E-Business on a Budget
The expectations surrounding e-business have grown more realistic during the past year, but an important legacy of their return to earth can be expected to remain in place for some time: enterprise e-business advocates must content with shrinking budgets, downgraded ambitions, and the skepticism of the corporate cfo. Initiatives that would have gained instant approval from top management in 2000 have been slashed left and right this year, and the same is likely to be true in 2002. There is no escaping the fact that tight budgets and unyielding financial controls have become critical tools for delivering on quarterly earnings expectations, leaving a long list of delayed software purchases and stalled technology projects in their wake.
Despite their price tag, e-business implementations can yield increased sales and cost savings. So it comes as no surprise that executives are addressing e-business just as they are most other segments of the enterprise: The idea is to get the job done, but to spend wisely and, first and foremost, to spend less. If a project can shave costs or preserve sales, executives often will give it the nod, but generally speaking, the case must be proven and reproven before the first dime is spent. And of course, given that it is a buyer's market, companies are negotiating with vendors from a position of strength and evaluating multiple alternatives.
Once a project begins to move forward, pilots and incremental implementations are the norm. Performance metrics are absolute musts and typically are scrutinized every step of the way, with no additional funds or project expansions forthcoming unless concrete goals are met.
For Kottayam V. Natarajan, Jr., director of e-business development at the Port of Seattle, the task of implementing e-business on a budget perhaps has been more challenging than for most executives. Not only must he face his bosses within the port commission, but, as a public administrator, he must ultimately answer to political leaders and, by extension, to the body politic at large.
The Port of Seattle manages the activities of the Seattle seaport as well as Seattle-Tacoma International Airport. The mission of the port authority, when it comes to e-business, is to be at the digital forefront of U.S. trade and travel. It is a matter of concern not only to regional business but also to the public as a whole. "Seattle is a major gateway to Asia," explains Natarajan. "Our region derives more per capita in trade with Asia than any other in the country."
But Seattle has some formidable competitors, cities with names like Los Angeles, San Francisco, Oakland, and Portland. "If it is cheaper and easier to go through those other ports, they will get the business," says Natarajan. "We are aware that people have the option of shipping goods and traveling through other ports and cities."
The Port of Seattle does not have an unlimited budget with which to pursue its e-business goals, including developing cost-cutting initiatives and creating competitive advantages. But that does not equate with lying down and quitting. It does mean working smarter, in this case by deploying projects on a pilot basis before extending e-business initiatives more broadly.
The context for the Port of Seattle is similar in many ways to situations facing other major enterprises and includes a sharp awareness of the gyrations of the recent past. During the boom period, for example, companies sometimes threw money at e-business without even knowing how the money was going to be spent. "I would often get calls from clients asking for advice on what e-business projects to undertake," says George Reilly, a Gartner Group analyst. "They already had the funding," and it then became a matter simply of deciding how to spend the available dollars.
In the current environment, it is far more difficult for e-business proponents to get to yes. "Enterprises are conducting e-business with greater pragmatism and tighter budgets," says Antonio Benecchia, a Detroit-based partner with Roland Berger strategy Consultants. "No one is signing off on an e-business project unless there is a return that is proved or expected with a very high level of confidence, and by return, I mean a short-term return with hard dollars attached to it." This year, and surely next, companies are seeking to maximize the efficacy of their e-business investments and to make it easier to get funding next time.
One of the most widespread strategies for addressing the inevitable scrutiny facing proposals for funding is to introduce a new project as a pilot: a project of limited duration and modest investment that is designed to prove its concept. The Port of Seattle has deployed several of these as part of its e-business buildup.
"People start with pilots to create success stories and to limit damage," says Benecchia. "If it doesn't work, there is less impact on capital investments and on operating budgets."
Following last year's implementation of a new, Web-based infrastructure provided by IBM Global Services, this year the port has embarked on pilot programs addressing e-procurement and document management. Their success has spawned several more pilot programs. "In the e-procurement pilot, we ended up saving 3,500 hours in staff time and $400,000 in costs," says Natarajan, "and we also revamped the work process." Five vendors, in addition to the original two, are being added to the procurement system this year.
The port's e-procurement portal was developed by the authority's in-house IT department in close cooperation with its accounting and procurement functions. The core of the program is the American Express procurement card system, which allows accounting and procurement staff to capture orders and general ledger information directly into the port's PeopleSoft Financials system. The portal links directly to vendors from which the port orders most frequently.
The document management pilot, headed by KJM, a program and construction-management services firm, came in connection with massive construction projects at Seattle's airport. "This system will manage the plans and documents that are coming out of the woodwork," says Natarajan. "We anticipate that it will cut administrative expenses in half and that 50,000 documents [a year] will be managed through the system."
Several pilots now in the planning stages at the port similarly address specific business needs, from expediting employee parking permits and ID badges to allowing boaters to make marina reservations and teachers to make field trip reservations online. "We're not looking only at the strict financial ROI but also at the impact on regional economic development, community support, and customer service," explains Natarajan.
Pilot projects allow companies to pick off simple projects that can provide value one at a time, according to John Bermudez, an analyst at AMR Research. "One way to tackle the supply chain is to provide better visibility to suppliers and customers," he says. "Some procurement projects don't amount to much more than putting information on a Web site," and thus are well-suited to pilots. "Suppliers can access this easily, and companies can reduce inventory and lead times without that much effort. Customers and suppliers can absorb only so much information anyway."
But Gartner's Reilly warns companies not to let pilot projects languish. "We often see pilot projects hanging in there, especially if they have some level of success," he explains. "If the pilot has substantiated what was hoped for, end the pilot and turn it into a true e-business initiative. Put it through project evaluation and see where it fits into the overall e-business portfolio. Keeping it on as a pilot defers the full value you can get out of an industrial-strength solution and bleeds resources that could be applied elsewhere."
Pilots are by no means the only way to squeeze the most out of constrained e-spend budgets. Not surprisingly, cost concerns have created a favorable environment for ASP solutions and the price advantages that typically accompany them. Such was the case for The Frank Russell Company when it came to acquiring and deploying new human resources software. The economic downturn has had its impact at Frank Russell, as the Tacoma, Washington-based funds manager experienced a dip in the level of capital under its management. With that came a more circumspect attitude toward e-business investments.
still, something had to be done about its human resources package. Its 12-year-old DOS-based system was accessible only at headquarters and was not serving the needs of a company that had since expanded globally. At a pay-for-performance company like Frank Russell, human resources is not a tangential administrative task: Bonuses and equity participation are important parts of employee compensation, and the fair management of those elements is critical.
Those considerations led to the acquisition of a PeopleSoft human resources module. Logistics and costs dictated the choice of implementing the software at PeopleSoft's eCenter, the ASP division of the software company. "Having the site located somewhere else and being able to access it from multiple places made it possible to move through the project quickly," says Gene Johanson, Frank Russell's director of information technology. "It also reduces costs because you don't have to create work space for the implementation people or incur travel and hotel expenses. PeopleSoft's consulting group in Chicago worked with its eCenter group in Pleasanton, California, in a way which was transparent to us. We could concentrate on conversion issues and not on infrastructure."
These benefits are typical of companies going the hosted route, according to ASP aficionados. "You get quicker access to world-class technology," says David Boulanger, an analyst at AMR Research. "If PeopleSoft does this hundreds of times a year, why does Frank Russell need to be in the business of implementing a back-end system? Hosting allows companies with significant IT departments to focus on more strategic processes, and it transfers the risk of a successful implementation to the vendor."
Going the hosted application route can provide cost advantages both immediately and over time. "Our research indicates that firms save anywhere from 20 to 30 percent when using outside help to manage applications over a three-year contract cycle," says Forrester Research analyst Jennifer Chew. Entering a multiyear contract also spreads the costs over the contract period and eliminates the typical first-year spike. Frank Russell's deal with eCenter extends for three years with an additional 18-month option. Johanson says that Frank Russell achieved a 200 percent return on its investment in less than one year.
Johanson believes that acquiring a conventional license-as opposed to renting software by the month-and implementing it remotely will pay dividends down the road in more ways than one. "It gives us leverage when we renegotiate the deal, because we can take our business elsewhere," he says. "And in the crazy ASP business, our CFO would be extremely unhappy if an outsourcing contract went down the toilet and we needed an additional capital outlay for software."
Minimizing the use of precious capital often involves selecting achievable goals that will enhance the odds of the project's eventual success. Narrowly focusing a project on specific pain points-be they processes or even commodity purchases-is one way to do that.
Ford Motor Company spends $80 billion annually on direct and indirect materials, but the auto maker's private hub initiative with e-steel specifically attempts to reduce the $1 billion that Ford spends with its North American steel suppliers and stampers. The e-steel hub automates Ford's existing offline volume leverage program that seeks to pass savings on to its parts suppliers.
"If I'm working with Mill A and get a better deal from Mill B, I can switch and achieve savings for myself and others in the supply chain," explains Bob Adams, director of global raw materials at Ford's world headquarters in Dearborn, Michigan. The e-steel hub allows Adams to perform this magic automatically and seamlessly, so that he can exert Ford's muscle deeper into the supply system for everyone's benefit.
this case because the technology was available for this particular commodity," says Adams. "We first looked at e-steel's public exchange and told them that we'd love to use their technology but that we wanted to use it for our own purposes and not as part of a public entity."
e-steel has since de-emphasized the public e-marketplace aspect of its business model in favor of sales of direct-materials procurement software, such as that being used by Ford. Adams plans on developing similar systems for the procurement of other commodities, and e-steel has the inside track to win that business. Launched in early March, the Ford/e-steel hub had attracted all of the company's North American stampers and steel suppliers at over 175 locations with 1,200 users by July.
Although Adams declines to put a number on the savings, "We consider the project a success this far, as measured by the favorable feedback from users. Full participation in the program represents huge transactional savings. It provides visibility as well as the ability to make quick sourcing decisions throughout the supply base."
Many companies are developing private hubs in an attempt to gather key suppliers and customers in online venues. But, "What is instructive in the case of Ford is that it has developed a private hub specific to a pain point," notes Matthew Sanders, an analyst at Forrester Research.
Private exchanges make sense, according to Sanders, when they attack unique business processes or target specialized supplier markets. "Highly tailored activities like sharing product design specifications or complex requests for quotes require flexible communication with key suppliers," he says. "Private hubs enable buyers to quickly scale these interactions beyond single-point connections. They also enable better interactions with long-standing suppliers by providing dedicated infrastructure and deep integration that streamline information sharing within a limited network."
Sanders admonishes, however, that private hub investments must fit within today's constrained budgets and must offer a demonstrable return on investment to corporate executives. He holds up the Ford/e-steel initiative-and particularly its rapid deployment-as an example. "This quick demonstration of benefits," he says, "makes approval of the next project much more likely."
In other words, the current economic downturn has led to what one strategy consultant calls a new "show-me phase" of e-business. "A year or two ago, C-level executives were driven by the e-business buzz to say yes," says David Rich, global managing partner for electronics and high tech at Accenture. "They weren't always sure what they were signing off on, and they didn't give much time to thoughtful deliberation of the business case. Effectiveness won out over efficiency."
By choosing pilot programs or limiting the scope of e-business projects into digestible and easily assessable components, executives can obtain a proof of concept before going on to fund broader and more costly initiatives. For example, says Rich, a strategy like the use of hosted applications "avoids a big spike of development activity before everyone gets used to the system and the company sees a benefit stream. All of these techniques are ways in which enterprises can line up the costs with the benefits of an e-business project." And in so doing, enterprises can reap the savings and sales benefits offered by e-business without breaking the bank. --56