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May 24, 1999

E-Business: Strategic Investment

continued...page 2 of 3

Related links:

What's The Investment Worth?

And from our sister publications:

InternetWeek Measuring ROI For The Top Line Of The Business

Why Bother?
Some companies don't even look at their strategic E-business applications as IT projects, so there's little reason to evaluate ROI. In January, Milacron Inc., a $1.7 billion machine-tool manufacturer in Cincinnati, launched Milpro.com, an E-commerce site that uses Open Market's Transact commerce server and LiveCommerce catalog software. Alan Shaffer, Milacron's group VP of industrial products, jokes that he approved the seven-figure budget request of the company's director of E-commerce "in less than 10 seconds." He then doubled the budget in midproject last year. "Return on investment? We never even discussed it," Shaffer says. "This isn't an IT project, it's just another market channel. Very few people do ROI on expanding their market channels."

Shaffer gave his IT people one non-negotiable imperative: Be the first to market in the industry. "I told them we could change what we did or what it cost, but not when it would launch," he says. He also accepted that Milacron wouldn't see significant online sales until 2001. In fact, the company projects that Milpro.com will achieve only $600,000 in online sales for the first six months ending June 30.

Milacron's analysis of the Web initiative is about as far from traditional ROI calculations on IT spending as you can get. But like the Bank of Montreal, it sees its E-business efforts as a way to boost customer service. Milpro.com, which is upgraded every 90 to 120 days, is not only a vehicle for sell-ing more cutting tools and fluids to small machine shops, it also provides customers with technical advice about using the company's products.

"A paper catalog gives you no clue about that kind of information," says Shaffer. "To deliver that knowledge to the point of sale around the clock--there's no other way besides the Web that could do that as cost-effectively."

Milacron has included free services to encourage customers and potential customers to use the site. The Milpro Wizard offers advice on machine-tool and fluid problems, products, and other issues. The Job Shop Mall lets customers post a classified ad or search ads posted by other users, and users can list or search for new and used machinery and equipment at the site's Machinery Flea Market. In Milpro.com's first three months, 400 machine shops registered to market their services on the Job Shop Mall, and customers listed 200 pieces of equipment for sale in the Machinery Flea Market. Shaffer says the number of customers using the Wizard on Sundays and at midnight drops by only half from peak periods.

Milacron's tracking of site usage relates directly to three of the top five ROI criteria for E-business cited by respondents to the InformationWeek Research survey: improving customer or client satisfaction (cited by 87% of IT and business executives), lowering the cost of promoting products and services (70%), and increasing direct access to customers (68%). (The other two measures were lowering operational costs and adding new customers, cited by 85% and 72%, respectively.) Milacron's Web site may not achieve a quantifiable ROI, but by doing well in these areas, it's advancing the company's strategic goals. "If you treat your E-commerce site like an IT project," says Shaffer, "it's the kiss of death."

Selling and providing services for customers over the Internet are just two aspects of E-business. Many companies use the Web to make their supply chains more efficient, cut back-office processing costs, and achieve other efficiencies. IT executives and consultants say it's often easier to show a quantifiable return on investment in these areas than more strategic, customer-oriented projects.

"Clearly, a big part of ROI is shortening cycle times with supply-chain partners, and that has a lot more to do with extranets than with your Web site," says J.G. Sandom, senior partner and director of interactive at marketing firm Ogilvy Interactive Worldwide, whose E-business clients include Ford Motor Co. and GTE's wireless division. "The less you have to deliver by print, phone, and fax, the more money you'll save. It's a great way to show ROI quickly."

Cutting Calls
That's why Philips Lighting Co., the $5 billion lighting products unit of Royal Philips Electronics, expects to see a quick return on its investment in TradeLink, an ordering system that works on the Web for smaller distributors that don't use electronic data interchange. Call-center inquiries regarding inventory or order status account for about half the expense of processing an order. In a pilot test of TradeLink, Philips Lighting found the system reduced customer-service phone calls by 80%. Philips expects big savings as it rolls out TradeLink to 400 distributors by year's end.

Jim Worth, director of E-commerce at Philips Lighting, in Somerset, N.J., says the best way to guarantee ROI is to start small. "Metrics from small-scale pilots are the best way to go," he says. "Until you have it running right, don't tell anyone about it, because there will always be a lot of people who don't like what you're doing."