The Net As a Lifeline

A tough economic environment makes the Web even more important for companies attempting to cut costs, generate new revenues, and better serve customers

As America stood still in the wake of the September 11 attacks, casino and hotel operator Harrah's Entertainment Inc. (HET ) faced a sharp downturn in business. The country was in no mood for a party, and few people were willing to hop a flight to Las Vegas. Occupancy rates at Harrah's flagship hotel soon dropped by more than 25%. So on Sept. 14, Harrah's launched a small counteroffensive: The company sent out targeted e-mails to thousands of customers it thought might want to take a trip to the tables and slots. The gambit worked, helping to fill nearly 4,000 rooms that otherwise would have gone empty. By Sept. 30, the hotel was back near 100% occupancy. "We were able to get our message out immediately over the Internet," says Harrah's Chairman Philip G. Satre.

The key to Harrah's success: This summer, the company linked its database of 24 million gamblers to its Web site and e-mail marketing system. A year ago, Harrah's wouldn't have been able to seize the day. It has long known who the highest rollers are, based on its records of customer habits: Many avid gamblers participate in a rewards program that allows the company to track their playing, using cards that can be plugged into slot machines or presented to pit bosses. Until this summer, though, reaching those players with targeted pitches required bulk mailings via snail mail. Now, when a customer clicks to Harrah's Web site from an e-mailed pitch, the company knows how much the player spends and can offer a tailored deal. The customer can then immediately book the room and a flight to get there, and reserve a seat for a show.

Harrah's beat the house odds. The September 11 attacks instantly made the toughest economic environment in a decade even worse. But for companies such as Harrah's that have spent the time and the money to beef up their Internet capabilities, the sting may not be as bad. With its innovative marketing, Harrah's rebounded more quickly after September 11 than other big casinos in Vegas, says Bear Stearns & Co. analyst Jason N. Ader.

Suddenly, the Internet has become a lifeline. Companies in a sales squeeze are looking to the Net as a tool for cutting costs, generating new revenue streams, trimming inventories, and serving customers and employees more efficiently. Sure, this was happening before the attacks. Today, though, those efforts are no longer just an advantage--they're urgent.

Still, jittery executives only want to fund projects that promise to pay off fast. With the military on the move in Afghanistan, consumer confidence flagging, and further terrorist attacks an ever-present threat, corporations fear the economy may be heading into a recession. So they are carefully choosing the Net projects they go ahead with based on hard-nosed calculations of return on investment. Vague Web initiatives that cost millions to simply build the brand are out, the residue of giddier dot-com days. "There's going to be a search for more short-term payback," says Hal Sirkin, e-commerce practice leader at Boston Consulting Group. "People are still thinking how to reinvent the company, but they may not take the big leaps that they would have a few months ago."

The projects getting the green light are those with proven track records for delivering results. Companies are putting human resources and customer service online so they can reduce the number of call-center employees. They're pressing ahead with supply-chain management initiatives--although often in smaller pieces than two years ago. And they're moving all aspects of purchasing to the Web, allowing them to slash internal costs or wring deeper discounts from suppliers. DuPont (DD ) expects to save $400 million a year buying supplies online. The initiative's total cost: just $15 million over three years. And the British arm of laboratory-equipment distributor Fisher Scientific International Inc. (FSH ) is investing less than $50,000 in an online network that zaps invoices directly into the accounting systems of customers and suppliers. The project should pay for itself in six months, and within two years should cut 80% of the $370,000 Fisher spends annually to process bills from suppliers.

The key is putting the money in the right place. While spending on Net initiatives isn't climbing as fast as it did a year ago, it's still going to rise by 9% over the next 12 months, according to AMR Research Inc. Granted, that's down from a predicted 11% increase before September 11, but better than the 3.7% increase in overall spending on technology Deutsche Banc Alex. Brown is expecting. The areas being funded? Supply-chain projects are now expected to grow by 9%, AMR says. Customer-focused initiatives, such as projects that let clients help themselves to info online, are going to see 6% growth. Product-development programs will grow by 5%. Indeed, most managers are keeping the Internet faith: An Accenture Ltd. study this summer found 57% of 840 execs worldwide say e-commerce initiatives are fundamental to their company's survival.

What might endanger that survival is too much emphasis on short-term results. With the economy slipping into a recession, key longer-range projects could be put on hold. Most at risk: Squishier initiatives that don't show an immediate ROI, says Erik Brynjolfsson, co-director of the Center for e-Business at Massachusetts Institute of Technology. One example: knowledge management projects, which help companies better tap into and share the information their employees possess. "Firms that focus too much on cost savings may miss out on the productivity gains down the road," says Brynjolfsson.

Getting those gains requires more than just a technology fix. Simply grafting computers and software onto existing business processes will do little to give a company the productivity boost the Web-savviest companies are seeing. The real payoff comes when companies change the way they interact with customers and suppliers, organize their factories, and move products around the world. PC giant Dell Computer Corp. (DELL ) has been honing its Web operations for years, so today it knows what parts it has and what it's going to need as orders stream in. Dell can do this because it requires key suppliers to be linked over the Web. The Net makes all of this work faster, but long ago Dell built its entire business around super-tight integration with both customers and suppliers. "The Web expanded Dell's capabilities, but much of the architecture of its success was in place before the Net," says David C. Mowery, a professor at the Haas School of Business at the University of California at Berkeley.

Dell's Web smarts allowed it to react quickly after September 11. While its efficiency put Dell at risk as borders were closed and air travel was shut down, it also helped the company make it through the disaster without a hitch. When the attacks began, Dell instantly sized up its operations and figured out where supplies might be disrupted. It quickly ramped up production in factories in Europe and Asia and filled orders from there. And with the Web giving it a real-time view into orders pending, it prioritized orders and filled the most important first. At the same time, Dell salespeople were able to look online to see the configurations that could be assembled and shipped quickly despite the disruption--and then steer customers accordingly. "The company with the most efficient supply chain was able to weather this the best," says Dell Chairman Michael S. Dell.

Indeed, companies that lost computers in the attacks were asking for thousands of replacements. The upshot: Dell expects a profit of $410 million for its third quarter ending Nov. 2, while competitors Compaq Computer Corp. (CPQ ) and Gateway Inc. (GTW ) have told Wall Street to expect losses. Compaq was unable to ship $300 million worth of computers due to supply-chain disruptions after the attack.

Other companies are more fully embracing the Web. Copier maker Ricoh Co., for example, had long planned a gala sales meeting for more than 3,000 customers on Sept. 12 at the Jacob K. Javits Convention Center in New York City. The event, headlined by former Vice-Presidents Al Gore and Bob Dole, was designed to show off Ricoh gear and unveil a new online service for storing and sharing documents via the Web. As the terrorist attacks unfolded less than 24 hours before the gathering was scheduled to start, Ricoh quickly cancelled the meeting. The event is now likely to be rescheduled for next year, but Ricoh didn't want to wait that long to introduce the new service, called Document Mall.

Instead, Ricoh turned to the Web. The company plans to go ahead with the launch using a collaboration service called WebEx, which lets people see and talk to each other while sharing files online. This fall, 6,000 Ricoh salespeople and customers will be invited to Web seminars on Document Mall. Ricoh estimates it will save at least $60,000 in travel expenses, as well as countless employee-hours of flying and trundling through airports--while keeping skittish workers closer to home in these troubled times. "It's much more productive for us to do the rollout this way," says Isabel Kaplan, Ricoh's head of e-business marketing.

These days there's a lot less experimentation in Web projects. For example, two years ago Otis Elevator Co. thought it could goose its revenues by placing screens linked to the Web in elevator cars. These would present a constant feed of news--liberally salted with ads. Problem was, during the Internet boom years Otis faced upstarts with oodles of venture-capital funding that were giving away similar screen systems for free, making up the difference in ad sales. "The business model doesn't work with free screens," says Ron Beaver, Otis' vice-president for information systems. A year ago, Otis jettisoned the initiative.

You might think that was the end of Otis spending another penny on Internet projects. Wrong. This year, it more than doubled its Internet budget and expects a 50% increase in 2002. The bulk of the new money will go to an effort linking Otis with its suppliers and customers via the Web to streamline the way parts move in and out of its factories. Beaver estimates that half the elevator parts Otis sends out to construction sites arrive before they're needed, and end up sitting around for weeks or months, meaning the company carries them as inventory much longer than necessary. The new Web system should help the company better monitor whether a cable, a cab, or a carton of call buttons is ready to ship, because it will be in constant contact with its suppliers. And with progress reports available online, Otis will know what stage the builder has reached and when it's ready for each part.

Otis also is tapping the Net to slash repair bills. The company has a system that allows technicians at 10 centers around the globe to monitor elevators via a Net link. When a door sticks or the car doesn't stop at floor level, the elevator zips off a signal alerting Otis to send someone to fix it. Today, some 20% of elevators Otis maintains worldwide use the system--a number it hopes to nearly double by the end of next year. The payoff is huge: Since Otis no longer has to dispatch repair staff as often to check for problems, elevators with remote monitoring require only one-third the number of visits as those without the system. That has helped Otis keep its North American repair staff steady while increasing the number of elevators it services by 10%, to 120,000, over the last year.

These days, Web projects must be no-brainers. The payoff from some simple initiatives such as moving procurement online can be so huge you wonder why they didn't happen years ago. At DuPont, for example, purchasing on the Web has cut the cost of buying supplies by $200 million--a 5% reduction in the first year of the $15 million project. Better yet, the chemical giant expects another $200 million in annual savings by 2003--numbers that sound pretty good at DuPont, where analysts expect to see profits slide by half this year. Before the system was in place, employees ordered supplies, such as pipe fittings and lab chemicals, using phone calls, faxes, or by simply running out and picking stuff up. Now, employees log onto a Web site to buy virtually everything. DuPont can better control what gets bought--and can funnel orders to vendors who promise price breaks.

Corporate chieftains are figuring out that the Net can help them better weather tough times. No doubt, the terrorist attacks made a bad situation worse. But economic turmoil also creates opportunities for those who place their chips on the right numbers. The smart money is betting that getting Web smart is like having an ace in the hole.

By David Rocks

Contributing: Andrew Park, Aixa M. Pascual, Darnell Little, and Jeanette Brown

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