e-Business Finance, Legal and Regulatory Issues


 

Introduction:

For the past four weeks we have introduced and discussed key aspects of an e-Business, including, business models, infrastructure, marketing and operations.

This week we will introduce and discuss financial planning, legal and regulatory issues pertaining to e-Business.

Financial Planning

  • What should an e-Business focus on market share or profitability?
  • What is a business plan and why is it relevant for e-Business?
  • What are the ways to fund an e-Business?

Financial Reporting

  • What is the rationale for transparency in reporting of income and expenses?
  • What are some of the standardized reporting techniques?

Legal, Regulatory, and ethics

· What are some legal issues that can affect an e-Business?

· What are some regulations an e-Business must abide by?

· What are the ethical issues that affect an e-Business?

The big picture:

The financial, legal, regulatory and ethical issues we are going to discuss this week are less glamorous that business models and marketing. However, they are potent enough to derail the most powerful business models and strategy. Typically they involve behind the scenes activity so they do not get much press. However, if a Fastow can destroy a Fortune 6 company and a Napster can be shut down, lesser mortals beware.

Much like a champion boxer who neglected his health or worse was on banned substances, an e-Business that does not watch its financial health or is involved in illegal or unethical behavior is only one punch away from a Knock Out or one drug test away from disqualification.

There is no worse mistake than procrastinating about identifying and addressing legal, regulatory and ethical issues. A good solution, to be really effective, must include clearly stated rules, roles, process and training.

Financial Planning

There isn’t much debate that sound financial planning involves monitoring a company’s vital statistics and suitably adjusting strategy. What is often argued is what these vital statistics are. There are market share bigots and profitability zealots. Similarly, there are viewpoints on financial ratios and the resulting action. We are not about to settle those debates because each side has merit based upon the situation. However, the need to capture data and monitor ratios is something that cannot be emphasized enough.

As we have discussed previously, an e-Business is, well, a business. Its long term survival is dependent on its financial health. More often than not, e-Business failures have involved a degree of financial mismanagement. In most cases because of lack of sound planning; in some because of deliberate criminal intent.

However, having a financial plan is also not a guarantee of success. In the simplest terms, a financial plan is dependent on projections that may or may not have a basis. The analysis involves ratios which may or may not have relevance. It involves conclusions that may or may not have been drawn correctly. And lastly, business decisions might not have factored in any of the above!

In the heady days of the mid-90s, some business plans got funding based on relationships rather than merit. They contained revenue projections that were unrealistic, to say the least, and impractical cost figures that often missed many major expense items. Admittedly, this was uncharted territory and mistakes are normal. However, the youthful inexperience of the entrepreneur combined with “irrational exuberance” of investors exacerbated the situation to the point of disaster.

What is perhaps more distressing is the lack of a business plan, at least a serious one, at most large companies which pursued e-Business. Their failures are more easily hidden in much larger income statements and balance sheets. But the fact remains that a lot of them lost as much, if not more, value than their start-up brethren.

Sound financial planning is critical for any business venture, especially for new ones. They require much tighter controls because there is very little wiggle room.

My own experience with start ups and old economy clients has provided some pointers to good financial management:

  • Before you take the first step make a business plan. You might have heard that serious business people make plans small enough to fit on the back of a napkin. You cannot do yourself a bigger disservice. Make a plan that is detailed enough to run on autopilot. This is the only way to know what you don’t know. What you don’t know can and will hurt you.
  • Market share or profitability. Without a doubt, initially, market share but eventually, profitability! But make sure not to spend so much getting market-share that when the customers come, you are not around (Webvan.com?). Amazon.com spent the first few years gaining market share but had deep pockets to survive till the second half of 2002 when it turned profitable.
  • Chose your metrics and ratios carefully. Overdependence on ROI can lead to undesirable results. Initially, revenue projections are prayers at best and costs are hard to allocate. There are some projects that have negative ROI but essential for other projects.
  • Good understanding of your business model leads to a realistic strategy and related financial plan. Market research is a good aid in devising the appropriate course of action. One must start with understanding the market forces: customers, competitors, regulatory etc.
  • Projections are the starting point, monitoring the next step, and course correction an absolute essential. A good manager knows how to read the signs and continuously make course correction. A process similar to the guidance system on a missile.

Legal, Regulatory and Ethical issues

There is a fine line separating some legal and ethical issues. Often it does not matter if something can send you to jail because it is bad enough if it could derail your business. It does not matter if you did something wrong because a perception is often enough to keep customers away. For each dissatisfied or displeased customer, rest assured, you are losing ten. Finally, ignorance may be bliss but when it comes to laws and regulations it could prove injurious to your business’s health.

Sometimes businesses do not realize the seriousness of legal and ethical issues and do not demonstrate a sense of urgency about addressing them. They are lulled into procrastination by a belief that these issues do not address the bottom line or this stuff happens to others. That is a very costly time bomb waiting to explode.

One of the most daunting issues in a big company setting is the determination of the legality of an issue. One can start the process but not know when or where it will lead. At Prudential, it was a very time consuming and frustrating experience. I remember trying to get approval to add an online chat feature for customer service. It is well known that visitors sometimes get confused and frustrated with web pages. This, invariably, results in either their departure from the site and/or an expensive service call. A cost effective solution is online chat with a service representative. Financial services companies, especially heavily regulated ones such as insurance companies, are obligated to keep records of their customer interaction. Hence, our legal department, which is correctly concerned about frivolous lawsuits, was taking its time clearing our request. After months of negotiations it was not clear why we could not convince them. Eventually, it turned out that they had never used the feature and did not know its capability to keep logs. They did not bother asking and my team did not bother telling. A simple demonstration cleared something which was stuck for months.

Privacy: Most web sites today detail the company’s privacy policy. However, very few take this issue seriously. One must never ask for some personal data such as social security numbers and “mother’s maiden name”. Some web sites use this information as customer ids and password verification! There are better and more secure ways of doing this because security is not only in protecting information but also in not having it, unless absolutely necessary, in the first place.

Access to minors is also a point often overlooked. Portal sites do a good job of denying minors accounts and emails without parental consent. I am especially impressed with some web sites that send the requests to parents’ email ids. However, after that everything falls apart. The content is not rated and ads that should not reach minors reach them.

At http://www.monroecommons.com/ , we had devised the engine, from ground up, to rate and distribute content based upon age classification and personal preferences.

Internet Decency: The debate rages on as to how prime time TV is getting bolder in its programming. What was once taboo is increasingly acceptable? The internet has a bigger issue as the “programming” is open to millions, if not billions of people. Consequently, it is the web site owners’ responsibility to exclude content which might be offensive to its customers.

At http://www.monroecommons.com/ , we also had a mechanism to automatically, “bleep” offensive words. This system was only limited by our offensive word vocabulary!

Intellectual Capital: This is another area where e-Business has introduced, or exacerbated, the personal ownership of content. A good e-business makes it absolutely essential not to plagiarize. A great one actively monitors and takes action against it.

Taxation: This is perhaps the hottest topic of debate as it relates to internet based commerce. States, which are increasingly under financial pressure, are debating taxing internet based sales. With only 1-2% of total commerce being transacted on the net this is not a real issue yet. However, the free ride might be coming to end in the future.

Dispute Resolution: Anyone who has tried to collect money knows the limitations of our system. Anyone who has tried to return something purchased on the net can attest to the need for a good dispute resolution system. With the transactions amounts becoming smaller and the parties dispersed geographically the issue of jurisdiction and resolution has taken on a whole new meaning. eBay.com and other sites have devised mechanisms, including using PayPal.com and vendor rating systems to deal with this issue. However, much stricter controls need to be in place to ensure success.

Self Regulation versus Government Regulation: The tales of government inefficiency and high handedness are many and widely recounted. We also know there are opposing views on whether we are better off with less government and lesser dependence on government. In general, it is a good idea to self regulate, because what may be legal might not be good for business. A customer’s perception of privacy and security violations are enough to derail a business. One must not run their lives or businesses by waking up to the color on the terror warning meter and take corrective security action, it is sufficient to note that there are many flavors of malcontents out there trying to break into a business. Protect yourself.

Summary:

Good financial planning, legal and ethical practices are critical to the success of an e-Business. They must be viewed as part of the overall picture, not a stand alone component. They must be tightly coupled with all other components such as strategy, technology and organization. However, financial decisions are sometimes taken from a very myopic, expedient and tactical perspective. For example, companies, such as Webvan.com, spent billions in operations and marketing, without a clear financial plan only to realize that when the customers came their doors were shut.

One must choose what to secure and how to secure extreme care. More importantly, there is a broader definition of security. Security is not restricted to protection from threats of physical violence or stealth. Let us not protect our company out of business. We do not want to be theman ("company")who stocked up on guns and ammunitions ("tools/procedures/requirements") to protect his home ("business")and had no money ("value proposition/goodwill/tough to do business with")left to pay the mortgage ("what is a business without customers, employees, partners?"). Unfortunately, this is not where the damage ends. It frightened his "children" (employees?)and an intimidated neighborhood (partners?) refused to help the homeless man.

The key point in financial, legal and ethical decisions is that they are not “point in time events” but processes. The business model and common sense should be the guide in all such decisions. A complete and thorough analysis that weighs in key factors such as model, strategy, customer preferences, product, price etc. should result in a financial, legal and ethical strategy, processes, organization and tools that are the “best” one for that situation.


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Posted on 06/04/2009 by


e-Business Finance, Legal and Regulatory Issues author sourabhhajela

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