Making money with electronic commerce

Thought the Internet was going to be big? You ain’t seen nothing yet. Electronic commerce is poised for a massive expansion, transforming the way many industries work.

This revolution poses some new questions for accountants chiefly because in industry after industry electronic commerce will shatter the cost basis of the business.

But, first, just what is electronic commerce? The concept seems to have sneaked up on the business world, largely because it has grown out of electronic data interchange (EDI), a means of sending structured electronic messages between computers.

Now users are increasingly looking at electronic commerce as a universe of technologies in high, medium and low-use bands (see diagram). Among high-use technologies are familiar friends such as email, cellular communication, barcodes and, of course, EDI.

Technologies in the medium-use band include shared databases, videoconferencing, mobile computing and the Internet. These are moving at varying speeds towards the high-use bracket.

Still on the periphery are technologies such as electronic cash, intelligent agents and document image processing. Their common theme is that they are used to develop trading relationships. But more significant still, these technologies are being used to change the nature of markets. Marketplaces are turning into ‘market-spaces’.

Market-spaces revolutionise the nature of trading in three ways. First, information replaces the goods themselves. For example, more people now access the Financial Times from a computer terminal than visit their newsagent.

Second, the context of the trading relationship is different because the screen replaces a person-to-person transaction. For example, the Nationwide Building Society has discovered this by establishing ‘virtual branches’ in which customers review their financial service needs at a multimedia screen rather than with staff.

Elsewhere, the growth of diverse technologies such as multimedia kiosks, Internet and interactive TV show how electronic commerce is changing the context of the trading relationship.

Third, the infrastructure is different because computers and networks replace buildings and documents. Andy Bytheway, a lecturer at Cranfield School of Management and a specialist in electronic markets, points out that one consequence of the development of market-space is that the variable component of cost relating to the individual customer becomes very small. ‘The volume of sustainable business increases dramatically and an increasing proportion of revenue goes directly to the bottom line,’ he says.

Lee Tate, vice chairman of the Electronic Commerce Association, says that as market-spaces grow, some of the advantages of size melt away, indeed even become a handicap: ‘The multinational corporation finds itself competing with Fred-in-the-shed.’

Bytheway argues that there are other dramatic changes. He suggests that potentially the most revolutionary impact of electronic commerce is the ability for a supplier to link directly with customers without the benefits of intermediaries. ‘The detailed information about each customer, their likes and dislikes and their history of purchasing and enquiry was previously impossible for large companies to ascertain. New levels of relationship marketing are now possible.’

But this is a threat to intermediaries. For example, Cerebus Systems, a company start-ed up by telecommunication engineer Ricki Adar, is signing contracts with major recording stars to digitise their music.

Cerebus makes ‘tracks’ available over the Internet. This cuts out several players in the traditional music industry supply chain, including the CD manufacturer, distributor and retailer.

Not surprisingly, electronic commerce has caught on fast in industries where companies have to develop hundreds or thousands of trading relationships in order to succeed. These industries range from retailing to automotive manufacture.

For example, in retailing, the experience of Londis Holdings, the convenience stores distributor, shows how electronic commerce can sharpen a company’s competitive edge. In little more than five years, Londis has developed and implemented a new business strategy which makes generous use of electronic commerce and other technologies. The strategy has powered the company’s growth in this period, with sales up from # 100m to # 281m, the annualised rate of growth up 600% and shareholders’ funds up from # 3.75m to # 11.5m.

Graham White, Londis Holdings’ chief executive, says: ‘IT has helped us gain competitive advantage, both through re-engineering certain aspects of our business and the sheer power that information gives us to work closer with suppliers for mutual benefit.’

Londis’s electronic commerce strategy was based on a four-pronged attack on key business priorities. The strategy has replaced manual order books by electronic ordering, provided a range of store-based systems for retail outlets, cut the administrative costs of handling store owner accounts and reduced costs of handling invoices.

Increasingly, what leading exploiters do is to ensure that electronic commerce is driven from the application rather than being simply connected to it. It is integration in the application that is the key to making a big success.

Another lesson is that some of the ‘killer applications’ in electronic commerce come from integrating two or more of the technologies in unexpected or creative ways – for example, digitising music and distributing it over the Internet.

Accountancy professionals making a contribution to this electronic commerce debate will be delighted to find there is a great deal more to it than simply adding up the numbers.

Peter Bartram is a freelance journalist and author of The Competitive Network, a new study of the use of electronic commerce. Details from 0171-240 3488.