The Future of E-Business

Electronic commerce has become such a key part of business thinking nowadays that it's easy to forget how young the technology really is. Only a few years ago, the idea of making purchases online was just that -- an idea whose actualization seemed at least a decade away. As we have witnessed a rapid increase in the pace of technology adoption and innovation, we are left wondering how e-commerce will evolve in the next year -- or even the next month.

Offering his views of the new frontier was Alan Naumann, President and CEO of Calico Commerce, who spoke at the May Stanford Breakfast Briefing. Alan began his technology management career at HP, and after several years moved to Cadence Design Systems, where he served 10 years in key executive positions. Since he joined Calico in 1997, the company's market valuation has increased 10-fold and its quarterly sales have increased more than 500%. His goal is to merge the positive attributes of a major company like HP with the fervor of an Internet start-up.

Calico was hatched out of a technology incubator set up by the City of San Jose, and has taken an applications focus rather than a hardware strategy. Calico has grown to be a leading vendor of business-to-business (B2B) e-commerce solutions, with 101 large customers spanning 7 industries in three major geographies (USA, Europe, and Japan), 320 employees, and current annual sales of over $35 million.

In recent months, e-Commerce (especially the business-to-consumer segment) has fallen from grace with the venture capital community, because few fledgling companies still show much promise of achieving market dominance and making significant profits. Yet in the midst of all the pessimism of the pundits, Alan made a bold assertion: e-Business is under-hyped.

What supports this conclusion? First, most of the Internet is still ahead of us. Despite all the hype about B2B e-Commerce this past year, only 1% of business transactions are being conducted on-line. Second, sales and marketing automation is one of the last remaining frontiers for business efficiency improvement (solutions for functions like accounting and ERP have been around for decades), and sales and marketing typically account for 20-50% of company expenditures. Third, every time the market adopts a new computing platform, the world changes; we've already seen it with minicomputers, desktop PCs, laptops, and the Internet -- imagine how different the world will become when powerful wireless devices become ubiquitous.

Alan described several mega-trends he sees going on in e-Commerce:

List pricing => Complex pricing
Business-to-consumer (B2C) => Business-to-business (B2B)

Simple transactions => Complex transactions

Sell-side emphasis => Multi-dimensional transactions

US-centric thinking => Globalization (item: Spain's Terra acquires Lycos)

Seller has power => Buyer has power

Today's B2Be-commerce business space can be described as being build on a foundation of enterprise applications (such as those from SAP, Oracle, and Siebel) and an intermediate e-Commerce platform (supplied by IBM, BEA, Microsoft, and Sun), with applications ("Net Market Makers") riding on top. On the sell side are applications like those from Calico, Broad Vision, and Kana, and on the buy side are players like Ariba and Commerce One.

Alan sees the 'shopping cart' mentality going away as transactions become more customized, more complex. Buyers will no longer be plucking stock items off of virtual shelves; they'll expect the product configuration and pricing to be tailored to their needs. Dell Computer pioneered this level of service with its made-to-order PC business, and Cisco has done the same with its routers and hubs, but we can expect to see the model extended well beyond the hardware business and into "soft" products like insurance and telecommunications services.

Another evolution Alan foresees is in the brick-and-mortar retail sector. In place of the Home Depot model, which relies on low-paid, relatively transient staff to help guide customers through the buying process, he sees the rise of the Best Buy approach, in which in-store Internet kiosks provide guidance to buyers who choose to shop in the physical store rather than on-line at BestBuy.com.

Perhaps the broadest trend is the one moving from bilateral (one-to-one) trade to "e-marketplaces", where many buyers and sellers converge. In the early days of e-Business, most development had a sell-side focus. This spawned a response from the purchasing side, and procurement products and services appeared. Sellers reacted by forming supplier networks, and the buyers followed suit by creating virtual purchasing networks, or VPNs. With each new paradigm, the two sides move a little closer to a multi-seller, multi-buyer trading exchange.

(Alan quoted an industry analyst that said ‘… the VPNs recently formed in the automobile and aerospace industries represent the only place outside of Jurassic Park that dinosaurs can be seen mating’. Because these giant companies will inevitably have diverging interests, he sees those particular VPNs as unsustainable).

So what are the buyers and sellers trying to get out of the deal? Alan laid it out in a table:

What Buyers Want What Sellers Want

* Personalized content * Tuned sales & marketing messages

* Advice * Solutions to customer problems

* Custom solutions * Differentiation, mass customization

* Easy multi-vendor shopping * Maximum revenue per sale

* RFQ or contract pricing * Efficient contract implementation/sales

* Electronic relationships * Effective cross-selling & up-selling

E-business will certainly go through some dramatic changes over the next few years, and many of the changes will be driven by companies in the Silicon Valley, where many experiments are going on all the time, and where Kaizen -- the Japanese term for continuous improvement -- is a way of life.

Alan took a few questions from the audience:

Q: What is your biggest challenge?

A: Keeping up with the pace of technology. Calico puts 45% of its revenues back into R&D, compared with an industry average of 13%. Getting the word out (marketing Calico’s offerings) is a close second.

Q: The PC is the current way into the internet-- will that be changing soon?

A: It will continue to dominate in B2B, because wireless devices are simply not practical for complex transactions, and PCs fit fine into the office infrastructure where most B2B transactions are conducted. However, I foresee wireless devices being used extensively for alerts.

Q: How do privacy concerns affect customization?

A: Security and privacy issues are a major concern for B2B as well as B2C. Buyers are reluctant to provide the kind of detail sellers need to fully customize their offerings if there is any concern that the information might end up in other hands. Sellers need to mind this and make a clear commitment to protecting the privacy of their customers.

Q: How will exchanges keep customers coming back?

A: Customization will be the key. The traditional list-price catalog model will cease to exist in many markets.

Q: How do you make the trade-off between growth and profitability?

A: Tough question. You want to grow as fast as you can in order to achieve market dominance, but you need cash to survive. We always keep a few "vest cards" -- ways that we accelerate profitability if the institiutional investors are getting uncomfortable w/ our ongoing rate of investment

Q: Will startups survive?

A: SAP and Oracle are out to dominate e-Business, so I expect they'll be going after Ariba and Commerce One. It will be interesting to see how it plays out. We like our position: public, with close to 400 employees and 100 customers.

Q: What issues and trends do you see in globalization?

A: Currency exchange issues will continue to be a challenge. Getting international CEOs to believe that eCommerce is not a fad seems to be another.

Q: Big companies (such as the dinosaurs you cited), unlike start-ups, are profit-driven. How can innovative initiatives such as e-Business be adopted within that environment?

A: Big companies should develop partnerships with e-Commerce suppliers, and offer them a small percentage of the transaction as an incentive for helping get e-Commerce implemented. Top managers fear that e-Commerce initiatives will be bottomless sinkholes for expenses. When you try to sell the concept of e-Commerce to your management, pick a project that will allow you to show measurable results within 6 months, so that you can gain the credibility to take on a larger project.

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By Jim Schibler, senior technical marketer and chair of the SD Forum Marketing SIG.


Jim can be contacted via jimschibler@home.com.

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