EXTRANETS: LOG ON, LINK UP, SAVE BIG

Companies are using Net tech to forge new partnerships and pile up eye-popping savings

BUSINESS AT NET SPEED Click for June 22, 1998 issue













Chrys Barnes knew she had a problem. As head of procurement for sprawling Los Angeles County, she oversees an organization that bought $650 million in goods and services last year using paper forms--and had no unified purchasing system. Buyers responsible for stocking the county's offices, hospitals, and jails tap into more than 25,000 suppliers. ''We buy everything from chicken to condoms,'' Barnes says. The process was so chaotic that one office might order pencils, not knowing that thousands sat unused in a county warehouse. The launch of Web-based buying sites by some suppliers only raised the potential for pell-mell purchasing. ''We couldn't just turn people loose to place orders over the Internet,'' she says.

Barnes bet on a high-tech solution. In tandem with the county's overhaul of its mainframe-based finance system, she constructed a $2 million Internet-based procurement program using software from Walnut Creek (Calif.) startup Commerce One Inc. Now, buyers with browser-equipped desktop PCs can surf a countywide network and comparison shop among approved suppliers linked in over the Net.

Routine purchases are O.K.'d using rules built into the software, while special items get routed to managers for their approval. Orders and payments are all electronic. The comparison-shopping alone could save the county up to 5% on prices--adding up to tens of millions of dollars a year. And better inventory management will let the county reap a $38 million windfall over the next five years from closing its central warehouse. ''We're seeing tremendous savings,'' Barnes crows.

BIG BUCKS. She's not alone. Although it lacks the visibility of online shopping by consumers, business-to-business commerce over the Internet will account for 78% of the dollar value of cybertransactions this year, says Forrester Research Inc. (FORR). Organizations like L.A. County are jumping on the bandwagon for an obvious reason: Using the Net to communicate with customers, distributors, and suppliers can save big bucks compared with doing it over the phone or via expensive proprietary data networks. Businesses will exchange an estimated $17 billion in goods and services this year over the Net, Forrester says. By 2002, that's expected to top $327 billion. Analysts are divided over how much companies will save, but conservative estimates hover in the tens of billions.

E-commerce isn't new to many companies. Tens of thousands already are using an older technology called Electronic Data Interchange, or EDI, to exchange some $250 billion worth of products this year, usually over expensive private networks. But EDI is notoriously pricey and complex to set up--effectively shutting out millions of smaller businesses. It's inflexible, too. EDI only transmits rigidly formatted electronic documents such as purchase orders and invoices. Internet E-commerce, on the other hand, lets businesses cheaply swap all kinds of data: sales contacts, product brochures--even engineering drawings. ''It's like having an open phone line with your customers,'' says Sandra K. Morris, the director of Internet marketing and E-commerce for Intel Corp. (INTC), whose customers are PC companies.

The savviest companies already are enjoying huge advantages from online business relationships. Chipmaker National Semiconductor Corp. (NSM) is saving its distributors $20 million this year by steering them to order products online, while at the same time asking them to supply detailed sales projections through the Web site. That helps National better plan its manufacturing schedules.

Boeing Co. (BA) has booked $100 million in spare-parts orders from airlines in the last year through a Web site that took just seven months to build. And networking giant Cisco Systems Inc. (CSCO)--the shining star of business E-commerce--books $11 million in orders each day from resellers, or around $4 billion a year, on its Web site. Cisco CEO John Chambers says the company saved $363 million in technical support, marketing, and distribution costs last year by exploiting the Web. More than one-third of the savings came from hiring fewer people to assist customers.

The potential for Net-based business relationships goes well beyond automated transactions, though. Companies ranging from Mobil Corp. (MOB) to NationsBank Corp. (NB) are embracing so-called extranets, or business networks that extend a company's internal network--known as an intranet--to key business partners over the Net. Extranets use open software standards to shave networking costs and open the door to innovative applications.

Prudential HealthCare figured that out. The managed-care plan has an extranet linking its internal systems to the corporate networks of large subscribers. That lets benefits managers at companies enroll new employees themselves--rather than sending paperwork or dialing Prudential's call center. It also allows people to check their eligibility and claim status, or change doctors at any hour of the day. The payoff is sweet for Prudential, too: The self-service extranet cuts hundreds of calls a day to the company's 800 number.

Extranets are about more than just saving money, though. They also can be a way to forge more intimate business links among partners, allowing them to share business data, even collaborate on product design and development. Hewlett-Packard Co. (HP) and Procter & Gamble Co. (PG), for instance, have extranet links to their advertising agencies to swap marketing plans and speed the review of ad campaigns. And winemaker Robert Mondavi Corp., which buys satellite images from NASA to spot problems in its vineyards, aims to push those images out over an extranet to its independent growers this year. That would help growers avoid vineyard problems--and improve the grapes Mondavi buys. Extranets ''can help you build better relationships,'' says Steven R. Soderberg, Mondavi's senior vice-president.

VIRTUAL KEIRETSU. That's what moved Adaptec Inc. to spend $1 million for an extranet. A leading supplier of computer-storage products, Adaptec (ADPT) doesn't make the chips it uses in its products. Adaptec saves money that way. But the company can't move as quickly, in some cases, as rivals that build their own chips. ''In this business, you're either fast or forgotten,'' says Dolores Marcial, vice-president of procurement.

To speed up communications with Adaptec's Taiwanese chip suppliers, Marcial used software from startup CrossRoute Inc. (Redwood Shores, Calif.) to tie all the companies together in a kind of virtual keiretsu. Now, messages from Adaptec flow in seconds from its headquarters to partners in Asia. More important, the two-way communiques include not just parts orders but also engineering drawings and detailed manufacturing instructions.

Adaptec has reaped great benefits, reducing the time between the order and delivery of its chips from as long as 16 weeks to just 55 days--the same turnaround enjoyed by companies that make their own. The time for processing purchase orders fell from six days to minutes, and suppliers stopped having to manually re-enter faxed orders--eliminating the potential for disastrous errors. All told, Adaptec saved $1 million in costs and trimmed $9 million from its work-in-process pipeline. ''This is the real thing, not some theory-land,'' Marcial says.

It doesn't get much more real than the Trading Process Network created by General Electric Co. (GE). A giant electronic marketplace, TPN now includes a dozen large buyers, including Con Edison, and 2,000 suppliers. GE alone bought more than $1 billion in goods and services through the network last year, says John Berry, a GE marketer. Over the next three years, the company figures it will save $500 million by buying through its TPN extranet.

Not all companies will see such a fast payoff. For example, extranets won't instantly solve Boeing's massive production problems and billion-dollar write-downs. But behind the scenes, enterprising Boeing managers have launched 75 extranet projects they hope will eventually save the company millions of dollars.

The projects range from modest changes such as new ways to distribute airplane-service bulletins, all the way up to planned sharing of massive online databases tracking the history of every plane Boeing sells. Some innovations, such as sending required documents to the federal government over the Net, ''were so obvious that we didn't even go through the normal cost-justification process,'' says Graeber Jordan, Boeing's senior manager for electronic-commerce deployment. Developing Web programs is relatively low-risk, which encourages companies to try novel ideas. ''The Web is an insidious process-reengineering tool,'' says Jordan.

Tinkering with processes will get companies only so far, though. For friction-free E-commerce, companies will have to do a lot of consensus-building on standards for everything from part numbers to security. The surprise is how elusive that goal is today. The computer business is a case in point. After years of willy-nilly growth, every company uses different schemes to describe the features of its products--and unique formats for paperwork such as purchase orders. ''We have to reengineer the way companies work to make it possible for them to go electronic,'' says Fadi Chehade, CEO of RosettaNet, a consortium striving to set commerce standards for computer products.

RosettaNet is defining a lingua franca for describing everything from the speed of a printer to the color of a mouse. ''To get out of this Tower of Babel, we need a common language,'' Chehade says. For proof, look no further than Ingram Micro Inc., the distributor where he worked before RosettaNet. Ingram processes some 60,000 product returns per day--computers, printers, and other tech gear. Many come back because customers and salespeople can't figure out how to order what they want. That doesn't happen in businesses such as apparel that have strong standards. For E-commerce to fly, many other industries will have to follow suit.

That's one reason analysts don't think Internet commerce will kill off the decades-old Electronic Data Interchange technology. Heavily used by big manufacturers, EDI provides a secure means of coding and exchanging standardized business forms, usually over private data highways called Value-Added Networks, or VANs. Many big EDI users aim to stick with it because of their sunk costs and the perception that VANs are more reliable than the Net.

In fact, EDI and the Net can be complimentary. The value of EDI transactions today is 14 times larger than business-to-business Net commerce. That ratio is changing fast, though: Within five years, the two will be running neck-and-neck, at more than $450 billion annually. Consultant Gartner Group says that of companies using EDI today, 80% plan to implement extranets within five years. One big reason: Companies can now run their EDI transactions over an Internet-type network--allowing them to keep their current systems in place while enjoying the Net's lower cost. By 2003, more than 30% of EDI data is expected to traverse the Net.

The Net also is making EDI accessible to smaller companies previously shut out by its high startup fees. Analysts say it can cost $50,000 to add a single trading partner to an EDI network, because every link requires complex software translators to convert data between the participants. Now, EDI providers such as GEIS, Harbinger, and Sterling Commerce are adding ''WebEDI'' services that convert purchase orders from big buyers into Web forms that smaller suppliers can get over the Net. GE's TradeWeb, for instance, costs companies less than $1,000 a year to join--cheap enough that 3,000 small suppliers have signed up.

A Silicon Valley startup has an even better idea. EC Co., based in Palo Alto, Calif., has constructed an Internet service that converts EDI data into formats small companies can import directly into their PC-based business systems. The service is cheaper than traditional VANs but provides all the same types of security and reliability. ''It's robust and easy to use,'' says Erica Rugullies, an analyst for Giga Information Group. EC also handles electronic payments--something many VANs don't. That was enough to persuade the Ace Hardware chain to sign up. On Jan. 1, Ace told its suppliers to go electronic or start paying a fee for every paper-based transaction. So far, 40 mom-and-pop suppliers have joined the network at a cost of just $1,000 each.

EDI's eventual downfall could come from a different quarter, though. Internet standards committees are creating a variant of HTML, the language of Web pages, called eXtensible Markup Language, or XML. Unlike HTML, which defines how a page looks, XML signals what the data on the page stand for. That means when a browser sees ''$699.95'' on a Web site, it knows that's a price. The result: Buyers can more easily compare products and services across multiple E-commerce sites. XML ''tags'' also turn Web pages into live documents, meaning companies can send each other Web-based purchase orders and invoices. ''XML is like EDI for the rest of us,'' says Phillip Merrick, chief executive officer of software startup webMethods Inc.

IMPRESSIVE ROSTER. With or without XML, extranet-based purchasing systems are a hot area. After decades of focus on automated production planning, companies have squeezed the fat from their manufacturing material costs. But few have devoted equal attention to managing money spent on operating resources, such as office supplies, furniture, and janitorial services--which can add up to one-third of revenue.

That's an opportunity targeted by Netscape Communications Corp. (NSCP), as well as Commerce One and startup Ariba Technologies Inc. Ariba is working with suppliers such as Boise Cascade Corp. (BCC) to create online catalogs that corporate buyers--or employees on their intranet--can peruse to make purchases. Visa International, Verifone, and Federal Express Corp. (FDX) are joining in to provide payment and logistics services. All told, Ariba says its software can reduce the processing cost of purchases from $75 to $25 or less, while improving internal controls and speeding deliveries. What's more, by centralizing buying, Ariba says, companies can strike better volume discounts with suppliers. Ariba already has signed up an impressive roster of customers, including Chevron (CHV), Cisco, and Bristol-Myers Squibb (BMY).

The most profound but intangible consequence of this sort of E-commerce could be its effect on millions of clerks. True, automation will cost some people their jobs. But most E-commerce pioneers say their goal isn't to reduce the head count; it's to eliminate drudgery and improve productivity. ''We didn't want people to be paper pushers,'' says Adaptec's Marcial. ''We wanted them to manage procurement and inventory.''

That makes good strategic sense. Novel though it may seem today, data-communications technology will ultimately be cheap, ubiquitous, and invisible. At this point, users will be free to focus on the most interesting parts of their work, which should boost their satisfaction. And it's the people on either end of the wire who will elevate some companies above the rest.

By Andy Reinhardt in San Mateo



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