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Oracle Corporation

As companies struggle to stay afloat, cost savings have soared to the top of the corporate agenda. Yet, the environment for fresh investments in Internet technology remains. Executives have come to see the Internet as a vital tool to drive operational efficiency. Even where margins face extreme pressure, a determined push into e-business continues.

The economic downturn and the dot-com collapse in the United States have forced executives to concentrate with renewed resolve on the bottom line. “New economy” models of revenue growth have been discredited, cost benefit analysis and other traditional business yardsticks have returned with a vengeance.

While the dot-com debacle has not destroyed enthusiasm for the Internet, it has certainly inspired its share of caution – even fear. Executives are no longer willing to risk experiments. They want certainty that technology is working to support their business strategy, not the reverse. And they want specific examples of Internet-driven success stories before they decide to apply Web technologies to their own operations. Interviews with dozens of senior executives at major multinational firms across a range of industries, and drawing on a recent online survey of 144 companies, explains how corporate leaders are using the Internet to cut costs and boost productivity, and how they measure success.  There are four main conclusions about how to best make cost savings work:

• Business strategy must come first. Companies need to avoid adopting technology for its own sake, as IT experiments can raise rather than lower costs.
• Squeezing real gains out of the Internet requires a willingness to rethink, then reinvent, entire business processes as they are transferred to the Web.
• “Quick wins” – Internet-driven innovations that demonstrate a quantifiable payoff over a short period are crucial to maintaining corporate momentum.
• Top management – From the CEO on down, must push the process, delivering an unwavering message of support and removing roadblocks where necessary.

Companies that heed these lessons stand to benefit in several ways. Shifting business processes to the Internet can enable firms to reduce spending significantly on such matters as transaction costs, customer acquisition, and expense report processing. It can also deliver less quantifiable operational benefits, such as improved morale and customer and supplier satisfaction. Though more difficult to measure, such benefits work to boost the bottom line indirectly, by improving productivity and burnishing the company’s brand. Expectations need to be kept in check, however. In order to save money, companies will first have to spend money, whether on new IT matters systems, redundancy payments for excess employees, or corporate reorganization. Here the risk, and the fear, is most pronounced. There’s nothing inevitable about the payoff from Internet investments. That is why executives need to examine the business process, along with the business model that underpins it, before grappling with the technology. Technology is a part of the equation, but the key decisions are strategic and too weighty to be left to the IT department alone.

Dot-Coms Aren’t the Internet

The wild spending of failed online retailers, such as Webvan and boo.com, has given the Internet an image of profligacy and waste. But efficiency and thrift are more appropriate associations for mainstream business. Executives in traditional industries are quick to draw a distinction between the discredited dot-coms – with their illusions of boundless growth and cavalier disregard of sound business practice – and the Internet’s promise to inject efficiency into established companies. Far from feeling gloomy about the Internet, a growing number of global corporations are taking advantage of the technology’s potential to cut operating costs, boost productivity, and create new business opportunities.

“Forget about the dot-coms with their ‘new economy’ plans,” says Richard Radecki, director of e-business for Delphi Automotive Systems, who credits online auctions with saving his company $140 million in material costs over the past three years. “We’ve learned that the Internet’s real power lies in helping old-economy companies do things better and more efficiently.”

Delphi isn’t alone. Delta Air Lines estimates that its Internet initiatives will save a total of $300 million a year by 2003. “It’s certainly not pocket change,” quips Vince Caminiti, Delta’s senior vice president of e-business. While Mr. Caminiti dismisses many of the failed dot-coms as “misguided experiments,” he’s not dismissing the Internet. “Here, if we can think of a way that the Internet can help us, we’ll look into it and then use it,” he says. This enthusiasm extends across industries. At CIGNA, an Internet-based human resources self-service application has saved the insurance carrier more than $200,000 in printing costs alone. “This is only the beginning,” says David Gordon, CIGNA’s senior vice president of e-commerce. “We feel we’ve just begun to experience the cost-cutting and productivity benefits that the Internet has to offer.”

Survey: Keeping the Faith

Optimism about the productivity gains and cost savings offered by the Internet is reflected in an online survey conducted in July 2001 by the EIU e-business forum (www.ebusinessforum.com), an Economist Group Web site devoted to global e-business intelligence. Of the 144 companies from around the world that responded to the survey, a full 83 percent said they were currently using the Internet to cut costs (Figure 1). As this near-unanimity suggests, saving money via the Internet currently ranks high among corporate goals: 16 percent of respondents called it their firm’s “top strategic priority” and an additional 52 percent said it was “one of many strategic priorities.” Only 2 percent dismissed cutting costs via the Internet as irrelevant to company strategy (Figure 2).

No More Experiments

This sustained enthusiasm for the Internet goes hand in hand with a heightened awareness of the need to demonstrate, with transparent metrics, that technology investments yield a quantifiable return. Companies that previously followed the dot-coms’ lead and put money into online experiments have grown more cautious. Although there are still defenders of a high-wire “launch and learn” strategy – diving into the Internet with the awareness that haste could entail mistakes – the advocates of “watch and wait” are having their day.

Calculated risk remains a part of doing business, but the emphasis now is firmly on the calculation rather than the risk. Any new Internet game plan, however innovative, needs a sound business footing, and executives are under pressure to find a technology that can provide the maximum return for the money invested. Mr. Caminiti of Delta makes regular presentations of promising technologies to the airline’s executive board. But management rarely approves an initiative unless the system can provide benefits across the enterprise. “We’ve needed to sharpen our pencils a bit to find the best possible solution,” he says. Cummins Engine, a U.S. engine manufacturer, exemplifies the new thinking. “The slowdown is forcing us to think more clearly and strategically about what we’re doing,” says Tracy Embree, Cummins’ director of e-business strategy. Last year the chief information officer doled out money to fund interesting ideas. Now, with investment money scarce, the company has made each business unit responsible for funding its own e-business projects. Any manager who wants to launch such a project has to apply standard business planning. Does the initiative support the business’ strategic goals? How does it match up against the business’ sales-growth targets, return on investment requirements, and cashflow needs?

Measures Are Elusive

Finding a measure to illustrate how Internet initiatives contribute to the bottom line is a tricky business, particularly when other cost-cutting efforts are under way. “It’s often difficult to know if a savings is the direct result of something you’ve done with the Internet or some other change you’ve applied,” explains Eric Johnson, professor of business at Dartmouth College’s Tuck School of Business Administration. “You have to look at the situation very carefully and not overestimate the Internet’s impact. ”Yet, finding a relevant benchmark is possible. Cisco Systems measures its Internet savings by performing before and after comparisons of specific business operations. “We ask, how much did it cost to do it the old way versus with the Internet?” says Pete Solvik, Cisco’s chief information officer. “You can’t just look at the overall P&L. But if you examine individual business processes, such as emails versus phone calls, you can usually find the answer.”

In addition, executives need to recognize that many Internet-driven innovations can help the bottom line indirectly through less tangible benefits, such as improved customer satisfaction or better staff morale. Often the intangibles go hand in hand with tangible savings; online expense reporting, for instance, can reduce overhead while making employees more content and giving management better data on company spending.

Corporate Adoption Has Just Begun

Most companies don’t yet have a lot of experience to build on. Oracle, which has engaged in a heavily publicized effort to harness the Internet in all its business processes, estimates that it is only halfway into its own e-business transformation. Executives agree that adoption of the Internet is still in its early stages. Asked in the Economist Intelligence Unit online survey to assess their progress so far, most respondents indicated that their e-business journey is in its early stages. Only 7 percent thought they had moved all the processes they could to the Internet and just 11 percent said they were more than three-quarters of the way down the road. The largest group, 23 percent, instead agreed with the statement, “We’ve just started; only a fraction of the work is done.” (Figure 3). Little wonder, then, that most companies are only beginning to see the first modest results from their efforts to harness the Internet. Respondents’ estimates of their companies’ savings cluster at the lower end of the spectrum (Figure 4). More than one-third of all respondents recorded Internet-generated savings of less than 5 percent for the most recent financial year. Expectations for the future are considerably more bullish, however (Figure 5). Asked about the prospects for Internet-driven savings over the coming two years, nearly one-tenth of responding companies thought they’d be able to report cost savings of over 50 percent. Such optimism about the future gains to be reaped from e-business explains why the vast majority of survey respondents expect their corporate information technology budgets to continue rising over the coming two years. Twenty-two percent predicted that IT spending would rise “substantially,” while 46 percent expected their budgets to grow “slightly.” Only 6 percent expected company IT spending to decline (Figure 6).

Start With “Quick Wins”

Convincing management and shareholders to push ahead with Internet spending isn’t easy, however. Because of pressures to document an attractive return on investment, executives aiming to maintain corporate enthusiasm for an e-business transformation need to focus on a “quick win” strategy. Finding small-scale, relatively inexpensive projects that yield a measurable payoff, preferably over a period of months rather than years, can help build momentum for bigger and bolder initiatives. Mr. Cummins is pursuing such projects. One initiative aims to put wireless sensors in the big engines that help haul ore out of mines. Cummins has agreements with mining companies to ensure that these engines rarely break down. If an engine has downtime that exceeds a certain percentage of total operating time, Cummins has to pay a fee to its customer. The sensors alert the company when the engines require maintenance. Cutting the amount of downtime has a dual benefit: It is a cheap way to make customers happier as well as to avoid paying fees.

Cummins’ e-business strategy group hopes to use such successes to prod others in the company to come up with new ways to use the Internet. Ms. Embree reasons that if the company continues to make careful e-business investments, it will be in a better position to move quickly when the economy improves: “Even though we’re in a downturn, now is the time to get our strategies and plans to the level that when times are better, we can move down the road more quickly.”

Understand the Principles

In deciding where to apply Internet technologies, companies need to grasp the mechanisms by which Web operations can deliver efficiency. The most obvious, and that seized eagerly by the dot-coms, was to treat the Internet as a global storefront, where products could be put on display for millions at the cost of only a Web site.

The dot-coms’ demise underscored the fallacies of this approach. Without an efficient back end and an understanding of the challenges of marketing, logistics, and fulfillment, online retailers spent more to acquire customers than they could ever recoup in revenues. Internet cost savings hinge on a few key principles:

• Automation – The Internet can drive efficiency by transforming time-consuming manual or paper-based data processing into a digital format.
• Transparency – The Internet can make information available to a mass audience simultaneously, whether through a consumer Web site or a corporate intranet.
• Self-Service – The Internet can put most customer service and transaction processing in the hands of end-users, rather than costly administrative personnel.
• Simplicity – The Internet thrives on standardization, which can help streamline procedures that are based more on corporate tradition than business logic.

As this last point suggests, companies shouldn’t cling to their existing ways of doing things as they embrace the Internet. Striving to replicate offline processes in an online system can be a recipe for costly chaos. A sales force that relies on customized discounts cannot coexist with the clarity of online pricing, for instance, so companies may find that they need to simplify drastically before automating. “ The more simple the product is, the easier it is to get the customer to adopt it, the easier it is to standardize it, and the easier it is for us to get it online and roll it out,” says Jay Butler, global corporate investment banking technology and operations executive for Bank of America.

It’s Not About Technology

Technology issues abound in the digital world. Compatibility of new systems with old ones is a key concern, and companies may face a choice between integrating a new technology with the old and starting from scratch. But technology issues should not be allowed to overshadow the business ones. Executives must be wary of being bullied into adopting a particular service by customers or business partners, or into constant tinkering by their own IT staff. Bill Gaughan, vice president of e-business and information technology for Bayer’s polymers and chemicals division, says he will only add new features to the company’s private online business exchange if he can determine that they will in some way contribute to the bottom line. Take vendor suggestions with a grain of salt, he cautions. “Many vendors warned that we would soon be out of business if we didn’t grab their technology,” says Mr.Gaughan. “A lot of these companies have since gone under, so watching and waiting on them was a big help.”

Leadership Is Key

More important, companies need to ensure that investment decisions reflect fruitful cooperation between the business side and the technology side, between the CEO and the CIO. Particularly after the dot-com disasters, the head of IT must understand and embrace the company’s business logic. IT people tend to excel at explaining how technology works but are less adept at describing how the technology will affect the business, notes Gary Roberts, Oracle’s senior vice president for global information technologies. Yet, it is only where the IT chief grasps the key business challenges that firms can avoid “just implementing technology for the sake of implementing it,” says Mr. Roberts. “You’re not in business so that you can try out every new gizmo and whiz-bang that comes out.” A corollary is that technology should be adopted in a way that meets identifiable customer demand. “We’re striving to be innovative,” says Bank of America’s Mr. Butler. “But unlike many of those failed dot-coms, we realize that success lies in making real-world services better and more convenient. If the customer doesn’t want it, we don’t offer it.”

Precisely because such key issues are strategic rather than technological, consistent decisive support from the CEO and the rest of top management is crucial to the success of any Internet undertaking. This is particularly the case when using the Internet to save costs prompts a corporate reorganization, shifting power from national offices to headquarters, for instance, or when it redefines the way employees do their jobs, by offering some staff the prospect of more specialized work and inspiring fear of redundancies among the rest. Maintaining a drive for change despite such upheaval depends heavily on management’s ability to communicate throughout the organization a coherent vision of the future.