April 28, 1998

ENTERPRISE SPECIAL REPORT: DOES THE MIDDLEMAN HAVE A ROLE ON THE WEB?

Presented by the MIT Enterprise Forum of New York City

In this latest installment of the MIT Enterprise Forum of New York City Inc., speakers focused on technological changes affecting business-to-business selling, in a session titled "The Death of the Salesman." BW Enterprise is pleased to provide excerpts from the meeting.

The Internet is widely hailed for eliminating intermediaries. Some see it as going so far as to shift control from sellers to buyers. While the greatest buyer-power imbalance is in consumer sales, the big action in the near-term is in business-to-business selling. This program looks at how Web selling is causing disintermediation, re-intermediation, and formations of new kinds of buyer associations.

These excerpts feature comments from Beth Enslow, senior analyst for Gartner Group, an information technology research firm; and Wayne Flaggs, vice-president for strategy and business management at IBM's Enterprise Web Management unit.

The moderator is Richard Reisman, president of Teleshuttle Corp., who consults on Internet applications, including communications and electronic business.

DICK REISMAN, PRESIDENT, TELESHUTTLE CORP.

Welcome to the second part of this series, "Death of a Salesman." The name in a sense is a misnomer because we're really looking beyond that question. We're not trying to answer that specifically, because the answer is much more complex. Is there a salesman? Clearly there is. The real issue underneath all of this, you might think of as Inter-net-mediation, which is how the Internet is changing intermediation. The Internet is really bringing a radical increase in connectivity. It changes the connectivity among people, systems, and business, which is having a huge impact on markets and marketspaces and how people do business.

What we're looking at are the questions of how this changes. One is disintermediation, which is the removal of the middleman. Obviously with the Internet, it becomes easier to sell direct like Dell and Cisco are doing. At the same time, it's not really that simple. There is a place for middlemen, and there's a significant amount of re-intermediation where people are finding new ways to add value -- using the technology to deliver that value. That's one of the things we'll be addressing very heavily on this panel.

At the same time, power is shifting somewhat from sellers to buyers because now buyers can now trade information, they can form associations that give them new kinds of power relative to sellers. So the balance in the markets is changing because of this communication.

What we're doing is using the computer business-to-business market as a case study because it's one of the most advanced. Obviously because the users in that market are technically advanced, and the vendors are technically advanced, it's a good case study. It's also good because it's complex. It has a lot of direct sales, it has multitier sales channels, which are fairly rich with lots of kinds of value-added services. So, there are a lot of places for new kinds of productivity to add value and change the game.

So, in doing that we have a great panel here tonight who can look at this from a number of different angles. We will go in sequence through the group.

BETH ENSLOW, SENIOR ANALYST, GARTNER GROUP

We're in a relatively unique position at Gartner Group because we deal with just about every point of the computer supply chain from semiconductor manufacturers to PC manufacturers to wholesalers to VARs [value-added resellers] to the businesses that actually buy computer equipment and peripherals. What we've seen over the past three years is some radical changes in this marketplace.

We consider the computer market to be a pressure cooker of EC activity. And one that we highly suggest all other industries take a look at, because sooner or later that pressure cooker is going to be moving into your industries. We're going to talk a little about disintermediation, and we've done some specific analysis over the past 18 months about who is at most risk being disintermediated or bypassed by the Internet.

What we really think is fascinating about the computer industry is that they have really been able to use Internet technology to deploy multiple business models. We have Dell who has turned itself into a bill-to-order go-direct-to-the-end-consumer model. This has caused some great upheaval in the computer industry, as I'm sure some of the panelists will get into.

We also have some other models. The go-direct model is not the only model that the Internet supports. We have 3Com, for example. They have what's called a channel-commerce strategy. What this means is that they will use the Internet to attract and market to prospective buyers. They will even let them do some configuration on the site. At the time when transaction occurs, 3Com actually passes the customer off to a reseller, to their channel partner, who finishes the transaction and does the post-sale services. We also have companies like Compaq and companies like IBM here who have gone to the channel-assembly model where instead of doing final assembly of finished goods and sending them off to the wholesales and buyers, they extend their enterprise's capabilities by using the capabilities of their channel partners. They have companies like MicroAge now doing final assembly...

And finally, we have companies like Adaptec that make semiconductor chips. What they found out is that their lead times were about twice as long as some of their competitors', and the reason being is that Adaptec actually doesn't make anything. It designs computer chips and then it uses fabricators and assemblers in East Asia to actually assemble the product. That time gap and sending normal EDI [electronic data interchange] transactions, sending CadCam diagrams by mail or by fax was taking too long. So, they have been leveraging Internet technologies to do EDI over the Internet. To actually hook processes up over the Internet so they have created a seamless connection. By doing this, they've been able to reduce cycle times by 50%.

We think it really is the creativity in developing these new business models and these new channel roles that is so intriguing about the computer market. The one big lesson here is that companies that are flexible and that are very driven by customer responsiveness seem to be the ones that are coming out on top in this market place. We think, again, that this will translate into other markets as well.

As I mentioned when I began, we've done some specific analysis on wholesalers and their risk factors as the Internet and global transportation of logistics comes to bear. What has been the typical business model for a wholesaler? Well they buy low and they're going to sell higher. They are going to have local sales people with product catalogs on paper that go out to customers, sell them the new products, and they're going to have local inventories and warehouses around their customer base. All this is thrown out in this Internet work world. Now with the Internet, you don't need people to come around with big paper catalogs, we can go on the Internet with electronic catalogs. We also don't need people to have local warehouses stocked with product because now I can call FedEx and have that shipped to me within 24 hours.

So, what's the value of a wholesaler? What's the value of an intermediary? We think that's the big challenge here. How can they add value to their channel? We took a look at who is at most risk of being disintermediated. We discovered it was computer wholesalers like MicroAge, and I'm not going to steal Bob O'Malley's thunder here by telling you how they reinvented themselves. Let's say that they absolutely did.

Let's step back for a moment and think why were they at such a risk. For a couple of reasons. We actually drew up a scorecard of risk factors.

Is the product digital? Can it be digitized? If we look at software, which is one of the components that a MicroAge, for instance, would deliver to a company, absolutely. If I'm a wholesaler and I deliver software, I might as well just go home. I have a client in the Midwest, and they have these huge warehouses full of empty space. They used to be a distributor of software, and every year the amount of space in the warehouse that was occupied by software continued to shrink because now everyone is delivering over the Internet. So, this company really had to sell off their assets and completely reinvent themselves.

Encyclopedias are another great example. When I was a kid, we used to have the Encyclopedia Britannica that weighted about 2,000 pounds. Now you can get them on a little CD. There is no room for a wholesaler of encyclopedias.

Do computer-literate buyers consume the product? This is obvious. If I'm using the computer, I'm more apt to buy over the Internet.

Is the product assembled from commodity components, which doesn't require very expensive manufacturing processes? This is important because if I'm a new company coming into a market and I can use commodity parts to build something, then I can use the Internet as a low-cost sales and marketing channel, and I don't need to have all those expensive warehouses and manufacturing facilities. This is the Dell model.

There's a company called Sun Data that builds computers but they actually don't build the computers. FedEx stores components in their warehouses and somebody would come into a FedEx server, where the Web catalog and electronic catalog is hosted, and place an order. FedEx personnel will actually take the order, assemble the components, and ship it off to the end-customer. What does Sun Data do besides collect a check? They are an information distributor. They develop electronic catalog and one-to-one marketing techniques. They are able to be a computer manufacturer per se without owning any manufacturing facilities or any inventory. This is a beautiful model.

So, what we see is that there are a number of risk factors here. What we've determined is that yes, there is something that companies can do. Wholesalers are not toast as some were proclaiming a few years back. The issue is what value do they add. They have to add a completely different value than the traditional business model. What they need to do is they need to enhance the physical flow of goods, and this comes in the channel assembly. They need to be able to take multiple suppliers' products, merge them together, send them off to the end customer, and act as a channel conglomerator. They need to enhance the information flow by providing electronic catalog information, maybe developing Web sites for their end customers.

Another example is a company called Aurora Electronics, a company in San Diego that is a wholesaler of electronic components. They decided that they want to get out of the business of being a physical goods distributor. Instead...they are going to create an open-sourcing environment for people to buy over the Internet. Rather than being a product broker, they are going to be an information broker.

And finally, enhancing the consumption of goods. This is where distributors can really play a big role. They can do training, they can do installation, they can do financing, they can do all these cool sales services. That is where we believe they will make the majority of their money. There are activities that an IBM or a 3Com may not necessarily want to perform because that's not their core competency, and so these cool sales services are going to be key to wholesalers surviving.

The main message here is companies that are flexible, companies that are very adaptable to changes and consumer demands and changes in business conditions seem to be surviving. The '80s were called the Me Generation, and I think that perhaps the '90s may be called the Now Generation as in: "I want it now."

All our consumers seem to want everything now. All our customers want immediate turnaround and how do we support that? We need agile business processes. The problem is a lot of companies have been on this standardization kick. They put in some of these ERP [enterprise resource planning] systems and they poured the concrete on their business processes and now their processes have hardened, and they basically are going to have to take jackhammers out to rip up that concrete to get new business processes.

I think it's going to be a fascinating time over the next two or three years just how far they can push these new business models.

WAYNE FLAGGS, VP FOR STRATEGY AND BUSINESS MANAGEMENT, ENTERPRISE WEB MANAGEMENT - IBM

I've spent a lot of time in the job I'm in, which I'll talk about in a second, going around the industry talking to other companies like IBM who are in this industry, as well as some of the thought leaders. And one overwhelming fact is that we're all learning every day in this business, so this kind of forum is helpful to everybody. I'll try to address as many of the issues that you wrote in the list. Dick gave us a list of about 20 issues, and I have 15 minutes to try to stack them all in.

I'm in an organization now in IBM that was created only about six months ago. Our Chairman Lou Gerstner decided that, number one, if IBM goes out and promotes its E-business message to customers, he's got to be able to point at IBM itself as a proof point for those messages, which is natural.

Secondly, is that if you've ever gone on our site, you've obviously recognized that we have lots and lots of pages of content and there are lots and lots of dollars behind that to create it. Any time you spend that much money in a corporation, you want to make sure you're getting a return on investment. So this group called Enterprise Web Management was put in place to develop a Web strategy and put some business discipline on our dollars for Web activities. Specifically, I'm responsible for the strategy piece and the business discipline too.

In that respect, what we've done in this period of time is spent a lot of time looking at value opportunities for the Web within IBM. Rather than looking across the whole spectrum of the corporation, we're going to focus today on the customer-facing side and E-commerce and customer care. We also will look at how it's important to employees and how it can respond to procurement; we call that E-procurement. It obviously has a big play in marketing communications and with our business partners so that's where we've been spending our time...Yet even so, and this is clear across the industry today, everyone is having a hard time quantifying the value they are getting out of the Web. We sort of intuitively know we're getting it, but it's a very hard time measuring it.

Number one is I don't see anyone going out of business or being completely disintermediated in the set of channels that we deal with today. To put it another way, we still think the indirect model can work, although we think that it has to be more adaptive to the Web....

Online sales is the sizzle today, but customer care is really the beef. If you take a customer review, vendors seem to always talk about E-commerce, and customers seem to always talk about customer care. That is what they're most interested in. Why is that? Well, look at the business value. If you look at the revenue that's being generated on the Web today, most of that is represented by a channel shift or a revenue shift to a different channel. It's not revenue lift. Specifically, and for all the ones you hear about, this is true, I'm not making this up for IBM, it comes from a couple of different places. Number one is that this was revenue that went through a call center and an 800 number in many cases. Or it's revenue that's associated with extranet sites for large customers, allowing them to order their systems over the Web vs. whatever it was before, either call centers or other media.

The current value play today in E-commerce is moving transactions to a lower expense to revenue channel, and that's not bad by the way. That's still good stuff for a corporation. So, you ask what stops you from doing more of that? Well the first thing is the value-add required to install some of the products that would naturally be sold over the Web. If they are part of the solution sale, it's hard to just sell the piece part of it without the rest of the solution. Clearly, there are a lot of system integrators -- different solution remarketers who still have a major role to play in this world because they are providing the total solution. The second thing that stops us from selling more over the Web is some of the products are just too complex.

The third [issue] that really gets into the channel issues is the ability to show a market-level price on the Web site. This is really when you get into the real channel-contention issue, and Microsoft has done this with software. We've done this with a set of our after-market products, which is you put them on the Web, but you produce an accommodation price on the Web site, not the market-level price. So you really are telling the world buy it from the indirect channel.

When you go to the market level price, you're saying we're indifferent to the choice and, ergo, there is channel contention. We're trying to figure out how to get this balance right. We're doing some experiments in a couple of countries now where we are doing market-level pricing with after-market sales in collaboration with partners...[T]hey may decide, in some cases, that their productivity has increased enough by having smaller transactions done over the Web that they can use their people to go sell higher-value systems.

The fourth reason why I think more transactions are being done over the Web is: Do the Web applications allow the customer to perform other pieces of the purchase cycle, not just the actual buy. Can you do all of the product evaluation you need? Can you do the configuration? In the case of our large extranet customers, this gets to some of the stuff Beth was talking about, can you integrate the purchase into the customer's procurement system? That's when it really gets fun for our customers, and that's where they see real value. I will tell you, and you can ask anybody this, that today there are very few transactions that are completely Web-based. There may be one piece of that purchase cycle that is done or multiple pieces, but not that entire transaction.

A lot of the numbers that you see talk about Web-based revenue. A lot of that has to do with the Web enabling the orders from the channel partners. So, although that does save an administrative cost and reduces the cycle time, it really doesn't change the channel role. That is the current value play for E-commerce.

When you look at the future though, what IBM and other players in the games are thinking about, is how to get the revenue lift? We got the revenue shift, how do we get the lift? The most obvious one is acquiring new customers especially in small business. None of us has gotten this right today. None of us has found the ideal model to go after small businesses and keep those customers. The second is something the Web is just terrific at, which is cross-selling products and services to existing customers. For instance, someome calls one of our technical support sites and they don't have a support contract or a maintenance contract. What a great time to ask them. Selling within context or cross-selling can be a real important activity in the future for generating revenue.

One of the biggest dissatisfiers of our customer certainly is nonresponsive or incorrect answers to questions or problems. For a company like IBM, that has a very broad product set and is dealing with large, sophisticated customers, the Web can really solve a lot of these problems for us. So, between self-service technical support and customer service by E-mail, if I can call it that, they are two major initiatives that we have on going now. I will tell you that this is clearly a place that we are learning everyday and, clearly, we have to invest more dollars and energy.

For instance, effectively structuring all the technical information that we have and making it more easily navigable is a major effort on our part. If any of you have spent a lot of time going to different sites trying to get questions answered on any of your software or hardware, it is not simple. So no one really has that piece down.

We also have seen our E-mail volume skyrocket. When you give a customer a chance to E-mail you to ask for something or complain, it will happen. Even though we're looking at this as a chance to satisfy a customer or an opportunity to sell something, very honestly when you get this E-mail we still have to do a much better job at triaging all this E-mail that's coming in and leveraging some of the software and research out there about how to answer these questions through software without human intervention. We are learning how to do that.

Another thing to look at is how to produce customer on-demand sales collateral. The whole idea of printing brochures that get out of date, that sit in warehouses that people don't look at and have a lifetime of about two weeks after printing, the Web allows you to do this a lot better. We are spending time on that.

I think the Web will ultimately have a high impact on the role and the number of tele-sales reps. One, for instance, is that when we do most of our campaigns today, we give you two options. Call this 800 number or come to this Web site, which is hopefully not the homepage of IBM, but a Web site that's associated with that campaign, with a URL specifically for that campaign...Few transactions are solely done on the Web so their will always be a human safety net and there will always be a role for the telesales person.

Let's talk about the indirect channels. Everyone is wondering if they will become the IT equivalent of travel agents and whether there's this Travelocity thing out there that's going to change everything in our industry. I don't really see that happening. It's not a simple answer, though.... For instance, if you take a high value-add channel such as a system integrator, selling a complex solution such as a UNIX-based ERP solution, the chances are pretty good that that business model is going to stay around for awhile.

On the other hand, if you look at a second-tier distributor, take for instance consumer PCs or simple commercial desktops, they face a different challenge. They have to learn to reduce their costs, live with lower margins, work with vendors to reduce supply chain-cycle times, and provide responsive customer service probably across the broad set of products. Maybe that's reinvention as it's called.

As I said in the beginning, the roles change, the productivity goes up, the customers are happy and the blue-suiters get to keep their jobs, and customer care will help drive Web sales. So, I'll end with one significant point. No matter what that channel strategy is, the Web site is going to be the vehicle for us to develop strong ties to our customers. So we will always try to build traffic on our site.... This will be critical to IBM forever, whatever our channel strategy.