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January 29, 2001

The Results Are In

By increasing revenue and cutting costs, E-business efforts can help companies weather the economic chill

By Chris Murphy and Christopher T. Heun

More on TKTK:

Significant E-Business Change Is Brewing (12/18/00)

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mid January's growing stack of year-end financial results, there's some new data to warm business and technology leaders feeling the chill of an economic cooldown: measurable E-business results. A growing number of companies are demonstrating that Web commerce and other E-business initiatives are more than just strategic necessities; they're helping the bottom line.

Wells Fargo & Co. took in $600 million in new loans last year thanks to home-equity loans it originated online. Delta Air Lines Inc. and Northwest Airlines Corp. saw more than 5% of sales come in through their Web sites, with each transaction saving as much as 80% in processing and commission costs. General Electric Co. says online auctions cut its procurement costs by $480 million last year--and vows to save $1.5 billion this year. In fact, in a recent survey by InformationWeek Research, 65% of respondents say the percentage of their companies' total revenue being generated by E-business grew in the past 12 months.

Not all companies report E-business performance in their financial statements, but the evidence that's available lends weight to the argument that the Web has become an indispensable sales channel. In addition to generating revenue, E-business helps companies realize efficiencies and cut costs.

The timing couldn't be better. An economic slowdown "makes E-commerce and E-business more important," says Mark Rohrwasser, who leads GE Plastics' E-business efforts. Earlier this month, GE Plastics reported that almost 20% of its $7.78 billion in sales last year came online, and it predicts that more than half of this year's sales will be generated that way. "People are looking for a more-efficient way to do business," Rohrwasser says.

A continued slowdown in the economy will increase the pressure on E-business initiatives to support customers more efficiently, and not just handle sales transactions, Rohrwasser says. Within the next few months, GE Plastics plans to begin hosting online collaboration for its business customers as they design components and choose materials. GE Co. has pledged to deliver 10 cents a share in cost savings this year by buying and selling online and digitizing manufacturing processes.

For Enron Corp., 2000 marked the first year its E-business efforts showed results--and they were impressive. Enron created its online trading platform, EnronOnline, in November 1999 to bring transparency and speed to its wholesale energy commodities business. Enron blew away its original goal of handling $40 billion worth of contracts last year, doing $336 billion instead. Now, the company is using EnronOnline to move into new areas, such as selling broadband capacity.

For airlines, E-commerce was a bright spot during a year marked by rising fuel costs, rotten weather, and bad publicity caused by growing delays. Online sales resulted in lower costs. At Northwest, a typical $300 leisure-travel ticket booked online costs less than $5 to process, including all the servers and support, compared with $30 through an outside agent. The St. Paul, Minn., airline's Web site sold about $400 million worth of tickets, 7% of Northwest's total. "We don't have a separate profit and loss for the Web, but we track ourselves that way," says Al Lenza, VP of E-commerce and distribution. "Every ticket we sell online saves us money."

FTD.com, the online subsidiary of FTD Inc., managed to report a $2.3 million profit for the fourth quarter. It did so by convincing customers that looking at bouquets online is a better way to shop for flowers than by phone--83% of its sales now come through that channel.

FTD.com is also using the Web to cut costs. With 40 employees, it outsources its call center and pays based on usage, so costs fall as customers shift to Web ordering. The company also is saving $10 million a year by moving most of its marketing from TV and catalog advertising to direct E-mail. For example, users are asked for their mothers' birth dates when ordering flowers online for Mother's Day; just before that day arrives, FTD sends an E-mail reminder and gift ideas.

"This allows for the marketing of flowers for the five major holidays to marketing 365 days per year," says CEO and president Michael Soenen. The result: sales grew 38% in the most recent quarter, to $32.5 million, compared with the previous year.

Clyde Ostler, Wells Fargo's VP of Internet services, led the bank's $250 million investment in Internet infrastructure and marketing for online banking and lending last year. One piece of the San Francisco bank's Internet strategy, online home-equity loans, was marketed in areas in which Wells Fargo doesn't operate branches. While the online effort doesn't cut the bank's costs--indeed, it adds to them--Ostler says sales of online home-equity loans will more than cover the marketing investment and turn a profit this year. And, by bringing in customers from as far as New York, where Wells Fargo has no branches, Ostler says, it passes the bank's main test for Web efforts: "Can this channel give us sales we wouldn't otherwise have gotten?"

No wonder E-business initiatives remain a high priority. Three quarters of companies surveyed this month by InternetWeek, a weekly technology publication owned by CMP Media Inc., InformationWeek's parent company, say they'll increase Internet spending in 2001, by an average of 40%.

E-business efforts don't always deliver near-term or concrete savings. Last month, Northwest started offer-ing Internet check-in, letting travelers print boarding passes from their home or office printers. It's not an immediate money saver, but that's OK, says Lenza. "It's not only a sales channel, but a service tool," he says. The system has been adopted faster than any other Northwest technology initiative, with 3,000 passengers using it every day.

And of course, buying or selling more online doesn't automatically translate into profits. "Anybody can add the Internet as another channel," says Dave Sutton, a strategy consultant for E-services firm Inforte. "That adds cost, but it doesn't always save money."

Companies that use the Internet only as a new sales channel won't create a long-term advantage over competitors, Sutton warns. He compares selling via the Net to frequent-flier programs: Every airline has one, and each can quickly match any other's features and offers. "If you don't tailor it to your business, the Internet is very easy for others to copy," he says.

What's more, efficiencies attributed to E-business can be hard to pin down. GE declines to be specific about just where its cost savings are being realized. But Bear, Stearns & Co. analyst John Inch is a believer. "GE has a history of aggressively downsizing its personnel when it sees an opportunity," he says. "But you need a critical mass of E-business first. 2000 wasn't the year. In 2001, we'll start to see this."

Inch says simply E-enabling a company without trimming expenses won't help financial performance. But he believes large companies are just reaching that point in their E-business development where they'll be able to cut staff or consolidate facilities, and hard-pressed manufacturers won't hesitate to do some cost-cutting. Inch also cautions that any savings companies generate from E-business won't automatically flow to the bottom line. "Some of it is freeing up capital that can be put to use elsewhere--research, product development, and even price rebates," he says.

While internal E-business investments are delivering dividends, speculative investments in dot-coms are having the opposite effect. Companies that bought stakes in dot-coms or Internet incubators in order to tap their energy, talent, and new technologies are now paying the price for faulty business models and declining market values.

DuPont & Co., for example, invested $220 million through an alliance with WebMD, a Web site for doctors and patients that later merged with Healtheon, to promote its expertise in life sciences. The Wilmington, Del., chemicals and pharmaceutical conglomerate was forced to take a hit of 20 cents per share against earnings last quarter to reflect the falling value of the Internet company's stock.

Likewise, Textron Inc. took a $117 million charge last quarter to write down the January 2000 investment it made in Safeguard Scientifics Inc., an Internet holding company that the Providence, R.I., manufacturer teamed with to accelerate its implementation of new technologies. Compaq also had to write off $1.8 billion in assets at the end of last year, primarily because of its stake in Internet holding company CMGI Inc.

A slowing economy and uncertain stock market may mean E-business efforts face greater financial scrutiny. Janey Place, VP for E-commerce at Mellon Financial Corp., says her company recently shelved an initiative to create wireless account access because it didn't believe customer demand justified the investment.

And while it's interesting now, Place predicts that the trend of breaking out E-business results will diminish as E-business becomes more pervasive. "I think it will fade into the overall profitability," she says. Many companies can only hope that she's right.