e-Business technologies continue to transform the way companies operate their supply chains and connect with their partners and customers. But have these technologies really made companies more competitive?
[From iSource Business, August/September 2003] A global pharmaceutical company has rolled out an e-procurement system that is helping to reduce costs, freeing up precious dollars that can be spent on developing the new products that drive the company's success in the marketplace.
A financial services company has used Web portals and other e-business technologies to help capture new customers and drive higher customer retention. And a building materials manufacturer is using an e-sourcing solution as the technology platform for its strategic sourcing initiative, helping the enterprise to remain cost competitive.
Three companies in divergent industries employing different e-business technologies to drive competitive advantage. Have these companies blown their competitors out of the marketplace? Alas, no — at least not yet. Which begs the question: What good is all this technology, anyway?
Measuring Technology's Impact
Part of the challenge in thinking about how e-business solutions have contributed to competitiveness is assessing the real return on investment in these technologies and then relating that ROI to improvements in a company's supply chain performance and, ultimately, its position in the marketplace. Just getting through the first part of that equation can be difficult for the simple reason that most companies devote surprisingly little attention to tracking the ROI on technology implementations, according to Tom Pisello, president and CEO of Alinean, which develops tools for ROI- and value-assessment, as well as IT spending and performance comparisons. Pisello estimates, based on his company's experience, that something like 10 percent of technology projects see the necessary follow-up to determine whether they have delivered the expected performance gains. "It's just not being done today," he says, "mostly for lack of time and budget, sometimes for lack of business savvy below the level of the chief information officer, sometimes for lack of business savvy at the CIO level."
The second part of the question — measuring improvements in a company's supply chain performance — also is problematic. In fact, in a white paper called "Why Companies Flunk Supply Chain 101," business consulting firm Bain & Co. reports that just 33 percent of companies are correctly measuring the performance of their supply chains. "More than 85 percent of senior executives say improving their firms' supply chain performance is one of their top priorities," writes Miles Cook, co-director of the consultancy's supply chain management practice, "but fewer than 10 percent are adequately tracking that performance. And fewer still — 7 percent — collect the information necessary to meaningfully measure their progress."
Perceptions play a crucial role, too, in judging the impact of supply chain solutions. For example, a survey by technology consultancy Aberdeen Group revealed that companies considering buying a customer relationship management (CRM) solution expected that the technology would help them achieve "enhanced revenue/market share," but companies that had already implemented CRM cited "productivity improvements" at the top of the list of benefits actually achieved. Given the inherent difficulty in quantifying productivity gains and the perception of such benefits as "soft," this "expectations gap" has left many CRM users frustrated with their investments, Aberdeen concludes. Other studies confirm this "expectations gap": research by IT consultancy Gartner shows that 55 percent of European CRM projects were failing to meet expectations; nearly half (45 percent) of the respondents to a survey by business consultancy Booz Allen Hamilton said their supply chain technology solutions have not lived up to expectations; and 54 percent of those polled in a survey by Forrester Research said that their supply chain applications were not meeting their expectations.
Top- and Bottom-line Results
Pretty grim statistics, and yet companies continue to spend upward of $19 billion annually on technology to improve their supply chains, according to International Data Corp. figures. That's not surprising, given the current economic downturn, says Christa Degnan, research director at Aberdeen. "We're really seeing companies deploy technologies to contain costs because it's very difficult to grow top-line revenue in today's economic climate," Degnan says.
These technologies appear to be having a measurable impact, too. For instance, Aberdeen has reported that early adopters of e-procurement solutions have achieved lower unit prices (by 5 to 10 percent, thanks to improved contract compliance), reduced order requisition costs (from $114 to $31, on average) and decreased inventory costs for indirect goods (by 25 to 50 percent). And Degnan's own research has shown that enterprises implementing travel and expense management solutions are paying as much as 10 percent less for goods and services due to increased contract compliance. The top line has also seen some impact from technology, as well. In a recent study, Aberdeen found that despite a widely held perception that customer relationship management applications were not delivering ROI, CRM users responding to a survey reported, on average, 14 percent increases in customer satisfaction and 10 percent increases in customer retention, helping to drive a median increase in revenues of 10 percent.
And some companies have seen both bottom- and top-line results from e-business implementations. Case in point: Aviall, an independent distributor of aviation parts. In their study of Aviall's implementation of an order management system, Kosin Huang and Jon Derome of technology research firm Yankee Group report that the company was able to reduce its inventory management costs by $2.1 million a year and cut order processing costs from $6.22 per manually handled order to $0.32 for orders processed online. Moreover, as a result of the implementation, Huang and Derome write, "Aviall was able to win exclusive distribution contracts specifically because it was able to offer value-added inventory management services. Aviall closed a $300 million deal and a $60 million deal largely because of its improved supply chain performance."
At this point a skeptic would point out that any or all of the results cited above might be attributable not to the technologies that enterprises have implemented but to other factors influencing companies' performance, including everything from industry dynamics and the political environment to management decisions and the weather. "Companies are definitely creatures of their environments and have to play within the confines of their ecosystems, and technology is one piece of that environment," concedes Yankee's Derome, who is program manager for the consultancy's Business Applications and Commerce group. Derome notes that attempts have been made to separate out the impact of those different factors, but he says that he has yet to see a study that asserts a direct correlation between technology and a company's performance.
Still, Derome argues that the absence of hard proof of a technology-performance correlation does not prove the absence of such a correlation. "You can definitely see a relationship," he says. "There are certain investments that a company makes that seem to deliver quantifiable return. Granted, that return might be influenced by other factors, but companies do seem to have the ability to use technology to advance the business."
Which leads to the next question: If everyone has access to the same technologies to advance their businesses, can those technologies really lend a competitive advantage? Isn't it really more like a standoff between equally well-armed foes? Well, actually, yes, according to Tom Velema, senior manager in the supply chain and collaborative commerce practice with Deloitte Consulting. "Once you create competitive advantage and you become the benchmark, the competition will look at you and figure out what they can do to either get on a par with you or beat you," he says. "That's always the game that you're in." The point, Velema continues, is not that investing in e-business technologies will necessarily result in a lasting competitive advantage, but that not investing in these technologies would eventually result in lasting harm.
Sarmento Silva, director of purchasing system development and re-engineering at AstraZeneca, views it this way: "Any business requirement starts off as a competitive advantage. But when businesses see a competitor that has caught up and started to pass them by implementing some technology, then they have to implement that technology, too. Then it becomes a matter not of competitive advantage to have those technologies, but of a competitive disadvantage not to have those technologies."
David Camp, chief marketing officer at Tigris Consulting, a strategic sourcing and SCM consultancy, puts it more bluntly: "All the enterprise software packages merely represent a cost of entry for every organization. They're no longer competitive weapons." His colleague, John Fontana, a principal at the company, adds: "No one implemented SAP and used it to drive out of business another company using Oracle and another competitor using PeopleSoft. They all got better."
15 Tips to Tone up Your Enterprise
iSource Business asked a group of supply chain practitioners, business consultants and solution providers for their best tips on how companies can use e-business technologies to prepare for the competitive race. Here's what our experts came up with:
1. Focus on the strategic. "Let technology do the tactical work so that purchasing people can do the strategic work," says Sarmento Silva, director of purchasing system development and re-engineering at AstraZeneca. "Move people away from tactical process and into strategic thinking."
2. Don't forget the change management. "You have to work with your internal customers to make sure that they are very secure that you're not changing something in a way that will reduce the quality of what you're buying." — Sarmento Silva, AstraZeneca
3. Make sure your people are up to the job. "We can implement the best technologies and have the best processes. Those are given, right? So then it comes down to people. You've got to verify that your people can do the creative stuff, and that takes training, education and brutal evaluation." — Sarmento Silva, AstraZeneca
4. Don't get so caught up in managing data that you forget to leverage your information. "You need to be agile with your information. You need to be able to get information in and out of your organization, and get the right information to the right place at the right time, at the lowest possible cost, so that you can make business decisions based on the correct underlying documentation." — Tom Velema, Deloitte Consulting
5. Communicate and motivate internally. "The secret sauce is how well we communicate within the company, how well we motivate participants in projects, especially when the projects cross different divisions of the company," says Richard Jones, managing director and chief information officer at Countrywide Financial Corp. "The secret sauce is getting everyone excited about what this means for the enterprise, and getting people motivated and energized to make the project a success. When you're dealing with projects that bring the enterprise together, 90 percent of every problem is communications."
6. Whenever possible, hire a professional to run an e-business initiative. Ed Williams, vice president of corporate supply chain at Johns Manville, hired an e-sourcing veteran to manage the company's implementation of FreeMarkets' QS sourcing platform. "Getting the right person to lead the effort is critical, because inside this company, we're touching HR, we're touching IT, we're touching engineering, we're touching manufacturing," explains Williams. "You need someone to engage these people, give them a comfort factor that this is something that is proven, that we can follow some simple rules to avoid the pitfalls, and that we'll be very successful."
7. Use the e-business tools strategically rather than purely tactically. Christa Degnan, research director with Aberdeen Group, says that while many companies are using travel and expense management solutions to get a handle on how much they are spending, reign in dollars and make sure people are complying with contracts already in place, the most creative companies are using the information to understand where their T&E dollars are going and then employing strategic sourcing processes and tools to negotiate new contracts. " Those companies are seeing dramatic hard-dollar cost drops in a lot of service category areas because they are being aggressive with the information that they have," Degnan says.
8. Think small. Jon Derome, program manager for business applications and commerce at Yankee Group, says he is seeing a shift in technology investments away from traditional large-scale enterprise software categories to what Yankee calls "edge-of-the-enterprise" technologies: customer- or supplier-facing solutions that allow a company to make incremental gains in service, collaboration or integration as a way of achieving competitive distinction.
9. But don't forget the grand strategy. Advises Tom Velema, senior manager in the Supply Chain and Collaborative Commerce Practice at Deloitte Consulting: "You can't start by blocking out the sun — you need to have specific pain points in mind that you can resolve — but you have to think about the big vision, too." That's key to building a technology infrastructure that both meets today's requirements and is flexible and scalable enough to meet tomorrow's needs as well.
10. Stick with standards. "Consider the dedication of your company and industry to technology standards, whether it's nitty-gritty standards like J2EE or industry initiatives like UCCnet or RosettaNet. If you can encourage your company — or even be so bold as to encourage your industry — to leverage those kinds of standards and take advantage of the opportunities that those standards present, over time that will allow you to build a less costly infrastructure." — Jon Derome, Yankee Group
11. Get executive involvement in supply chain management at the highest level possible. According to a Booz Allen Hamilton study of supply chain success factors, in companies where responsibility for SCM resides below senior management, achieved annual savings in the cost to serve customers were just 55 percent of what they are when SCM was the purview of top management, at the CEO or chief operating officer level. Why? High-profile execs can ensure that SCM is part of the company's overall business strategy, rather than an afterthought.
12. In any technology implementation, make sure all the stakeholders have a shared understanding of the expected results. Tom Pisello, president and CEO of Alinean, says that too often chief information officers focus on delivering an IT project on time and on budget, rather than focusing on the metrics that matter to line-of-business executives. "CIOs need to work collaboratively with the business unit in putting together the business plan, understanding the impacts, modeling those impacts and then helping to achieve the impacts," says Pisello.
13. At the end of the day, it's all about hard work. Says John Fontana, a principal at Tigris Consulting: "After the 1990s, people are trying to figure out where their next source of competitive advantage is going to come from. It's not going to come from software, because everyone's got it and it's just leveling the playing field. It's all about blocking and tackling. The magic is gone, and it's all about pounding out results and getting incrementally better day after day."
14. But just because the software market has been in a funk, don't get the idea that IT doesn't matter anymore. David Camp, chief marketing officer at Tigris Consulting, puts it this way: "I don't think the era of IT as an innovator is over. It's just going through a period of maturity, and that's a good thing. It's like a forest fire that blazes through the forest, clears out the underbrush and creates a healthier environment for the trees that remain."
15. So keep thinking about the next technology that will give your company an advantage. "You know the old saying, 'He who is not busy being born, is busy dying.' We are already thinking about how to do things better, how to take more transactions out, how we can better slice and dice our data to get better information." — Sarmento Silva, AstraZeneca
[SIDEBAR] The Practitioner's Perspective: AstraZeneca
At pharmaceutical company AstraZeneca, Sarmento Silva has no doubt that technology
is advancing the enterprise's business and contributing to its competitiveness. Silva, director of purchasing system development and re-engineering for the London-headquartered company, explains that AstraZeneca, like other players in the pharmaceutical industry, relies heavily on new product development to remain competitive. "A pharmaceutical company is only as good as its pipeline," Silva says. No wonder the company, which has 2002 sales of $17.8 billion, spends more than $11 million every working day on research and development, adding up to $3.1 billion in 2002.
Given that imperative, the supply chain function's role at the company is to work assiduously to lower the company's costs, thereby freeing up precious dollars that can be spent on developing new products, assuring the company's position in the marketplace. To that end, AstraZeneca — formed by the 1998 merger of competitors Astra and Zeneca — began implementing an e-sourcing tool from solution provider Ariba, starting in 2001. Currently the company has deployed that tool globally, and AstraZeneca is now rolling out other pieces of Ariba's spend management platform, such as Buyer, Contracts and Invoice. Eventually, the company's plans call for putting all its indirect spend — $2.2 billion in the United States alone — through the Ariba system, with the exception of very low-dollar, high-volume goods that will continue to be bought with a purchasing card.
Silva says the company already has achieved significant savings by running reverse auctions for certain services and some maintenance, repair and operations (MRO) goods through the e-sourcing platform, averaging 15 to 20 percent cost reductions. (Silva declined to specify which goods AstraZeneca has put through the system or to quote dollars and cents savings because that information is considered proprietary.) "Those [savings] really were credited to the technology," Silva says, "because we had already had what we considered to be some pretty solid contracts in place, but we were able to squeeze a little more."
Not that Silva believes that technology is a panacea. On the contrary, he believes that in the long run supply chain practitioners must use technology to free themselves of tactical chores — the order processing and paper shuffling — so they can concentrate on more strategic work. "Just using the technology to squeeze down costs may help you get cost savings in the short run, but long-term savings are going to come from working with your suppliers to help them lower their costs so that they are getting more out of it while you are also getting savings," he says.
[SIDEBAR] The Practitioner's Perspective: Countrywide Financial Corp.
Countrywide Financial Corp. has taken a customer-centric approach to applying technology to advance its business and become more competitive, according to Richard Jones, managing director and chief information officer at the Calabasas, Calif.-based company, which is number 209 on the Fortune 500 list. "Our drivers are primarily about the customer," says Jones, explaining that the company's e-business efforts have been directed toward integrating the institution's Web presence with its telemarketing and branch office operations. The goal of this transformation from "brick-and-mortar" to "brick-and-click": to create a better customer experience and therefore to increase customer loyalty, ultimately driving higher revenues.
Currently, Countrywide's online presence accounts for about 50 percent of its B2B business, and about 25 percent of its B2C business, according to Jones. That's up from single-digit percentages back in 1999, a year when online upstarts like e-Loan and others looked set to give Countrywide and its "brick-and-mortar" brethren stiff competition as the Internet boom unfolded. At that time, Jones says Countrywide decided that while the e-upstarts had good Web sites, Countrywide itself had a good business model but needed to improve its e-business assets to compete head-to-head with the newcomers.
To that end, the company undertook initiatives to upgrade its online presence, culminating last November in the debut of a new Web site, CFC portal, that ties together Countrywide's various online offerings — home loans, banking, insurance — allowing customers to access various services through a single sign-on. Moreover, by integrating these online services with the company's offline systems, Countrywide has been able to create a customer relationship management environment that facilitates a potential client's transition from the CFC portal, to contact with one of the company's call center representatives, to a visit to a branch office down the street to close a deal. "We view e-business as just another channel, integrated with their other channels, rather than as something separate from the 'brick-and-mortar' sides of our business or as a different business model," says Jones.
Jones, who was named Citigroup Smith Barney CIO of the Year Award for 2003, says that Countrywide's application of e-business technology to improve its competitiveness is nothing new. This is a company, after all, whose CEO, Angelo Mozilo has said that Countrywide is a technology company that happens to find itself in the financial services industry. "We've always viewed our technological capital as the key element that gives us a competitive advantage," Jones says. "That's been understood since our beginnings in 1969, when we were up against the large banks that had a lot of investment capital, and we were the little guys that were starting a mortgage banking company. Technology was really the way we could distinguish ourselves, and we've always sought technological superiority in what we do. It's how we stay ahead of the competition."
[SIDEBAR] The Practitioner's Perspective: Johns Manville
Denver-based Johns Manville may be 145 years old, but the $2 billion building materials manufacturer is arming itself with the latest in e-business tools as it works to remain competitive in today's challenging marketplace. Specifically, the company — which produces insulation, roofing systems and engineered products such as mats, fibers and filtration solutions — is implementing an e-sourcing solution called QS from FreeMarkets as a platform for the strategic sourcing program.
Ed Williams, vice president of corporate supply chain at Johns Manville, is bringing to Johns Manville the same approach to strategic sourcing that he practiced at Carrier Corp., where, as vice president for supply chain management until coming to JM last January, he helped introduce the FreeMarkets solution as a tool for ensuring the company was getting marketplace pricing for the goods it buys. "Before Carrier, I worked at Xerox Corp.," Williams explains. "Xerox had about 50 cost engineers who could come up with a target cost estimate for about anything you might want to buy. At Carrier, I did not have the luxury of a battery of cost engineers, and I don't have cost engineers here at JM. So the FreeMarkets tool allows us to get to competitive benchmark cost levels."
Johns Manville is using the FreeMarkets tools to whittle away at the cost of its indirect spend, beginning with certain IT projects and local plant projects along the lines of janitorial services and cafeteria services. Currently, Williams is expanding the use of the tool to direct materials and transportation, and he plans to start running online auction events for certain raw materials soon.
But Williams is not relying solely on the e-sourcing tools to keep Johns Manville's costs in line. Rather, he views the QS solution as one instrument in a whole toolbox of processes to work the company's spend. "At Carrier, we may have put as much as 20 percent of our spend through the solution," he says. "We may get to 50 percent at JM, but that still leaves 50 percent that we're going to have to work other ways, whether it's through Supplier Integration or Supplier Workshops [two programs that Williams has initiated at JM], global sourcing in Asia or cost reduction through working with engineering." Still, the e-sourcing tool is a necessity in this day and age, says Williams, noting, "You'd be at a substantial disadvantage not having a similar solution today."