Strategies for Finding the Value in e-Business Investments

Online transactions, the darling of the go-go 1990s and the venture capital explosion, still account for a tiny fraction of the business done between businesses and consumers. Business-to-consumer transactions amount to about $20 billion, less than 1 percent of total retail activity, according to a December Brookings Institution report. The same report says online business-to-business transactions-widely believed to be the e-Business Holy Grail-amounted to about 1.6 percent of the $6 trillion in private sector economic activity.

Yet e-Business won’t go away. Its growth as a tool to generate value continues as executives demand that their companies explore e-Business. In fact, Citigate Cunningham surveyed 175 U.S. and European companies and found that half named “leveraging the Internet” as one of their CEO’s top priorities. Clearly, the need to invest in e-Business continues, albeit without the exuberance of recent years.

“When we were in the boom, there was a tremendous amount of panic to be competitive in e-Business,” says Martin Curley, people, intellectual capital and solutions director for the Information Technology group of Intel. “There’s a more rational approach now with capital being scarcer. Organizations are returning to fundamentals.”

But what are those fundamentals in a world where value is increasingly measured in bandwidth, page views and click-through rates? How do executives know if they’re getting the value out of investments in online inventory management, Internet customer tracking and Web-based transactions?

The answer, according to experts from the Wharton School, Intel Corporation and elsewhere, is that the fundamentals are no different-but the means of evaluating them may be. Evaluating return on investment is a common process, but the returns might not always be obvious. The media were fond of referring to the new economy of the 1990s, but experts say it isn’t that new.

“You can’t ignore the fact that there is a new economic reality,” says Harbir Singh, professor of management at Wharton. “But you also can’t jump into the new economy with both feet without a clue how you’re going to make money.”

Broad Considerations When Investing in e-Business

Curley says the most easily justified e-Business investments are those that provide business value and improve IT efficiency. One example he cites: peer-to-peer enabled e-learning, or distance learning facilitated by technology. This provides just-in-time instruction that can be more effective and efficient than traditional education-and uses the existing corporate IT infrastructure. “This makes the investment attractive to both the business and the information technology organization,” Curley says.

What makes e-Business investments the same as other IT investments? Curley says it’s the need to understand the goals and the investment’s expected impact. Is the impact improved business efficiency, effectiveness or perhaps business transformation?

But what makes e-Business investments different? For starters, there is the pace at which investments may need to be made. And with that comes finding the balance between getting your investments to market without undermining reliability or efficiency. The faster you move, the less likely you are to have operational excellence. The key is getting everyone to agree on the right tradeoff or sweet spot.

Experts note healthy trends as a result of the economic downturn. Rather than blindly pouring cash into Internet divisions, for example, executives are recognizing that business is business-whether online or in person. They also recognize that all the returns aren’t obvious at the start.

Know the customer, know your niche: Could a bank today survive without access to automatic teller machines? Probably not, says Patrick Harker, Wharton dean and professor of operations and information management. “Could a bank survive today without a Web presence?” Harker asks. “Well, the question depends on how big (a presence).”

He cites Commerce Bank in Cherry Hill, N.J., which has a small Web presence but no online banking-a bandwagon most larger banks are leaping on with little immediate return. Instead, Commerce Bank offers seven-day-per-week branch banking. “They clearly looked at the market segment they wanted to attract and they developed the systems to deliver that,” Harker says.

Recognize there will be intangible benefits: The tangible benefits are typically easy to find. When Curley’s group looks at new investments, his people also spend time attempting to evaluate the intangible benefits. “The assumption is that we have already performed a financial benefit analysis for the tangible benefits,” Curley says. In fact, the tangible benefits are often readily available from the vendors, says Lorin M. Hitt, a professor of operations and information management at Wharton.

In the Brookings Institution report, one vendor to a healthcare company claimed online insurance claims processing would reduce the cost from $10-$15 per paper claim to $2-$4 per online claim. Another study pegged the marginal cost of an online banking transaction at four cents, compared to 70 cents for a call-center transaction and $1.44 for a transaction with a teller.

But that’s not enough. “We can measure cost savings easily, but that turns out to be not the biggest component of value long term,” Hitt says. “It’s my assertion that intangible benefits represent the most significant component of value and it’s the most difficult to measure.” They include items such as pursuing new markets; improving customer service; adding features that couldn’t be easily added any other way (i.e. FedEx package tracking); and speeding time to market.

Fit the investment into your culture, not as an add-on: A recent report by the Massachusetts Institute of Technology’s Center for Information Systems Research identified three key strategies that influence the success of e-Business investments. One is a reliable, cost-effective and flexible IT infrastructure; a second is fast and reliable delivery of IT products and services that relies on both internal and external strengths.

The third is a governance structure that treats e-Business as part of the business, encouraging both consensus building and responsiveness to market demands-and funds both applications and infrastructure.

A white paper on the topic produced by Cisco Systems said most IT investments fail to deliver enough value because of “cultural, organizational and leadership gaps between IT and business functions. Companies that bridge this gap create a more integrated and focused enterprise powered by an enviable cycle of IT and business success.”

Office Depot may be a case in point. The company treats the Internet as another door into its stores and would be happy to have 50 percent of its customers online, according to a recent media report. The strategy has placed Office Depot as the second-largest online retailer behind “Do not think of (e-Business investments) as separate from other investments,” Harker says. “Often we view the Internet as something with a different cost and revenue stream. Stop thinking of a branch customer and an Internet customer. They are a customer and often they use all these channels.”

Tips to Evaluating e-Business Investments

Once you’ve measured the tangible benefits of an e-Business investment, how do you measure the intangible ones? How do you know if you’ve gone too far? The experts offer some strategies.

How Wide Is The Gap? Hitt points out that executives know exactly what an investment will cost. They can quantify to the penny how much the servers, the software, the training and the maintenance will be. Experts such as Curley think in terms of ratios: If it takes $3,000 to develop a solution, it may cost $7,000 to maintain it over the life cycle. Once you’ve nailed the costs, Hitt says, “How much do we need to break even? How much do the intangible benefits need to be worth in order for this investment to make sense?”

Buying Options: Technology investments in the best of times are slippery. Viewed as a marketing decision, losses can be too easily waved away; viewed as an investment decision, Singh says, they can be paralyzing. “(Executives) could turn out to be risk averse because they might realize that they might need a million users before they could make money, and then their inclination might be not to do anything,” he said. “Second, the alternative might be that they would spend the money and keep waiting for something to happen.”

Instead, Hitt and Singh say, executives can consider the outlay an investment in an option. “We may want to make this investment anyway because we may not have this opportunity again,” Hitt says. Part of valuing an option is saying that you will spend money now in order to make a better decision later. Sometimes, the better decision later is to stop spending money. Curley calls it the risk of not doing a project.

This approach “does not mean you postpone the uncomfortable question of where the profit will come from,” Singh says. “The options approach is a way to stage your investments over a period of time and also to stage your exposure over a period of time.”

Value Dials: Intel’s e-Business group, chartered with transforming Intel into a 100 percent e-corporation, embeds business value into its e-Business investment process by having a goal of defining, designing and implementing for business value. At the core of this process is a matrix of business variables or ‘value dials’, which can be impacted by e-Business investment-examples include cash cycle variables (e.g. days of receivables), productivity variables (e.g. direct labor costs), or customer service variables (e.g. customer satisfaction). By identifying which ‘value dials’ are targeted to be impacted and by regularly measuring value dial improvements against a baseline, business value is managed during the full lifecycle of an e-Business investment.

Internet Value Framework: Curley’s organization uses a business value index-sort of a corporate scorecard-to measure intangible as well as tangible benefits, weighting different items depending on the project. In its white paper, Cisco uses a matrix called the Internet Value Framework, creating four quadrants. Along the X-axis, measure the level of innovation. Along the Y-axis, measure the level of business criticality. A project that is highly critical and highly innovative, for example, would demand traits such as adding shareholder value, addressing company competitive issues, or a loss of compatibility.

Backcasting: Singh cites this approach as a form of scenario planning, in which executives chart the possible futures from an investment and determine, the likelihood of each. Instead, this approach starts in the future and works backward. “Start with a point in 2010 where you would like to be, then work your way backwards and see what it would take to get there from your current state in 2001,” Singh says. “You don’t just take one point. You take a range of points and work backwards and join them to the present, and it tells you what steps you will have to take to get there.” That may help determine if an investment will get you where you ultimately want to be.

What Matters Most

Ultimately, all the analysis in the world won’t make up for a bad idea. The experts all say the reality that has gripped the IT industry is ultimately healthy for executives as they apply a more rigorous approach to the investments they make.

“You have to have a viable business model. All that happens otherwise is that you fail on a larger scale,” Singh says.

“The one thing you cannot manufacture is cash.”

©2003 Intel Corporation

See also…

Starting a Business

Business and Finance Law

Internet Law Forum