Re-Engineering Redux

FRAMINGHAM (04/24/2000) - Capital markets have spoken. The promise of profits in business-to-consumer e-commerce is hollow - at least for now. Money to build the Inc.s of the future will be harder to come by. Peapod, the nation's first online grocery-shopping service, needed a cash infusion from a supermarket chain. The market caps of most consumer e-commerce companies have dropped dramatically.

The problem was quite predictable. The Internet is the great commoditizer.

Prices went down as e-commerce companies tried to buy consumer loyalty. But, as the old joke goes, if you're losing money on every transaction, you can't make it up on volume.

What e-commerce companies have missed is that you can only buy customer loyalty by dramatically improving your value proposition - beyond price.

When Michael Hammer and I introduced the idea of re-engineering in 1992, we were principally focused on dramatically improving internal processes, like new product development, order fulfillment and service. For e-commerce to work, companies must look outside themselves and understand their customers' processes, like purchasing, bill payment and manufacturing, and offer ways to improve them in combination with their own. Why didn't "e-tailers" look at consumer processes and try to integrate them with their own? Real re-engineering is hard to do, and many New Economy venturers lived with the hope and promise that just having a slick Web site would do.

Now the question is whether business-to-business e-commerce will be any more successful. Capital markets have shifted their interests to business markets, but somewhat nervously. Investors should be concerned because so-called business-to-business digital marketplaces will succeed only if they offer re-engineered processes to sellers and buyers. Otherwise, these marketplaces will just drive down sellers' prices and offer no other value.

But that need not be the case. A General Motors executive recently told me that the digital marketplace the company is building to acquire automotive components is expected to improve many of GM's processes. GM estimates that production and inventory costs could both drop by as much as 15 percent, and the cost of a vehicle could be reduced by as much as 14 percent. Transaction costs on the $87 billion GM spends annually on purchasing components could also drop as much as 20 percent.

So how should companies that want to launch or join digital marketplaces think?

Here's some advice for making the next round of re-engineering work better than the last one.

-- Start thinking about standardizing processes in your industry - especially those that touch the customer. Processes like bill payment and presentment are good examples. Both sellers' and buyers' costs could be dramatically reduced if these processes were simplified and standardized. Business-to-business digital marketplaces finally provide this opportunity.

-- Be prepared to operate with more standardized processes that may be offered by a third party. For example, there's a company operating today - Inc. - that will instantaneously evaluate and rate customer credit risks.

Standardized processes done in-house will increasingly be outsourced to third parties. The Internet is the great enabler here.

-- Consider offering your customers computing services through your digital marketplace. Small to medium-size companies that may buy your products don't manage computing well. Most would be very receptive to what I have described as a version of "ERP lite."

-- Don't create a digital marketplace alone. No matter how big your company may be, you won't have all the products and services customers need. You can improve your customers' efficiency by giving them the place to shop. Offering variety is one of the great value propositions. That means that you and other sellers in your marketplace will have to align your processes to make it easy for your customers to shop.

It all adds up to one argument that I've been waiting 10 years to make: The New Economy won't work without re-engineering.

Champy is chairman of consulting at Perot Systems Corp. in Cambridge, Massachusetts. He can be reached at His newspaper columns are syndicated by Tribune Media Services.

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