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Managers at some very old line businesses have quietly launched thriving online operations. In the process, these innovators have uncovered fresh sources of revenue.
Russ Banham, eCFO
June 15, 2001
Back in the spring of 2000, back at the height of the E-commerce boom, executives at the Potomac Electric Power Co., or Pepco (www.pepco.com) were looking for a way to coin it off the digital craze. At the time, share prices of Internet businesses were going through the roof, and analysts were projecting huge profits for old-line businesses that rolled out new economy enterprises. Managers at Pepco, which is based in the Washington, DC, area, had already decided to deploy a new, Web-enabled procurement system. It looked to be a surefire money-saver. The question was: Would other corporates be interested in buying their office supplies from the utility, too?
After lengthy deliberation, managers at the power generator decided to make a revenue generator out of the planned purchasing system, eventually christening the new business PepMarket. "We were looking to leverage our investment and create an additional source of revenue," recalls Andrew W. Williams, the company's senior vice president and CFO. Initially, Pepco managers predicted the new venture would throw off $50 million in annual sales within five years.
It barely took five weeks for Pepco management to realize its numbers were off. According to Williams, business at PepMarket was downright anemic. "We got roughly 5 percent of the buyers we thought we'd get, and less than 20 percent of the product suppliers," he concedes. In the fourth quarter alone, the exchange lost $1.4 million. Says Williams: "People just weren't willing to put the nickel in the slot and pull the handle when the time came."
Pepco's managers didn't have that problem. Seven months and $11 million into the rollout, the utility's executive team closed the electronic trading exchange. "If it's not going to fly," notes Williams, "you've got to be ready to shoot it down quick."
Apparently so. Over the past year, scores of retailers, manufacturers, and service companies have unveiled E-commerce businesses. All too often, the curtain's come right back down again.
Dell Computer, for one, shuttered DellMarketplace just four months after the small-business procurement site went live. Energy giant Chevron capped Silicon Valley Oil, its fledgling online marketplace for fuels, in less than a year. And management at Wells Fargo recently hung a "temporarily out of service" sign on the virtual doors of the bank's procurement exchange for small businesses. "Just because these companies did something cost-efficient in- house," says Laurie Orlov, ebusiness research director at consultancy Forrester Research, "they think that automatically makes them an expert at selling it to others. Millions of dollars later, they find out it doesn't."
This is not to say that every old-line business is destined for heartbreak in cyberspace. Fact is, some earthbound corporations have managed to establish thriving operations in the virtual universe. Corporate stalwarts like The Washington Post Co. and United Parcel Service Inc. have devised appealing — and lucrative — Internet business models. Others, like Eastman Chemical Co., are still in the early days of moving from commerce to E-commerce. But Eastman Chemical's Internet venture — called ShipChem — holds real promise.
So why are these companies succeeding when so many others have failed? For starters, managers at these old- line businesses have avoided pie-in-the-sky expectations about Net ventures. Specifically, they have not presumed that whizbang technology would automatically attract an audience. Jack Prouty, national partner in charge of business integration at KPMG LLP, believes Pepco and Dell may have thrown in the towel too soon. "You can't expect customers and revenues in just a few months," he says. "You've got to focus on nurturing and preserving the value of these assets, as opposed to seeking quick profits."
Conversely, senior executives at the Post and UPS have shown real patience with their E-commerce ventures. At Eastman, top management has not wavered in its backing of ShipChem — this, despite an ugly shakeout in the online exchange sector. "It's not easy getting companies to switch from comfortable, established buying patterns into new patterns," notes George Reilly, a research director at technology consulting firm Gartner.
Mostly, however, the management teams at these three clicks-and-mortar innovators have not assumed that customers would blindly follow them into cyberspace. Instead, they've followed the money trail. "These companies are extending their core competencies and brands," asserts Orlov. "They're creating corollary services and products their customers actually need."
In the process, managers at the Post, UPS, and Eastman have performed a minor miracle. They've imbued their old- line businesses with new economy cachet, transformed their corporate images, and uncovered additional — and substantial — sources of revenue.
The Paper Chase
The Washington Post Co. (www.washpostco.com) first ventured into the virtual universe way back in the early '90s. In fact, company management announced the formation of a subsidiary to develop Web businesses in 1993 — almost prehistory for E-commerce. Not surprisingly, the Post's early stabs at developing Web businesses mostly involved posting the newspaper's content online.
Around the same time, the media giant began moving into the career services sector. In 1997, the Post bought Lendman, a job fair promoter, for an undisclosed amount. As it happened, Lendman also owned a small résumé- scanning and database company. That little side business greatly intrigued executives at the Post. "We immediately saw an opportunity to develop this capability into a separate, Web- enabled business," recalls Jay Morse, CFO at the company.
Post management moved quickly, turning the scanning and database company into an online résumé management business, dubbed HireSystems. Then, in September 1999, The Washington Post Co., along with The Tribune Co., Central Newspapers (now Gannett), and Accel Partners, started up BrassRing, a division that sponsors conventions for high-tech employers and prospective employees. HireSystems became part of this new division and was renamed BrassRingSystems (www.brassringsystems.com), complementing both BrassRing's job fair enterprise and the Post's classified advertising business. "We market it to our corporate advertisers, and at our job fairs," explains Morse.
One Post advertiser, General Electric, relies on BrassRingSystems to handle the thousands of résumés the company receives each day. "We manage their résumé flow by scanning and inputting all the résumé data into a database," says Morse. "So if GE wants someone with experience handling cobalt, living in Columbus, Ohio, and with an MBA from MIT, we can search this for them in seconds."
BrassRing has prospered, analysts contend, because it capitalizes on the Post's existing relationships. "By printing corporate help-wanted ads for decades, the Post established crucial relationships with their advertisers' HR departments," says Reilly. "Now, they're taking this customer base to the next level, marketing an online recruiting service that can pare their clients' employment-related expenses."
Although Morse would not disclose BrassRing's annual revenues, published reports put sales at somewhere between $90 million and $100 million. That's not exactly pin money, even for a media giant with $3 billion in revenues. "We're achieving double-digit revenue growth," crows Morse. "This is a keeper."
In Minnesota, executives at the Star Tribune are likewise transforming their print experience into a thriving online business. As have scores of daily newspapers, the Minneapolis-based Star Tribune, which is owned by Sacramento, California-based McClatchy, has developed its own Web site featuring current news articles, archival material, ads, and the like. According to Nick Rogosienski, vice president at the paper, the success of www.startribune.com got company managers thinking. "We decided to leverage our Web-site design and engineering talent into a separate online business," says Rogosienski.
To date, that separate online business — the Star Tribune Interactive Media Division — has built nearly a thousand Web sites for local retailers and other businesses. Unlike some failed Internet ventures, the division can count on two discrete revenue streams: design fees and advertising income. "We've always believed that the person who builds the site has the inside track on recommending how you promote it," explains Rogosienski, who heads the Star Tribune's Web design group. While he won't discuss exact sales figures, Rogosienski says the Net venture is a stone winner. "By day two," he recalls, "we knew we were driving toward profits."
How's My Lending?
Driving is something they know about at United Parcel Service (www.ups.com). But surprisingly, the package delivery company has created a stand-alone E-commerce unit that has little to do with crankshafts or drag coefficients. Instead, Atlanta-based UPS is attempting to break into the financial services sector. "Our mission is to enable commerce," explains Scott Davis, chief financial officer at UPS. "We define commerce as the movement of goods, the movement of information, and the movement of funds."
The defining moment for that definition came in 1998, when UPS launched UPS Capital (www.capital.ups.com). While a land-based company, UPS Capital includes a growing online component. That cyber-arm of the operation helps UPS business customers arrange global trade financing, obtain letters of credit, and purchase export credit insurance. In essence, it's a virtual captive finance operation, akin to a General Motors Acceptance Corp.
Davis, who was named CFO at UPS in January of this year, claims that the Web venture is a logical extension of what the delivery company does. He points out that UPS drivers collect scads of information about a package upon pickup — from where it's going to who it's from to every place it will be in between. "On the receiving end, the consignee's signature triggers the financial flow — the payment for that package," explains Davis. "We see UPS Capital as a natural progression for us to provide that final piece of the solution."
Of course, extending $2 million of credit to a manufacturer in Myanmar may be a bit riskier than delivering a bassinet to Boise. But Davis counters that UPS often knows more about its customers than the customers' bankers know about the customers. "UPS drivers are the ones on the shipping docks," he notes. "No one has that kind of daily due diligence."
In fact, company management contends that such insight gives UPS Capital a leg up on competitors. "A typical lender will only advance 50 percent of the funds against inventory because they have a concern where that inventory is at a given time," says Joseph Guerrisi, a UPS managing director. "If you control where the inventory is, you can be more flexible in your terms. We know where the inventory is at all times, always."
Maybe so. But in January, UPS brought in some reinforcements: The company is acquiring First International Bancorp to bolster its structured-trade-finance and commercial-lending programs. Nevertheless, Forrester's Orlov thinks UPS may be on to something with its click-and-mortar financial services group. "UPS Capital is completely correlated to the core business," she asserts. "They already track nondelivery of goods. Tracking nondelivery of payments is a logical extension."
Resins in the Sun
With UPS Capital, the 90-year-old logistics company is taking on a decidedly new-economy look. At Eastman Chemical (www.eastman.com), executives are engaged in a similar makeover — with one small difference. They want to get into UPS's business.
The $5.3 billion-in-revenues global provider of plastics and polymers recently launched ShipChem (www.shipchem.com), a virtual logistics provider for the chemical industry. "Our idea is to generate a new source of revenue and profits for our shareholders by offering a way for chemical companies to outsource their logistics," says Jim Rogers, CFO at the Kingsport, Tennessee-based Eastman.
As managers at Chevron can attest, however, building transaction volume early on is crucial to the survival of a fledgling E-marketplace. To help prime the pump, parent Eastman Chemical has started moving its entire $400 million in logistics operations to ShipChem. "Ramping up with that kind of revenue transactions should get the venture going," insists Mark Klopp, Eastman's managing director of digital business ventures.
If the little bit of seeding takes, Eastman could find itself in clover. All told, the global chemical industry spends about $160 billion each year on logistics — or roughly 20 percent of the sector's working capital. By aggregating third-party logistics providers on one portal, maintains Klopp, ShipChem will slash transport and inventory costs. "The idea is to increase the transparency of the supply chain for the global transportation and storage of chemicals," he says. "That, in turn, improves your ability to assess inventory levels as they relate to demand forecasting. Less safety stock is required, which helps reduce working capital."
Of course, it remains to be seen whether ShipChem will succeed where so many industry-specific E-marketplaces have failed. Gartner's Reilly, for one, has his doubts. "The challenge is to compel other chemical companies to join," he insists. "To do that, they'll need to prove they can provide service that is superior to the way chemical companies already manage their logistics."
So far, three B2B chemical exchanges have outsourced their logistics services to ShipChem, and an unnamed chemical company has agreed to conduct transactions on the site. In addition, Albermarle, a supplier of specialty and fine chemicals, recently hired ShipChem to assess that company's logistics and transportation operations.
For his part, Klopp asserts that Eastman is resolutely committed to the online project. "We've got to get it right simply because this is how we now manage our own logistics," he explains. "We don't have a choice about this."
10,000 Volts per Staple
At least with ShipChem, managers at Eastman Chemical are sticking to an industry they know. Others haven't followed that simple strategy. Executives at Dell Computer (www.dell.com), for instance, went slightly far afield when they launched DellMarketplace.com last November. The B2B site catered to small-business buyers searching out deals on office supplies. "We were looking for an opportunity to generate a new revenue stream beyond PC sales," explains Ken Bissell, spokesman for the Round Rock, Texas-based computer manufacturer and direct retailer.
Dell had already developed its own internal office- supply procurement system. Bissell says that Dell's larger commercial customers, including Pitney Bowes and 3M, encouraged the PC maker to transform the system into a commercial venture. It was not necessarily great advice — DellMarketplace.com barely lasted four months. "We figured we'd create this E-marketplace in which we'd all sell our products," laments Bissell. "It just didn't pan out."
Things apparently aren't panning out for Wells Fargo (www.wellsfargo.com), either. Last year, the San Francisco-based financial services company cut the ribbon on two office-supply procurement sites, one for small-business accounts and the other for larger accounts. Visitors will have a hard time finding the small- business portal today, however — the exchange's third- party software provider, PointSpeed, has gone out of business. Wells Fargo management now say the company expects to relaunch the small-business exchange with another partner this summer.
The bank's other virtual procurement business, targeted at middle-market companies, is still alive and kicking. Danny Peltz, senior vice president in Wells Fargo's Internet services group, says the venture is "a natural extension of our purchasing-card business." Wells Fargo definitely has a lot of potential customers for the exchange. "We've got 30,000 middle-market customers and bank 30 percent of the Fortune 500, all of whom need to buy indirect materials like office supplies, catering services, and computers," Peltz notes. "They'll want to buy through a bank, simply because of the higher guarantee of credibility we offer."
That logic is lost on some observers. "If I'm in the printing business, I'd go to a procurement exchange that has expertise in my industry," argues Forrester's Orlov. "I wouldn't associate that expertise with my bank — despite promised discounts."
Indeed, given the track records of Dell, Wells Fargo, and others, it would seem that selling office supplies online is best left to office-supply companies. But in the rush to add some new-economy glitz to their corporate images, it appears that some brick-and-mortar executives have forgotten what businesses they're in. "Too many companies are exaggerating what they consider to be extensions of their core business," claims Orlov. "They're stretching the definition to the breaking point."
You don't have to tell that to managers at Pepco, who are likely still smarting from the quick demise of PepMarket. For his part, CFO Williams claims that the utility will eventually recoup its investment. "Thanks to the purchasing process improvements we're reaping through the procurement system," notes Williams, "we should recover our $11 million investment in PepMarket within three years."
Still, you have to wonder why PepMarket ever saw the light of day. Gartner's Reilly has an answer. "They had this nice purchasing technology," he explains, "looked at their customer base, and figured they could sell them office supplies through an E-marketplace."
A good idea — in theory. In reality, the idea lacked that certain something. "What they left out," offers Reilly, "was a compelling reason for their customers to associate the buying of office supplies with the company that sells them electricity."
Russ Banham is a contributing editor at eCFO.
Tiptoeing Through the Land Mines
So what makes for a winning E-commerce venture? eCFO asked Jack Prouty, national partner in charge of business integration strategies at KPMG LLP, for some advice. Prouty offered up the following pointers — all gleaned from his work with old-economy clients who have launched virtual businesses.