E-Business Loses Momentum - InformationWeek

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03:13 PM

E-Business Loses Momentum

Companies scale back because of a slow economy and poor results

It appears the business world's lightning-fast adoption of the Internet has hit a speed bump. A combination of factors, including the economy, immature technologies, high implementation costs, and even workplace culture, have hampered the spread of E-business.

InformationWeek Research's E-Business Agenda study of 375 IT managers shows declines in the past year in the use of nearly every type of Internet application. The number of respondents using E-commerce applications is 57%, down 10 percentage points from a year ago. The use of Internet-based supply-chain networks continues to decline, down four percentage points to 51% of respondents since last year, and down 10 percentage points from our E-Business Agenda study conducted 18 months ago. The only growth was in intranets; 94% of respondents have an internal communications Web site for employees, compared with 91% last year.

But this doesn't mean the business world is recoiling from the Internet. Executives at the world's largest companies still consider the Net a vital part of strategy and growth. At many companies, Internet-related investments continue to outpace other technology spending. What the research numbers do show is that E-business is experiencing some growing pains.

"We're not seeing any decrease in interest in using Internet technologies to change the way business is conducted," says Ben Gaucherin, VP of technology for IT consulting firm Sapient. "We're definitely seeing a change in the way people approach the Internet and manage investments around it." The economy and bad experiences with immature technologies play a big part, he says. Companies are taking their time with implementations to make sure they align with business goals.

The discriminatory nature of E-business plays a big role in the decline of some applications: Most companies with revenue of more than $1 billion have robust Internet strategies, but many small and midsize companies are struggling with complexity and cost. The drop in the use of Internet-based supply-chain networks, for example, was six percentage points among companies with revenue of less than $100 million, which made up one-third of the survey respondents. For those using E-commerce, the drop was 17 percentage points among companies grossing less than $100 million, compared with four percentage points for those between $100 million and $1 billion and two percentage points for companies grossing more than $1 billion a year.

Joel Sanders, manager of IT at Doing Steel Inc. in Springfield, Mo., is among those feeling stung by E-business. The manufacturer of steel building structures has a few vendors and customers willing to conduct business online, but most won't give up the conventional method for communications in his industry: the fax machine. "Our purchase agent still spends half her day sending faxes, and I thought five years ago that by now we wouldn't be doing any of this stuff with paper," he says.

It's mostly a matter of money, Sanders says. Doing Steel uses some of the industry's E-marketplaces--but mainly just to get basic information about suppliers and customers, because most aren't equipped to conduct business online. "The typical general contractor isn't a huge company, and they don't have the money to get the E-business ball rolling," Sanders says.

InformationWeek's survey shows that fewer than one in four businesses use E-marketplaces, compared with one in three last year. Still, the Internet seems to be playing a big role in E-commerce for the broader manufacturing market. Sales derived from Web sites and extranets now make up 13% of revenue for manufacturers, compared with 8% a year ago, the biggest increase among all the industries surveyed.

Alan Amling, senior director for E-commerce at shipping company United Parcel Service Inc., says online marketplaces and some other types of E-business collaboration efforts have shrunk because the initial expectations or approaches were wrong. For example, he says, concerns about the potential competitive disadvantage and security haven't been addressed. "People are developing a more pragmatic view of what collaboration is and what it can do for them," he says. UPS considers itself to be an exceptionally pro-E-business company, providing a growing cadre of online tools to business partners, such as ones that let customers of Barnes & Noble Inc. track their book deliveries through the retailer's Web site.

And while buying and selling online isn't working well for Doing Steel, simpler E-business processes are. Nearly all the company's drawings and designs are sent over the Internet among architects and engineers, compared with several years ago, when everything was sent via overnight mail. Sanders estimates he saves $4,500 a year in printing costs and nearly $18,000 a year in shipping costs as a result.

Money and the broader economy are hampering E-business in the bottled beverage industry, says John Patterson, E-business manager at American Beverage Corp. in Pittsburgh. The $130 million-a-year company started working last year with cardboard suppliers and graphic-design shops on an online collaboration project for designing the packaging that holds four-packs and six-packs of bottles. Without warning, the cardboard companies, which were funding the project, bowed out. "It's a great concept, but it never took off," Patterson says. "I think the biggest reason is that cardboard companies are usually small, so they don't have the resources with the economy right now to take on projects like that."

Patterson is excited about the work being done by UCC Net, a consumer-goods organization that's working with food-industry E-marketplace Transora .com and large retailers such as Albertson's, Wal-Mart, and Winn-Dixie to develop standard methods for defining product data, plus standard XML technologies for the industry. If everyone can agree that a fat-free product is defined as "F.F.," for example, it's easier for retailers to deal with data that comes from a variety of manufacturers. The food and beverage industry still relies primarily on the clumsy, inefficient method of individual EDI relationships with each supplier.

"If we can get data standardized, then we can do pure E-commerce," Patterson says. "For a company our size, it's important that standards are developed. Otherwise there's the risk of Kraft or Philip Morris creating so-called 'standards' that we couldn't comply with."

The E-commerce struggle among small companies isn't entirely lost on vendors. Take Microsoft, which has a new strategy to sell small and midsize companies low-cost, ready-to-assemble applications, including those for enterprise resource planning, supply-chain, and financial transactions. These offerings will rely on Web services, the broad term for applications that are assembled over the Web using open interfaces and protocols.

Indeed, companies big and small are excited about Web services, and its broader adoption could mean the next growth spurt for E-business. Among respondents to the survey, 57% say Web services will replace older technologies or standards. More than half have started using them, and another 17% are testing them. But many IT industry experts say it will take years for Web services to become common, and two in five survey respondents say it's going to be difficult to adopt them.

Jerry Savage, VP of E-business at the Butler Co.

Butler has had trouble getting smaller business partners to adopt E-business, VP Savage says
Jerry Savage, VP of E-business at the Butler Co., a $500 million-a-year distributor of pharmaceuticals for animals, is hoping Web services spur E-business in his industry. "Our internal transactions are built upon Simple Object Access Protocol and XML, and we believe strongly in those technologies," he says. The company hasn't seen huge success in online sales--only 2% of its sales are coming from the Web--but a new system based on XML and Soap that feeds orders from salespeople's notebook PCs into Butler's back-end system is getting rave reviews. "We plan on reusing that technology to link our customers into our back-end systems as well," Savage says, making it easier for veterinarians to refill orders, for example. "We're moving forward with Web services, in hopes that it will catch on in our industry."

Butler also faces the challenge of getting smaller companies to adopt E-business. Out of an estimated 350 suppliers, Savage says, the company does online commerce with only about 40. "Larger companies such as 3M, Pharmacia, and Nestlé Purina are equipped to do E-commerce, but smaller companies are struggling. Sometimes, they don't even have an IT department," he says.

To boost E-business with smaller companies, Butler began using a service provider called Advanced Data Exchange, which provides a private exchange among suppliers and distributors. Rather than having to build online links to each distributor, suppliers interface with ADX, which manages electronic transactions such as purchase orders and order acknowledgments. But that's taking off slowly, too. "We hope this will catch on, but those companies of $1 million to $30 million are slow to adopt," Savage says. "It's a cultural thing. They're more comfortable with receiving a fax."

E-business is proving to be much like the ecosystem: It won't thrive unless companies of all sizes are linked in. The challenge for vendors, service providers, and even large companies with solid E-business strategies is to make E-business simple, easy, and affordable for all.

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