InformationWeek: The Business Value of Technology

Will customers come along for the ride?

IBM chairman Lou Gerstner certainly thinks so. In an exclusive interview with InformationWeek last week, Gerstner said the company is taking steps to help customers adapt to the strategic, organizational, and cultural changes mandated by the rise of electronic business.

"E-business moves the agenda of the IT industry back into the CEO's office," says Gerstner. "The new mantra is growth-globalization, cycle times, speed, and competitiveness. What we keep saying to our customers is that E-business is not a technological change. It's a fundamental change in the way business will be done in their industries-aided, abetted, supported, and enabled by technology."

So far, the strategy is yielding dividends for customers. Woolworth Co., for example, uses IBM's E-business technology-everything from Lotus Domino to a merchandising planning suite-to improve its supply chain. "We now operate in 12 countries and needed a system that was very flexible and reactive an d able to aggregate up for a corporate view in a consistent manner for more than 7,000 stores in constant currency," says Thomas Beauchamp, VP of IS at Woolworth.

Adds Randal Langdon, director of interactive sales technologies at Merrill Lynch & Co., which uses IBM technology to give customers access to research and account information: "E-business is critical to where we are going, because in the final analysis, it will strengthen our connection with clients."

IBM is realizing some of the benefits, too. The company says that last year it sold 100,000 network computers, the thin clients that are the end-user interfaces to IBM's E-business software and service offerings, and has several major contracts in the works. In the fourth quarter of last year, IBM shipped 4 million seats of Lotus Notes, twice as many as in the same quarter the year before. IBM Global Services-with 10,000 of its 130,000 employees dedicated to E-business-last year brought in 25% of IBM's $78.5 billion revenue.

"Services and our whole-solutions approach is our ace in the hole," says Irving Wladawsky-Berger, general manager of IBM's Internet division.

Gerstner says IBM will add several new technology initiatives to that E-business mix beginning this year. They include powerful new servers and storage for back-end processes, Java applications, full-motion video on the Internet, and more knowledge-management features for Lotus Notes. IBM's goal: Reorient almost everything it does toward helping customers do network-centric business.

Size Vs. Speed
But some question whether IBM is too big and risk-averse to pull it off. "IBM's global reach, network, and processing power give it an edge," says Robert Djurdjevic, president of Annex Research, a market-analysis firm in Phoenix. "But size is a detriment in a quickly moving market."

But that's just the point of E-business, Gerstner says. IBM, for example, uses its own Lotus Notes to collaborate and reach decisions quickly. "All large companies know today that s peed and being early to market are often more important than being right," he says.

Fundamental to IBM's strategy is a focus on three cross-industry solutions: electronic-commerce payment systems, supply-chain services and software, and customer-relationship solutions, including business intelligence and call-center technologies.

"The three areas are the fundamentals all of our customers across all industries will want for building their E-business environments," says Linda Sanford, general manager of IBM global industry. "We have real products and customers in all three areas. We have the strategies, and we have the team in place. Right now, the plan is to execute."

IBM's strongest suit may be in payment systems. It's where the company offers CommercePoint, a line of E-commerce products that includes IBM's merchant server, and Internet security consulting services. But the flagship service in this category is Integrion Financial Network, a consortium with 18 banks, Visa, and CheckFree to offer on line banking and bill payment services.

Integrion will have a shoot-out this summer with MSFDC, the Microsoft-First Data Corp. joint venture, when both groups plan to make electronic bill payment and presentment systems and services generally available.

BancOne, one of the first two banks to begin processing PC banking transactions through Integrion last year, plans to participate in the MSFDC pilot.

"There will be multiple payment system vendors out there," says Bruce Luecke, general manager of interactive delivery services at BancOne. "Assuming customers want those bills to be summarized, there has to be an integration point. There's an opportunity for Integrion to play a great role there as my integrator."

Thirteen banks either use or plan to use Integrion's services this year. Lined up to help MSFDC are 20 integrators, including such heavyweights as Cap Gemini, Computer Sciences, EDS, Price Waterhouse, and Unisys. They'll provide banks, billers, and transaction processors with services a nd support around the MSFDC system.

To better link vendors, suppliers, and customers, IBM's E-business initiative provides what Gerstner calls "a booster shot to the process of shrinking supply chains." The company offers a handful of products that extend the packages of more traditional vendors in this market. "IBM is not competing against the SAPs and PeopleSofts or the i2s or Manugistics," says Ted Rybeck, chairman of consulting firm Benchmarking Partners. "Instead, they are a value-chain player offering extensions that turbocharge what these enterprise applications vendors do." ANX, the Auto Industry Action Group's industrywide extranet, is one example. IBM is creating the middleware that lets auto makers and parts suppliers pass information-such as production schedules-back and forth.

Step-Saver
Another IBM offering is Makoro, a suite of supply-chain applications under development for the retail industry that has attracted the attention of Disney, Sears, and Woolworth. Makoro for Mer chandise Planning, the suite's first module, is being rolled out by Woolworth to help analyze sales and create purchase orders. Because Makoro automates some manual steps, "we have more time to analyze and plan," says Woolworth's Beauchamp, "and we're able to create plans at a much greater level of detail than before without adding any staff to do that."

Using Makoro, along with IBM's Notes and Domino software and RS/6000 servers, Woolworth is beginning to knit together its more than 7,000 specialty apparel stores, such as FootLocker, under a three-year, $160 million project.

Replenishment On The Fly
IBM has been helping Procter & Gamble Co. for the past five years with a continuous replenishment system that lets P&G business partners send electronic purchase orders to IBM, which processes them and routes them to P&G for replenishment of inventory. The company runs 40% of its total goods shipped in North America-representing $6.5 billion in sales-through the IBM system, says R alph Drayer, VP of efficient consumer response at P&G. But even that aggressive implementation is being ramped up. Within the next two months, P&G and three retailers will begin a pilot of CPFR-Collaborative Planning, Forecasting and Replenishment. CPFR aims to reduce or eliminate the need for a middleman, as retailers will have their own planning and forecasting system and will directly share that data with their suppliers.

But while IBM has had a lock on this market for the past five years, it's unclear what IBM plans to offer in this new collaborative environment. The company says only that it has several initiatives in place, but that CPFR is high risk and experimental.

Another key IBM focus is to help corporations improve their customer relationships using call-center, data warehousing, and other technologies. IBM's Customer Relationship Solutions group, part of the Global Services organization, is spearheading a companywide push into what IBM officials call customer care. The goal is to help companies improve customer service and maximize customer profitability by integrating call centers, sales force applications, and data warehouses.

"Our charge is to bring together with a single point of focus all the technology, consulting, and systems-integration capabilities IBM has across that continuum," says P.J. Mitchell, VP and head of Customer Relationship Solutions.

IBM's forthcoming customer-care products include speech recognition and "cyber collaboration" technology that support simultaneous voice and data connections over the Internet.

IBM Global Services is expected to roll out its first business-intelligence service offerings in the next few weeks. The focus will be on multimillion-dollar systems-integration projects in seven or eight vertical markets, including telecommunications, utilities, finance, manufacturing, government, and education.

PCS Health Systems, a prescription benefits-management company in Scottsdale, Ariz., offers an example of what those services can do for customers. PCS is adding Web software to its data warehouse and report-distribution system, both provided by IBM, as a way to extend those systems to its customers.

"We'll be moving all of our apps to Web apps through the first half of this year," says David Thompson, VP of information warehouse services with PCS, a unit of drug maker Eli Lilly & Co. "The thing that's driving us to this so quickly is the support of remote customers, people we don't control."

PCS's E-business offering provides real-time processing of prescription claims, and collects historical data on patients, prescriptions, doctors, and pharmacies for decision support and data analysis. Web access will lower administration costs because the company will no longer have to ship and support the PC application for all warehouse users, Thompson says.

Change Is Key
But whether IBM or other companies succeed with their E-business strategies depends more on customer willingness to change their processes than on t he products vendors try to sell them. "It requires a whole change in the way people think," Gerstner says. "I've talked to a number of large manufacturers who have, through Notes, brought their vendors right into the basic engineering, production, and inventory data of their company. The vendors have access now just like insiders.

"It's a huge cultural issue," adds Gerstner. "Are you willing to open the boundaries of your enterprise and bring in your extended team in a truly collaborative way?"

IBM is reorganizing around E-business as well. "We evolved and sharpened our focus [on E-business], and we are dramatically shifting our resources," says Neil Isford, VP of network computing at IBM Global Services.

Within the past few weeks, IBM executives have been appointed to coordinate resources for six core technologies for E-business solutions: enterprise resource planning, Web servers, enterprise Notes, E-commerce, server consolidation, and business intelligence.

For example, Marty Clague, gener al manager of IBM's global E-business solutions, now coordinates resources for the Web servers, enterprise Notes, and E-commerce technologies. That way, when customers need an expert in those technologies, Clague finds the right resource within IBM.

And in the IBM Global Business Intelligence Solutions unit, the staff will nearly double in size this year to 900 sales people, consultants, and support personnel. This month, IBM Global Services is assembling a team of more than 500 consultants and systems integration specialists to focus on all aspects of the decision-support market, including applications development, data warehouse planning and deployment, data mining, and facilities management.

An IS overhaul in systems and management inside IBM was designed to "drive IBM to become an E-business in our supply chain and product development, and to more closely link process and application deployment," explains David Carlucci, formerly CIO of IBM and now head of IBM's S/390 division. But some wonder wh ether IBM can continue to sharpen its focus, respond to changes, and balance its workforce and product lines without baffling its customers.

"IBM has to articulate its position very clearly," says Alyse Terhune, an analyst with Gartner Group Inc. "IBM also has to sell into a limited marketplace, because the market hasn't grown up yet, and it has some strong competitors. IBM's ability to execute is very high, but it has had false starts, and organizationally it's been all over the place."

Of all IBM's E-business technology components, probably the most misunderstood is the network computer. Most companies have done little more than ruminate over the value of the NC, while others have made some small pilot-program purchases. Still, IBM has had more success than most vendors. Users are already working to tie their NCs into other IBM-dominated E-business functions.

Value City Furniture, a Midwest furniture retailer, is a recent example. The company, which just inked a deal with IBM for 1,000 Java Ne twork Stations, will use them to access point-of-sale, accounting, ordering, credit and inventory applications housed on AS/400e systems located in each of its 66 stores. Meanwhile, the company is working on applications that would link its AS/400s to business partners. "We plan to get furniture manufacturers into our E-business world so we can share images and sales information," says Jerry Kerr, CIO and VP of the Columbus, Ohio, retailer. "Our goal is to close up that supply chain."

Key to making NCs even more integral to IBM's E-business strategy is eSuite, a set of lightweight Java applets designed for thin clients and PCs that Lotus will begin selling next month. General Motors is looking at eSuite for areas such as engineering, where thousands of Unix workstations now are used for technical computing and Windows-based workstations support personal productivity applications such as word processing. "eSuite would allow that on one machine," says Dennis Walsh, GM's chief technology officer.

IBM's T ivoli Systems unit also plays a pivotal role in IBM's E-business strategy. While Lotus brings collaborative Web technology and Java applications to the table, Tivoli provides enterprise management of E-business applications and middleware. "Specific TME 10 modules are being adapted and extended for that environment," says Tom Bishop, VP of infrastructure development for the Austin, Texas, unit.

Eye On The Competition
But if IBM is to shore up its ranks for a serious run at E-business, it may need to turn more immediate attention to its competitors. In an InformationWeek survey of 200 IT managers, Microsoft was cited by 33% of the respondents as the most-trusted vendor for E-business solutions. Only 15% cited IBM. Of the companies surveyed that are already IBM customers, only 61% said IBM would appear on their short list for E-business solutions.

"Microsoft is going to be a powerful force," says Bill Howard, VP of IT at Inland Steel Industries Inc. "IBM has an uphill battle to stay in fron t of them." Other major vendors betting big on E-business are Hewlett-Packard and Sun Microsystems (InformationWeek, Dec. 15, p. 30).

However, customer loyalty can be short-lived in this fast-paced market. For several months, Kosher Grocer Inc. was using IBM's Net.commerce server, along with IBM RS/6000s, a DB2 database, and other software, to run its online grocery business. But it has decided to turn to E-business technology from Pandesic, the Intel-SAP joint venture formed last August. Pandesic's software-also called E-business-focuses on back-end fulfillment operations with links to legacy applications that automatically credit and debit accounts, adjust inventory levels, and notify suppliers when an online order is processed.

Name branding was a key reason the company originally chose IBM technology, says Craig Diamond, president of the Brooklyn, N.Y., grocer. "My first consideration was, 'Which company should I go with?' not necessarily, 'Which product?'" he says. "But IBM didn't offer what I needed."

What Diamond was looking for was a completely automated operation, from order entry to shipment, with no paperwork involved-and IBM's Net.commerce software didn't provide that without significant customization, he says. "Their software is good for someone who is just starting out and doesn't plan to make any modifications or changes," Diamond says. "We're growing too quickly. IBM couldn't support that."

IBM's size is its double-edged sword. Taking all those IT solutions to market is a formidable task, even for IBM's sales force of 67,000. IBM has more people and money to apply to developing and implementing solutions, but pumping those resources into the right areas quickly without leaving some elements behind is nearly impossible.

But some customers and industry executives say Gerstner is a focused, goal-oriented executive, guiding IBM through a logical progression of change. "I think Lou has done an extraordinary job," says C. Michael Armstrong, chairman and CEO of AT&T, whose caree r spanned 31 years at IBM. "He did what he said he was going to do. He got the costs out, the business organized, and he's driving the revenue up."

Total Turnaround
Customers are also enthusiastic about Gerstner's accomplishments."Not long ago, we were throwing IBM out on their ears," says Bill Friel, CIO at Prudential Insurance Co. "They were unresponsive, not providing leadership in solutions or pricing. But the turnaround under Gerstner has been dramatic."

There's no question that IBM is still in flux-still weak and uncoordinated in some spots, still too big and lumbering in others.

But there is a strategy, and while IBM faces some stiff tests, that strategy has righted the company and looks as though it will make IBM a reliable contender for market leadership-even if it never again is the one-stop monolith of old.

Gerstner says he thinks he has IBM positioned exactly where he wants it: "When the time comes where the [E-business] industry moves from just a browser opportunity t o a commerce opportunity, it's coming our way."

With additional reporting by Clinton Wilder , Mary E. Thyfault , Tom Stein , Mary Hayes , Caryn Gillooly , and Beth Davis .