Recession? What Recession?

Many enterprises up e-biz spending

Fred Buehlers web strategy has a familiar ring to it: invest in promising startups, beef up the storefront and roll out new technology. What makes it remarkable is the timing. Even in the midst of a jittery economy and a parade of dot-com disasters like, the vice president of e-business for Eastman Chemical Co. is doing e-business like its 1999—not 2001. This year, Buehler will spend more, do more and devote more people to the companys e-business efforts than ever before. In a slowing economy, hes moving more quickly.

And, surprisingly, hes not alone. Despite the well-publicized gloom and doom, companies—many of them traditional brick-and-mortar players—are continuing to invest in the Web. To be sure, some enterprises are taking a cautious, scaled-back approach to spending on e-business initiatives, concerned about dour economic news and shakiness among their e-commerce technology vendors. In recent talks with eWeek, however, many savvy CIOs say now is not the time to scale back on e-business initiatives. Many are increasing spending, some by 100 percent this year.

Whats changed isnt the willingness to spend, but rather where the spending is going and the expected returns. Senior business managers no longer see the Web as a cure-all or a must-have at any price, IT executives say. Their take on the Web has matured.

Rather than focusing on sexy Web sites and the dreams of instant e-commerce, this year many enterprises are putting the emphasis on making supply chains more efficient, customers happier and operating costs lower by integrating e-commerce much more deeply into existing core processes and systems. Theyre low on sizzle, sure, but theyre high on potential ROI (return on investment).

"E-business is just business," said Giga Information Group Inc. analyst Chip Glidman, in Norwalk, Conn. "The bulk of the money companies can make in e-business is going to come from using the Web to be more efficient. People thought the Web meant the rules had all changed. They havent. In the end, the Web must be evaluated like any other technology initiative. And this is the year thats going to happen."

For many established companies, that scrutiny is leading to one conclusion: Spending on e-business initiatives still makes sense. Overall, according to research company Cahners InStat Group, in Scottsdale, Ariz., large and midsize businesses are expected to increase Web-oriented technology spending from $49 billion last year to $110 billion by 2004.

Backing that up, a recent survey by AMR Research Inc., of Boston, said 87 percent of enterprises this year will be either increasing spending on e-business or at least holding steady. Ninety-four percent said theyll be increasing or sustaining current levels of e-marketplace investments. Among e-business initiatives, only investments in intranets are declining. Thats because, according to a separate report by Forrester Research Inc., of Cambridge, Mass., two-thirds of enterprises have completed installation of their intranets. In fact, according to Forrester, 65 percent of billion-dollar-and-larger companies are considering investing in procurement technologies this year, while 53 percent are looking at supply chain technologies.

More than money

With top management eyeing ex- penses more carefully, much of that e-business-related spending no doubt is intended to streamline supply chains and cut costs. "This is the time of good old standard financial analysis techniques," said David Scott Lewis, an analyst with Meta Group Inc., in Burlingame, Calif. "The CFO [chief financial officer] is a lot more involved, and if he cant see it, it wont happen."

But a focus on ROI can be taken too far, warned Carol Rozwell, an analyst at Gartner Group Inc., in Stamford, Conn. Now is not the time to just squeeze every dollar out of a Web effort, Rozwell said. "The recession, if there is one, will end eventually, and its the companies who position themselves well during it who will come out of it on top," she said. "Just focusing on cutting costs is the wrong direction to go right now."

Eastmans Buehler agrees. "This is the year of execution, not of saving money," he said. "Our whole industry [chemicals] has been focused on cost savings for years and years. Theres nothing strategic about it, and its not what differentiates you with customers. And thats what were about this year: increasing customer satisfaction."

Eastman is increasing spending on e-business initiatives by 10 percent this year. Most of its intended to make customers happier. One example: The companys Web storefront just launched 10 new wizards—Web-based applications that help visitors make correct buying decisions. Customers can enter details of a project and find out how much of which chemicals to buy.

Although the applications will result in cost savings in the form of fewer calls to customer service, that wasnt what sold Buehler, his team and business managers on the project. Instead, they asked themselves whether they would want these features available if they were customers. The answer was a clear yes.

Creating these interactive, intelligent purchasing tools took months of programming, but Buehler said hes certain its worth it. "We want to have the best Web store anywhere, and these kinds of things help us get there," he said.

So far, Eastmans Web store generates about $300 million in sales annually.

Expanding the pie

Besides making current customers happier, Buehler and other Eastman executives expect that e-business will help the company find new customers. So far, Buehler said, most online transactions are cannibalizations of other sales channels. This year, the goal is to grow sales substantially without stealing sales from other channels.

The wizards are one step; another is developing local language content sites—first for Latin America and then for Europe and Asia.

Finding new customers is driving increases in e-business investments at many enterprises. Health-care insurer Horizon Blue Cross Blue Shield of New Jersey, for example, is working to enhance its Web site to support automatic account establishment and next-day issuance of membership cards. Turning those processes into Web-based, self-service operations, said Senior Vice President and CIO Charles Emery, in Newark, N.J., will not only cut operating costs but, more important, also make Horizon more attractive to smaller employers. "The more we can take what we do behind the firewall and move it outside, transaction processingwise, the stronger our Web efforts will be," Emery said.

Opening many of its core processes to the Web wont be cheap for Horizon. Emerys budget for e-business initiatives is twice what it was last year—$40 million. Its a lot of cash, but necessary, Emery said, if Horizon is to cash in on IT investments and strategies that began to take shape several years ago and are intended to allow the company to use its Web site to bring doctors, patients, employers and insurance providers together.

"Were going to have a more active rollout on the Net this year," Emery said. "We spent so much of 1999 and 2000 building up back-office systems for Y2K that now weve laid the building blocks."

Like Emery, Eastmans Buehler is pouring much of his e-business investment into improving integration between e-commerce and back-end systems such as ERP (enterprise resource planning). The companys online wizards, for example, tie into information in its SAP AG ERP system.

Another part of the integration strategy is to create deeper online connections between Eastmans ERP systems and those of its suppliers and even their suppliers. Already, the company has deployed 15 private business-to-business extranets linking it to key suppliers. The next step is to extend those links to include the Eastman suppliers own suppliers, using middleware from WebMethods Inc., of Fairfax, Va. (Eastman took an equity stake in WebMethods 18 months ago.) Buehlers goal is to have at least one of those B2B extranets integrated from supplier to store shelf by the end of the year.

From POS to price changes

Also spending more this year to use the Web to integrate suppliers and customers more tightly into his companys core back-end systems is Bud Mathaisel, CIO at electronics manufacturer Solectron Corp., of Milpitas, Calif. Mathaisel has seen his IT budget double this year to support those e-business initiatives. And, as a result, hes seen top managements expectations rise. "The board is leaning heavily on us to go even faster, " Mathaisel said.

For starters, Solectron will continue to invest in foundation systems like ERP by integrating them with Web-based electronic ordering systems. Another effort involves working with partners to codify the information flow, making sure suppliers know what and where everything is. Like Eastman, Solectron is investing in B2B middleware that will allow customers to tap into Solectrons back-end systems to track everything from a purchase order to a price change.

Solectron is also counting on B2B e-marketplaces to facilitate information flow with its suppliers and customers. The company is pouring major investments into working with two large vertical-industry exchanges—contract manufacturing exchange Converge Inc. and electronics industry exchange LLC. Among other things, Mathaisel is working to help those e-marketplaces produce standards, such as the Extensible Market Language variant RosettaNet, to allow everyone to do business more easily.

But looking at spending isnt the only way to gauge a companys ongoing commitment to e-business. Besides increasing their budgets, enterprises are restructuring organizations and processes to support e-business today and tomorrow. Mathaisel, for example, has turned to a portfolio approach to manage the rapidly expanding list of e-business initiatives under his watch. In addition, Eastman recently integrated e-business responsibility directly into each of its core business units. That way, Buehler said, e-business will continue to be considered a mainstream part of the enterprise.

Wait and see

Of course, not every enterprise is doubling its e-business budget or restructuring around the Web.

The wobbly economy and the resulting shakeout in the ranks of e-commerce technology vendors, for example, has caused Atlanta-based Beers Construction Co. to shift to a wait-and-see stance on e-business.

In the past year, Ortez Gude, vice president in charge of technology, watched his company commit to a number of off-the-shelf Web offerings, only to see providers such as Collaborative Structures Inc. go out of business or be acquired.

That left his business units—and his IT team—scrambling for replacements. And thats not something he wants to see happen again.

"Weve always had an intensive process where we evaluated potential partners, and we factor in the risks, the viability of the company and the payoff," Gude said. "But the market is now a whirlwind of change. Companies weve done business with have gone, and others have consolidated. Were not going to change our strategy and do the development ourselves. But we are going to look at potential partners a lot more closely."

And thats carried over into how the $1 billion construction company is looking at electronic marketplaces and exchanges. "The senior management team is more worried about making investments in the Internet than before," Gude said. "Its not changing our fundamental direction or belief in the Internet, but on things like exchanges, were not moving forward with the same velocity. Weve backed off."

Gudes budget is a "little higher" this year than last, he said. The difference is in how he will spend the money. Last year, he concentrated his investments on e-commerce, including an online e-payment project. "This year, were going to work on how to more effectively deliver information onto the Web in order to reduce our costs. We want to focus on customer service and use the Web to make an impact on the bottom line."

While the economic slowdown has created questions and uncertainty for companies like Beers, its also created some IT opportunities. Dot-com layoffs, some IT managers say, have served to ease the recently tight market for people with leading-edge IT skills.

J.P. Morgan Online, like Beers, is going to change the way it spends on the Web this year, dramatically. But its not decreasing spending. The private banking firm merged with Chase Manhattan Corp. last year, and when the dust settled, it was clearly time to change some things, said Morgan Online CEO Glenn Smith, in New York.

The company began its Web efforts three years ago with two goals in mind: Give current customers lots of tools and acquire new customers. The first goal has been moderately successful, Smith said, "to the point where people are asking us if were giving the store away by putting so many tools in our customers hands."

But customer acquisition was expensive and tough, in part because private banking "is a high-touch business," Smith said. "People want to speak with a real human being and deal with someone directly. The Web just doesnt do that for us."

That fact, combined with the merger that gave Morgan Online access to an entire customer acquisition team, forced Smith to make a tough decision: close down the J.P. Morgan Online acquisition group, lay off about 100 employees and focus only on current customers.

But Morgan is keeping its Boston-based technical subsidiary, Arrakis, which is working on the second and third generations of the site. In addition, the company is looking to incorporate into its site a number of additional features from Chase, including banking.

In fact, Morgan is increasing overall e-business spending, although Smith wouldnt say by how much. "It would be a real mistake to back off it now," he said. "Weve figured out a way to make it personalized and give our customers interactive dialog. Its time to take that to the next step."

Whats perhaps surprising is that, even as the economy appears to slow, many established businesses are accelerating their spending on e-business initiatives—intent, like Morgan, on taking that next step.

"We used to talk about how slow and overhead-laden brick-and-mortar companies were, that they were too ponderous to compete on the Web," Gigas Glidman said. "But its clear now that theyre blessed with good business practices. The companies that are going to have the best strategies long term are the slow and steady variety. Thats the key."

And thats where Eastmans Buehler comes in. "We just didnt get caught up in the hype. Weve got sound due diligence. All we have to do now is execute," he said.