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Cover Story

Secret to e-commerce

Nov 08 - 14, 1999

For IT, e-commerce is a challenging opportunity, a blend of old skills and new directions. One part of e-commerce is IT management. The same old stuff is still critical: the legacy systems curse, data management, operations and all the burdensome complexity systems that IT professionals face every day. What makes electronic commerce new—and demands new IT learning—is IT's responsibility for the customer relationship and its role in creating the profit structures that influence its stock valuation.

Of course, IT has long been a part of customer service, but mainly in terms of transaction management. The typical bank ATM network and airline reservation systems have been transaction factories for decades.

But transactions are the equivalent of buying coffee at a 7-Eleven. Relationships are much more: collaborating with a trusted financial adviser or having your hair cut by your favourite barber. Dell, Charles Schwab, Amazon.com and Cisco are online favourites even though there's often a cheaper seller.

Building strong customer relationships is the key to e-commerce success, not excellence in transaction processing, important as that is.

The reason is straightforward: The cost of acquiring customers and investing in infrastructure and support are so high that repeat business is essential. If you get stuck at the transaction level, you may have superb IT, but you don't have relationships —the only path to sustainable profitability.

The e-commerce winners have all three: IT management, customer relationship and a profit structure. Cisco's formula is typical: Manage the sales transaction side, then provide research and evaluation tools for comparison shopping and self-configuration. Turn your back office into the customer's self-management front office, streamlining your own processes and cementing the relationship. Customize the front-end interface; add seminars and interactive access to experts; open up spaces for communities to form. Extend the variety and range of options you offer to create a branded hub.

Amazon.com's financial "losses" look like a little less of a problem in this light. It's following a systematic economic model: spend to get customers (more than 20% of its revenue); keep them (close to 70 per cent repeat business); bond with them ("My Amazon" personal mini-site, alerts, status information and other relationship communications); collaborate; add new business at a low marginal cost and at low new customer acquisition cost.

The other e-commerce first-generation hall of fame companies display the same underlying combination and evolution. Dell and Cisco are absurdly profitable; that valuation perception applies to as-yet unprofitable companies because the market sees the IT relationship-profit structure linkage. It sees that Amazon is cash flow-positive already. In an industry with 3 per cent to 5 per cent operating margins, it has a repeat business incremental margin of more than 80 per cent. Basically, the e-commerce game is about substituting heavy fixed customer acquisition and infrastructure costs that enable high transaction operating margins for the traditional business's higher variable costs and lower margins. You lose the game if you don't get the repeat business; that comes only from sustained relationship-building.

So what's the role of the IT organization? It obviously retains most responsibility for IT, though only in partnership with designers inside and outside the firm, with systems integrators and with technology/ e-commerce partners. What does it do to meet the company responsibility for customer relationships? Surely it's not enough to shrug one's shoulders and say, "That's marketing." Accountability for P&L? Again, it's not enough to say, "That's not our job—we're IT."

The agenda for IT is to learn to lead this triad of technology plus customer relationship plus new profitability structures. What an opportunity. And what a learning agenda.