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Internet commerce software enables companies to take the dot-com leap.
Edward Teach, CFO Magazine
October 1, 1999
Internet time, as we are all learning, moves a lot faster than ordinary time. It already seems ages since companies first began putting up Web sites, like so many billboards on the information superhighway. Not only have the billboards become more enticing--with their Java applets, their streaming audio and video-- they've also become more functional, serving as gateways for E-commerce.
Today, thanks to Internet commerce software and services, more and more companies are setting up Web stores--and more and more consumers are buying. Online retail revenue should reach $12 billion in 1999, according to Internet analysts Jupiter Communications LLC, and rise to $41 billion by 2002. These are modest sums by business-to-business standards, but that isn't stopping sellers from rushing to the Web.
Small companies can manage fine with low-end Web stores or hosted storefront services. But midsized and larger companies that expect to do a lot of business on the Web need more. They need servers that can provide rich functionality and handle thousands of simultaneous shoppers. They demand Web stores that can be integrated with multiple databases and systems -- accounting and order-entry, inventory and fulfillment, enterprise resource planning (ERP) and customer relationship management.
The chart at the end of this article lists seven leading vendors of high-end Internet commerce applications--the foundations of high- traffic Web stores. Be forewarned, though: industry analysts advise that no one vendor is close to providing a complete, end-to-end solution (see "The Ideal E-Store," below).
High-end Web-store software falls into two categories, according to Erica Rugullies, a director at Giga Information Group, a Cambridge, Massachusetts-based IT advisory firm. One is the platform and toolkit, typified by products from IBM Corp. and Microsoft Corp. These products provide basic commerce-server functionality, including a catalog, plus software tools for developing other functions. The other category is the packaged application, such as those offered by BroadVision and Open Market Inc. These applications come preloaded with much more out- of-the-box functionality. Both kinds of commerce servers provide interfaces for integrating third-party software.
Which category is cheapest? It's a wash, at least for large companies, says Rugullies. She explains that you can spend, for example, a mere $6,000 on a license for Microsoft's Site Server Commerce Edition, but that expense may represent only 5 percent of the total cost of assembling and deploying a fully featured system. A high-end system like InterWorld Corp.'s may cost $250,000 per Unix server, but that sum may compose two-thirds of the total deployed cost.
Which category is best? It depends. The platform-and-toolkit approach has the strength of flexibility; packages like Site Server and IBM's Net.commerce can be tailored to companies' needs--and every company's E- commerce needs are different. But that flexibility is achieved at the price of extensive development work. By contrast, packaged applications offer a more comprehensive, more monolithic solution, and are generally faster to install. But experts warn that monolithic systems may be difficult to modify in response to, say, changes in business models or to acquisitions.
Meanwhile, some ERP vendors, anxious to expand their product footprints into E-commerce, have introduced Web stores. Products from Great Plains, Baan, Oracle, PeopleSoft, and SAP offer superior integration with the mother system. But Giga, for one, doesn't expect ERP vendors to become "major players" in E- commerce (with the exception of procurement) for another 18 to 24 months.
Technology Comes Last
It should be remembered that business issues drive Web commerce, not software choices. "Ninety-nine percent of the time, people call us with the wrong questions," says Geri Spieler, analyst at Gartner Group Inc., in Stamford, Connecticut. "They start with the technology. That's absolutely the last thing they need to worry about."
Instead, she suggests, companies should first evaluate the impact of a Web store on customers and sales channels. "You wouldn't open up a store if you didn't have a strategy," says Spieler. "The amount of money and support that goes into maintaining [an Internet business] is enormous. It's not just a cool Web site. It can play havoc with your bricks-and-mortar inventory, if you don't know how to integrate it properly. And if you don't deliver to the customer, look out!"
We found three companies that looked closely at the business case before leaping into Web sales. Each chose a different solution: platform and toolkit, packaged application, or ERP store.
----------------------------------------------- --------------------------------- The Ideal E-Store
According to Giga Information Group, the ideal Internet commerce server would fully cover the sell-side E-commerce "value cycle" and thus include the following functionality:
----------------------------------------------- --------------------------------- A Foot in the Door
Payless enters the Web market for shoes
Payless ShoeSource Inc., the $2.5 billion discount footwear retailer in Topeka, Kansas, had a modest Web site for promotional purposes, but it wasn't enabled for E-commerce until this year. Late in 1998, the company decided to get serious about Internet sales-- but only after deciding the business proposition was sound, says Steve Frazier, vice president of corporate development.
The average price of a pair of Payless's shoes is just $12; would a Web customer want to pay a significant percentage of that in added shipping costs? "But we turned that around and said you're missing the point," recalls Frazier. "For well under $20, we're delivering a trusted brand straight to your house."
Shoes aren't the easiest thing to sell via catalog, whether paper or electronic; customers are fussy about fit. But here's where a clicks-and-mortar strategy has a big advantage. "If your issue is fit, we offer you returns in 4,400 locations," says Frazier. Its real-world business also gives Payless a leg up on marketing costs--by far the largest expense in creating a successful Web site. "We have mobiles [promoting Payless.com] hanging up in our stores," says Frazier. The company sends out 300 million pieces of direct mail every year, he adds; "we get a free space on that. And our URL [uniform resource locator] is on the end of our TV commercials."
Channel conflict was a nonissue, says Frazier. "We own all our stores; we're not taking away sales from franchises," he explains.
Speeding to Market
By January 1999, Payless was ready to start building its Web store. It began by deciding to outsource development aggressively. "We wanted to match the Internet [start-up] speed to market," Frazier says. In February, Frazier, director of strategic planning Keith Spirgel, and director of E-commerce Rhonda Wells talked to "17 or 18" E-commerce developers. They came in three basic flavors: online media companies, hardware/software providers, and system integrators. The solutions considered ranged from off-the-shelf packages to high-end servers. Says Frazier, "We decided we wanted to be in the middle."
In part because Payless is an IBM shop, running DB/2 databases, IBM's Net.Commerce was chosen, with IBM Global Services as the integrator. Organic Inc., a San Franciscobased E-commerce business and site developer, was hired to design the storefront interface. The chief challenge was to integrate the new platform with existing systems.
Inventory systems, for example. "If you order a shoe [from Payless.com], it has to be available to ship," says Frazier. Online sales must feed back to replenishment systems, "so we know what we're selling every day."
Sales tax for Web sales is "a bit of a nightmare," says Frazier. "We theoretically pay 4,400 different sales taxes," because Payless allows Internet customers to return shoes to real stores. The Web store has to automatically charge the correct tax once the customer has filled out the online order form. So Payless bought a third-party tax-software package and attached it to the Net.commerce server.
That's not the only system that Payless bolted on to IBM's platform. It custom-built a catalog on top of Net.commerce's more basic model. It attached a credit-card interface (CyberCash) on the front end and a shipping system on the back end. It also added a store locator (a piece of mapping software) and personalization software.
A Nice, Medium-Sized Number
On May 27, Payless.com sold its first pair of shoes. So how's business? Frazier hedges. "We're pleased," he says. "We've hit many of the initial goals, and we're growing steadily every week." How much did Payless.com cost? A "small multiple" of what it costs to open a Payless store ($500,000).
"We did very careful ROI analysis," Frazier adds. "We want this to live up to the same standards as any other investment. We don't believe selling shoes online is going to have the same impact as in other categories. But even something that could be a few percentage points of sales would be a nice, medium-sized number."
----------------------------------------------- --------------------------------- Right Tool for the Job
acron's web site woos thousands of new customers
In the United States, there are about 117,000 small job shops that use the kind of metal- cutting tools and technology made by Milacron Inc., the Cincinnati-based manufacturer. But these shops are too small, too numerous, and too dispersed to be handled by a direct sales force. "They are using our products through independent distributors or catalogs, or using competitors' products," says Angela Snelling, director of E-commerce for the Cutting Process Technologies Group of Milacron, which had 1998 sales of $1.8 billion. "But as a whole, they are interested in additional service." And, they are interested in buying Milacron's products via the Web.
How does Snelling know? "We asked them," she replies. In early 1998, Milacron telephoned no fewer than 5,000 shops, inquiring whether they had PCs, modems, and browsers. "We were shocked at the number that had Web access," reports Snelling. One of every 8 shops was already buying online.
Encouraged by the survey and prodded by group vice president Alan Shaffer, Milacron set out to establish a Web sales site for those job shops. Snelling wasn't required to come up with a projected return on investment, because "any ROI would be hard to base in reality." The main priority was to be first to the Internet market in the industry.
In March 1998, Snelling and Tom Williams, then director of IT at a Milacron subsidiary, chose Burlington, Massachusetts-based Open Market Inc.'s E-commerce sales software. "We went through an extensive process to select vendors," recalls Snelling. "We probably talked to 20 [vendors] or so." As for developing a system in-house, "we considered that for about two seconds. We wanted speed to market. We're not a software-development house; we couldn't come up with the functionality and depth of what was already out there."
Integrating Open Market with existing order- entry, financial, warehousing, and shipping systems was no easy task, since the site interfaces with multiple business units and multiple ERP systems. Milacron had 4 or 5 people devoted full-time to Web development, but Snelling says about 120 people from all over the company also worked part-time on the project, "evenings and weekends." As for hosting the Web site, the company decided to outsource that to the Internet services division of EMC Corp., the Hopkinton, Massachusetts-based data storage giant.
But E-commerce software is only part of the story. To attract new and repeat traffic to the Web site, Milacron decided it was necessary to offer an array of free services and information, much like those offered by successful Internet exchanges.
Milpro.com's "Wizard," for example, is an expert system that gives users fast, free help in finding the right grinding wheel or fluid to use on an application. Another feature helps a job shop prepare a customer quote. There's a "mall" for listing job shops, a flea market with machinery for sale, another section for customers wanting jobs to be done, a catalog to find distributors, and more.
Milacron's direct sales force was shown a demo of the Web store at a December sales conference and was told the company would pay them a commission on Internet sales. "It's part of the incentive program," says Snelling. "They have old geographical territory. Now they have new cyber- territory."
Last January, Milpro.com went live. In the weeks after the launch, Milacron trumpeted the Web site through direct mail, ads in trade magazines, and telemarketing. The total cost of launching it amounted to "the low seven figures," says Snelling. Only standard, in- stock products are listed on the site. The prices aren't discounted, but are competitive with catalogs and distributors, she claims. Payment is by credit card or open account. Milacron outsourced the handling of returns.
Asked to comment on the Web site's performance, in terms of either sales or site visits, Snelling will say only, "We have been well pleased with customer response and the feedback we get." None of the revenue, and all of the expense, are budgeted for the first year of operation: "The sales are all gravy."
----------------------------------------------- --------------------------------- Pump Up the Volume
Diamond Multimedia upgrades its online store
Diamond Multimedia Systems Inc. is a hot company in the Internet economy. The San Jose, California-based PC peripherals company (1998 sales: $650 million) makes and sells everything from motherboards to modems to graphics cards. The Rio, its pioneering portable MP3 device that plays music downloaded from the Web, has stirred up both sales and litigation. Diamond's Web site (www.diamondmm.com) is one of the 10 most- visited computer hardware sites in the world: the U.S. site receives from 85,000 to 90,000 hits per week, and the European and Asian sites draw another 50,000 and 25,000 weekly hits, respectively.
But despite the numbers, Diamond wasn't selling all that much merchandise directly through its online store. "We never took it seriously," says Bernie Miller, vice president and CIO. "It had the ability to do transactions, but we didn't have a good handle on reporting." As Internet commerce heated up, Diamond wanted to do more business online, not just with the retail customer but, down the road, with its business-to-business channels as well. The Web store became a problem to be solved.
The solution wasn't too far away. Diamond runs its business on Oracle Corp.'s ERP software, so it opted for Oracle's Web-sales application, iStore. The iStore software had almost everything Diamond wanted, such as a searchable catalog, shopping cart, automatic E- mail response, and, of course, interfaces to the ERP system's relevant modules. The integration is seamless: "From the time someone logs into the site until the money is reconciled, it's hands-off," says Miller.
This isn't to say that iStore amounts to a turnkey solution. "I don't think any application is a turnkey," remarks Miller. E- commerce applications are generic; the buyer has to flip the switches that will mold software to its business model. "You have to simulate every type of activity," he says. Diamond brought in Proxicom Inc., an Internet consulting and development firm in Reston, Virginia, to help flip the switches.
Almost as Popular as Sex
The new, improved store (www.estore.diamondmm.com) went online in July. In the short time since, Miller says Web revenues have more than tripled, and the goal for Q4 is to do "six to seven times" the business for the same period in 1998. Business for now is confined to retail customers, but distribution channels will be brought online, in increments, starting with VARs and system integrators.
"We have to be in that space, and as quick as we can," says Miller--but not so quick that the channels rebel. In terms of Web-store implementation, he adds, business-to-business sales present more challenges than retail sales do, such as inventory replenishment, credit limits, purchase orders, and sell- through information.
Diamond also plans to distribute authorized MP3 music files from its Web store when secured, copy-protected digital music formats become available. Given that "MP3" reputedly ranks second only to "sex" in popularity as a search-engine term, Diamond should see its Web- site traffic explode.
So is Miller having fun yet? "It's pretty exciting," he says of the online venture. "The whole Internet experience is not just changing the way business operates, it's changing the way IT is running."
----------------------------------------------- --------------------------------- ENTERPRISE INTERNET COMMERCE SERVERS
Vendor: Art Technology Group (ATG) Inc.
Product: Dynamo Product Suite
Starting price: $30,000
Customers: BMG, Sun Microsystems, The Street.com
Vendor: BroadVision Inc.
Redwood City, Calif.
Product: One-To-One Commerce
Type: packaged application
Starting price: $75,000
Customers: Hartford Life, Liberty Financial, Circuit City
Vendor: IBM Corp.
Product: Net.Commerce Start, Net.Commerce Pro, Net.Commerce Hosting Server
Starting price: $4,999 (Start), $19,999 (Pro), $12,500 (Hosting Server)
Customers: L.L. Bean, Payless ShoeSource, Goodyear
Product: Commerce Exchange
Type: packaged application
Starting price: $150,000
Customers: American Eagle Outfitters, Brooks Brothers, Guess Jeans
Vendor: Microsoft Corp.
Product: Site Server Commerce Edition
Starting price: $3,499
Customers: Dell Computer, barnesandnoble.com, CBS SportsLine
Vendor: Open Market Inc.
Product: Transact, LiveCommerce (catalog)
Type: packaged application
Starting price: $65,000 (Transact), $45,000 (LiveCommerce)
Customers: Acer, Ingram Micro, Lycos
Vendor: The Sun-Netscape Alliance
Mountain View, Calif.
Type: packaged application
Starting price: $250,000
Customers: Cutler Hammer, Visteon, GTE
Source: Giga Information Group, CFO magazine