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Replacing workers with Web-based applications boosts margins, but beware of unexpected complications, including hidden labor costs.
Kris Frieswick, CFO Magazine
October 1, 1999
Ever since 19th-century Luddites literally smashed the engines of the first industrial revolution in hopes of reversing progress, workers have had to compete for jobs with faster, cheaper, and more-productive technology. As the Luddites and subsequent critics have learned, technology usually prevails. The fact that new technology ultimately spawns more, and often better, jobs offers scant solace to workers confronted with job-extinction.
This prospect now faces an increasing number of employees as companies rush to embrace Internet-based commerce. In fact, the new Web- enabled business landscape could soon become a battleground for misplaced workers and their newly E-commerce-enabled employers.
From the employer perspective, prospects are bright. In 1998 in the United States alone, Web-based technology slashed $15.2 billion from corporate cost structures, according to Giga Information Group, an E-business research firm in Cambridge, Massachusetts. In 2002, annual savings will top $600 billion, Giga reports, noting that from 60 percent to 80 percent of these savings will reach the bottom line.
Part of these results will stem from added business and increased transaction efficiencies from better technology, but the lion's share will come from reductions in human costs. As arbiters in this trade-off, finance departments sit right in the middle. The business plan for a transaction-processing Web site is based on the cost-savings potential of the Internet, but unleashing those cost savings inevitably means workforce reductions. Layoffs are always costly, but if the workforce is unionized, the cost involved in labor reductions can bleed off potential Web-enabled cost savings. Case in point: Bell Atlantic.
Bell Atlantic first launched its online service center capability in September 1998. Today, a small but growing number of residential customers are already ordering new hookups, changing features, and checking bills online. The savings could be huge. But first the company must successfully negotiate its contract with the Communications Workers of America (CWA) when it comes up for renewal in August 2000.
The company expects the real Web payoff to begin by year-end, when its Web site achieves "flow-through," the point at which a transaction can be handled from end to end without human intervention, unless processing glitches arise. Once flow-through is achieved, the Web site will slash the time required for its service people to process routine transactions from up to 40 minutes to no time at all, according to Mercedes Cutler, who, with job-share partner Alison Curtis, is Bell Atlantic's director of new-channel development for consumer marketing. The equation is obvious: The more customers move to the Web, the less need for the company's customer- service employees.
"There are some union issues," Cutler concedes, although she adds that other issues override them. "Our business right now is growing. We wouldn't invest in this capability unless we were going to drive people to the site and we thought this was a winning idea."
Winning, indeed. The company can direct-market online more cheaply and with better response rates than by conventional methods that hawk voice mail and caller ID to residential customers. Once online billing begins in second-quarter 2000, the site will cut the cost of processing and mailing a bill from $4 per piece to about $1, according to one estimate. If the company could get just half of its 26 million customers to accept electronic billing, you're talking big numbers- -nearly half a billion dollars a year fully implemented, before taxes.
Merits notwithstanding, technology doesn't come cheap. Bell Atlantic spent $4 million in 1998 to launch the new site, but executives won't reveal the costs of growing and maintaining it. Those additional costs include the new 150-person Internet Group, which was created to integrate the company's existing legacy systems with the Web front-end (which enables flow-through), and a planned expanded technical customer-service team to assist online customers with such problems as forgotten passwords.
The price tag for maintaining and supporting a site like this could exceed several million dollars annually, says John Swainson, general manager of application and integration middleware at IBM Software. An investment of this size could easily chip away at cost reductions in the first year or two.
Success depends not only on smooth implementation of the technology, but also on commensurate reductions in labor costs. For that to happen, Bell must deal with the Communications Workers of America, which represents 72,000 Bell customer-service employees, technicians, operators, and IT workers.
For its part, the union sounds cautious. "Technology is changing, and we recognize that," says union spokeswoman Candice Johnson. Contracts reflect this expectation, she says. They call for extensive retraining programs for all bargaining-unit employees, and up to 2 years of wages for laid- off workers with 25 years of service. At the same time, however, Johnson expresses a sentiment that clashes with the very nature of new technology. "As more companies move their transactions to the Internet," she says, "we are going to make sure that our people are there, doing what they have always done."
Despite the magnitude of their investment and the dramatic impact on business strategy, Bell Atlantic executives claim they have not quantified the Web's effect on unionized activities. Good business might ordinarily demand detailed assessments of many different scenarios, but company spokeswoman Joan Rasmussen insists that Bell Atlantic simply has not performed this analysis. The Web, after all, is still in its infancy, and cost implications are hard to predict. "Obviously, there will be an impact on the workforce," says Rasmussen. "But we don't know to what extent. It's too soon to tell. Certainly, we are experienced with jobs that change with time."
The Front Lines
Bell Atlantic executives seem confident that rapid growth alone will allow the company to reassign unnecessary workers. This position is to be expected, considering the company's contentious history with both the CWA and the International Brotherhood of Electrical Workers. Although relations have certainly improved over time, strikes by those unions have brought the company to a virtual standstill at least twice in the past decade. Company admissions that it planned to eliminate union jobs would only make union negotiations harder.
But its job-creation party line seems to fly in the face of experience in other industries. Employees at many banks and financial services firms have already felt the Internet's sting. Scudder Kemper Investments, the Boston-based asset-management unit of Zurich Financial Services Group, recently announced plans to shutter five retail offices and four telephone centers as a consequence of more Web-based customer services.
Financial services firms are not widely unionized. However, in terms of E-commerce applications, they offer a view of things to come in the telecom industry, with about a two- year jump on telecommunications companies, says management consultant Ragu Gurumurthy, a principal in Booz, Allen & Hamilton Inc.'s telecom management practice.
To some extent, increases in Internet-based jobs offset reductions in the existing workforce. "It's a huge project," says Walt Meffert, Bell Atlantic's director of electronic commerce.
Andrew Bartels, a Giga vice president, says many companies that moved transactions to the Internet either redeployed unnecessary employees or did more business with existing staff.
The Cost of Training
Moreover, as Gurumurthy points out, technology is creating a vast array of new products that Bell Atlantic can sell, including Internet access. With these new products come new jobs. However, many of these positions require an entirely different skill-set from that required in customer service. While total employment may increase, the customer-service employees may not win the new positions without extensive retraining, which can be expensive.
The incremental nature of the Web site has, so far, allowed Bell Atlantic to take a wait-and- see position with regard to its impending workforce-related expenses. However, companies that invest in a Web site for the express purpose of cost savings cannot long ignore a cost center as large as union workforce reduction costs.
And, according to Rosemary Batt, an assistant professor of human resources studies at Cornell University's Industrial and Labor Relations Institute, those reductions will be enormous throughout U.S. corporations once this type of technology takes hold. She adds that she has not yet seen any retraining programs in the telecom sector that provide displaced workers with the specific skills they need to compete for the new jobs created by that technology.
"This has the potential for huge reductions in the labor force," says Batt. "It will lead to massive job losses."
Bell Atlantic emphatically states that the company will always need customer-service representatives, because not everyone will want to buy via the Web. But the tide is already shifting, and workforce shift isn't far behind. Batt argues that moving too aggressively toward Internet provisioning, now or in the future, may not necessarily be the right business strategy. Some research, she adds, indicates that a customer relationship focused sales effort, with more interpersonal contact, results in higher sales than allowing the customer to "self-provision" services via the Internet.
"If you make the service too much like a commodity," says Batt, "you make it too easy for the customer to go somewhere else."