E-Biz: Down but Hardly Out

Downturn be damned. Companies are still anxious to expand online because the Net is a way to boost sales and shrink costs

It's hard to ignore the economy when it comes up and slaps you hard across the face. Take General Motors Corp. (GM ) Its sales of cars and trucks slipped 9% last month on top of a 5% drop in January and a rough fourth quarter last year. Now the company is cutting costs across the board--even shaving 10% off the budget at e-GM, its e-commerce unit that generates 1,000 sales leads per week for its dealers and incorporates Web technology in its cars. Its president, Mark T. Hogan, says the corporate parent remains a big believer in how the Internet will reshape the way it will do business, but those changes will happen more slowly. "We're pushing out some future stuff that we would have liked to have done quicker," says Hogan.

With the economy stalling, expect GM's brand of reluctant pragmatism to rule the day. The companies that have begun remaking their businesses by shifting operations onto the Internet still see the financial benefits in doing so. But the economic malaise is delaying their efforts. New tech orders slipped to $33.1 billion in January, down from $34 billion in November, according to the Commerce Dept. And in a February survey of 150 corporate chief information officers by Morgan Stanley & Co., 11% said they plan on spending less on technology because of the slowing economy. Another 27% said they're evaluating whether to cut back or delay purchases. "If you're scared, you wait, and a lot of people are scared," says analyst Charles E. Phillips of Morgan Stanley.

Not everyone, however. For companies that have tasted the early results of the Internet, there's a strong will to stay the course. According to interviews with dozens of corporations and surveys of hundreds more, many of the e-business pioneers are forging ahead even as the economy falters and dot-coms implode. From conglomerate General Electric Co. (GE ) to office-products retailer Staples Inc. (SPLS ), they're determined to get the most they can out of the Internet. And they warn others to back off at their own peril. When the stock-market bubble burst for Net companies, "it was like the pressure was off. I think that's going to lead to a significant reduction in efforts," says Jeffrey K. Skilling, chief executive of energy supplier Enron Corp. (ENE ) "We think that's a huge mistake. Incumbent companies have got to come to grips with this new technology because it is very, very powerful."

Selling stuff online is the least of it. What Skilling and others are doing is integrating the Internet into every nook and cranny of their businesses. Call it managing by Web. They're using the Net for everything from filing expense reports and calculating daily sales tallies to sharing employees' intellectual capital and communicating instantaneously with suppliers. The Web, for example, lets Cisco Systems Inc. (CSCO ) connect directly with its suppliers so that when the maker of networking equipment gets an order, suppliers can start making parts right away. That puts inventories on a bread-and-water diet. The Net also can automate interactions with customers: About 40 of Dow Chemical Co.'s (DOW ) customers reorder chemicals without human intervention when sensors in their storage tanks signal they're running dry.

Corporate transformations like those being undertaken at Cisco and Dow Chemical represent the real potential of the Internet. Even considering the slowdown, market researcher Gartner Group expects business-to-business e-commerce to reach $3.6 trillion in 2003, compared with just $107 billion in consumer transactions. With a lure like that, companies that are holding off buying traditional computing gear are focusing their tech dollars on e-business. But not all e-business. Companies are focusing on areas that give the quickest results. According to a January survey of corporate execs by AMR Research, 87% will either sustain or increase their spending on Internet initiatives for sales growth and customer management, and 84% will hold firm or increase their budgets for taking purchasing online. Health maintenance organization Kaiser Permanente, for example, is investing heavily in moving its purchasing to the Net, and that will contribute to a 10% increase in its overall spending on e-commerce this year. "We're not abandoning our commitment to these investments because we think they're going to yield long-term benefits for us," says Richard Pettingill, president of Kaiser's California division.

"WHOLE HOG." The pull of e-biz is obvious. Companies find that moving their operations to the Net means money in their pockets. After just over two years, Staples, the $10.7 billion office-supply retailer, boosted annual online sales to $512 million last year. And that's not robbing from store sales. The average yearly spending of small-business customers leaps from $600 to $2,800 when they shop online. Staples is slowing store openings to a trickle, but plans to spend $50 million on technology this year--the same as last. "We're still going whole hog," says CEO Thomas G. Stemberg. "The payoffs are just very high."

Still, many companies are more cautious about shifting their businesses to the Net these days. Dazzling promise has given way to more realistic expectations. For starters, the technology is expensive and complicated. At a large corporation, a big e-biz project can cost tens of millions of dollars and take a year or more to install properly. And, when things go wrong, it gets even pricier. On Feb. 26, Nike blamed its software suppliers when problems with a new supply-chain management system contributed to the loss of up to $100 million in sales and a profit shortfall. "So this is what we get for our $400 million!" thundered CEO Philip H. Knight in an earnings conference call. While analysts say it's unclear who deserves the blame, disasters like this are a black eye for e-business.

There are cultural hurdles to overcome, too. Just because technology is available to turn a company's business processes upside down doesn't mean the folk who work there welcome the shake-up. When chemical maker Buckman Laboratories International Inc. launched its company-wide information sharing system, managers at first declined to participate. They figured knowledge is power and were reluctant to give it up. So the company had to come up with ways of rewarding participation and punishing those who held back. According to Gartner Group, a full 50% to 70% of the work it takes to make a knowledge-management initiative a success revolves around coaxing cultural changes.

Another hang-up: Suppliers and customers might not be ready to play along. A Mar. 4 report issued by Jupiter Research showed that 50% of the procurement agents surveyed see so little advantage in going online that they expect to do less than 20% of their purchasing over the Net for at least the next two years. The primary reason? Their existing suppliers aren't online yet, and they want to keep buying from suppliers they know.

Things get even dicier when it comes to public e-marketplaces where buyers and sellers gather to haggle. More than 1,500 e-marketplaces were launched in the past five years, and already 125 of them are either out of business or have been acquired. Corporations are nervous about handing over their purchasing processes to dinky outfits that might go dark next month. Then there's the trust issue. "Everybody believes their supply chain is a competitive advantage," says Douglas J. Grimm, senior vice-president for global strategic sourcing at auto parts maker Dana Corp. "Why would I want to share that with a competitor?"

All this means that the e-business revolution now looks like it will advance at an evolutionary pace rather than a gallop. Citing the economic slowdown and disarray among the e-marketplaces, Gartner Group on Mar. 13 issued a less aggressive forecast for the future of worldwide business-to-business e-commerce. Instead of hitting $7.3 trillion in 2004, Gartner now predicts a total of $6 trillion--less than 10% of all B2B transactions.

WINDOW OF OPPORTUNITY. For e-business believers, the key to getting started is leadership. Is the boss behind the Net? John F. Welch, CEO of GE, left no doubt in the minds of his 340,000 employees when he said during a Jan. 17 TV interview that GE wouldn't let up on its tech projects. In fact, tech spending is growing by 12%. "This is the moment to widen the gap as far as we're concerned," he said. On Mar. 13, GE said that it expects to save $1.6 billion from its tech projects in the next year and that Web sales will hit $15 billion. "GE won't slow down," says Adrian J. Slywotzky, a vice-president at Mercer Management Consulting Inc. and co-author of the book How Digital Is Your Business? "It depends on how many people think and behave like Jack Welch that will determine how long this slowdown lasts and how much productivity improvement happens in the next 12 months."

There seems to be a Welch-like impulse among some corporate leaders these days. In Forrester's survey, 35% of 1,000 large North American companies said they already are selling products online, either to consumers or businesses. An additional 30% said they're now rolling out such systems, and 16% said they're considering it.

E-business pioneers light the way. Tech companies such as Cisco have moved more than 80% of their sales online--and much of their purchasing, too. Cisco's Net systems haven't inoculated it from the sick economy, but when the company got hit with a sudden drop-off in orders in mid-December, just-in-time information let it immediately cut back on its parts ordering and set in motion a cost-cutting strategy that includes 8,000 job losses.

While tech companies have been e-business leaders, others are experimenting, too. In just two years, Eastman Chemical Co. (EMN ), a $5.1 billion chemical manufacturer in Kingsport, Tenn., has moved 15% of its sales and 19% of its purchasing online. To help transform the way the chemical industry operates, Eastman is entering joint ventures with other industry players--including a logistics Web site to coordinate shipping and storage. Next, it will be piloting a collaborative planning, forecasting, and replenishing system that links Eastman with its customers and suppliers. Thanks to the Net, Eastman has improved its revenues per employee--now at $340,000--by an average of 9% each year for the past five years.

FORD'S PROMISE. Hard numbers are difficult to nail down, but it seems e-business is having a considerable impact on companies latching onto the Net. In a quarterly survey released on Mar. 8 of nearly 500 top executives, Pricewaterhouse-Coopers reported that those that used the Net aggressively last year scored productivity gains--measured by increases in revenues per employee--2.7 times greater than those of businesses who had not yet embraced the Net.

Consider Ford Motor Co. (F ) Engineers searching for ways to improve the fuel efficiency of its vehicles are using Web collaboration technology to share design changes and other information with engineers and suppliers scattered around several locations. That way, they can instantly analyze how a proposed design change would affect a vehicle's fuel economy. Analysis that might have taken three days can now be completed in less than a minute. That's important as Ford races to make good on a promise to boost the fuel economy of its sport-utility vehicles 25% by 2005. Just as significantly, the technology will shave $5 million to $15 million off a vehicle's development costs. While that's small change on a car that costs $2 billion to develop, the savings would be sizable if it were applied companywide, Ford says.

General Mills Inc. (GIS ) harnesses the Net to cut down on shipping expenses. Rather than do things the old-fashioned way and ship its products on scores of half-empty trucks, it now uses the Web to collaborate with 20 other companies from other industries that are shipping products on the same routes. General Mills, its partners, and their trucking companies can tap into the system from any Web browser and find somebody to help them fill up trucks on outbound trips and load empty trucks with goods on return journeys. On test routes, General Mills has saved 7% on shipping costs--or about $2 million in the first year.

FRESH PARANOIA. For such old-line companies as General Mills, braving the new world of e-business involves tearing up and replacing old systems. Young companies have the distinct advantage that they can get wired from the ground up. Look at Juniper Networks Inc. (JNPR ) In just three years, it came out of nowhere to capture 35% of the market for high-end Internet routers. Juniper outsources 100% of its production to contract manufacturers. Juniper's customers, mainly big telecom service providers, order their equipment on Juniper's Web portal--but the orders go straight to the contract manufacturers. Sales have exploded from just $3.8 million in 1998 to $673 million in 2000. And, thanks to the Net, Juniper has $726,000 in annual revenues per employees, vs. $320,600 for older rival Nortel Networks, which handles considerably less of its sales online.

The first phase of the Net--when retailers worried about being Amazoned--may be over. But in the dawning e-business era, a new rallying cry will be heard: Don't get Junipered. This threat could turn out to be much more potent than the last.

By Steve Hamm in New York with David Welch in Detroit, Wendy Zellner in Dallas, and Faith Keenan and Peter Engardio in New York

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