Internet Commerce

The Internet is a great place to find new customers. It's an even better place to serve existing ones

Tom Farmer and Oona Huber have a business relationship based on Internet technology. Yet they didn't meet through a search engine. They rarely visit one another's external Web sites. And their conversations take place not in the ether but rather around a mahogany conference table.

That conference table occupies a hefty chunk of acreage in the Cypress Room at Fujitsu America's sprawling headquarters, in San Jose, Calif. In 1997 Huber, who is Fujitsu America's benefits administrator, sat at that table while Farmer and his trusty PowerPoint presentations pitched her on RewardsPlus, a company that sells nontraditional benefits to corporate employees. During a series of face-to-face meetings, Farmer and Huber hashed out the complex issues involved in fusing their companies over the Web. "We wanted to know precisely how we would be connected," says Huber. "Could our employees be linked from our intranet? How often would we send RewardsPlus payroll data?"

In the popular vision of Internet commerce, Web sites are open emporiums, and buyers and sellers have little contact off-line. But RewardsPlus isn't interested in serving indiscriminate masses on a public site. Instead, the company is forging strong digital bonds with its customers using an extranet--a private site accessible only to the company hosting it and that company's designated business partners. Extranets can be a chore to set up and may require significant coordination on security, technology, and process issues. But the rewards--particularly for companies doing volume business with a limited number of customers--are considerable.

As corporations prune their suppliers' ranks, small companies are looking to extranets and other Web-based mechanisms to cement relationships with business customers. And they are in good company. Although consumer companies like and Auto-by-Tel continue to snag headlines, business-to-business commerce dominates economic activity on the Internet. This year companies buying from other companies will account for $17 billion of the total $21.8 billion in Net transactions (excluding financial services), and on-line business-to-business sales will surpass $300 billion by 2002, according to Forrester Research.

Electronic commerce isn't new, of course. For years the Fortune 500's upper echelons have hammered down costs and controlled inventory by sharing critical business information over value-added networks. But that sharing, called electronic data interchange (EDI), was complicated and expensive. Small businesses had a tough enough time when their large customers pressed them into electronic relationships; initiating them was out of the question.

The Internet changes that. Small companies can now process EDI transactions over the Net for a small fraction of the cost of a private network. (See "A More Modest Proposal" below.) And for less than $100,000 they can rope off portions of their Web sites and provide important customers with a secure place to find things like account balances and customized catalogs with account-specific pricing. Such arrangements not only win customer loyalty but also reduce overhead, particularly for companies that allow on-line ordering.

But before you and your business partners start to tango, you must establish the rules of the dance. What changes--technological and procedural--must both parties make to engage electronically? What services will bind you most closely together? What information are you willing to surrender? Many CEOs get queasy just thinking about their invoices, purchase orders, and price lists whizzing over the Internet, while others make impossible demands of their business partners. "It's the tyranny of opportunity," says Jonathan Yarmis, senior vice-president of the Internet Research Group at Mainspring, a consulting firm based in Cambridge, Mass. "The good news is that there are incredible chances to get closer to the customer. But it doesn't just happen. You have to offer a lot of time and effort, and it can become your full-time job."

What follow are the stories of three companies that are committing that time and effort.

The benefits of marriage
RewardsPlus CEO and president Ken Barksdale never worried that an extranet would change his business--an extranet is his business. The company has poured nearly $700,000 of its $2.1 million in seed capital into a Web-based system that lets corporate customers buy and administer boutique benefits programs for employees. "If we can improve everyone's bottom line by keeping transactions in the electronic sphere, we will succeed," says Barksdale. "And we will have chained ourselves to our partners and customers in the process."

Barksdale was director of sales for a division of the Zurich Insurance Group in 1994, when he and Jack Kwicien, the division's president, unearthed an intriguing nugget of market research. Corporate human-resources departments apparently were coping with the drum-tight labor market by beefing up standard benefits packages with less orthodox offerings, such as auto insurance and financial services. But they were encountering resistance from the finance side, which argued that core benefits were already too expensive.

Barksdale and Kwicien (who recently left RewardsPlus for personal reasons) figured that by reducing the cost of benefits administration they could pry the lid off a big market. They recruited two colleagues--technology manager Jamie Spriggs and marketing veteran Frank Longwell--and with them repaired to the basement of Kwicien's house to devise their business model.

What they came up with was essentially an outsourcing service. Traditionally, buying and administering benefits is an à la carte affair: corporations make separate arrangements with the vendors of homeowner's insurance, college savings programs, prepaid legal services, and so on, and must then tackle the payroll deductions for each. On the flip side, benefits vendors spend a lot of money marketing group plans to individual employees.

Barksdale and company wanted to aggregate multiple vendors' plans in one system, make information about them available to a corporation's employees over an extranet, and handle the order and payroll-deduction processes for buyer and seller. For its trouble, the company would take a 2% to 4% commission from the benefits providers, which in turn would save 15% to 20% on sales. "We lower overhead by working electronically," says Barksdale. "We provide a costly service at no charge to the employer, reduce the cost of the benefit to the employee, and reduce the customer-acquisition cost to the provider."

RewardsPlus was launched in June 1996, 20 months after its conception. Today it brokers plans for 16 benefits providers and serves a total of 129,947 employees at 11 corporations. As of June it had pro-cessed close to $2 million worth of transactions over its extranet.

RewardsPlus's Web-based system has several things going for it. First, information moves over a private, secured section of the Internet leased from AT&T for $800 a month, instead of over a value-added network, which could cost twice as much. Second, corporate customers need only one connection to RewardsPlus, no matter how many benefits options they add to their rosters. HR departments zip information to RewardsPlus's server, where a proprietary system called Surededuct calculates deductions before sending the data back. Finally, customers' employees can access RewardsPlus's services through their companies' own intranets, allowing employees to visit Oz without realizing they've left Kansas. "We want all the good feelings about the service and the benefits to go to our corporate customers," says Longwell.

RewardsPlus's arrangement with Fujitsu America is typical of how the system works. RewardsPlus rounded up suppliers for the four benefits, including pet insurance (this is, after all, California), that Fujitsu wanted to offer employees; it then posted the suppliers' information on its own intranet. Now, when a Fujitsu sales director wants to insure his shih tzu, he simply hops on Fujitsu's intranet and clicks on an icon that says "ChoiceRewards." That bounces him to a page--still inside Fujitsu--displaying promotional material about some of the plans. From there he enters his user name and password and is connected to the RewardsPlus server in Baltimore, where he is greeted by a page with heavy Fujitsu branding. "That's great for us because it looks to our employees as if we are doing all the work to provide them with these benefits when, in fact, we are doing very little," says benefits administrator Huber.

Huber sounds happy now, but she admits she was skeptical when Farmer, vice-president of sales for RewardsPlus, approached the company in July 1997. The Fujitsu America job was just so big: 5,000 employees spread among 18 separate corporations, each with its own payroll application and schedule. "Companies typically think that they can connect to us and keep track of the payroll deduction, but we have a pretty complicated setup," says Huber, who had fielded kludgier proposals from other vendors.

But since this was to be a marriage rather than a date, RewardsPlus was willing to invest money to make that problem go away. Spriggs spent $25,000 on a data-conversion program that readily digests Fujitsu's--and other customers'--varied payroll formats. "If they couldn't have accommodated our different systems, we probably wouldn't have gone with them," says Huber.

Although the technical issues were the mountain, RewardsPlus and Fujitsu still had to negotiate some procedural molehills. For example, Huber balked at sending RewardsPlus the names and addresses of Fujitsu employees, which the outsourcer needed to process payroll deductions. "My head would explode if I ever heard that our employees were solicited for products outside of the agreed-upon benefits offering," she says. To allay her fears, Spriggs signed a contract restricting RewardsPlus's use of the information. Huber's anxiety didn't surprise Spriggs: privacy is a big issue in many extranet arrangements. "It's always a lengthy discussion," he says. "The customer has to trust us."

Huber also worried about security. How could she ensure the safety of employee information outside Fujitsu's walls? Not surprisingly, RewardsPlus had heard those concerns before as well, and Spriggs gave Fujitsu's technology team an exhaustive rundown of his company's elaborate system of firewalls, secure servers, and encryption technology.

Once its corporate customers are satisfied, RewardsPlus must thrash out a whole other set of issues with benefits providers. The most contentious is control of payroll deductions. Normally, providers handle those deductions for their own plans, but "we just ask them to turn their system off for our accounts," says Spriggs. In the few instances in which providers have refused, RewardsPlus has simply walked away from the deal. "We have to do business our way to gain the efficiency in cost, and we can't break from the model," says Barksdale.

Many benefits providers, however, are happy to play. New York City-based American International Group (AIG), for example, has been offering automobile and homeowner's insurance through RewardsPlus for five months. "We needed to try another distribution model for our group sales," says vice-president of sales Jim Shevlin. All it cost AIG, Shevlin points out, was the time it took to educate RewardsPlus about its products and to learn about RewardsPlus's services. Still, he's reserving judgment. "Sure, it looks good on paper not to have the marketing costs," says Shevlin. "But we have to see if they are as effective as we are at getting new customers. Then we'll know if the costs are really lower."

The extranet gives RewardsPlus a competitive advantage that could make it tough to catch up to. But it also means the company must make enormous investments--currently one-third of sales--in technology. With that rapid a burn rate, Barksdale doesn't project profitability until June 1999. "We know we have a long way to go," says Longwell. "But I've learned more in the past two years of developing this company than I did in my entire 26 years in the insurance industry."

Answers in easy reach
Of course, an extranet doesn't have to be your business to help your business. As vehicles for customer self-service, extranets can reduce the time and money spent answering the plaintive calls of your customers.

Ken Jackman used to do a lot of that. Jackman is a regional sales manager for SilverPlatter Information Inc., a $72-million company based in Norwood, Mass. SilverPlatter licenses huge bibliographies from publishers such as Elsevier Science and the American Psychological Association, converts them into searchable databases, and then ships them--typically on CD-ROMs--to the customers of its global network of 176 independent distributors. The distributors sell those databases to academic, corporate, and public libraries.

In the past SilverPlatter's distributors kept Jackman--whose region is Latin America--chained to the phone. A call from a distributor in Argentina checking on the whereabouts of a shipment might be followed by a Brazilian customer's query about renewing a subscription. "We couldn't spend our time marketing new products, since we were always answering pesky questions," says Linda Krasner, regional sales manager for the United States.

By 1996 Web-based customer service was coming into vogue, and Krasner began meeting weekly with manager of application development Tom Bergman and five other employees to figure out how to make that strategy work for SilverPlatter. All the company's customer information resided on a Progress database behind a firewall. It would be relatively easy, Bergman thought, to yoke that database to a Web server, also behind the firewall, and let distributors log on for their information. "We could have gone with a proprietary system to link to our distributors," says Bergman. "But it clearly wasn't as cost-effective as the Web."

But while the technical logistics were a cakewalk compared with those of the RewardsPlus project, SilverPlatter had to grapple with tough access issues. The company was putting a critical in-house database on-line, and it didn't want to give users carte blanche. For example, distributors taking over other distributors' accounts request their complete sales histories, and "that's something that we want tight control over," says Bergman. The Web team ultimately decided to restrict distributors' access with a system of passwords.

During the six months the Web team was debating what to reveal and to whom, it was also chatting up customers and sales reps about their requirements and making sure they had Internet access. In December, Bergman began a three-month beta test with 10 distributors around the world and used their feedback to refine the system further. For example, several distributors said they wanted to be able to easily import data into Microsoft Excel spreadsheets or an Oracle database. In response, Bergman created a button labeled "raw data," which users can click on to download their order histories directly into common business applications.

SilverPlatter rolled out the extranet to all its distributors in March 1997. Since then the number of calls and faxes the company receives has dropped by 70%, Krasner says. The people who aren't calling include employees of companies like EMC International, a distributor based in Ann Arbor, Mich., with six offices around the globe. Members of EMC's Mexico City staff often need to check whether an order from SilverPlatter was shipped. (Despite NAFTA, cargo bound for Mexico still gets stalled at the border.) Instead of picking up the phone, the staffers simply open their bookmarks, click on SilverPlatter's extranet, type in their user names and passwords, and call up the invoice.

Distributors are also answering their own pricing questions. That's no small matter when you consider SilverPlatter's byzantine pricing scheme, which takes into account everything from the kinds of bibliographies on a database to the locations where that database will run. In the past SilverPlatter sent distributors eight yellow-pages-sized binders listing thousands of products and pricing options. Now distributors logging on to the Web site can access customized price lists based on their previous orders. Anyone inquiring about a new product simply answers a few questions on-line about how it will be used; the system returns the appropriate price.

The extranet, including software and labor, cost SilverPlatter about $30,000 to develop. That's money well spent, says Bergman, who's gathered plenty of anecdotal testimony about distributors' satisfaction with the system. "It's not easy to give a hard number for the return on investment with technology," he says. "But at least we know we are pleasing the customer."

A catalog of reasons
In many instances companies that sell to companies just want to offer their catalogs and take orders on-line. But serving customers who make repeat volume buys is a kettle of fish very different from serving customers who pop by for the latest Patrick O'Brian novel or a bottle of ChÂteau Latour.

Eric Boelter, vice-president of sales and marketing of the Boelter Cos., has always wanted to simplify ordering. The business has grown steadily since 1929, when Boelter's grandfather, Fred, began peddling paper goods to taverns around Milwaukee. Today the $60-million company sells more than 9,000 items to 2,000 hotels, restaurants, and food services nationwide using a massive paper catalog: 360 pages crammed with everything from napkins to range tops.

A few years ago Boelter toyed with the idea of transferring the order process to EDI but decided that "it would have been too costly, and too many of our customers wouldn't have been able to use it." Then in 1995 he discovered the Internet. That was something his customers could--and did--use. So he set up a Web server and created a site that had a home page open to the public but would protect the meat inside.

Next Boelter called the purchasing managers and technology directors at the Hyatt Regency and Drake hotels in Chicago, both big customers interested in on-line ordering. Numerous phone conversations and a few drives down I-94 later, Boelter had a good idea of what services were dearest to his customers' hearts. Customized price lists and access to ordering history were their top priorities.

Those lists and histories already sat on Boelter's IBM AS/400; all he had to do was make them available on a protected basis over the Web. Working with Ironside Technologies, a systems developer in Toronto, Boelter and administrator of electronic commerce Sheril Immekus developed the template for a slick, Java-based electronic catalog that mimics the company's paper version and pulls data from the minicomputer. Customers entering a user ID and password can look up products and place new orders. The site also tracks standing orders and lets customers resubmit or add to them with just a few clicks. "The goal is to provide whatever information they ask for over the Web," says Boelter.

Although purchasing managers can search for new items on-line, they must still call a sales representative for quotes, since numerous variables are considered in pricing a first-time sale. And before they can access the system for the first time, users must register either on-line or over the phone, allowing Boelter to certify that they are, in fact, customers or potential customers. "We aren't using it as a marketing tool," says Boelter. "We're just trying to make it a service for customers who are serious about using it."

Some of those serious customers use the site for more than procurement. Recently, a longtime customer who owns seven restaurants came to Boelter with a problem: his independently managed locations were not complying with corporate ordering rules. "Ordinarily, there wouldn't be much we could do," says Boelter. "But with the Web we have ways to solve his problems."

Because the Web server snatches information from the customer database, Boelter and Immekus can compile reports on individuals' buying activity and post them as pages on the site. That one-on-one service can be provided quickly using Microsoft FrontPage and Adobe Photoshop. The restaurant owner now uses the site to run store-specific reports on purchases made within a given time period. Or he can check individual products--such as martini glasses--to see if all his restaurants are buying the same kind.

Other customers have similar arrangements. The Chicago Hilton, for example, doesn't order so much as a napkin ring over Boelter's site, but the purchasing manager visits it weekly to view a report that stacks his budget against purchases made from Boelter. "It's a way for me to make his life easier," says Boelter. "And it doesn't cost me that much to do it."

Specifically, Boelter has spent about $200,000 on the entire system. That sounds pretty economical in light of the $180,000 cost of printing and mailing a paper catalog twice a year--less so when you consider that only 30 of the company's 2,000 customers buy on-line regularly. (Boelter has done $75,000 in on-line transactions since the system was launched, in December 1997.) About 5 more customers begin using the Web service each month, although not all of them stick with it. Usually, those who back out do so for technological reasons beyond Boelter's control. For example, one customer begged off after having difficulties accessing its own Internet provider. "This is often just as much a discovery process for our customers as it is for us," says Boelter.

Immekus is complacent about the fact that many customers simply prefer doing the paper and phone thing. "Just as you'll always find folks who don't like using voice mail, we'll always have customers who need to talk with a salesperson to place their orders," she says, leaning back in her chair in the nondescript warehouse that abuts the Boelter Cos.' offices. In that low-tech setting, the issue of Wired magazine lying next to her computer looks as out of place as a nonalcoholic brew in a Milwaukee sports arena. On its neon green cover, Godzilla stomps across a city behind the headline: "Forget the Dow! Here Comes the New Economy!" For the Boelter Cos. and others like it, that message is both a promise and a warning: there's still time to tame the beast.

Joshua Macht is an associate editor at Inc.

A more modest proposal
EDI on the Internet is for everyone

Kaya Erk hates saying no to customers. So when a Fortune 500 computer manufacturer asked Erk's $20-million company to send its invoices over a value-added network, he deftly skirted the issue. That's because the CEO of Kycon Inc., in San Jose, Calif., had priced electronic data interchange (EDI) systems and knew that, in his case, it would cost $25,000 just to set up the software and $1,500 a month for the proprietary line. "We didn't do enough business with them to make it worth it," says Erk, whose company makes computer and telecommunications connectors.

Fortunately, a number of start-ups and stalwarts are making it possible to do EDI over the Web, where it is both cheaper and easier to manage. For example, General Electric Information Services now lets small companies fire EDI-formatted invoices and purchase orders through their browsers to a large customer's EDI mailbox. There's no software to download: companies pay a $25 introductory fee, and after that it's $65 a month plus $1.50 per transaction. Other EDI providers, including Harbinger, offer similar services.

Erk went a different route. Succumbing to customer pressure last year, he dropped $199 on EC Exchange from the EC Co., based in nearby Palo Alto. Now he simply dials into the EC Co.'s Web server and from there transmits an EDI form to his customers' EDI mailbox. The secured Internet line costs about $30 a month for each address; transactions under 10KB are 45¢ apiece.

Erk now does about 50 EDI transactions a week with eight companies. Each new engagement involves a little setup time, but that's "easily managed," says Erk, who also wants to do EDI with small suppliers. "The best part is that the large companies don't do a thing to their EDI systems," says Erk. "And yet we don't have to do too much, either."

Published on: Sep 15, 1998