InformationWeek
Defining The Business Value Of Technology
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November 6, 2000 |
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Amazon's IT Agenda
The E-retailer is ramping up its technology infrastructure, from the front office to the back, to gain efficiencies and profits
By John Foley and Steve Konicki
eff Bezos had just finished a speech on his favorite subject--his dream of making Amazon.com Inc. "the Earth's most customer-centric company"--when a faulty microphone made it difficult to hear a question from the audience. The CEO stepped away from the podium, sprang from the 4-foot-high stage to the floor below, and plunged into the crowd to meet his questioner face to face. The gesture, at the PC Expo conference in New York a few months ago, was warmly received. Chalk one up for customer-centricity, Amazon.com style.If only all of the company's problems were so easy to solve. Amazon.com's stock is far below its 52-week high of $113, trading in the $30 to $40 range last week. An update to its privacy policy in late August drew an angry backlash from consumer groups that objected to, among other things, Amazon.com's plan to include customer data along with other assets if the company is acquired. And the E-retailer continues to spend money faster than it makes it--with no sign of profitability on the horizon.
Financial analysts and investors are looking closely at the business plans of all dot-coms, but Amazon.com has come under particularly harsh scrutiny. Twice in the past four months, a Lehman Brothers analyst has expressed concern over Amazon.com's cash-flow situation.
For Bezos, the pressure is on to demonstrate that an online business can be both customer-centric and profitable, while competing with brick-and-mortar retailers that are no longer Internet novices.
To do it, Amazon.com is depending on an IT infrastructure that--though respected for innovative features such as its 1-Click technology and ability to launch new services, as it did last week with its Japanese-language site--was straining to support the company's growth and ambitions. In an effort to pump up that infrastructure, the company has been on an IT shopping spree. In recent weeks, Amazon.com revealed a deal with Excelon Corp. for business-to-business integration software and another with SAS Institute Inc. for data-analysis applications. They're the latest in a string of purchases that includes products from E.piphany, Hewlett-Packard, Manugistics, and Oracle.
"I don't think any large E-business-enabled company can afford to build every product it needs to be efficient," says Morgan Stanley Dean Witter analyst Charles Phillips. The technology deals show Amazon.com knows it has to control costs and find efficient ways to ship merchandise, optimize logistics, understand its customers, and analyze how to provide products for specific segments, Phillips says. "To me, it's a good sign that they have figured out that these things can help them be more productive and save costs," he adds.
Amazon.com is spending more money, and a higher percentage of its revenue, on IT. In the first nine months of this year, the company's expenses related to technology and content rose to 11.1% of net sales, compared with 10.6% in the same period last year. In hard dollars, that translates to $200 million in nine months this year vs. $102 million through three quarters last year. Amazon.com attributes part of the increase to the establishment of a much-needed second data center.
The investments help bring corporate-class computing to an IT environment that had become a mix of computer systems and custom-developed applications, vestiges of Amazon.com's early years as a dot-com startup. "Amazon is 100% homegrown-engineered," says Joe Galli, the company's former president and chief operating officer and now president and CEO of VerticalNet Inc.
But that's changing, according to one analyst familiar with the company's strategy. "Amazon is in the process of ripping out what it built in the dark ages of the Internet and replacing it with packaged software that is more advanced than Amazon's own stuff, and more advanced than Amazon could hope to build on its own," says Hollis Bischoff, a VP and director of E-business transformation with Meta Group.
Charlie Bell, Amazon.com's VP of IT infrastructure, acknowledges that the company has a lot of technology projects under way, some involving packaged applications. "As we progress and grow, you're going to see us use packaged software where it makes sense," Bell says. "To the extent we can find [off-the-shelf] solutions, we definitely prefer to do that."
That doesn't mean Amazon.com is doing less internal development, Bell says. The most important applications--for example, personalization and customer-contact--are still written by the company's own programmers. "You could characterize us almost as a software company," he says. "The stuff we build here is our identity."
That still leaves plenty of room for outside help--and if the company's last 10-Q statement is any indication, Amazon.com certainly needs it. Amazon.com acknowledged the vulnerability of its technology underpinnings in the statement, which was filed with the Securities and Exchange Commission late last month: "We need to add additional software and hardware and upgrade our systems and network infrastructure to accommodate both increased traffic on our Web sites and increased sales volume and to fully integrate our systems," Amazon.com said in the 10-Q. "Without these upgrades, we may face additional systems interruptions, slower response times, diminished customer service, impaired quality and speed of order fulfillment, and delays in our financial reporting."
In other words, Amazon.com's IT infrastructure is in serious need of bulking up, which explains why the company is launching one big project after another. Late last year, Oracle officials revealed that the database company was building a multiterabyte data warehouse for Amazon.com. In the spring, HP was named as Amazon.com's primary Internet infrastructure provider, and Manugistics was picked to supply logistics software. Amazon.com also recently began using E.piphany's customer-relationship management platform to ramp up its E-marketing
efforts.
Photo of Jeff Bezos by Ellen Banner
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