So far, we discussed leveraging the internet to create or modify business models, infrastructure and marketing.
This week we will introduce and discuss the issues and decisions surrounding e-Business Operations:
- What processes are affected by e-Business and vice versa? Does that differ by the stage or type of business?
- When do we introduce/integrate processes; is there a logical progression or sequence?
- Where should a process be operated? In-house or outsourced?
- Why should we e-enable some processes and not others?
- How are the current operations affected by adding e-Capability?
- Enabling applications:
- What are the applications enabling e-Business processes?
- What aspects of a business should be automated?
The big picture:
Imagine a futuristic company that has no employees or offices. Its entire business is run on computers and networks i.e. all of its operations are automated and integrated. Its face to the world is a website that:
· Marketing: Customers use to identify, select, configure and buy products and make payments. They can also get pre and post sales service from the web interface. Marketing collateral is created and distributed to customers’ email boxes. Other web based advertising such as banner ads are employed. Market intelligence gathered through the web and decisions made.
· Manufacturing: Orders are sent directly to an automated manufacturing line that makes the products and delivers them to the distribution centers.
· Supply Chain: Partners use to sell sub-components and get payments. They can collaborate on new product designs online as well.
· Financials: Incoming and outgoing financial transactions are updated in the financial systems such as general ledger, accounts payable, accounts receivable, purchase order and invoicing.
Automating and integrating processes in this manner can create substantial shareholder value. Let us say a typical company’s cost of labor is 40% and Sales, General and Administrative (SG&A) expense is 20% of costs. This model of operations could result in a 60% boost to margins over its “brick” competitors!
Technology exists to make this vision a reality. Give or take a few details, off the shelf applications exist to enable this company.
However, there are two ingredients missing: knowledge and a personal touch:
- For example, how does this company come up with the “product” it wants to market? It could be a service or even a digitized product, such as software, but someone still has to design it and position it. Even if we create some expert systems, we still need someone to make them!
- Some people, customers and partners, are just not comfortable dealing with machines. Do we give up that segment of the market? Some products’ sales are based on relationships. Do we give up on those products?
Do you think this company would work for all products and customers? If all competitors did business this way how do you differentiate yourself? If you are in a commodity market with minimal product differentiation, does it make sense to differentiate on service or price or packaging etc.? How does this company adjust to market changes?
Consequently, the company model we just described is “paradise”: ideal but not achievable. Most companies fall short of this model of extreme efficiency. Some business models do not need this level of process efficiency.
Till expert systems advance to a point where we don’t need people, let us include employees into this picture.
Now the website includes features for Administration:
- Potential employees to identify, select and apply for jobs; keep in the loop on their applications’ status; conduct interviews and if selected get their appointment letter.
- Employees to do their work, communicate with each other and business partners and, of course, get paid
What did we just do? We gave up 40% of our margin! As it turns out, real world companies have processes which include both manual and automated parts. Consequently, all other things being the same, they have varying degrees of process efficiencies. That SG&A advantage we mentioned earlier is almost lost when one considers customer acquisition costs for a new “pure play”.
What are we really trying to prove?
Among the many lessons strewn along in this example, six things stand out:
- A business is a business: Businesses, much like human beings, are similar at a certain level of generalization. From a process perspective, the difference between a “brick” and “click” business is in what process and thread is automated.
- Business model drives processes: Subtle differences in automation, steps and procedures differentiate successful e-Businesses from failures, much like the 2% of human DNA that differentiates us from apes. However, there are some jobs that are ideally suited for apes not humans. Automate wisely not widely. Let your business model be the guide.
- Technology enables a process: Technology dazzles but we should not be blinded to the fact that it is enabling a process. Marketing, Sales and Distribution, Manufacturing, Forecasting, Production Planning, Procurement and Financial process, to name a few.
- Process integration is the key: Websites are an organization’s “interface” to the world (Customers, partners, prospective employees etc.). We still need the rest of the body, including the brains. Most importantly, we need good connections between all its components.
- Knowledge is the differentiator: In a world where companies have similar processes and implement similar systems (ERP?) the key differentiator is knowledge. Value your employees?
- Optimize then automate: Processes consume resources (employees, time etc.) which cost money. Efficiencies require efficient processes and then technology enabling them.
The interplay between business model, strategy, processes, technology and organization when combined with knowledge provides the differentiator.
Introduction of the internet into an organization affects most (all?) of its processes and systems. The specifics depend on many factors including the degree of current automation. Let us look at some areas where the Internet has had a profound effect on operations
The internet has enabled a new distribution channel and greatly enhanced customer relationship management. An internet based distribution channel results in greater revenues as we can sell the same product to a wider geographic area. One must keep in mind that other factors limit this expansion. It is true that GM can sell cars, through the web, in Mauritius. However, if they do not have a robust after sales network in that country their gains might be hindered.
Personalization is perhaps the single most powerful capability in this new world of “segment of one”. Additionally, the internet has greatly enhanced our ability to capture a wide variety of data on consumer buying habits. Together, they present a formidable challenge and opportunity for companies in “brick” or “click” space. To succeed, one must have sophisticated CRM processes and tools that connect to the Integrated Product Development (IPD) process.
One of the key measures of manufacturing success used to be the dollars tied up in raw materials and finished goods inventory. Just in time (JIT) manufacturing helped reduce these costs to a large extent. The internet era has introduced “mass customization” which can greatly strain this JIT capability. Right from a demand forecasting to a sophisticated Bill of Materials (BOM) to distribution one has to have sophistication and integration with vendors and partners. This has created multiple points of failure. However, the internet has also provided invaluable tools to deal with this situation. B2B Exchanges have strengthened the procurement processes and internet based integration with vendors has provided a robust IPD process.
A client of mine is creating a portal exchange for the flower industry. This complex supply chain originates in South America, where flowers are grown, and flows through Miami and eventually to distributors and retailers. When one considers the perishable nature of flowers, the spot procurement practices and very low technology savvy of the retailer, this is a daunting problem to solve. It requires not only fancy technology but also changes in current processes and behavior.
One of my clients used to procure technology contracting services worth multi-billion dollars each year. Their procurement processes were not integrated with the rest of their processes including manufacturing and production planning. Additionally, they had multiple points of contact for potential providers.
The technology services contracting industry is extremely fragmented with thousands of players. One cannot adjust the production capacity of this “service” either. Consequently, the bigger companies used to farm out work to smaller companies till there were 4-5 links in this chain!
Combined, this resulted in supply chain inefficiencies that increased the per hour price of a programmer from $40 to $120!
A private exchange is the starting point of a solution to this problem. What was needed was a set of processes that enabled demand management, supplier integration and an organization structure to support this process.
To operate in this new world, back end processes and systems need to be modified as well. The key change is integrating them with the front-end processes and systems. An order triggers a chain that ends at financial systems such as GL and AR. To enable process efficiencies, the entire process must be optimized, integrated and automated.
There is a considerable amount of paper and manpower that goes into internal processes such as human resources. An e-enabled process can significantly reduce these costs and improve employee satisfaction. Corporate intranets with self service features, e-learning, online forms and handbooks are some applications that are producing good results.
However, employees are also becoming detached from their companies. Over time, there will be no company “spirit”. One cannot emphasize the need for personal touch. It is still a good idea to have that “company picnic”.
Introduction of internet based technologies also creates disruption and a unique set of operational challenges. Let us look at some of the key challenges:
Integration of e-Business within existing processes is a daunting task, often underestimated. Not only does this require process changes but also behavioral changes. At a large client, we went through each business unit and key process to find integration points and resulting changes in applications, infrastructure and organization. We also devised change procedures and provided extensive documentation and training to the existing staff.
Seamless integration across channels is critical to the long term success of an organization. A customer must have the same experience and results, no matter which channel they are dealing with.
The internet continues to erode organizational boundaries. Combined with rising cost of employee benefits and the reluctance of companies to subsidize them, this has resulted in the emergence of the independent contractor. Individual units of capacity and knowledge that plug and play at a point in time to deliver value, then go their separate ways. In that respect, this forward movement is taking us back to the middle ages!
Seamless integration across this network of symbiotic units is critical to a company’s success. Short term, a company has to seamlessly integrate across its partners and vendors so that they all share the same processes and sense of customer service.
At an insurance industry client, one of our biggest challenges was how to keep web content fresh and eliminate discrepancies between the various channels. An insurance product goes through extensive changes in documentation as it goes through a state by state regulatory process. Additionally, it also has a different flavor by state as regulations differ. How does one keep all this information current and consistent across channels? We devised a process and procedures and implemented Vignette as the tool to manage content from creation to destruction and archival.
The Internet opens up yet another door to the world. The problem is that the welcome sign also invites some unsavory characters. The key issue, then, is how one protects valuable assets without creating a barrier for its customers, employees and partners.
At a client in the financial industry we created a comprehensive view to the assets, their characteristics, probability of loss, ways to replace, value lost, possible attackers and their profile. We also created layers of security that had to be breached to reach the asset. Based on this we created a comprehensive process and procedures that linked into existing processes to dissuade, prevent, detect, and defend and post-loss actions. These were supported by state of the art tools such as firewalls and “sniffers”. The key component was a dedicated organization which also provided awareness and training to the employees. This was done at regular intervals to “build security in” and make it a part of life and not something to be alarmed about.
Good operations are critical to the success of an e-Business. Operations 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, operations decisions are sometimes taken in from a technology perspective. For example, companies bought ERP packages and then realized that they needed to change processes to fit the package! If your competitors have the same ERP package then where is your competitive advantage? If you change the ERP to fit your processes then where are the savings? One must chose what to automate and the application with extreme care. The business model should be the guide in all such decisions. A high-touch product might be best served with a personal touch. A complete and thorough analysis that weighs in key factors such as model, strategy, customer preferences, product, price etc. should result in an operation that is the “best” one for that situation.