Resources/Articles/The Electronic Communications Revolution: View from 2001
The electronic communications revolution is drastically changing the investment
climate and introducing numerous new unknowns into virtually all equations
and investments because it changes the economics of communication.
These changes are so fundamental—to individuals, businesses and societies—that they are difficult to appreciate fully. Yet the sweeping nature of such
a change means that virtually everything is affected, directly or indirectly.
The stock market of 1996-2000 reflected in large part investors’ discovery
of some elementary aspects of the electronic communications revolution, and
their excitement about the potential of the extent of change. Massive
change engenders elevated levels of opportunities and threats in financial
and intellectual capital, which travel closely together in periods of massive
change because if one has more relevant intellectual capital regarding the
nature of change, one can profit by marshalling one’s financial capital
appropriately.
The correction in the financial markets during 2000-2001 was not a simple
matter of "greed getting its just desserts" or a "boom/bust pattern." It reflected
an extremely useful realization: there are many unknowns about the revolution,
as well as the technology and business models that underlie it, and investors
have not yet understood it well enough to maintain investments under intense
scrutiny and adversity. Investors, when faced with pressure, must be
confident of their investments to be able to hold them when the environment
becomes difficult; if they are not, they desert their investments.
Making informed investment decisions requires a sound understanding of
the electronic communications revolution and transformation as well as insight
into the "customer context." Only then can one formulate intelligent
strategies to approach investments in early stage technology companies (hereafter
ESTC) going forward.
The Fundamental Value
Proposition
Electronic communications is the digitization of previously analog communications,
largely through the use of computers and transmitted or delivered through
wireline or wireless networks. To illustrate one basic element of the
value proposition, let’s say that you change your residence, and you need
to change the billing addresses for all of your subscriptions and bills,
most of which still arrive via postal mail. Utilities will probably
take you thirty minutes each to interact with a telephone based representative
during business hours, assuming no human error. The cost to the utility
for your call averages 7-12 dollars, with your cost often being much higher,
assuming that you are paid more than an average representative. Subscriptions
can be somewhat better, but the operation is largely the same. It is
analog (no record or ability to share the transaction with anyone outside
the conversation) and relies on synchronous communication (you must speak
with the representative live).
Contrast this situation with a utility’s well designed website, which
enables you to change the address at 9 p.m. on Sunday if you wish.
You can often get to the self-service page within five clicks, you have a
digital record of the change, and the transaction is asynchronous, that is,
you interact at will with a computer that is always available, when your
cost of interaction is lowest. The average Internet-based self-service
transaction costs the servicing company one dollar or less. That represents
a ten-fold reduction in cost of service for the company and likely a similar
reduction for you, while improving service levels. It is also highly
scalable: servicing 10,000 customers costs the same as servicing 100, and
therefore it offers significant advantages over telephone customer service,
which is far more costly to scale. This scenario does not assume the
even better example of a web-based address changing management service that
can change all the addresses for you from one site. For a more detailed
discussion, see Exploring
the Communications Economics of Electronic Communities. The Business to Business
Value Proposition
Multiplying the above example by millions of transactions that companies
have every day with their customers, it is evident that extensive value can be created for provider and customer. However, many B2B transactions
are far more complex and costly than this example. For instance, a
commercial customer may contact a vendor to correct an error in a major order. For many companies, such a call sets off a chain reaction, as sales, ordering,
packing, shipping, invoicing and other departments get involved, each call
incurring the 7-12 dollar cost, often multiple times.
As impressive as the above scenarios may be, in fact the potential is
far greater when one considers that most commercial transactions are accompanied
by communications, many elements of which are candidates for digitized communications. In order to execute commercial transactions, information must flow between the parties until each feels comfortable with the transaction’s terms. Much of this information can flow via digital processes.
E-Business at Global Enterprises
E-Business describes the strategic, process and technology activities
that "bricks and mortar" (BAM) organizations undertake to digitize communications. Considering that analysts are in widespread agreement that business to business
(hereafter B2B) transaction value and e-business investment will dominate
business to consumer for the foreseeable future,1BAM companies represent the "customer context" or buying environment for ESTCs’ products and services; therefore, insight into issues relevant to BAM e-business initiatives will be critical.
There are many customer context elements that have nothing to do intrinsically
with e-business but that dramatically affect the value it can create.
The BAM’s strategic goals and attitude around the initiative are often defined
by its existing market position relative to peers and neighbors in its value
chain. If the company is disadvantaged, it may attach a high strategic importance to the project with the intent to aggressively grow its market
position by using quick adoption as a competitive weapon. Likewise
the company’s culture has a major impact on its attitude toward the investment. For example, does the company see itself as an innovator, is it confident
of its ability to derive value from innovations, and what is its track record
of late?
Specifically regarding e-business itself, realizing verifiable economic
value from BAM e-business investments can be a challenge, although the examples
outlined above are simple to understand. Significant expenditure is
required to create the strategy that stipulates what processes should be
targeted first; often significant retraining and redeployment of human resources
is involved; if advanced technologies are used, unknown complications can
arise. Even more fundamental: it isn’t terribly easy to measure transaction costs with unassailable certainty. Lastly, transforming processes within BAM organizations requires time, during which the organizations’ processes change for other reasons than the e-business effort.
Technology Challenges
Technology is a major driver of the potential of e-business, and it is
comprised of hardware, software and network engineering at the most simplistic
level. The ESTC is likely only one of hundreds of technology vendors
with whom the BAM works. Vendors are all changing very rapidly, driven
by a high competition. Therefore, applying myriad components of technology
solutions to achieve a measurable economic result is a very complex proposition.2 It is well known that more than three-fourths of technology projects fail to deliver promised expectations due to the complexity of the technology and the degree of change at the client where it is being developed or installed.
Evaluating the economic value presented by e-business, then, is a challenging
proposition in itself. On one hand, the value is extremely compelling,
intuitive and certain, given the simple examples above. On the other
hand, technology is inseparable from e-business and it is very complex and
difficult to measure. And if that part of the proposition were not
daunting enough, it is only part of the answer because it is the business
use of technology that generates economic value, not the technology itself. The technology solution must be used by the company long enough to measure
the value of the transactions processes, which must often be compared to the
transactions prior to the e-business solution, which were often not measured
with certainty.
The coup de grâce in the challenge to measure the economic value
from e-business arises due to the digitization of communications. Digitization explicitly and visibly connects people where they were not connected before.
For example, a large corporation’s corporate office may have an average of
500 staff, each making an average of 30 analog phone calls per day.
The explicitness and awareness of the phone calls was minimal prior to e-business,
so measuring their economic value was not an issue or possibility.
If 35% of these communications can take place through e-business transactions,
an investment is required, which drives a desire to measure an economic
result. Theoretically, it can be done, but this is new territory because
measuring the value of the calls is inherently difficult, not only because
e-business is suspect.3
Moreover, the digitization of communications, because it decreases transaction costs in most cases, often increases the number of transactions, which "diminishes"
the cost savings and increases the organization’s ability to change (in fact,
a desired result). The degree of change makes it more difficult to
isolate economic benefit because there are fewer constants. Furthermore,
the point at which value is generated can and does move. Practically
speaking, knowing where to define value is an art as well as a science, and
it will be imbued with uncertainty for the foreseeable future.
Conclusions
Electronic communications represents at once a very compelling
value proposition coupled with complex technology choices, increasing change
within organizations and inherent challenges in measuring economic value
delivered beyond a reasonable doubt. How, then, are investors supposed
to assign value to the companies that are driving the electronic communications
revolution?
When investments are made in the context of a major transformation such
as the electronic communications revolution, a strategic outlook is best
because it will seek to identify risks and unknowns, and it will specify
the intentions to act to minimize the impact of the risks. This contrasts
with the "rush to market" mentality during 1996-2000 in which most investors
dealt with the complexity of value propositions by focusing on the simple,
intuitive truths that they could experience first-hand, such as electronic
banking, self-service, configuring made-to-order products and massive product
selection. As 2001 draws to a close, investors are confronted with
deserting the market or making a concerted effort to master the complexity
represented by these investments.
Investors are now at a crossroads: 2001 especially has been a time of
reexamination and setting a new course as the gale of the hyped first stage
of the electronic communications revolution subsided. A more robust
analytical discipline that draws on a strategic perspective will enable
investors to grow beyond the stereotypical "short-term return mentality." Increased strategic understanding will also bring investors closer to ESTC
and Internet company executives with whom they will be able to have a more
insightful dialog, which will dramatically increase their ability to capitalize
on the high degree of risk and reward.
Notes
-
Forrester, Gartner, Jupiter and IDC have consistently pegged B2B transaction
value and e-business investment as dwarfing B2C through 2010 at least.
Eventually, as transformation of analog processes penetrates the economy as
a whole, that will probably change as it reflects the economy today, with
consumer spending accounting for roughly 67% of GDP, with this caveat: a
significant percentage of the total will undoubtedly remain analog and never
be candidates for digitization. Back
-
To whit, a complete Customer Relationship Management (CRM) solution would
entail integrating over 300 vendors in 2000. Back
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One ramification of this point is the current "downgrading" of the "New
Economy’s" productivity gains. For one example, see
Productivity Myth, The Industry Standard, August 20, 2001.Back
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