Cost-cutting cramps e-business evolution

If you're implementing an e-business strategy, chances are you're re-inventing yourself from a product supplier to a service provider.

If you're implementing an e-business strategy, chances are you're re-inventing yourself from a product supplier to a service provider.

After all, that's what e-business is really about. Sure, it streamlines operations and cuts costs but cost cutting is not what the buzz is about. It's about customer service and building customer loyalty.

As former Apple CEO-turned-venture capitalist John Sculley said at the Auckland IT Investment Forum earlier this year, in the traditional economy the producer was in control of everything. The producer said, "This is good, here are the features, here are the price points".

In the new economy the balance of power has shifted to the customer. The customer says, "I want the best quality, with the best service, at the best price. I want it customised and I want it now." If you look at those demands through the lens of the old economy you have to ask - how can anyone deliver that and possibly make any money? The answer lies in the Internet. The Internet is the enabler that shifted power from the producer to the customer.

Sculley speaks from bitter experience. When he was CEO of Apple, the company was one of the largest selling personal computer manufacturers around. Apple executives thought it was all about innovation, product styling, great marketing and dominating a few markets such as education and creative professionals. Sculley admits they completely missed the idea that you can build a very valuable business around customer logistics. It was the strategy seized upon by Michael Dell, who took a commodity and put in a system to let the customer design the product.

Today, through the Internet, Dell customers can design products with the features they want and have them delivered within 48 hours. Dell set up contracts with major vendors and got them to help build the logistics system so they could assemble these products and sell them direct, thus giving them an entirely different cost model to anyone else in the industry.

Having learned this lesson, Sculley, through his VC firm, has helped co-found a service-based company called People PC. It's based around the premise that the computer industry is used to shipping products with a 10% to 20% out-of-box failure rate while in the communications world people are used to almost perfect performance. So there is a large gap in customer satisfaction between the computer and communications industries - and yet the two are converging.

To bridge that gap People PC is a membership service which offers extraordinary customer hand-holding in terms of setting up and bundling PCs with ISPs. It makes money by selling 'bounties' to partners. Companies like E-trade that spend several hundreds of dollars to acquire a new customer pay People PC $50 and offer People PC members a special deal to sign up.

People PC gets its commission, the partners get a new customer and the customer gets a cheap deal on whatever the partner is selling. It's similar to what E-force, an online buying membership, that makes money from clicking tickets is doing here.

People PC is also doing deals with large employers to provide service to employees and retirees. For example Ford has 400,000 people in this category. Usually People PC charges $23 a month but Ford subsidises the fee bringing it down to $5 a month. Likewise Delta Airlines, which has 76,000 people, are doing the same thing with their staff - paying $12 a month. For these corporations, it's part of the trend towards becoming a model employer that can retain staff.

And it's not just business-to-consumer where the customer is all-important. Business-to-business has plenty to gain here too. After all, everybody is selling to somebody else and the aim is to keep the customer loyalty rate high.

Sculley believes that customer churn rate is one of the new metrics for success.

For example in 1990 America On Line was running at break-even while its major competitor Prodigy had lost over $US1 billion. The telling metric was the churn rate of the customers. Prodigy was turning over customers at a rate of 44% a year, while AOL had a churn rate of about 22%. That made the difference between whether one company was haemorrhaging cash and one was breaking even. The acquisition cost of a customer , as discussed above, is another of these new metrics.

Supporting this new approach to business, is a slew of e-business technology. ERP (enterprise resource planning) systems have been around for a while and until now they've serviced the company internally. Now with a Web front end and a customer relationship management (CRM) system your supply chain can be extended to add service to the customer. Used to its full potential a CRM system should ensure that not only are customers satisfied but they'll come back.

Andrea Malcolm is Computerworld's chief reporter. Email her at Andrea Malcolm.

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