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A Delicate Balance

A Delicate Balance

The Internet is profoundly changing the economics of transactions, relentlessly eroding long-extant business models and creating an unstoppable economic tidal wave that will transform the fundamentals of business. The result could be bad news for CIOs just starting to mop their brows and breathe a little easier as they wait to taste the fruits of their Y2K labours. Because, according to Colin Mackinnon, Deloitte Consulting partner responsible for electronic commerce, e-commerce is going to come at CIOs like a second Y2K.

Mackinnon is commenting on a new study by Deloitte Consulting and Deloitte Touche that predicts the Internet will totally transform many facets of the traditional relationship between buyer and seller, destroying or replacing some channels and creating untold new business opportunities. The study foreshadows a new age of price wars waged by cyber agent "shop-bots", the replacement of currency with software in a new era of competition between banks and software companies battling to implement digital cash clearinghouses, and the advent of priority-priced online services.

Mackinnon says that as they did with Y2K, CIOs will have to walk a delicate tightrope in assessing the likely impact of e-commerce on their businesses.

They will have to find ways to balance their natural caution and cynicism against the need to come to grips with the profound impact the Internet will have on their products, markets, delivery channels and organisational structure. And since the Internet is ushering in a business, not a technology, revolution, they will have to work closely with, rather than lead, the senior business managers.

The report, "The New Economics of Transactions", which its authors claim is well grounded in the economic analysis of traditional and emerging markets, identifies six significant forces shaping the new economics:1. For many retail products, Internet-based software agents called "shop bots" will search for products, compare prices, conduct transactions, and arrange for delivery -- all based on instructions that consumers provide them.

2. Certain types of products will "morph" into digital bits in order to be transported from producer to consumer.

3. Internet transactions will alter the traditional form of money, as security and privacy solutions allow for extensive use of digital cash; shop-bots as well as humans will begin to use "electronic" wallets to complete their purchases.

4. Over the next several years three themes will dominate Internet e-commerce information technology.

First, CSPs (commerce service providers) will replace ISPs (Internet service providers) as an increasing number of vendors provide "end-to-end" services that enable customers to establish their version of e-business on the Internet.

Second, the move to implement priority service pricing protocols on the Internet will introduce economically-sound resource allocation logic to differentiate between important economic transactions and the lower-priority of using the Internet for entertainment.

Third, it is likely that XML and XSL will replace HTML as the universal language of e-commerce on the Internet.

5. The desire for security, "seals of approval" and privacy will lead the market for "trust".

6. Governments will revise the "transaction of transactions" to deal with the inadequacy of traditional methods of assessment and collection as companies and markets seek to use cyberspace to save money.

Since the costs of buying and selling in the marketplace will decline dramatically as these trends accelerate, the study says the new economics of transactions will push implementing global Internet e-commerce even more rapidly as we enter the next millennium. And Mackinnon says that that finding has profound implications for CIOs determined to maintain authority and respect as this fundamental business transformation gets under way.

"I think the first thing the CIO needs to be aware of is that this isn't a technology revolution, it's a business revolution," Mackinnon says. "Of all the technology developments we've seen in the recent past, this is the one that's probably most closely aligned to the business and will basically [have an impact on] the fundamentals of the business in many ways.

"The CIOs who sense they are going to drive e-commerce initiatives within the business, or who feel they are going to be forced to do that by senior management, are in the wrong position."Business managers will have to drive the changes, but it will be the role of CIOs to help senior business managers to understand how the underlying technology will enable completely new ways of doing business, Mackinnon says.

It is not something they can delegate to e-commerce managers, and it will preferably be done in an executive management committee-type environment.

CIOs also have a great opportunity to be seen as the early evangelists, not so much selling e-commerce to the business but working with the business to develop the ideas and concepts that are going to make a difference. Failure to do so will make them look like Luddites or laggards.

Familiar Pattern

In many ways Mackinnon sees the evolution in understanding of the impact of e-commerce as echoing the evolution in understanding of the Y2K problem. Ten years ahead of the rollover into 2000 technical people were warning there would be a date compliance problem and were being ignored. Five years later service providers and others saw a huge commercial opportunity to make money out of the situation, and the hype began.

The rising hype created cynicism among CEOs until fear, uncertainty and doubt started to build at board level. Once directors started quizzing CEOs about the likely impact on their business, those CEOs began turning to CIOs demanding answers that were frequently not available.

"That's why we saw Y2K suddenly start to be taken seriously, and then the wave broke with an unholy crash, and we've had two years of incredibly intensive effort to actually address it," Mackinnon says. "I see exactly the same pattern replaying itself in e-commerce. We've had the early technical pundits, who have been the visionaries, see what the technology could deliver, try to convey that in business terms to business people, but be largely dismissed as a bunch of IT soothsayers whom no one took seriously.

"We've then seen it move slightly more to the mainstream as some people started to dabble with it and some people started to wake up that it was going to have some business impact; but it's still seen as an extension of using some natty technology," Mackinnon says. "At the end of the day, it's the fear, doubt and uncertainty that are going to push the [e-commerce] button. And we've started seeing boards of directors and CEOs waking up to the fact that this thing may not put them out of business in quite the same dramatic fashion as Y2K, but is actually an opportunity or potentially serious threat to their current business."Few enterprises have yet come to grips with the fundamental impact the Internet will have on products, markets, delivery channels and organisational structure, Mackinnon says. But now is the time for CIOs to be seen to be taking a realistic -- and balanced -- business approach. If they start jumping on the hype bandwagon and selling the notion to CEOs and business managers that the Internet will be all things to all people, without recognising the realities of their business and industry, they will lose credibility.

On the other hand, if they work with the business to develop the ideas and concepts that will make a difference to the business, they will gain in prestige. Otherwise the next big business development will be driven by business senior managers, who will come down at the 11th hour and tell the CIO that the business must change and it must change now.

"The CIO needs to be actively involved as the idea is developed, so they can start aligning their strategies -- and their infrastructure development in particular -- so that they are well positioned when the business opportunities start rolling along. They've got [to have in place]what it takes to deliver very quickly," Mackinnon says. "Speed of delivery now, and speed of implementing business process change, is the only real competitive advantage."Different CatalystsIn North America it is big businesses with open wallets and a desire to experiment and invest in e-commerce that have been the catalyst for change.

Here, where the landscape is dominated by SMEs whose IT budgets are relatively small, Mackinnon says the catalyst will come from groupings of smaller companies that share a common interest or play in a common space or industry environment.

The implications are that it will be much more difficult for Australian companies to take that first step, since they will be reliant on other people agreeing to take the step with them. Australian CIOs will need to constantly evaluate the way new alliances will have an impact on the enterprise's ability to interact with the IT structures of other organisations, he says.

"Different industries with different batting propositions and value chains will have differing opportunities for e-commerce to be beneficial. One of the first things that CIOs need to get their minds around is an understanding of where the opportunities lie. That allows you to come to terms with where the hot spots are going to be," Mackinnon says.

The report makes clear that a strategic capability of any organisation will be its ability to partner with and share transactional business processes across its own organisational boundary and with other organisations. CIOs used to working in outsourcing and partnering models will find it much easier to "get their heads around this", Mackinnon says. "The CIOs who still hold onto the 'we'll build it ourselves' and 'we'll get competitive advantage by building a better mousetrap' mentality are going to be the people that are left behind in the dust."The only way to progress is to leverage the quickly evolving new areas of business solutions and expertise that you can't possibly hope to develop yourself. The ability of the business to move forward quickly will depend upon its ability to partner and enter into strategic alliances. "The CIOs' real contribution to that is how quickly they can roll out an integrated technology infrastructure to support a business deal that might be done literally overnight." Digital MorphingOne early transformation is occurring in the traditional relationship between buyer and seller. The Deloitte study finds that in some cases the line between buyer and seller is "morphing", as sellers allow buyers to take part in the process of creating the unique product desired. The same thing is likely to happen to some products. The study identifies a select group of tangible products that will be transformed into intangible form for transport from producer to consumer over the Internet. These products include VCR video tapes, music CD-ROMs, software diskettes, and printed books and magazines.

Businesses marketing those products -- anywhere in the world -- will be able to compete with local suppliers. For the mainstay of products and services, though, a local presence and a local logistical and delivery and support capability will remain crucial. Mackinnon says smart overseas operators who have been playing in the field long enough to get the business model right are aggressively looking to move offshore. They will do so by moving into local markets and either directly setting up operations or -- more likely -- doing so through acquisition or merger. That has significant implications for Australian CIOs.

"The threat is if you don't identify who those players may be, your traditional competitors will; or someone who has been a non-traditional competitor will see it as a way to get into the e-commerce, Internet space," Mackinnon says.

Killer App

According to the study, by 2002 an emerging "killer application" will see traditional ISPs replaced with more powerful commerce service providers (CSPs) created to handle $US1.1 trillion of business over the Internet. As companies handle increasingly large volumes of business transactions, both consumers and companies will look for CSPs to provide a platform for value-added services such as secure transactions.

Australian CSPs will offer different kinds of services from those in the US, and will tend to act more as catalysts to e-commerce by creating transaction streams that offer a more sophisticated range of services, Mackinnon says.

Some ISPs will become CSPs by adding payment processing and greater functionality to support business transactions. The big banks, telcos and ISPs are also likely to become CSPs by providing solutions built around physical logistics and distribution. However, there could also be some involvement by unexpected players like advertising agencies that will contribute their marketing and branding know-how in the new economy.

"A commerce service provider of the future supporting e-commerce could be anybody from a Federal Express to a National Australia Bank to a Telstra," Mackinnon says. "What do you do until the dust settles? You work on the basis that you can't go to one player for everything, and you work on these partnerships and bringing together people into joint ventures to make something happen that's important to you.

"I think you will find CSPs emerging around specific opportunities to do business, and for those parties involved in that opportunity one CSP will be the logical partner to play with. For example, we've seen a big movement in government procurement. All the Australian states have just signed off a basic framework to do electronic procurement and some of them are now pushing forward to selecting the systems and service providers who will support that.

"Those service provider organisations who essentially fit the business of government will become their natural partners. But that may be someone totally different from someone playing in the financial services community, for example."Bit TaxThe study also predicts governments will revise the taxation of transactions to deal with the inadequacy of traditional methods of assessment and collection as companies and markets seek to use cyberspace to save money. This will pose a potential headache for CIOs as they are forced to re-jig their systems to cope, Mackinnon forecasts.

But he says there is also a wild card for CIOs in the implications of the Australian government's Online Services Bill 1999. Some critics have said the effect of the bill will be to slow down Australian access to the Internet and drive some businesses offshore. "I think it will give them a headache; it will add costs to their operation and how they do it and therefore act as a bit of a break to how quickly they will add services.

"Obviously in the states there has been a supposed moratorium on the governments poking their noses in while they let the market evolve and develop.

That may change as the e-commerce wave really takes off and tax bases get eroded; but I guess we've seen an inclination in Australia for them to get involved earlier. So you can't ignore what might come out of left field," he says.

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