Avoid The Pitfalls Of Going From Bricks To Clicks

The year may have changed, but the e-commerce song remains the same. A recent KPMG report says many attempts by traditional companies to integrate the Web into their core business suffer from a lack of strategic vision, planning, and the IT talent and infrastructure required to execute the effort. The survey states that companies must properly align IT with a business vision that defines how the Web sales channel will complement brick-and-mortar operations if it is to succeed.

The survey, commissioned by KPMG and conducted by Benchmarking Partners, interviewed 48 companies--all but two of which were traditional brick-and-mortar companies--spread across nine industry segments. The message from survey participants was loud and clear: They are acutely aware of the need to execute a Web strategy to complement existing business models. But numerous forces undermine the effectiveness of these efforts. KPMG organized these challenges into three categories: external, executional and organizational.

External: The potential for channel conflict keeps companies guessing as to whether they should partner with middlemen, go direct, enact a stealth, end-run strategy or do nothing. Dotcom start-up competitors potentially disrupt the value chain, and companies are uncertain how to address the issue.

Executional: Companies have difficulty keeping IT talent, which exacerbates the infrastructure challenge of retooling existing systems to handle real-time supply partner and customer transactions.

Organizational: Astonishingly, 75 percent of respondents had no central decision maker for e-commerce, and less than half of executives with e-business responsibility have authority to cut checks. Many companies have multiple, department-level initiatives in play, with no enterprisewide strategy tying them together. Still, other companies are so busy making internal IT systems work that they have little time to think about how external forces are shaping the competitive environment.

The strategic response taken by two very different companies to the e-commerce challenges KPMG defines may someday be viewed as best practices.

Seattle start-up Armadillo.com is just beginning its hunt for customers. This IT outsourcer seeks to help manufacturers and retailers automate back-end processes, such as furniture ordering and order status. The company plans to charge a monthly rental fee to host these back-office apps. Armadillo.com will also charge a transaction fee when a retailer places an order with a manufacturer.

"The industry has been so fragmented that very few participants have been able to afford EDI," says Armadillo.com founder John Sylvan, pointing out that the retail side of the industry is comprised of hundreds of family operations with little in-house IT talent. He believes this business-to-business e-commerce play is justified by simple math.

"Furniture is a $30 billion industry, and the average invoice is about $1,000," he says. "Those are a lot of transactions that could be automated."

By also offering to build public-facing e-commerce sites for retailers, Armadillo.com hopes to provide the e-commerce leadership the industry lacks.

"Companies are all looking at e-business, but they're not sure what to do, and there are very few participants able to fund a major e-commerce initiative," Sylvan says. He believes that the industry faces unique challenges as a profitable category for business-to-consumer e-commerce. The obvious challenges include the lack of IT expertise on the retail side, and the basic nature of the furniture business as a high-ticket, high-touch buying experience with a long sales cycle. After all, it's no easy trick to get people to buy a dining room set online.

Sylvan says e-commerce will never sweep the industry. Yet these companies will still need to fuse a Web strategy to brick-and-mortar operations.

"Even though they see only 4 to 5 percent of business going to online sales, most furniture retailers can't afford it, because losing 4 to 5 percent of your sales means you're out of business."

Armadillo.com does not intend to compete with retailers. The company will either build a retailer's e-commerce site or will act as a retail portal linked to the service provider's supply chain.

Although furniture e-commerce sites such as Furniture.com and Living.com compete in this industry vertical, Sylvan believes Armadillo.com offers a unique value proposition that attacks an industry challenge less obvious to outsiders--order cancellation due to late shipment.

"Twenty percent of all sales are cancelled, and 15 percent are returned," says Sylvan. "We think we can justify our existence if we can reduce that cancellation rate by just 1 percent."

Like Armadillo, GE's $10 billion Power Systems business unit in Atlanta is dealing with an item that doesn't naturally lend itself to online sales. Some of the unit's turbines cost $35 million, which means you can't exactly pay for them with a credit card. So, for GE, the question became: Since turbines are not suited to sales over the Web, how can our business unit capture business value out of some kind of Web presence?

According to Jose Lopez, the unit's general manager of e-business, the company took a two-part approach. First, it developed a Web site that makes it easy for power plant purchasers of its turbines to order aftermarket parts. Second, it built a site that empowers GE to deliver after-purchase services and consulting.

"How do we manage project collaboration--the execution of the project and getting the unit up and running?" says Lopez. "The question is not will we sell a turbine online, but rather what type of enabling technologies could we provide to facilitate that sale?," he says.

This defined the business unit vision and also justified the business case for expenditures of $80 million, as well as deployment of a team of 200 on the effort.

Behind the scenes, GE employed a range of management and organizational techniques that let the company avoid the chaos of e-commerce execution pointed out in the KPMG study.

For instance, although GE wrestles with IT labor shortages like everyone else, the greater challenge in an enormous company with a large bureaucracy is quickly marshalling the right talent to bring off-Web projects on time and on target.

Lopez says the unit instituted a military-style "draft" to commandeer employees for the project. In coordination with the Head of Personnel and Divisional President Robert Nardelli, Lopez bypassed the bureaucratic swamp to build the cross-functional team--sales, marketing, IT, engineering and customers--needed to build the site. All drafted employees were physically moved to a dedicated location to complete the project.

"We delivered this as a start-up," Lopez says. GEpartsedge.com went from concept to live site in 45 days.

Lopez is not shy about poaching other business units for best practices, either. "Some of our best ideas came from appliances and GE Capital," he says.

For instance, customer service employees in the appliance unit succeeded in making customers comfortable with using that business unit's site for product information. Lopez replicated this customer-focused approach to raise the comfort level of GE's energy plant customers to use all of its Web resources: the post-sales, turbine project collaboration tools; the parts-ordering interface; and a real-time diagnostics tool.

GE also benchmarked best practices from its business partners. "We learn very quickly, and what it allows us to do is not to fall into the trap of starting a project from scratch without talking to someone that has gone through it," Lopez says. "We avoid some of the speed bumps this way."

Lopez expects that in 2000, GE Power Systems will convert $1.5 billion of annualized parts and services sales to the Web.

GE has discovered that its intellectual investment in making the Web work is as critical as its financial one. "We actually have people who think all day long: 'If I were a dotcom start-up, how would I attack the flanks of the existing business?' " Lopez says. "Then we either react to or adapt that particular philosophy."

It's that kind of thinking that will help brick-and-mortar companies successfully make the transition to click-and-mortar.

John Berry is an IT consultant and writer based in Bend, Ore. He can be reached at jb@empnet.com.