InformationWeek

November 17, 1997

Extranets Make An Impact

Net technology transforms the way companies conduct business

xtranets are hot-the snazzy new convertibles that every IT executive wants to test drive.

Extranets offer organizations exciting possibilities for zipping information between the offices of their suppliers and distributors. And these organizations realize that extranets can jolt everyone riding along in the enterprise.

For example, VHA Inc., a health-care cooperative, found that deploying its extranet rapidly increased the flow of business information among its 1,400 members, compressing purchasing cycles. "We knew it was going to move fast," says Scott Decker, director of research and development. "But you just can't respond fast enough [now]." Adds Thomas Koulopoulos, president of Delphi Consulting, an IT consulting firm in Boston: "The rhythm of work is altered incredibly by extranets."

Companies are deciding that they must have extranets because managers see them as tools for efficiently managing the supply chain. GE I nformation Systems, for example, is developing an extranet that it says will be a shopping mall for the health-care industry and save $100 million a year in material and processing costs.

In the auto industry, Chrysler and General Motors are following the lead of Ford. By the end of the year, Ford will have 250 suppliers connected to its extranet. All three automakers are cooperating on an industrywide extranet called the Automotive Network Exchange that will link them with 10,000 suppliers beginning early next year.

"We've really opened the eyes of the Ford management and showed them that this technology can have a tremendous impact on the business," says Kevin Vasconi, director of Internet applications at Ford. "And we're just starting to tap" its potential, he says.

Conduit For E-Commerce
Other companies are having similar epiphanies as extranets, broadly defined as business-to-business networks running over the Internet, rapidly replace electronic data interchange (EDI) as the primary m eans of managing the supply chain. A third of 150 Internet decision makers polled in October by InformationWeek said they are conducting electronic commerce via an extranet.

Companies that use extranets are imposing a number of changes because of them. They're relaxing many corporate controls, decentralizing management structures, altering policies about publishing information, and redefining relationships with their business partners.

That's what is happening at VHA, where its extranet will be the main conduit for $8 billion in trade conducted with its members each year. The Irving, Texas, health-care cooperative used to have a traditional IT department, but when it decided to open its system to hospitals, nursing homes, and equipment manufacturers around the country, the conventional approach was no longer adequate.

"You have to decentralize to move at Internet speeds," says Decker.

The IT group has loose authority over the technological infrastructure at VHA, but ultimate responsibility for the extranet lies with a steering committee consisting of people from functional units. Making the committee work-it rules by consensus and has no chairperson-required adjustments for everyone. Management has decided to rename the IT department but hasn't yet come up with a new moniker. The marketing department has had to let go of some old corporate standards of subjecting promotional literature to exhaustive review before letting it go out the door.

"It's important not to put too many corporate controls on these things," says James Burgess, VP of IT at VHA. "Too many filters start to constrain people's desire and ability to use [the extranet]. Everything doesn't have to be perfect. Everything doesn't have to be the same color, the same font, the same look. There can actually be typos on your extranet."

Other companies making the transition from Internet to intranet to extranet realized that the utility of these tools goes beyond marketing and advertising, to directly affect the production process.

"Res ponsibility [for Web-based initiatives] is moving out of the IT organization into the actual business operation," says Michael Marquardt, VP of operations at the Internet Operations Center, a consulting firm in Southfield, Mich. Some companies use a strategic triad of IT, marketing, and senior managers to oversee their extranets. Ford has a committee system much like VHA's, except that Ford's extranet committee is chaired by the purchasing department. At some other companies, the CIO and the VP of marketing fight for control and bring major disagreements to the executive committee or an outside consultant for resolution. In some cases, neither executive may be appropriate for the job.

"CIOs almost always own IS, but they have been very internally focused on technology," says Lee Dingle, director of interactive solutions at Cambridge Technology Partners, a systems integrator in Cambridge, Mass. "But extranets are externally oriented and have issues of branding. CIOs don't have that kind of experience."

A s a result, Dingle says, companies are forcing their IT and marketing departments to work together. Some are also appointing VPs with responsibility for areas called electronic commerce, new media, and interactive solutions.

John Kay, Chrysler's manager of electronic commerce, says his company's extranet has both improved and complicated relations with suppliers. The company used to give its proprietary software to only a few select individuals. But its extranet means that more people in more departments of supplier companies get information from inside Chrysler. "Our biggest concern is that the supplier on the other end interprets the information the way we want them to, because they now make a decision without calling us," he says. Suppliers' relying on information found on Chrysler's extranet has also "forced us to make sure the information is correct," Kay says.

The Nasdaq stock exchange has experienced a similar heightened sensitivity to accuracy since April. That's when it started providing resear ch information from Wall Street brokerage firms online daily to 2,600 companies that are traded over the exchange. "Companies are seeing data more easily, and they rely on it so much that when it's wrong, they really notice," says Bill Teague, Nasdaq's director of product management. "They realize they're not the only one seeing that data."

Delphi's Koulopoulos adds that an extranet accelerates business processes and pumps up partners' expectations for quick responses. "The way you respond to your supplier is going to reflect directly the type of culture you have," he observes.

One large health-care provider, for example, broadcasts competitive information to its sales force, but learned that this practice led to online chat sessions where participants criticized the company. Executives were stung, but they responded with messages of their own and put the issue to rest. "People are going to hear things and be exposed to things that are not necessarily kind or what they want to hear," Koulopoulos says. "But that's the beauty of an extranet. If you don't do that, you create an attitude and culture of not caring, and insulation."

Automatic Alerts
Some companies are monitoring their responsiveness to communications via the extranet by developing systems that automatically alert a supervisor if a request from a business partner is not answered within a certain number of days, says Michael Ferro, CEO of Click Interactive Inc., a Chicago designer of extranets for large companies.

Along with heightened expectations comes compressed reaction times. Information is generated more frequently and exchanged much more quickly. Reports on the quality of parts bought by Ford used to be updated quarterly, for example, but are now updated every day from the company's mainframe and transported to its extranet sites. That heads off problems, because suppliers can see how many of their products are being rejected by Ford on quality grounds. They also can try to fix any problems before they ship more products.

Capitalizing on an extranet requires significant amounts of training and support for a company's own employees as well as its partners-something that is often underestimated during planning. "We realize that training needs more budgeting," Chrysler's Kay says. One reason training is so important is that extranets tend to redistribute responsibilities among companies in the supply chain. Chrysler used to have staff that confirmed orders by telephone or fax, but the company now asks auto-parts suppliers to take on that role. "They may think we are dumping on them," but both sides benefit from faster order processing, says Kay.

Managers handling distributors and suppliers have to make some adjustments when juggling relationships in which customers interact with the company primarily through a machine. Instead of seeing the extranet as a distributor of information, managers need to think of it as a vehicle to enter a new business, such as consulting services. In fact, Nasdaq's account managers are developing a plan to offer consulting services to listed companies by adding to the information it distributes online.

Some companies are not prepared to get so close to their distributors and suppliers. "In many situations there's a reevaluation of the number of suppliers," says Cambridge's Dingle. "They will have closer relationships with fewer suppliers" because not all are trusted to the same degree, he says.

Keys to successful deployment of an extranet are support from top executives and having a creative bent that makes the organization receptive to change, says Marquardt of the Internet Operations Center. Advertising firms respond well, while banks are slow to adapt, he says, because they are bound by mainframes and old technology.

Team Spirit
Koulopoulos says companies that use extranets most effectively have flatter management structures and emphasize teams. Some companies fold extranets into broader corporate reorganizations, as Ford did with its Ford 2000 program, which increased emphasis o n teams and eliminated many of the bureaucratic layers that had developed over the years.

"Hierarchical, rigid organizations don't tend to work well with extranets and tend to adopt more of a broadcast model," where information is sent out to partners but none is received back, Koulopoulos says.

As industries such as health care and auto manufacturing embrace extranets, companies with all types of corporate cultures and management structures are constructing IP links between their suppliers, factories, and distributors. No one knows exactly how many companies are planning them or how much they are spending, because IT research firms such as Dataquest in San Jose, Calif., are just beginning to track the impact of extranets.

Harold Wolhandler, director of research at Active Media in Peterborough, N.H., says one way to gauge the boom is by observing the number of extranet software companies sprouting up. Active Media's more systematic measure of 3,500 companies with a Web presence last spring found that 20% had opened up some part of their corporate intranet to external companies.

"None of these companies sat down and put items in their budget for an extranet," says Click Interactive's Ferro. The reason: Extranets simply emerged. IS departments that ventured into extranets often borrowed the money from existing projects or received supplemental funds.

"But now they are budgeting for them," Ferro says. The number of requests for proposals being sent out is increasing dramatically, he says.

That's good news for vendors, systems integrators, and Web evangelists. For users involved with extranets, it means they should get used to forming new committees, having new business cards printed, and getting their hair tousled as they zoom along on their speedy new networks.

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