Electronic Commerce YoYo
I am bullish on electronic commerce! Yes, you read that correctly, electronic commerce is here to stay and represents a profitable business channel. How could this be, you ask? Many electronic commerce companies are going out of business and stocks are greatly reduced in market value. There is a glut of electronic commerce employees on the job market. All true. However, most of these casualties were caused by problematic business models. The problems stem from overinvesting and timing the development of the business volume.
I talked to a CEO about his investment in his business-to-consumer (B2C) business model. His initial investment was in the millions-of-dollars range. When the site went live, much to his surprise, not enough customers ordered products.
The typical web developer ended up miscalculating the business model because he believed there were more customers who would pay big money for initial web site development. The hyperboil built up to such a dramatic level that venture capital firms were investing ridiculous sums of money in companies that had unrealistic business plans. As a result, the bubble burst and now, with a big swing in the other direction, companies are abandoning electronic commerce business models in large volumes.
In my opinion, the B2C channel as well as the other electronic commerce channels, including information sources, publishing and business-to-business (B2B), have bright futures. Once a realistic level of capital investment is combined with the traditional sweat equity investment of an entrepreneur, the rationale for business models will continue to evolve. Terms like monitizing eyeballs, first to the space, cash burn rate, and others that reflect changes to traditional business models will no longer be implemented. However, new realistic business models that have not yet been implemented will emerge to keep electronic commerce businesses growing and excelling into the future.
There is no question that the overzealous business plan and overly optimistic valuations of electronic commerce business have affected mainstream companies as well as upstarts. For example, the world's largest retailer, Wal-Mart Stores, Inc., launched its electronic business, Walmart.com, with a venture capital firm from Silicon Valley, California, USA. At the time the dot-com business was launched, Wal-Mart management must have believed it needed help in this new retail channel and Accel Partners, the venture capital firm, must have perceived exceptional value, which warranted investing. Recently, Wal-Mart has purchased the entire interest in the dot-com business back from the venture capital firm. In the future, existing established businesses will evolve their electronic commerce businesses on a more rational basis. This exact scenario was played out by K-Mart, also a large retailer. K-Mart recently purchased the portion of its electronic-commerce business, Bluelight.com, that it did not already own. This web site was launched in conjunction with Soft Bank Venture Capital in 1999.
The lesson we have learned? It is critical to pace your investment in IT with classical return on investment (ROI) estimates. In my company, Etienne Aigner, our B2C has grown in size and technology slowly over the past five years. We have been profitable in four of the last five years. Sales have grown on average about 50 percent per year. We experienced a small loss in one year when we spent too much on IT development. Live and learn, but do not yo-yo around! (For a look, go to www.etienneaigner.com.)
This issue contains an article titled "Risk Management for Internet Banking" by Ganesh Ramakrishnan. The article reviews risks issues for this emerging business. In addition to the risks of business extensions using the Internet, we should not lose sight of the opportunities the Internet presents to reinvent business models.
New banks have been formed without capital investment in branches. This enables the bank to pay higher interest rates on deposits. Do you need a bank branch? Virgin Atlantic has started a bank in the UK that has no branches and combines an individual's savings, checking and loan accounts. This allows any savings to reduce loans, while the money is sitting in the account, and still keeps the money available. Loans carry high rates and savings accounts carry lower rates, therefore offsets are good for the customer. Virgin proudly advertises that the old bank model favors the banks and with new computer systems there is no reason accounts cannot be linked. The Internet will create new ways of banking and put pressure on traditional business models. Business evolves and you need to help your organization evolve with it, while still keeping your eyes on the control issues.
PricewaterhouseCoopers has once again published its Technology Forecast 2001-2003. This comprehensive forecast has been published consistently since 1988. This year's forecast is subtitled "Mobile Internet: Unleashing the Power of Wireless." To get a personal copy of the forecast, contact PricewaterhouseCoopers.
I was somewhat disappointed with the concentration of the forecast on mobile computing. This is no doubt an important technology development, however the concentration displaces reviews of other trends. In my opinion, while mobile will develop, it is a technology product chasing an application and a market. In nonwired countries, billions are being invested in mobile and there is little doubt it will evolve there first.
Perhaps we are in a technology-consolidation phase after proliferation of personal computers, client-server and the Internet. However, technology forecasts and updates on enterprise systems and CRM, which appear to be losing steam due to difficult return on investments, would be very helpful to business managers.
Other technology forecasts include continued progress in semiconductors, storage and communications. Moore's Law continues for at least the next decade! There is a forecast for an increase in network services, which, I hope include a continued trend towards software delivery as a service rather than a purchase. There will be an increased use of XML. Ongoing improvements in magnetic storage will be even faster than Moore's Law in semiconductors.
You Have to Give the IS Auditors Credit
Often in this column, I have credited the IS audit profession for recommending and supporting the emergence of the IS security profession. IS security professionals have become the front line of defense in the implementation of IS security and control procedures. Audit professionals also have contributed significantly to the field of data analysis. Beginning in the 1960s to address program verification and data testing, auditors invented audit retrieval and data analysis programs. While these programs were rudimentary, they did pave the way for many of the data retrieval and analysis programs of today.
Two firms that have traced the birth of their products to audit include ACL Services, Ltd. (ACL) and Interactive Data Evaluation Analysis (IDEA). Many auditors use these programs today. However, the programs are multifunctional and are used for projects in companies beyond basic audit.
ACL was founded in 1987 and now has offices in the Americas, Europe and Asia. According to ACL, it supports more than 150,000 users in more than 100 countries. ACL recently has broken its business into the ACL Institute, which is dedicated to training, and ACL Consulting. For more information on ACL, visit its web site, www.acl.com.
IDEA, founded in 1987, supports about 100,000 users worldwide and has about 28 distributors covering 50 countries listed on its web site, www.idea.com.
While ACL and IDEA are unique products, developed for auditors, they have found widespread use in general business applications.
Quotes of the Issue
"We were instrumental in getting corporate managers to think like owners."
- Henry R. Kravis, partner Kohlberg Kravis Roberts & Company
Source: The New York Times
"It's important for everybody to have an understanding of ROI, and all the financial ratios for that matter."
- Phil Davis, chief operating officer and senior vice president Allied Utility