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May 24, 1999

E-Business: Strategic Investment

For many companies, launching Internet initiatives that advance strategic goals is more important than getting a hard-dollar return

By Clinton Wilder

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InternetWeek Measuring ROI For The Top Line Of The Business

he Internet has changed the way companies communicate, how they share information with business partners, and how they buy and sell. It's also changing the way they view their IT investments.

As companies launch electronic-business projects, many are tossing out conventional thinking about the need for a return on investment and focusing on how the initiatives advance their overall business strategy--whether it's to improve customer satisfaction, increase brand awareness, or open new sales channels. A small but growing number of companies have recently begun searching for new ways to measure the ROI of their E-business projects. For less strategic projects, such as those that increase the efficiency of the supply chain, traditional ROI evaluations are still being used. But the bottom line is that E-business is seen increasingly as something that must be pursued at all costs.

The Bank of Montreal, Canada's third-largest bank, didn't even consider ROI when it committed between $55 million and $69 million to online banking initiatives, much of it for the development of custom-built middleware linking the Web to its mainframe applications and databases. "We weren't sure if it would make money or not, but we didn't see how we could continue to be a leading-edge, full-service bank if we didn't do it," says Ron McKerlie, the Toronto bank's VP of smart cards and emerging businesses.

The Bank of Montreal is hardly alone in pushing ahead with E-business projects without formally evaluating their potential ROI. In a recent survey of 375 IT and business executives conducted by InformationWeek Research in conjunction with Business Week, only 17% of IT managers and 12% of business executives said their companies formally required them to demonstrate the potential payback of their E-business applications. And 28% of IT managers and 39% of business executives said their companies required no ROI evaluation whatsoever (see chart, below).

pie chart

Consultants say many businesses are playing catch-up with E-business, and as a result, they're often jumping into it without carefully considering either the ROI or strategic implications of the move. "Of the E-business projects we're familiar with, I'd say two-thirds are done simply out of a sense of business urgency," says Bob Parker, an analyst at AMR Research. "CEOs are walking in and saying, `I don't know exactly what this is, but I know we have to do it.' There's an element of fear--the fear of getting left behind."

That's the wrong approach, says Parker. Even if a company doesn't do a formal ROI evaluation, there needs to be coordination between the CEO, the CIO, employees, and business partners that will be affected. A business case needs to be made. "The probability of failure increases when you do a project just because the CEO read somewhere that he needs to be on the Net," says Parker.

Critical Decisions
Ironically, companies that weigh those factors carefully often come to the same conclusion: They must proceed--regardless of ROI. That's because the Internet has increased the speed of business, changed the nature of customer service, and given companies the ability to enter new markets, says Diana Brown, VP and general manager of financial services for Web integrator Scient Corp. Companies must respond. "You have to keep E-business out of the normal budgeting process," she says. "If these investments are held up to the same magnifying glass as other line items--to make money this year--it's very hard to make anything happen."

More companies are justifying their E-business ventures not in terms of ROI but in terms of strategic goals. In the InformationWeek Research survey, creating or maintaining a competitive edge was cited most often as the reason for deploying an E-business application. That was followed closely by improving customer satisfaction, keeping pace with competitors, and establishing or expanding brand awareness (see chart, below).

The business and IT executives surveyed largely agreed on the top three goals. Where they differed was on the issue of cost reduction: 78% of IT executives cited reducing operational costs as a motive for deploying E-businesses applications, compared--perhaps surprisingly--with just 66% of business executives. (Full results of the survey will be released June 8 at InformationWeek's E-Business Conference & Expo in San Jose, Calif. For information, see www.ebusinessexpo.com.)

bar chart

Customer satisfaction was a key reason the Bank of Montreal launched Mbanx, an online banking service, and it has paid off. More than 150,000 customers use the bank's service, and their customer-satisfaction level is around 95%, compared with 60% to 70% for conventional customers, says McKerlie.

The bank has other E-business initiatives under way, including a joint venture with Canada Post for electronic billing and mailings; an online stock brokerage; online loan, mortgage, and credit-card applications; online billing for company credit cards; an automated E-mail response system; and an expansion of the bank's U.S. business (through Harris Bank in Chicago) that doesn't require opening new branches.

In assessing its investments in some of these projects, the bank was able to use conventional ROI metrics. For example, it could compare the estimated cost of sending an electronic bill vs. mailing a paper bill and calculate how long it will take to recoup the IT investment. But for other projects, the bank began using a new set of metrics for E-business developed by Scient. These ask:

Does the initiative target a valuable customer segment?
Does it improve the quality of customer service?
Does it reuse existing IT infrastructure?
Does it give the bank a commanding market-share lead from being first to market?
Does it help the bank learn more about its customers?
Is it a strategic fit with other existing ventures?

"We mainly use the new metrics to compare each of these initiatives with each other," says McKerlie. If the company has only $100 million to spend but wants to go ahead with projects that would cost $200 million, it uses both traditional and new metrics to identify the most important projects to pursue, he says.