InformationWeek
Defining The Business Value Of Technology
May 24, 1999
E-Business: Strategic Investmentcontinued...page 3 of 3
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How? In this case, the ROI calculation is straightforward. McKesson handles 4.5 million customer-service calls per year, at an es- timated average cost of $2 per call, for a total of $9 million. And 25% of those calls are customers requesting a printed copy of a statement or invoice via mail or fax. McKesson spends $3 each to produce and distribute such documents. By contrast, McKesson's cost for customers to access its accounts-receivable database over the Web via AR Link and print their own statements is about 8 cents. As customer usage of AR Link increases, the system should pay for itself quickly.
"It's easier to measure ROI from E-business, because the ability to get information is greater," says Amos. "When we measure customer-service calls, we can lose track of the call as it's transferred around. But online, we can track what customers are looking at--invoices, credit memos, billing status." AR Link went live in April and about 60 McKesson customers use it now, including Wal-Mart, which came online last week. Amos expects 9,000 customers to be on the system by year's end.
McKesson expects to realize an even greater return down the road from the development infrastructure it put in place for AR Link. The company built the Windows NT system with just six people, including developers from Web integrator Proxicom Inc., using JavaScript on the client, Visual Basic Objects and Microsoft Transaction Server for the server, and proprietary security technology. McKesson will use those same tools to build at least two more planned Web systems: Contract/Pricing Link and an ordering system called E Link. That will help cut development time, which McKesson figures costs the company about $170 per hour.
Like the Bank of Montreal, McKesson leveraged its existing IT infrastructure in developing AR Link by integrating it with the company's existing Oracle8 accounts-receivable database, which it says is the largest in the wholesale business with $2.5 billion in receivables at any given time. The company is also integrating AR Link with its SAP Business Information Warehouse. "We're learning that we can get a better return on our technology if we Web-ify it," says Amos.
While McKesson's use of ROI metrics are conventional, it illustrates how E-business is becoming more ingrained in the business mainstream. Companies are less likely to jump into an E-business project without doing an ROI study than they were a few years ago, according to Mike Beck, VP at Proxicom, the Web integrator that worked with McKesson. "In the last 12 months, there has been a re-emergence of ROI estimates for these projects, even though the expectations are very low," he says. "But they're often blown away by the actual results."
What's driving that change in some companies is the realization that customer interaction on the Web produces more hard data about the customer than any other "touch point". "Now that you can measure things so accurately because it's all trackable," says Amos, "you can put savings in terms that the CFO can really understand."
Cross-Functionality
Of course, it's easier to measure the ROI of an E-business application that cuts back-office processing costs than one that improves customer satisfaction. As companies struggle to come up with new metrics that measure the ROI of E-business projects, they must also take into account another key aspect of nearly all E-business initiatives: they're cross-functional. "The investments you need to make all come from different buckets--IT, marketing, customer service, and others," says Scient's Brown. "For each E-business project, it's not just a technology risk. But in many organizations, it's very hard to look at projects--and budgets--holistically."
United Parcel Service of America Inc. is trying to do just that. It's developing new metrics for its customers to help measure the payoff from E-commerce initiatives that UPS is helping with. "E-commerce cuts across the entire organization, and if we just continue to focus on the person who runs the shipping dock, that's not going to cut it," says Alan Amling, director of E-commerce at UPS, in Atlanta. "We have to look at accounts receivable, order entry, customer service--the whole value proposition. We need new metrics because no company makes a huge investment without monitoring the return at some point."
In the emerging era of E-business, ROI metrics must be flexible enough to adapt as a company's E-business strategy evolves. And even though the Internet has accelerated the pace of business like never before, E-business metrics need to reflect a long-term view of ROI. "The payoff of E-business could be a long time out," says Brown. "But if you don't do it, you'll never get the payoff at all."
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