The E-Business Software Weekly is a series profiling trends and developments in software and applications that support e-business, the Internet, and other electronic communication channels. Look for a new story each week in this space.
A Dot-Com Post-Mortem
Well, Christmas is over for another year. If you're a parent, you no doubt ran the gamut of the annual holiday duties, particularly those involving presents. Like making children's Christmas lists and sending them on to the North Pole. Bundling the kids off to the shopping mall to sit on Santa's knee and whisper their fondest wishes in his ear. Then ordering those last-minute gifts from some of Santa's favorite Internet outlets, like Toys 'R' Us and FAO Schwarz and The Disney Store. If all went well, you were rewarded on Christmas morning by smiles and wide, glowing eyes and shouts of appreciation.
But consider what would have happened if Santa were a little less well organized. Your son might have wound up with a Barbie doll instead of a Batman. Your pre-adolescent daughter with a bag of golf clubs instead of a kitchen play set. Your toddler with a puzzle, half of whose pieces were missing. And your new little baby with nothing at all. With this kind of fulfillment record, Santa and his elves would have been driven out of business long ago, replaced by a more efficient Christmas merchant-say, Jeff Bezos in a beard and a red suit.
Fanciful as this tale might be, the circumstances that it describes are not that much different than what one Internet retailer experienced in its short but celebrated life. The retailer was Webvan, the Internet grocer that closed its doors earlier this year after spending more than $850 million dollars in investment capital. While Webvan's demise was long foreshadowed and while, even from the start, perceptive analysts questioned the viability of the company's business model, the full dimensions of Webvan's failure are just now coming to light.
And in some respects, they make the proverbial yuletide lump of coal look like a polished diamond ring.
Failing the Basics
The San Jose Mercury News, the newspaper of Silicon Valley, has chronicled the rise and fall of the dot-com giants and wannabes as well as any daily paper in America. But with its recent investigative report into the final months of Webvan's life, the publication has infused more reality into the at-time surreal Internet bubble than any number of labored theories in the specialty e-commerce trades (whose ranks, it seems, are thinning just as quickly as their dot-com brethren). In the process, the paper has delivered a warning blow that should awaken the cautionary soul of dot-com survivors and would-be entrepreneurs alike.
Joelle Tessler, the Mercury News journalist who authored the report, describes his discoveries in elegiac terms. "This is the story of Webvan through the eyes of seven people on the front lines, the foot soldiers in one of the biggest bets ever on e-commerce," she writes. "They drove the delivery trucks, lugged the plastic totes packed with groceries, listened to customers complaints, and handled other duties essential to the online grocer's day-to-day business. While Webvan carefully guarded its image and its inner workings, its employees were doing their best to carry out the company's grand mission of transforming the way Americans buy groceries. For them, it was a bitter blow when the Foster City company shut down and filed for bankruptcy in July..."
In their frank, unfiltered comments to Tessler, the former Webvan employees typically display saddened loyalty to their one-time employer. In fact, reading the account, published in the December 16, 2001, edition the Mercury News, one sees how the employees' willingness to perform above-and-beyond the call of duty-a trait common among the work forces of Valley startups-kept Webvan's prospects alive even as customers seemed ready to bolt in droves. While the incidents recounted in the story prompt one to wonder how Webvan stayed in business as long as it did, they also make it clear that the company survived into last summer in large part due to the unstinting dedication of its employees.
Loyal though they may be, however, the employees had a dark tale to tell. As Tessler puts its, while analysts may argue whether Webvan was ahead of its time or merely expanded too quickly, "the workers on the inside saw how hard it was to carry out Webvan's promise: quality groceries at supermarket prices, delivered by appointment." The list of the firm's woes seems endless. According to Tessler, employees "saw a company that poured more than $30 into a highly automated warehouse in Oakland that was plagued by computer glitches and merchandise breakdowns. A company that was expanding nationally while it missed deliveries in the Bay Area, its home market. A company that had couriers stop at supermarkets to pick up items missing from orders and that had to toss out or give away food it failed to deliver."
Taken together, the workers' comments paint a picture in which Webvan ultimately collapsed not because it was an Internet company, not even (like such fellow dot-commers as Pets.com) because it tackled a nearly impossible market, but because it failed to execute some of the most basic principles of good business-principles, incidentally, that apply just as strongly to offline ventures as online ones. By neglecting these lessons from Management 101, Webvan probably ensured that the company would have met an early end, even if the bursting Internet bubble had been nothing more than a slow leak.
'Meltdown Mondays'
If the story of Webvan's demise as presented by the Mercury News has a theme, it is one of chaos. Among the scores of former workers interviewed for the article, many spoke of "meltdown Mondays," the heavy-order first days of the week in which the company's fulfillment system would completely shut down-sometimes, for almost the entire day.
Tessler describes the situation in this way: "Mechanical breakdowns [in the firm's $30 million automated distribution center in Oakland] caused conveyor belts to stop moving or revolving carousels to get stuck," she explains. "Software upgrades and glitches paralyzed the system. Shortages of warehouse workers crippled weekend production, especially after pay day every other Friday. And production problems often lasted into the following week as order volumes picked up on Mondays." The result? "Many big rigs were hours late leaving the warehouse during meltdowns, or they were missing orders…. For customers, [this] meant orders that arrived hours late, breaking Webvan's vaunted promise of delivering within a scheduled one-hour window, or that never came at all."
To help remedy these problems, one driver would regularly hand scan and stack the grocery-filled plastic totes himself, rather than waiting for the warehouse's automated system to do so. Another delivery worker would stop by Safeway, Food4Less, or Albertson's several times each week, hiding his Webvan badge as he went inside the stores to make the purchases necessary to complete customers' orders. And customer service agents among the company's squadron of three dozen or so would hand out instant rebates totaling $500 or more per day to customers who called to complain about their missing or incomplete deliveries-a horrendously expensive proposition.
In these and related incidents, Webvan's shortcomings were painfully clear-and simple. The company failed from the start to perfect the most basic business processes, and hence lacked the ability to execute transactions all the way to the customer's door. Indeed, one worker is quoted as saying, even though the firm's Oakland warehouse was built to handle as many as 8,000 orders a day, "we couldn't do more than 2,200 to 2,400 orders a day without getting far behind and having a meltdown." It is difficult to imagine a traditional merchant opening for business without seriously considering how the firm was going to successfully get products to its customers. Webvan's thinking, evidently, did not go that far.
A Shortage of Vision
Where does the fault for such a situation lie? Certainly not with the workers who operated the machinery; while sometimes in short supply, those who were present were routinely credited with performing their jobs well. And certainly not with the delivery people, who were at least as capable and dedicated as those working for firms like FedEx and UPS that boast sterling delivery records.
Rather, observes Tessler, the problems lay squarely in the company's executive suites. Whether the result of inattention, arrogance, or ignorance, Webvan's management did not appear to be aware beforehand how flawed their delivery scheme was. While some of the contributors to this situation, like computer glitches, might have been resolved by more thorough pre-implementation testing, others were more basic-and easily corrected. Simple calculations of workloads and throughput, derivable with standard industrial simulation software, should have told Webvan execs that the projected distribution schedules were simply not achievable, even under the best circumstances.
Facing an inflexible financial equation (e.g., so many deliveries within a specified timetable), perhaps the executives just force-fit numbers into their simulation equations without any regard for reality. The article (and the workers quoted therein) don't say, but an earlier column in this series gives some support for that theory. In that column, I quoted Fred Smith, the founder and CEO of FedEx, whose pre-launch back-of-the-envelope calculations of Webvan's profitability requirements indicated that the firm would have to deliver groceries with almost superhuman speed in order to reach any measure of financial success. It's not too much of a stretch to suppose that Webvan's executives were similarly shortsighted in their micro-level forecasts of the company's distribution capabilities.
Nor did they react sufficiently once the distribution problems reached the company's doorstep. "People at headquarters were oblivious to what was happening in the field," Tessler quotes one sales representative as saying. "They were too busy worrying about expanding into other markets." Operational management was afflicted with a similar shortage of vision Notes Tessler: "Even when things spiraled out of control, Webvan refused to give up, often continuing to pack orders that would never be delivered and would wind up rotting." Warehouse workers would often throw out thousands of dollars' worth of perishables, including premium-quality crabs, steaks, and shrimp. Othe workers would donate undeliverable pallets of food to charities and food banks-an admirable eleemosynary step, but one that was hardly beneficial for Webvan's bottom line.
What should Webvan have done? Instead of trying to deliver hopelessly late orders, one delivery manager quoted by Tessler argues, "we should have cut our losses and canceled orders that would be really late or incomplete." Yet the manager found himself with "drivers out at 10:30 at night looking for houses… It made no sense. Do people really want to get their groceries at that hour?"
Unfortunately, many customers-including corporate clients with $1,000-plus-per-week standing orders-did not receive their orders at any hour. While customers were reportedly understanding and willing to accept the rebates as compensation for a late or misplaced order, there ultimately came a breaking point, such as November 2000, when hundreds of customer-ordered turkeys failed to arrive by Thanksgiving. Customer service agents say, perhaps not surprisingly, that they repeatedly heard customers complain, "This is the last time I'm ordering from you guys." As one agent bluntly notes, Webvan's service "was supposed to make people's lives easier, but sometimes it became more of a hassle than just going to the grocery store."
Focusing on the Customer
Another of Webvan's ultimately fatal shortcomings was its inattention to its customers' needs, especially in such a basic respect as the design of its Web site. Dorothy Nelson, one of Webvan's lead site designers, told the Mercury News' Joelle Tessler that a key lesson that Webvan learned late in the game was that its target customer was not "the high-tech guy in his cube." Instead, "it was the time-starved mom with kids who wouldn't necessarily have the latest computer equipment."
Although Webvan's online order site was well-architected from a navigational standpoint, its pages sometimes loaded slowly, a problem magnified by the fact that shoppers had to traverse so many different screens to place a typical grocery order. But without any performance benchmarks to measure against, site managers were unable to point to any adverse business effects. This all changed when Webvan acquired rival online grocer HomeGrocer.com during Summer 2000 and, shortly thereafter, began merging its former competitor's locally based Web sites into the Webvan system. Tessler reports: "As soon as Webvan converted [HomeGrocer's] San Diego site, the percentage of site visitors who placed orders fell in half."
The reason? As Webvan's site design team soon discovered, the Webvan Web site "did not work well with WebTV or America Online, or with the smaller screens and Netscape browsers that are more common with older computers" like those used in San Diego, according to Tessler. HomeGrocer users also "encountered bugs and Javascript errors. Their browsers crashed. Parts of the Web store were cut off." (An AOL user, I recall experiencing some of these same problems myself when trying to order from Webvan.)
Webvan's Nelson sees this lesson as part of a larger problem, says Tessler: "Webvan didn't fully understand its market and focused more on adding new features to its site, like online coupons, than on stabilizing the system it already had built." Moreover, Nelson says, Webvan saw itself as "not just a grocer, but as a dot-com that would deliver everything from electronics to books to food the so-called 'last mile' to shoppers' doorsteps. We believed groceries were just a vehicle to get into people's homes."
E-Business Is Business
Bulletproof fulfillment and distribution. Executive engagement. Attention to customer needs. Viewed in isolation, these seem like fairly straightforward propositions, the kind of battle armor that no business executive or investor, planning to enter a fiercely competitive marketplace, would wish to do without. The fact that Webvan-and so many of its dot-com brethren-apparently forgot about these most basic business concepts is perhaps the greatest lesson of all from the dot-com shakeout.
As my good friend Mark Alexander, a Palm Springs based e-business consultant, likes to say, "Do you want to know what 'e-business' is? Just take off the 'e.'" The point is, e-business is just business, albeit business conducted in a different domain than traditional land-based operations. But it's still business.
Hopefully, the next round of e-business entrepreneurs will be more mindful of this key principle than many of their predecessors were.
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