Online Extra: Where the Web Is Really Revolutionizing Business

Companies are just beginning to rack up huge savings by taking administrative process -- internal and external -- online

Retailer Brookstone (BKST ) has more than 200 U.S. stores, a profitable Web site, and annual sales of more than $300 million. Not bad for a company that started its mail-order business by running a small classified ad in 1965 selling "hard-to-find tools" in Popular Mechanics magazine. To keep prospering, however, Brookstone knows that it must become more efficient. And so in July, it rolled out an intranet that lets Brookstone communicate with some 75 contract vendors.

Suddenly, faxes and phone calls are a thing of the past. The status of each order is communicated electronically to Brookstone's fulfillment and accounts-payable systems -- and to customers. In October, Brookstone will launch an online order-tracking system for Web and catalog orders. "It's time and money, but it's also much better control," says Philip Roizen, Brookstone's executive vice-president for finance and administration. "The complexity of the business is such that you can't do it manually anymore. These systems allow us to expand the business in ways we wouldn't have been able to do without them."

Turns out that the dot-com implosion signals anything but the end of e-business. The tech revolution may not have succeeded in overturning the Establishment, but a major evolution is taking place within Corporate America. General Electric (GE ) expects to save $1.6 billion this year, before taxes, by digitizing old-fashioned workflows and conducting nearly $14 billion in online auctions. Cisco Systems' (CSCO ) much-vaunted electronic order-entry system has decreased the rate of errors for the company from 20% to 0.2%.

DEMOCRATIZATION. These industry leaders are setting an example for the rest of the business world. According to a July Merrill Lynch survey of 50 U.S. and 15 European chief information officers, 100% agreed that changing and "Webifying" their processes is as important as ever. "Business has become increasingly chaotic. What's so exciting about the Internet is that it puts a common infrastructure in place that allows the chaos to be brought under control," says Geoffrey Moore, a partner with Silicon Valley consulting firm the Chasm Group.

Why is the Internet so important? Put simply, it offers a well-defined, standard infrastructure that permits companies to increase the number and efficiency of interactions both inside and outside corporate walls. That was possible in the past, but it was also extremely expensive. Corporations had to create proprietary, value-added networks, called electronic data interchange, and provide special software to any employee or supplier who wanted access. Such systems were out of reach of most small- and medium-size companies. By contrast, the Internet's standard protocol makes investment in those technologies possible for just about every company.

Such democratization is essential, if changes in a company's business practices are to deliver their full potential. A large corporation that moves its supply chain management system online, for example, won't see results unless each client and supplier can use the system.

Take Blue Cross/Blue Shield's Federal Employee Program (FEP), which is moving onto the Web, enabling the health insurer to provide real-time claims processing and interactive customer service. FEP's existing systems, which process medical, dental, and pharmacy claims for one of every two government employees across the country, are more than 20 years old and run on mainframe computers. The new system, which uses software from Relativity Technologies, will give the plan's customers, health-care providers, and claims processors access to pertinent claims information over the Internet. The new system wouldn't work if everyone involved didn't have access.

Moreover, distributed access helps FEP reduce administrative costs. Frequent regulatory changes require that FEP be able to update health information quickly and efficiently. Putting information online means that anyone with a Web connection can get to it. The result: FEP expects to save tens of millions of dollars in administrative costs annually. "Health care is a high interaction business and encompasses a complex set of transactions. Increasing the quality and speed of the service is key," says Alan Kortesoja, a vice-president at CapGemini Ernst & Young and a consultant on the FEP project.

REDIRECTING RESOURCES. Web-enabled back-office systems are also helping corporations streamline internal business processes. Analysts call functions such as human-resource information, travel and expense reporting, and procurement "context" services. In other words, they don't specifically contribute to the creation of products, but they are necessary to run the company.

The goal now is to make them as cheap and efficient as possible, so that resources can be redirected to money-making endeavors. E-PeopleServe, a joint venture of British Telecom (BTY ) and consulting firm Accenture (ACN ), estimates that moving human-resources information to the Web can save companies up to 40%. Even something as simple as online travel and expense reporting can save a bundle: By eliminating paper, Accenture itself expects to save as much as 93% in administration and processing costs.

Moving back-office systems onto the Net also means rethinking how they work. And that's where the job gets tricky. Some analysts worry that companies are making the mistake of simply transferring their existing business processes online -- rather than rebuilding them at the same time. "If I have a bad process and I 'Webify' it, all I do is accelerate the poor process performance. I get more errors, more drops, more problems between departments. Companies need to look at how work is done and figure out how electronic systems can make [various tasks] more transparent and efficient," says Mark McDonald, a partner at Accenture.

"POUND FOOLISH"? Most companies are still in the process of figuring that out. Analysts estimate that U.S. corporations are about 10% of the way to Web-enabling their back-office processes. That doesn't mean, however, that companies will be making huge capital investments on new software. In the short term, businesses are focused on projects with a quick return on investment. Complex customer relationship management and supply chain management systems are strategic, but for the moment, those investments are being deferred in many cases. "It's pennywise and pound foolish, but this year it helps meet the bottom line," says John Roy, a technology strategist at Merrill Lynch.

Waiting too long, though, could be risky. "If companies don't do this soon, it will come back to haunt them," says Roy. "Those that invest more [in moving back-office work] online will have the edge." The threat that dot-coms posed to traditional companies may have disappeared for the time being. But now, many companies could face a bigger challenge: gaining a digital edge before their traditional competitors do.

By Jane Black in New York

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