US credit card companies send out 6.9 billion bills every year. Assume that each one costs a dollar (a very conservative estimate, given that postage alone is 33 cents per item) and you're looking at the GDP of a medium sized country. Is it any wonder the same companies want to get their customers online, administering their own accounts?
Insurance companies spend around $19 per administrative transaction (eg, changing a customer's address details) when they do business through agents and brokers. These costs fall to around 45 cents online, according to US insurance industry specialist Meridien Research. That knocks spots off the other 'low-cost' alternative to agents, the call centre.
Ask most big UK companies what they would expect to pay for a Web-based ecommerce system and they'll come up with a figure of around £1 million. A lot of money? Put it this way: a call centre with a couple of hundred staff costs around £50,000 a week to run, and around 10 per cent of customers will get sick of listening to Vivaldi and hang up before an operator becomes available to take the call.
Replace the call centre with an ecommerce system and you would get your million pounds investment back in under six months. Not only that, but customers who want to get in touch won't be restricted to business hours. They will be able to get assistance 24 hours a day, 365 days a year.
In any event, implementation costs don't appear to be a major barrier to companies considering ecommerce. As the chart here shows, 'cost' is near the bottom of the list of insurance companies' concerns.
What sort of profit margins do tour operators make? Ten per cent? Five per cent? Guess again. If you examine the price of the average package holiday and subtract the tour operator's costs, chances are you'll be left with a big fat zero. It's only when the tour operators manage to sell you insurance or car hire that they begin to move into profit.
|Cost breakdown for a GBP500 package holiday|
Potential cost-saving from e-commerce =
Flights, ferries, other transportation
Accommodation including transfers
Marketing including brochures
Distribution including agent's commission
Overheads, e.g. admin., IT infrastructure
Total costs as a percentage of retail value
Tour operator?s gross margin
Imagine how this picture might change if the tour operator were able to remove the commission paid to the agent (around 8 per cent) and brochure costs (around 3 per cent) from the equation.
What all these examples illustrate is that most people think about the wrong things when they think about ecommerce. Yes, it's about opening new channels of distribution and winning new customers, but it's also about lowering the costs of doing business.
And this isn't just a win-win, there's a third win to be figured in: not only do business costs come down, the quality of customer service, measured in criteria such as time taken to respond, goes up too.
Barclays Bank has managed to move 450,000 customers to its online banking service and is adding new ones at a rate of 7000 a week. Just five of the UK's banks now have almost one million customers online between them, and by the end of next year Barclays expects the figure to rise to 10 million.
Despite the well publicised resistance of consumers to new technology and the frequently exaggerated fears about security, the public is embracing ecommerce services enthusiastically. In the short term, these services offer banks a competitive weapon for attracting new business. Longer term, it will mean lights out for more branches and redundancy cheques for more staff.
It's good to talk
Which seems an appropriate point to introduce a few caveats. Organisations adopting ecommerce as a way to reduce their biggest cost, salaries, may be disappointed. When HFC Bank introduced its marbles Internet credit card in October, it didn't start closing call centres or sacking people. In fact, the company believes that in the short term the requirement for telephone support could actually rise.
It may be that customers will be prepared to do most of their business with financial institutions via a Web browser, but sometimes they are going to want to talk to somebody. Computers still aren't much good at having conversations that begin "You've made a mistake. Sort it out."
HFC also chose not to make marbles an Internet-only service. You don't have to be online to apply for a card and those who prefer it can still opt for printed statements.
Businesses that drive customers to the Internet without giving them this sort of choice could be in trouble. HFC is not alone in believing that online services are part of a broader customer services mix that still needs to include the personal touch.
Don't assume either that building ecommerce systems is necessarily going to be easy. The relatively low cost of delivering online services is explained by the fact that in many cases, the back-office systems the customer interacts with were already there.
Integrating these systems and using them to deliver information and services to the Web is a major barrier to progress for many companies. In fact, 'technology integration' emerged as the single biggest problem faced by UK insurance companies in a survey commissioned by ecommerce software provider iE.
The other thing to remember is that the companies who reap the biggest benefits from ecommerce will be those that do it first. For there to be winners in the game of competitive advantage, there also have to be losers.
Getting there first means doing it fast, and inevitably there will be mistakes. Egg managed to attract enormous numbers of customers for its online credit card service. How many of them will have been put off by the technical problems that have bedevilled Egg since?
There are two golden rules: it has to work and it has to scale. Ecommerce systems will need to work first time and every time. The Internet, as suppliers never tire of telling us, is about increased choice. If your system is down, your customers will exercise their freedom of choice elsewhere.
What if the hundred thousand customers you are expecting turns into a million? How fast can you grow the system to cope with increased demand? Shanty-town ecommerce, to borrow the wonderful term coined by David Edwards at insurance software provider Sherwood International, simply won't do. Ecommerce systems need to be industrial strength, high quality and built to last.
Business on the brink of revolution
There is a Jezebel tendency in the IT industry as we approach the end of 1999, with some pundits issuing gloomy warnings about the slump expected to follow the end of the Y2K effort. They must be mad. Y2K has been nothing more than a distraction that caused much more interesting projects to be postponed.
Now that it's (nearly) out of the way, expect to see stratospheric levels of activity as this year's shelved ecommerce projects are dusted off and set in motion. iE's survey of insurance firms, for instance, found a ten-fold increase in the proportion of IT budget devoted to ecommerce between 1998 and 2000.
Dozens of other companies can produce similar evidence that we are on the brink not of another IT recession, but of a business revolution bigger than we can begin to imagine.
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