How much will you need to spend?

Worried about being an e-jit if you're not into e-business? You're not alone as the e-word goes for world domination in an increasingly online marketplace. But how much will it cost? Anna Wallis reports.

Worried about being an e-jit if you're not into e-business? You're not alone as the e-word goes for world domination in an increasingly online marketplace. But how much will it cost? Anna Wallis reports.

To try and gauge what kind of spend will be necessary for companies to engage in e-business, Computerworld asked vendors and consultants to look at three possible online scenarios:

  • a low-end shop front only;
  • a mid-tier small to medium enterprise (SME) company tying its front-end Web site to its back-end accounting systems;
  • and a full-on, enterprise solution encompassing ERP, supply chain and front end.

While there is a certain how-long-is-a-piece of-string quality about the question, several of the consultants and Web site designers Computerworld spoke to were specific.

According to KPMG e-business consultant James Graham, an entry level transactional Web presence for people wanting to sell a product or products over the Web can be "quite a successful medium and not that expensive".

SMEs can build such a site for $25,000 to $30,000 - coupled with "a very pragmatic approach".

For that kind of money, companies will have their products or services up on the Net with customers able to select and pay for them and the company receiving acknowledgement of the event so it can be actioned. But it will not get them any integration of existing back end/accounting systems, the next step up.

It is however more than just brochure-ware, where a company catalogue is pinned up on the Net and nothing else.

Such a company would either use an ISP such as ClearNet or Xtra with a shopping mall type environment to host the service or else use a Web development company to build the site and host it themselves. The outcome is a simple entree into e-business with the right levels of security for handling credit card transactions.

The next tier, says Graham, covers the larger New Zealand companies with plenty of experience in Web sites and an existing orientation towards business-to-business interactions.

"They're starting to realise the strategic game they are playing here. They're not just looking at building Web sites but they're looking at integrating channels - retailing across multiple channels or customer service across multiple channels.

"And looking at it more seriously and holistically."

This strata is looking at a spend starting at around $100,000.

"You can go up quite a bit from there but that at least will give them the integration. When the customer looks at the Web site they will be going right into their product files and discover, for instance, there is no stock available at that particular time or shipping will be delayed."

Graham says the range is quite broad in this tier and could go up to $300,000.

For that kind of e-business budget, companies are buying a lot of integration work and finish with a more modulised approach to their systems.

It is the foundation for future e-business expansion as well, with a well thought out development plan.

It is at this point that expenditure on Y2K comes into play. Companies that have invested in their core systems will find the interaction and integration necessary for a significant introduction of e-business much easier to achieve.

Graham: "The more we move up into the larger companies in New Zealand the more we see they are finished dealing with their ERP or core systems issues. The next circle around that, outside core systems, is in knowledge management and customer management or the e-business arena. Their foundation systems are now modern and they can make the information work better for them and their customers - and that's been a change in the last 18 months or so."

The third and final tier which is made up of New Zealand's larger corporates has a how-long-is-a-piece-of-string quality about it. But for a full enterprise solution, companies can spend "$1 million easily".

This involves a strong interaction on the supply chain side of the equation, with companies required to invest a lot of resource and major re-assessment of how the company works with supply chain customers. Consequently, a cost figure is difficult to nail and dependent on how far along the process a company wants e-business to extend from the fulfilment stage right through to invoicing and payment.

"So it gets very broad and people can spend a million dollars easily. And they have spent that much in New Zealand ... clearly," Graham says.

Ernst & Young's senior manager for its e-commerce group Peeyoosh Chandra says a small New Zealand retailer, with a singular product, such as honey, can be on the Web for under $6000. It's a simple solution, static but a start.

In the cost break down of developing one's own site, a domain name will cost $75 a year with a Web site, email account and Internet access costing around $380 a year.

"A start-up company would need about five mail boxes personalised into sales, returns, customer support, complaints etc.

"A mail box filtering tool such as Microsoft Outlook can be used to manage the emails. All up, overheads could cost around $2000 to $3000 a year.

Beyond that, the Web site needs to be developed. Buy a copy of FrontPage or use something like Yahoo's Web Page builder tool.

This means minimum hosting cost as long as orders can be received securely.

Marketing is also a priority so the company has to be listed on search engines. Either register on a search engine directly, or go to a Web site which allows registration with multiple search engines and will cost a one-off $US40 or buy a $300 piece of software such as Web Position Gold which keeps submitting a site to search engines for continual prime position.

And on top of this, credit card payments mean 3% to 5% of every dollar goes to the bank. For some companies, local delivery will be a new cost at $2 to $7 per package.

"So, if I'm a small player and just doing a limited Web site I'm looking at a total layout of $5000 to $6000 - including getting some fancy graphics and buying a copy of FrontPage."

Chandra says the next level up from this is dependent on what sort of consumer experience a company is looking to deliver, coupled with the what sort of back end systems it has.

Complexity and costs increase when personalisation is introduced online; Chandra says one of the fastest growing retail sectors on the Net is apparel, and successful e-tailers need to provide customers with access to information such as sizes and preferences that is customised to their needs.

Companies can expect to pay $10,000 for just the software platform and an equivalent amount for a developer to customise it. More robust, integrated solutions covering personalisation through to fulfilment can involve multiples of $100,000.

This level of retail front end consistently asks all the questions a sales assistant may ask of a shopper, such as on-selling a tie to go with a shirt, and remembers how the customer responded so that the retailer can improve their offer over time.

It is important to compare this level of expenditure with the size of the market opportunity and what it would have cost to reach an equivalent audience using a bricks and mortar retail infrastructure.

Chandra says there is a tendency for people getting into e-business to expect online users to put up with shoddy systems or hang round while "coming soon" flashes on the screen.

He says business people won't wait round, but will look for a solution that meets their immediate requirements.

The system also has to reflect the customer-supplier relationship.

"Say I was ordering a high-voltage capacitor off an electronics company. I know the part number and on entering it into the system, I'd expect to see immediately a picture of the item, a description of it, stock available and my own price because I buy off the company regularly. If the electronics company returns its book price, I'm not going to use its online site."

In this type of scenario, if companies aren't going to do it properly - with the necessary budget- don't bother doing it, he says.

Moving up to the third tier of operations, Chandra says while it's hard to talk numbers he can determine why people should invest.

Either it is going to reduce the per-transaction cost, or it will open a new opportunity/market or it enables a business to predict demand for a product better.

"As an example, take a company employing a team of 40 sales people costing $60,000 each. If they go online they can effectively reduce the sales team by half - because the queries of existing clients can be answered online - then it's justifiable to put in anywhere between half a million to a million in capital to get such a system going."

Any discussion of e-business has to include the cost of security.

A ComputerCentre Survey published two years ago showed on average, every newly-installed site on the Web was accessed within 28 seconds of being put up and attacked within five hours.

Not surprisingly, Datacraft e-business specialist Richard Bar-nett says securing the integrity of online data is crucial to the faster take up of online business.

And therefore companies need to establish what kind of expenditure is needed to secure the safety of their systems.

Datacraft is working on a model for clients to work out what needs to be safeguarded.

Take a company's market value - which in a public company would be its market valuation on a stock exchange - and subtract book value.

"That number is a very good guide to the indicative value of the company's intellectual property, the non-tangibles such as expertise and competitive advantage a company has."

And that has to be protected when a company goes online.

Barnett is reluctant to put a number or percentage on the model in terms of what companies should spend.

But he does say the spend on security by large, and more recently, medium-sized businesses in New Zealand has grown from just the firewall-type approach to consultancy solutions.

"They used to be quite small assignments - now they can expect to be in the $10,000, $20,000, $50, 000 and above mark.

"We see this becoming an issue similar to Y2K - where the directors are discussing online security at board level.

"The basic security of a business' systems will become as high a risk to the company's existence as Y2K was."

Risk is also a factor when companies decide when to get into e-commerce, says Advantage Group's sales and marketing director Drew Gilpin.

He says when considering the three tiers of investment, it can't be assumed it's New Zealand's biggest companies that are making the big investments.

"The question companies need to ask is 'how much pain are you feeling right now from the Web'. Often its smaller companies which make the bigger investments in e-business because they have the most to lose."

And often when companies do go online, it's a toe-in-the-water under-investment, says Gilpin.

The result - uninspired results which lead the company to reason it was right all along not to put too many eggs in the e-business basket.

He knows of one New Zealand company with a $5 million IT spend and a $1.5 billion turnover (the numbers have been slightly altered - but not the ratios - for privacy) which has only spent $100,000 on a Web presence.

A more logical spend for that kind of company would be between $250,000 and $500,000, he argues.

Any kind of online business must offer customers service levels that meet or beat existing levels and the expenditure must reflect that.

When Web sites fall short, customers will go lickety split back to the old world.

In Computerworld's three-tier scenario, Gilpin says those on the first rung should expect to spend between $20,000 and $30,000.

Next rung up, expect to spend $50,000 to $150,000 depending on the complexity.

Gilpin says budgets in this sector have trebled in the last couple of years as the Web has become a legitimate business tool.

Online services are now seen as a separate but complementary channel to bricks and mortar and not a cannibalisation of the existing set up.

In the third tier, clients typically spend between $600,000 and $1.5 million, says Gilpin.

To achieve a good result money has to go into scoping and specs and he says it's not unusual for customers to spend $150,000 before the build stage.

And Gilpin says it's important for those looking at e-business not to forget ongoing costs.

In software, the rule of thumb is expect to spend 20% of the price for application software on annual maintenance.

Those building and running e-business systems should also think of that as a good guide.

"Web sites are amorphous things. It may start with customer relationship management but its tentacles will spread further into areas of the business such as inventory, invoicing and accounts receivable.

"It eventually weaves its way into the whole operation."

And the march of online services across the business can't be ignored, says Gilpin.

"We shouldn't be talking about e-business or Web business as if it's removed from other business. The launch is over- it is the business."

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