site for both the novice and the Web-savvy shopper, she says. "We've also learned that you've got to have a really clean shopping experience. If anything confuses the user and causes him to not finish, you've lost that customer."

At General Electric Co., Camille Farhat makes a distinction between measures and indicators and says each is essential to success. "Measures are the consequences of things you do; you look at them after the fact," says Farhat, corporate e-business leader at the company's Fairfield, Conn., headquarters.

For example, online sales is a measure of what you've been doing. "Indicators are things along the way that point toward the outcome," Farhat says. Are you attracting users, interacting with users, transacting with users, retaining users, growing with users? Those answers indicate how you're doing.

The key to a good outcome is to continually keep your eye on the indicators and intervene when they don't look favorable, he says. For example, when customers log on but don't buy, follow up and find out why. "Then you can fix whatever is wrong with the experience," he says.

Farhat says measures must be simple, meaningful, quantifiable and auditable. For example, key measures for business-to-business projects in which GE is the buyer include the effort it takes to consummate a purchase and the number of suppliers that qualify to bid for the business, assuming that more suppliers bidding means lower costs for GE as a buyer.

When GE is the seller, it measures customer satisfaction by looking at whether customers are returning, designing their own Web pages to interact better with GE, asking for more applications and buying more from GE as they grow.

These basic metrics are essentially the same for any GE business, Farhat says, and e-business projects have to prove their value like all the rest. "They just compete for resources like any other project," he explains, "because if it's not going to empower the business strategically and tactically, they shouldn't be doing it."

The Balanced e-Scorecard

Eric Singleton learned the metrics mantra while steeped in the metrics-centric Six Sigma quality program at AlliedSignal Inc. Now, as director of global e-business at Raytheon Co., he's managing the performance of all the company's e-businesses using a balanced-scorecard approach. Here's what it measures:

-- Innovation and flexibility: Average time from concept to start; speed to match a rival's site; speed at which the competition will match your site; time between relaunches.

-- Customer loyalty: Percentage who return within a year; time between visits; duration of visit; conversion rate; percentage who give personal information.

-- Transactional excellence: Unique visitors each month; online sales abandoned; percentage of orders correct; time to respond to a customer; percentage of orders filled on time.

-- Customer information: Percentage of e-mail addresses collected out of all traffic.

-- Infrastructure reliability: Time to load a page; network uptime and scalability.

-- Supply-chain excellence: Inventory levels; inventory turns; order confirmation time; percentage of products built to order.

-- Valuation and financial performance: Return on invested capital; market capitalization migration (the changing value of the overall business).

-- Digital quotient: For complementary e-business channels, percentage of total revenue generated online.

At Raytheon, these metrics are reported up the line regularly to Singleton, who reports monthly to the chairman on the state of every e-business. "The purpose is to manage the business, drive decisions on whether to keep the business, add resources in areas where there's a gap and figure out how to capture successes and apply them to other e-businesses," he says.

"It works for Raytheon; I don't see why it can't work for everyone."

- Kathleen Melymuka

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