Year Of The Extranet At Last?

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January 5, 1998

Year Of The Extranet At Last?

Bandwidth and security problems aside, the business benefits are a powerful lure

By Alan S. Horowitz

xtranets promise to be the cyberworld's equivalent of blood vessels-running throughout the body, bringing nourishment wherever they go. So far, many of the bandwidth arteries are clogged, but industry observers say this technology holds great promise. "Extranets have the potential to take over most business-to-business communications," says Barbara Ells, an analyst at Zona Research.

Though 1998 may not be the "year of the extranet," the technology is beguiling enough that many expect substantial acceptance and deployment of extranets this year. Strong growth should continue into 1999 and beyond. Already, about 80 of 100 IT executives say they're developing intranets and extranets, according to Allen Bonde, director of advisory services at the Extraprise Group, a consulting and systems-integration firm in Boston.

If there's an overriding trend for extranets during 1998, it's that companies will continue to deploy the technology, though with a bit of skittishness. Security is an issue that will not likely be resolved to everyone's satisfaction anytime soon. Business processes have to be reengineered when companies become dependent on extranets, and this isn't an easy process. The Internet, despite the hype, is still not widely used. More time will be needed before many are confident enough with the technology to use it for crucial business functions.

Yet extranets hold considerable appeal. They can improve how companies function, such as with customer service. "You've got your sale s force, your support people, your call center [on the extranet] to support your customer," says Chris Selland, research director of the Yankee Group Inc. in Boston. "Companies are turning more to the extranet as a means of supporting their customers."

While the trend is decidedly toward more use of extranets, some problems need to be solved before bits and bytes flow freely. Extranets are essentially business-to-business networks operating over the Internet. If two companies open parts of their intranets to each other, they have, in effect, created an extranet. The extranet can provide secure communications between a company and its customers and suppliers, and be used for marketing, customer service, and transaction processing.

Demand for extranets comes primarily from marketing departments and customers, according to a study of 50 large companies conducted in July by Forrester Research. One-third attributed demand to those two sources. Driving the demand is the desire to create business opportuni ties (cited by nearly half those surveyed) and to meet customers' needs (cited by one-third).

Also, 70% of those surveyed said they use extranets for product and marketing information. But Forrester expects that usage to become less important in the next two years. By then, transactions will become the most prevalent use, the firm predicts. Though extranets are used for transactions by just 14% of those polled, Forrester expects nearly 70% of all companies to use them for this purpose within two years. Similarly, Forrester predicts that within two years, more than half the companies will communicate with business partners via extranets, compared with about one-third of the respondents today. "The motivations for extranets are simple," says a Forrester report. "Companies want to interact with partners more quickly, easily, and cheaply."

That desire could be compelling. As much as 40% of business-to-business E-commerce applications will be replaced by extranets by 2002, predicts Geri Spieler, a rese arch analyst at Gartner Group Inc. Of those companies using E-commerce now, 80% will use extranets within five years, Gartner predicts.

Security is the biggest issue facing those who want to deploy extranets, says Jim Goetz, VP and chief operating officer of VitalSigns Software Inc. in Santa Clara, Calif., a maker of software used for managing Internet and intranet performance. In agreement is Carl Howe, director of network strategies at Forrester Research and co-author of the firm's recent extranet study; he cites a lack of software standardization as a hindrance to extranet deployment. Howe also predicts that outsourcing of Web hosting, such as that offered by IBM and UUNet, will become popular because it shields a user company's network from outside users, essentially making security the outsourcer's problem. "IT managers don't want to become security experts," says Howe.

What's Missing
To explain what's holding back extranet deployment, Gartner's Spieler cites four areas that the tech nology cannot readily support yet: vendor-managed inventory, continuous replenishment, payment upon receipt, and electronic marketplace buying and selling. "This is what vendors are trying to fulfill, but it isn't happening yet," she says. "I wouldn't expect to see an enormous amount of improvement within the next year."

But talk to those in the IT industry, and you'll hear a far sunnier view. "It's wonderful being here in Silicon Valley. Everybody has an intranet and a high-speed connection to the Internet," says Dave Rome, VP of marketing at Ariba Technologies in Sunnyvale, Calif. But even he says Sand Hill Road is a long way from Main Street: "The closer you get to the heartland of America, where much of the buying is done, it isn't quite so true that everybody's got access to the Internet and a browser that can run a modern just-in-time Java compiler."

Perhaps a more subtle brake on extranet deployment is the absence of a widely agreed-upon killer app. Those seeking the extranet equivalent of the Internet Web browser can forget it, at least for now. Java and Dynamic HTML will likely gain popularity during the coming months, but neither is new, and neither is likely, by itself, to spur extranet usage. "Focusing on extranets is sort of like focusing on WANs a few years ago," the Yankee Group's Selland says. "It's hot, but what really does the good things for you is not so much the WAN or the extranet, but the applications you build on top of it."

Another take: Extranet killer apps exist, but they're being built by users, not vendors. "The killer app today in E-commerce isn't Netscape's Commerce Server or BroadVision or Microsoft, or whatever it may be. It's Cisco's Web site, it's Dell's Web site," says Joe Firmage, chairman and CEO of U.S. Web Corp., an Internet professional services and consulting firm in Santa Clara. "They're custom apps deployed by businesses themselves."

While it's true that extranet technology faces hurdles, it's no more likely to be held back than is the Internet itse lf. Investment in existing infrastructure will likely make extranets increasingly popular in 1998 and beyond. "Companies are thinking, `We have this Internet we've already built up; why don't we leverage all our sunk cost?'" explains Bonde of the Extraprise Group. An extranet is a logical next step to a Web site and intranet, he adds.

Siren Song
Also, the success of early extranet adopters is convincing many companies to try the technology. "1997 was laying the groundwork, making sure the technology was in place and working," says Gina Jorasch, director of strategic marketing at VeriSign Inc., a Mountain View, Calif., provider of digital certificates. "In '98, we'll see many more companies signing up. It's proven, they're more comfortable."

Some liken the increasing comfort level of extranet users to the early days of networks. "Initially, networks were very unreliable. It was a novelty to share a printer and maybe share a disk," says Jon Ferrara, executive VP of GoldMine Software Corp. in Pacific Palisades, Calif. "But then the networks really solidified. People actually started putting critical applications like accounting systems up on the networks."

Ferrara says extranets are on the verge of joining the mainstream, as networks have. "What's going to happen in '98 is that applications will roll out," he predicts. "We'll start using them, and by late '98 or early '99, it will be second nature." Customer acceptance should also propel extranets. So far, it's just a trickle at Motorola's computer group in Tempe, Ariz. Dennis Schneider, the group's VP of advanced technology and business development, reports that no more than 5% of Motorola's largest customers use the company's extranet today. But he expects that as many as 80% will use it within a year, due largely to the ease with which the extranet lets Motorola and its customers interact.

The advantages of extranets over other technologies are also motivating factors, says Firmage of U.S. Web. Mainframes helped large enterprises automate massive transaction processing, he says, but they didn't help individual departments cut costs or increase revenue. Client-server, he continues, helped departments focus on their own priorities, but the chaos of having many applications and protocols didn't serve the enterprise as a whole. Enter the Internet. "It provides the standardization of the mainframe, yet it also provides the flexibility of the client-server environment," Firmage explains. "This is the unbeatable combination that's delivering so much momentum to extranets."

Who will use extranets? So far, early adopters include members of the financial industry. Brokerage firms trade online, and banks offer online services. Other early users are technology companies, such as Cisco Systems, and the travel industry, including airlines, hotels, and travel agents.

Many industry members expect the base of extranet users to broaden. Martin Cagan, VP of platforms and tools at Netscape Communications, sees extranets moving into a wide range o f industries that include telecommunications, health care, and even child care, where parents can monitor their children via an extranet. Citing companies such as wood products maker Boise Cascade Corp. that are moving their supply chains to the extranet, Cagan says supply-chain management promises to be a major force behind the deployment of extranets.

Another attractive feature of extranets is their ability to personalize data for specific target markets and customers, says Ross Garber, president and CEO of Vignette Corp., a maker of Web content-management solutions in Austin, Texas. That's about to happen for a customer of Open Market Inc., a maker of E-commerce software in Cambridge, Mass. Ellen Brezniak, Open Market's VP of business-to-business operations, has a customer that is creating product catalogs it will run on the intranets of its 300 largest customers. Each catalog will be personalized to the individual customer. Placing the catalog on customer intranets has the advantages of increasing spe ed, convenience, and security, especially when compared with running the catalogs from the supplier's own Web site, Brezniak says.

Similarly, National Semiconductor is customizing its extranet offerings by giving customers access to four search engines, each targeted to different customers and how they look for information. "Anybody who has a Web site is going to have to figure who their audience is and deliver just what that audience wants," says Phil Gibson, the company's director of interactive marketing.

Brezniak of Open Market also predicts 1998 will see companies working together to create communities of common interest. For example, medical suppliers might collaborate on a Web site where hospital buyers can go for one-stop shopping, she says.

The auto industry is about to deploy something very much like that. The Big Three U.S. automakers-Chrysler, Ford, and General Motors-have jointly created the Auto Network Exchange (ANX), a Web site where automakers and suppliers can interact. "It used to be a problem for our suppliers to invoice us, to know when they'd get paid. But with ANX, they can track their invoices like Federal Express allows you to track packages," explains Susan Unger, Chrysler's executive director of IS. ANX is in the pilot stage with about 400 suppliers, and it should be fully deployed by mid- to late 1998, when it will include as many as 20,000 suppliers, adds Unger.

Another cyber community involves customers and a vendor called ichat Inc. in Austin, which makes real-time communications products. Merrill Lynch used ichat's chat-room technology to hold an event for major customers after October's stock-market plunge, says Dean Cruse, ichat's VP of marketing. It was a way for the financial-services company both to let its customers know what it thought about the market turbulence and to let investors engage in a dialogue.

Similarly, VHA Inc., a health-care cooperative in Irving, Texas, has put several forums online. They let co-op members share information about issues such as best practices, explains Mike Cummins, VHA's VP of MIS. Also, VHA will use the extranet for applications including training on demand, software deliverables, and product selling.

Extranets can save companies money. "Clearly, the motivator for extranets is the reduction of costs," says U.S. Web's Firmage. But as extranets gain sophistication, the costs of deploying them will actually rise, he predicts. Savings should instead come from process reengineering and systems integration.

For Cisco, an extranet saves money by speeding purchase-order processing to a few hours, down from about a week, says Richard Palmer, director of marketing in Cisco's Internet service provider unit. The extranet also helps eliminate errors and lets customers easily track orders. Cisco will add new extranet capabilities this year, Palmer says.

Competitive pressures will also move many companies to extranets. "Extranets are a competitive differentiation," says Netscape's Cagan. But this will be only a temporary ad vantage as extranets proliferate, says Ells of Zona Research. That's most telling of all: Extranet use will increase because companies won't be able to compete without them.

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