ROI is best used to compare potential EC projects with other internal projects and success factors—not with those of othercompanies! It also is important that a company develop a standard methodology and make it part of every technology reviewand investment.

The ROI CalculationROI can be computed for 1 year. It is the year’s net benefits divided by the initial cost of the project multiplied by 100. Forinstance, if a project initially cost $50 and returned $100 in net benefits (benefits minus costs), then the ROI in the first yearwould be 100/50, or 200 percent. However, technology rarely recovers its costs in the first year; more accurate calculations usea 3- or 5-year horizon. With a 3-year horizon, the ROI calculation is the average net benefits per year divided by 3. This is thendivided by the initial cost and multiplied by 100:

ROI = (((Net year 1 + Net year 2 + Net year 3) / 3) / Initial cost) � 100

An average ROI calculation yields numbers that are directly comparable with those one would find with other corporateinvestments, the cost of capital, or a simple bank certificate of deposit.

Payback PeriodIn many cases, the payback period may be more important than the ROI. Payback period provides an indication of risk andoffers insight into the company’s flexibility. Payback period is the point in time at which total benefits equal total costs. Let’slook at an example. Say that the initial cost of a project is $600 and that the net benefits are as shown in the following table:

Year 1 Year 2 Year 3

Net benefit = $200 Net benefit = $300 Net benefit = $300

In the first year, the company spent $600 but got $200, so it is out $400 at the end of the year. In the second year, itmakes $300, but it is still short $100. It takes half of the third year to cover the $100, resulting in a payback period of 2 andone-third years.

Why is payback important? Consider the following scenario: You’ve just deployed the perfect Web site with e-commercelinks to all of your legacy systems. It took you a year’s time and significant costs, but you have beaten everyone else to themarket. Your 3-year ROI will be 1,000 percent, but the payback period is 2 years, meaning that you will not cover your costs forsome time. What if someone develops a new development tool that allows you and the competitors to create a better applica-tion in a much shorter time? You know you should use this tool to redesign your site, but you still have not covered your initialcosts.

No matter how attractive the ROI and how good the NPV, long payback periods are not preferable, because technologychanges quickly. One should be flexible enough to discard a technology decision when a superior solution comes along.

CostsGathering cost information usually is easier, because most companies know what they have spent or are planning to spend. Toensure that the right costs are gathered:

◗ Count everything that is directly associated with the project (e.g., purchase of a new server).◗ Do not count infrastructure items not associated with the project (e.g., leveraging the existing network servers).◗ Count infrastructure items that were driven by the project (e.g., the company purchased a server because of this project and

two others like it; therefore prorate and include one-third of the costs).

Direct Benefits Benefits are either direct or indirect. Direct benefits include items such as decreased paper costs, reduced accounts receivable,reduced use of express mail, reduced or reassigned staff, sales of old hardware, and so on. These are tangible savings. Savingsmay be one time (e.g., reduced personnel) or recurring. Recurring savings should be included in every year’s computation.

Indirect Benefits Indirect benefits can also be somewhat intangible. For example, indirect savings may include reducing the time needed to testnew software by 25 percent. If you expect the company to increase sales by 10 percent because of a new sales support system,do not include both the profit on the increased sales and the value of your salespeople becoming 10 percent more efficient. Youshould reasonably expect that the increased salesperson efficiency causes the increase in profit. It is always better to count themore direct result (profit) rather than the indirect result (increased productivity).

Online File W15.1 Nucleus Research’s ROI Methodology

Chapter Fifteen 1

(continued)

2 Part 6

The following are some guidelines in assessing the value of an indirect benefit:

◗ Measure or estimate the expected change in time or productivity. For example, if you estimate that 1,000 employees each willsave 10 minutes per year, the change in productivity is 166.6 hours.

◗ Correct this amount based on the inefficient transfer of time. For example, if you save an hour, the employee may work only anadditional one-half hour. Therefore, the correction factor is 0.5 hour.

◗ Multiply the gain by the fully loaded cost of an employee (including retirement benefits, vacation, insurance, etc.) to calculatethe value of the benefit. If you are using multiple loaded costs, do this calculation for each category of employee.

◗ Reducing costs often looks better on paper than in reality. After the project is implemented, go back and look for a corrobo-rating measurement. For example, if you estimated the legal department would save 10 percent of their time, then you wouldtry to determine the following:

◗ Did the legal department reduce its staff by 10 percent?◗ Did the legal department’s expenditures grow at a rate slower than the rate for the rest of the organization?◗ Are the lawyers 10 percent more productive?

If any one of these is correct, your initial estimate was correct.

Calculating ROI and Other Metrics Calculate the net values at the initial year and for each subsequent year. Calculate the ROI using the formula presented earlier:

ROI = (((Net year 1 + Net year 2 + Net year 3) / 3) / Initial cost) � 100

The payback period is a little more difficult to calculate, but as mentioned earlier, it is a very important indicator of risk.Follow the formula presented earlier. However, automated ROI calculators make it easier to change assumptions and rerun theanalysis.

Source: Adapted from the ROI Knowledge Center at nucleusresearch.com/tutorial.html (accessed March 2005).

Online File W15.1 (continued)

The following are suggestions about how to handle intangible benefits.

◗ Think broadly and softly. Supplement hard financial metrics with soft ones that may be more strategic in nature and that maybe important leading indicators of financial outcomes. Measures such as customer and partner satisfaction, customer loyalty,response time to competitive actions, and improved responsiveness are examples of soft measures. Subjective measures can beobjective if used consistently over time. For instance, customer satisfaction measured consistently on a five-point scale can bean objective basis for measuring the performance of customer-facing initiatives.

◗ Pay your freight first. Think carefully about short-term benefits that can “pay the freight” for the initial investment in theproject. For example, a telecom company found that it could justify its investment in data warehousing based on the cost sav-ings from data mart consolidation, even though the real payoffs from the project would come later from increased cross-sellingopportunities.

◗ Follow the unanticipated. Keep an open mind about where the payoff from IT and e-business projects may come from, andfollow opportunities that present themselves. Eli Lilly & Co. created a Web site called InnoCentive (innocentive.com) to attractscientists to solve problems in return for financial rewards (“bounties”). In the process, Lilly established contact with 8,000exceptional scientists, and Lilly’s HR department has used this list of contacts for recruiting.

Source: Compiled from Sawhney, M. “Damn the ROI, Full Speed Ahead.” CIO Magazine, July 15, 2002. Adapted with permission. Copyright © 2006CXO Media Inc.

Online File W15.2 Handling Intangible Benefits

Chapter Fifteen 3

ONLINE FILE W15.3

ADVANCED METHODS FOR EVALUATING EC AND IT INVESTMENTSVALUE ANALYSISKeen (1981) developed the value analysis method to assist organizations in evaluating invest-ments in decision support systems (DSSs). The major problem with justifying a DSS is thatmost of the benefits are intangible and not readily convertible into monetary values. Some—suchas better decisions, better understanding of business situations, and improved communication—are difficult to measure even in nonmonetary terms.These problems in evaluating DSSs are sim-ilar to the problems in evaluating intangible benefits for other types of systems. Therefore, valueanalysis can be applied to several types of IT and EC investments in which a large proportion ofthe added value is derived from intangible benefits. The value analysis approach includes eightsteps, grouped into two phases. The steps of the value analysis approach are shown in the fol-lowing exhibit.

In the first phase, the decision maker identifies the desired capabilities and the (generallyintangible) potential benefits. The developers estimate the cost of providing the capabilities;if the decision maker feels the benefits are worth this cost, a small-scale prototype of the DSS(or another IT application) is constructed. The prototype then is evaluated.

The results of the first phase provide information that helps with the decision about thesecond phase. After using the prototype, the user has a better understanding of the value ofthe benefits, and of the additional features the full-scale system needs to include. In addi-tion, the developers can make a better estimate of the cost of the final product. The questionat this point is: What benefits are necessary to justify this cost? If the decision maker feelsthat the system can provide these benefits, a full-scale system is developed.

Though it was designed for DSSs, the value analysis approach is applicable to anyinformation technology that can be tested on a low-cost basis before deciding whether tomake a full investment. The current trend of buying rather than developing software, alongwith the increasingly common practice of offering software on a free-trial basis for 30 to90 days, provide ample opportunities for the use of this approach. Organizations may alsohave opportunities to pilot the use of new systems in specific operating units and thenimplement them on a full-scale basis if the initial results are favorable. For further discus-sion, see Fine et al. (2002).

INFORMATION ECONOMICSThe information economics approach is similar to the concept of critical success factors inthat it focuses on key organizational objectives, including intangible financial benefits,impacts on the business domain, and impacts on IT itself. Each of the key organizationalobjectives has several components. In addition, more metrics can be added (see McKay andMarshall 2004). Information economics incorporates the technique of scoring methodologies,which are used in many evaluation situations.

Identify value(intangible benefits)

Establish maximumcost willing to pay

Build prototype ifcost is acceptable

Evaluateprototype

2 3 41Phase 1

Phase 2

Enhance functionalityof full-scale system

Build full-scalesystem if benefits

justify it

Identify benefitsrequired tojustify cost

Establish cost of full-scale system

7 6 58

Steps in Value Analysis

information economicsAn approach similar tothe concept of criticalsuccess factors in that itfocuses on key organiza-tional objectives, includ-ing intangible financialbenefits, impacts on thebusiness domain, andimpacts on IT itself.

4 Part 6

scoring methodologyA method that evaluatesalternatives by assigningweights and scores to var-ious aspects and then cal-culating the weightedtotals.

SCORING METHODOLOGYA scoring methodology evaluates alternatives by assigning weights and scores to various fac-tors and then calculating the weighted totals. The analyst first identifies all of the KPIs andassigns a weight to each one. Each alternative in the evaluation receives a score on each fac-tor, usually between 0 and 100 points or 0 and 10 points. These scores are multiplied by theweighting factors and then totaled. The alternative with the highest score is judged the best(or projects can be ranked, as in the ROI Iowa case at the beginning of the chapter). Thenone can perform sensitivity analysis to see the impact of changing the weights.

The information economics approach uses organizational objectives to determine whichfactors to include and what weights to assign in the scoring methodology. The approach isflexible enough to include factors in the analysis such as impacts on customers and suppliers(the value chain). Executives in an organization determine the relevant objectives andweights at a given point in time, which are subject to revision if there are changes in the envi-ronment. These factors and weights are then used to evaluate IT alternatives; the highestscores go to the items that have the greatest potential to improve organizational perfor-mance. Note that this approach can incorporate both tangible and intangible benefits. Ifthere is a strong connection between a benefit of IT investment (such as quicker decisionmaking) and an organizational objective (such as faster product development), the benefitwill influence the final score even if it does not have a monetary value. Thus, the informationeconomics model helps solve the problem of assessing intangible benefits by linking the evalu-ation of these benefits to the factors that are most important to organizational performance.

Approaches like this are very flexible. The analyst can vary the weights over time; forexample, tangible benefits may receive heavier weights at times when earnings are weak. Theapproach can also take risk into account by using negative weights for factors that reduce theprobability of obtaining the benefits.

Most information systems projects are not stand-alone applications. In most cases, theydepend on enabling infrastructures already installed in the organization. These infrastructuretechnologies include mainframe computers, operating systems, networks, database manage-ment systems, utility programs, development tools, and more. Because many of the infra-structure benefits are intangible and spread over many different present and future applica-tions, it is difficult to estimate their value or to evaluate the desirability of enhancements orupgrades. In other words, it is much more difficult to evaluate infrastructure investment deci-sions than investments in specific information systems application projects (see Lewis andByrd 2003). Two methods are recommended for evaluating infrastructure investments:benchmarks and management by maxim.

USING BENCHMARKS TO ASSESS INFRASTRUCTURE INVESTMENTSOne approach to evaluating infrastructure is to focus on objective measures of performanceknown as benchmarks. These measures often are available from trade associations within anindustry or from consulting firms. A comparison of measures of performance or of an orga-nization’s expenditures with averages for the industry or with values of the more efficient per-formers in the industry indicates how well the organization is using its infrastructure. If per-formance is below standard, corrective action is indicated. The benchmark approachimplicitly assumes that IT infrastructure investments are justified if they are managed effi-ciently. Benchmarks come in two very different forms: metrics and best-practice benchmarks.

Metric benchmarks provide numeric measures of performance; for example: (1) ITexpenses as percent of total revenues, (2) percent downtime (time when the computer isunavailable), (3) central processing unit (CPU) usage as a percentage of total capacity, and(4) percentage of IS projects completed on time and within budget. These types of measuresare very useful to managers, even though sometimes they lead to the wrong conclusions. Forexample, a ratio of IT expenses to revenues that is lower than the industry average may indi-cate that a firm is operating more efficiently than its competitors. Or it may indicate that thecompany is investing less in IT than it should and will become less competitive as a result.Metric benchmarks can help diagnose problems, but they do not necessarily show how tosolve them. Therefore, many organizations also use best-practice benchmarks.

benchmarksAn approach to evaluat-ing infrastructure thatfocuses on objectivemeasures of performance.

metric benchmarksA method that providesnumeric measures ofperformance.

Chapter Fifteen 5

With best-practice benchmarks, the emphasis is on how information system activitiesare actually performed rather than on numeric measures of performance. For example, anorganization may feel that its IT infrastructure management is very important to its perfor-mance. It could then obtain information about best practices on how to operate and manageIT infrastructure. These best practices may be from other organizations in the same industry,from a more efficient division in its own organization, or from another industry entirely. Theorganization would then implement these best practices for its entire IT infrastructure tobring performance up to the level of the leaders.

MANAGEMENT BY MAXIM FOR IT INFRASTRUCTUREOrganizations that are composed of multiple business units, including large, multidivisionalones, frequently need to make decisions about the appropriate level and types of infrastructurethat will support and be shared among their individual operating units. These decisions areimportant, because infrastructure can amount to over 50 percent of the total IT budget andbecause it can increase effectiveness through synergies across the organization. However,because of substantial differences among organizations with regards to their culture, structure,and environment, what is appropriate for one will not necessarily be suitable for others. Thefact that many of the benefits of infrastructure are intangible further complicates this issue.

Broadbent and Weill (1997) suggest a method called management by maxim to dealwith this problem. This method brings together corporate executives, business-unit man-agers, and IT executives in planning sessions to determine appropriate infrastructure invest-ments through a five-step process. In the process, managers articulate business maxims—shortwell-defined statements of organizational strategies or goals—and develop corresponding ITmaxims that explain how IT could be used to support the business maxims.This approach canwork where there is no shared infrastructure or where the infrastructure category is a utility.

REAL-OPTION VALUATION OF IT INVESTMENTA promising new approach for evaluating IT and EC investments is called real options. Itsobjective is to recognize that EC investments can increase an organization’s performance inthe future. This is especially important for emerging technologies that need time to matureand may involve sequential investments in EC to place the firm to gain major future benefits.The concept of real options comes from the field of finance, where financial managers haveapplied it to capital budgeting decisions. Instead of only using traditional measures, such asNPV, to make capital decisions, financial managers are looking for opportunities that may beembedded in capital projects. These opportunities, if taken, will enable the organization toalter future cash flows in a way that will increase profitability.

These opportunities are called real options (to distinguish them from financial options thatgive investors the right to buy or sell a financial asset at a stated price on or before a set date).Common types of real options include the option to expand a project (so as to capture addi-tional cash flows from such growth), the option to terminate a project that is doing poorly (inorder to minimize loss on the project), and the option to accelerate or delay a project (e.g., thedelay of airport expansion cited earlier). Current IT investments, especially for infrastructure,can be viewed as another type of real option. Such capital budgeting investments make it pos-sible to respond quickly to unexpected and unforeseeable challenges and opportunities in lateryears. If the organization waits in its investment decisions until the benefits have been estab-lished, it may be very difficult to catch up with competitors that have already invested in theinfrastructure and have become familiar with the technology.

By applying just the NPV concept (or other purely financial measures) to an investmentin IT infrastructure, an organization may decide that the costs of a proposed investmentexceed the tangible benefits. However, if the project creates opportunities for additional pro-jects in the future—that is, if it creates opportunities for real options—the investment alsohas an options value that should be added to its other benefits (see Benaroch 2002; Devarajand Kohli 2002).

Benaroch (2002) illustrates a real-options approach in the investment in an electronicsales channel. The four-step options-based process attempts to understand and plan for the

best-practicebenchmarksBenchmarks that empha-size how information sys-tem activities are actuallyperformed rather than onnumeric measures ofperformance.

management by maximA five-step process thatbrings together corporateexecutives, business-unitmanagers, and IT execu-tives in planning sessionsto determine appropriateinfrastructure investments.

6 Part 6

balanced scorecardmethodAnalysis of a variety ofmatrices (finance, inter-nal operation, agility,customer opinions) forevaluating the overallhealth of an organization.

risk involved while attempting various configurations to maximize the value of the invest-ment. The four steps are:

1. Define the investment and identify the risks.2. Recognize shadow options (i.e., mapping the risks and options to control them).3. Identify investment configurations.4. Identify the most valuable configurations.

The mathematics of real-option valuation are well established but unfortunately are toocomplex for many managers (see Dixit and Pindyck 1995). For a discussion on using real-option pricing analysis to evaluate a real-world IT project investment in four different set-tings, see Li and Johnson (2002). Rayport and Jaworski (2002) applied the method in evalu-ating EC initiatives.

THE BALANCED SCORECARD AND DASHBOARD METHODS

Balanced ScorecardThe balanced scorecard method evaluates the overall health of organizations and projects.Initiated by Kaplan and Norton (1996), the method advocates that managers focus not only onshort-term financial results, but also on four other areas for which metrics are available. Theseareas are: (1) finance, including both short- and long-term measures; (2) customers (how cus-tomers view the organization); (3) internal business processes (finding areas in which to excel);and (4) learning and growth (the ability to change and expand). The key idea is that an orga-nization should consider all four strategic areas when considering IT investments.

The balanced scorecard, which is similar to information economics, assumes that in addi-tion to financial results, IT investments in people, skills and capabilities, databases, knowl-edge, and so forth are the leading indicators of the success of organizations. In their framework,van Grembergen et al. (2003) relate the balanced scorecard to the results of IT investment.

Source: balancedscorecard.org/basics/bsc1.html. © 1998 Paul Arveson. All rights reserved. Used withpermission.

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An Example of a Balanced Scorecard in Practice

Chapter Fifteen 7

As shown in the following exhibit, and as summarized in Chapter 14, the BSC approachproposes that organizations develop metrics, collect data, and analyze it from several per-spectives beyond the financial outcomes.

Plant et al. modified the BSC for EC application by incorporating four additionalperspectives—brand, service, market, and technology—and found them to be critical to thedevelopment and execution of e-business strategies. They applied their modified BSC to thee-business strategies of 44 companies in the United States and Europe. Identifying the com-panies as either leaders or laggards in their industries, their research indicated that the lead-ers possessed three characteristics:

◗ Leaders had the ability to understand their own value proposition and put in placerobust, relevant, and timely measurement systems that enabled them to judge the real-time effectiveness of their strategy.

◗ Leaders understood the value proposition from multiple perspectives: both internal tothe organization (e.g., from a financial and/or process perspective) and external to theorganization (e.g., the customer perspective).

◗ Leaders continually monitor their position relative to their objective goal criteria, adjust-ing the criteria, metrics, and strategy as necessary.

Sawhney (2002) attempted to use the balanced scorecard to measure the performance ofEC systems, including intangible benefits. He examined the EC systems from two perspec-tives: that of the e-business and that of the user. For more on the balanced scorecard, seeLawson et al. (2004).

Performance DashboardRayport and Jaworski (2002) developed a variant of the balanced scorecard called theperformance dashboard, which they advocate for the evaluation of EC strategy. Several otherattempts to fit the balanced scorecard approach to IT project assessment have been made[e.g., see van Grembergen et al. (2003), Averson (1998), and balancedscorecard.org. Themethodology actually is embedded in several vendors’ products (e.g., sas.com/solutions/bsc/).For demos, see corvu.com.

OTHER METHODSSeveral other methods exist for evaluating IT investments. For example, most large vendorsprovide proprietary ROI calculators. However, according to King (2002), proprietary calcula-tors may be biased and may lead to a sometimes-unjustified decision to adopt a project. Tomake the decision less biased, some companies use a third-party evaluator, such as IDC(idc.com) or META Group (metagroup.com), to conduct ROI studies. An example of such acalculator is SAP Business Case Builder (see sap.com/solutions/casebuilder). Several vendorsoffer nonproprietary ROI calculators (e.g., CIO View Corporation). CIO.com (2004) offersmany tools via Nucleus Research Inc. for calculating the ROI of different IT systems.

According to Rubin (2003), every IT project must be tied to a specific business objective,with its priority indicated, so as to measure the project’s success in terms of a specific primarybusiness value. Rubin developed a special “whiteboard” that includes metrics and their stake-holders. For details and examples, see Rubin (2003). Two methods follow.

The Exploration, Involvement, Analysis, and Communications ModelDevaraj and Kohli (2002) proposed the exploration, involvement, analysis, and communica-tions (EIAC) model for evaluating IT projects. The method is composed of nine phases,divided into four categories: exploration (E), involvement (I), analysis (A), and communica-tion (C). For details, see Devaraj and Kohli (2002).

Activity-Based CostingAnother approach for assessing IT investment was proposed by Gerlach et al. (2002) andRoberts (2003), who suggest the use of an activity-based costing (ABC) approach to assist inIT investment analysis. For details on how ABC works, see a management or managerialaccounting textbook. Using a case study, Gerlach et al. (2002) showed that the company that

8 Part 6

utilized ABC derived significant benefits from a better understanding of IT delivery costsand a rationale for explaining IT costs to department managers. Mutual understanding of ITcosts is a necessary condition for shared responsibility of IT, which in turn leads to effectiveeconomic decision making that optimizes resource utilization and the alignment of IT withbusiness strategy. In addition, the use of ABC helps in reducing operational costs.

ONLINE KEY TERMSBalanced scorecard method 6Benchmarks 4Best-practice benchmarks 5

Information economics 3Management by maxim 5

Metric benchmarks 4Scoring methodology 4

Chapter Fifteen 9

Setting up e-procurement metrics is difficult, because e-procurement may require significant investment in technology,redesigned processes, and employee training. In addition, purchasing or procurement capabilities in businesses typically evolvefrom simple online buying of supplies and materials to full-scale involvement in e-marketplaces. This evolution often occurs infour phases:

1. Internal buy-side system. In this phase, the purchasing department conducts its buying activities online. Buyers can workfrom consolidated catalogs, featuring products from multiple, preferred suppliers, and then complete transactions on theWeb. This phase builds the foundation for expansion of the e-procurement initiative.

2. Direct purchasing system. In this phase, the purchasing organization and the supplier network become more closelyaligned. Leveraging any prearranged purchasing contracts with suppliers, the purchasing departments share detailed infor-mation with suppliers over the Web to eliminate wasted steps for purchase order confirmation, credit checks, and shippingaddress verification.

3. E-marketplace involvement. In this phase, the purchasing company either joins or develops an e-marketplace. This Web-based intermediary unites buyers, sellers, and brokers, to both increase competition among suppliers and give suppliersaccess to a larger population of buyers. E-marketplaces usually offer dynamic pricing, aggregation of orders, multiple suppli-ers, price visibility across suppliers, and opportunities to collaborate. E-procurement activity in a marketplace can take twoforms:

◗ Participation in a consortium of trading exchanges (CTEs)◗ Creation of private trading exchanges (PTEs)

E-procurement allows one to search for buyers or sellers. Within these e-marketplaces, buyers or sellers may specify prices orinvite bids and initiate and complete transactions. Many e-marketplaces can also handle management of payables, settle-ment, customer care, and other administrative services.

4. Collaboration. In this last phase, the company connects internal procurement processes and systems with those of your sup-pliers via a partner extranet—basically, a secure connection between systems accomplished over the public Internet. Whensupplies or materials are needed, these collaborating systems automatically communicate orders, check availability, scheduleshipments, and exchange payment—all without requiring involvement from the purchasing staff. E-marketplaces can providean easy way for organizations to integrate their systems with many suppliers at once by establishing mutual standards for e-procurement.

Online Files W15.4 E-Procurement Complexities in Marketplaces

10 Part 6

The supplier side of e-procurement is called e-fulfillment. It is important for suppliers to integrate their e-fulfillment systemswith their buyers’ e-procurement systems. Some companies choose to take greater control over the e-procurement process bydeveloping their own EC systems. However, new applications must be developed and integrated into existing IT infrastructure,which requires expensive custom coding and time. To free themselves from coding and integration, companies can outsourcethis function to e-fulfillment providers who are increasingly using Web Services to quickly develop and enhance e-fulfillmentsystems.

Webservices.org defines Web Services as self-contained business functions that operate over the Internet. They are writtento strict specifications to work together and with other similar kinds of components. Web Services are important to businessesbecause they enable systems in different companies to interact with each other more easily. The Web Services architectureallows the packaging of Web applications that can be rapidly developed by e-fulfillment providers in response to buyers’ needsand used across a variety of legacy systems retailers already have in place.

Linens ’n Things, a home goods retailer, outsourced its e-fulfillment so that it could concentrate on its core retail salesbusiness. Besides e-fulfillment, the service provider generated warehouse forecasts by analyzing Linens n’ Things’ historicaldata, reducing the critical metric of put-away time, the time elapsed between arrival of the inventory and availability for onlinesale. Another Web Services provider utilized click-to-release time as a metric for a consumer electronic retail order fulfillment.Click-to-release is the time elapsed from when a customer clicked to buy an item online until a warehouse staff had a ticket(“green light”) to begin packing the order.

For Linens ’n Things, the Web Services-based e-fulfillment system proved useful when it decided to allow customers to pickup online orders from the local store, thus prompting a change in the system. Similarly, in response to security concerns, the e-fulfillment provider was able to quickly add CVV2 codes (four-digit codes on the back of credit cards) as part of the onlineorder process. The bad debt due to fraudulent online orders was tracked as half that of the previous year.

A 2004 e-procurement benchmarking research study by the Aberdeen Group found that more businesses were using e-procurement to manage more requisitions, spend categories, and suppliers than in the past, resulting in reduced requisition-to-order cycle time as well as reduced costs, resulting in lower overall prices.

Source: Compiled from Minahan (2004).

Online File W15.5 Web Services for E-Fulfillment

Chapter Fifteen 11

Welch’s, a marketer of grape-based products such as juices and jellies, doubled in size in a decade. Its 1,000 employees neededa collaborative means to connect various types of information residing in several intranets. Without a centralized location toaccess information, employees were having difficulty finding information in a timely manner. For example, sales agents receivedweekly forecasting and performance data through the mail. Sales agents also needed to share documents, retrieve product infor-mation, and get answers more quickly to speed up customer services. Welch’s, too, needed an effective way to communicateand collaborate with employees and business partners across the world. A portal would allow Welch’s to automate these reportsand make them available quickly.

Plumtree Software, Inc. (plumtree.com), is a portal software and services company that has helped Welch’s implement aWeb-based portal that also serves as a collaboration tool. The portal first integrated the intranets so that employees could getquicker access to up-to-date data. However, given that one of the requirements was collaboration, Welch’s needed to expandthe portal to its business partners in the form of an extranet. Welch’s extranet portal, called Grapevine, allows employees toaccess packaging instructions, hazard analysis, and label information sheets. Sales agents, in particular, have found that theirjobs have been enhanced by the portal, because it provides access to critical projects, sales training materials, shelf informa-tion, and product look-ups for all of Welch’s products.

Welch’s collaboration planning allows developers and partners to search quickly and find the correct contracts, productinformation, sales presentations, and other reports. Executives and project managers can monitor project status and accessknowledge about projects underway. Project team members can post vacation days, upload technical specifications, and assigntasks to other members.

Source: Plumtree (2003).

Online File W15.6 Welch’s Portals

12 Part 6

RFID (Radio Frequency Identification) is a technology that incorporates the use of the radio frequency (RF) portion of the elec-tromagnetic spectrum to uniquely identify an object. RFID is increasingly used in industry as an alternative to the bar code(Chapter 7). The advantage of RFID is that it does not require direct contact or line-of-sight scanning.

Thus far, RFID technology has basically been used in smart bar codes to track shipments. Recently, in response to mad cowdisease, the U.S. government has considered tagging cows with RFID tags to track their movement. RFID is likely to gainmomentum; Wal-Mart and the U.S. Department of Defense are among the early adopters. However, Brennan (2005), of theAlwaysOn Network, suggests that the early wave of RFID adoption overlooks the true capabilities and potential of the tech-nology—and doesn’t allow adopters to reap the full benefits because of the mandate from a major customer, such as Wal-Mart.The true ROI of RFID will involve comprehensive implementations with real opportunities on behalf of all participants in thesupply chain, because it is part of the wider movement toward sensor-actuator, always-on devices. The capabilities of smarttags range from monitoring the date of perishable goods and automatically reducing the price as the expiration approaches tosounding an alarm when a careless forklift operator places a palette of flammable chemicals in a restricted area. According toBrennan, in order for RFID to progress to more advanced functions, organizations will have to restructure their systems—fromapplication software to servers to administration.

True ROI will only come with a complete redesign of business processes to make better use of this new technology, asopposed to integration with legacy systems that will not last very long. Over one-third of respondents in an October 2004 HP-sponsored RFID survey said that integration with legacy systems was their “biggest expense”; less than 10 percent were spend-ing comparably on the new infrastructure that will soon be necessary. Worse yet, more than half the respondents answered thattheir largest investment was solely in the peripheral hardware needed for RFID implementation (tags, readers, etc.). Vempati(2004) offers many reasons why proceeding with a less-than-optimal system architecture can lower the ROI by increasing thetotal cost of ownership (TCO) over time. The higher TCO is composed of increased costs from legacy system maintenance and ITstaff training.

This will create some challenges for the traditional corporate infrastructure. RFID tags usually hold information about aproduct in the standard EPC (Electronic Product Code) format. The EPC identifies the individual item, but additional informationis written in the Physical Markup Language (PML), which is based on the more commonly known eXtensible Markup Language(XML). The vast amount of RFID data can easily overwhelm any database. But native XML databases are not only more capableof handling the deluge of information, they also are better at searching and sorting data in order to filter it and only processwhat is necessary. IBM’s next-generation database will contain both relational and native XML storage engines, and Oracle andMicrosoft are likely to respond with their own product offerings.

The real need for XML databases is when EPC information is combined with other PML data from sensor actuators in a busi-ness context. Imagine an item moving through the supply chain: It is scanned as it leaves the warehouse, again as it entersthe truck, its temperature is monitored in the truck, and it is continually tracked at all possible points down the line until it issold. The challenge is how all of this data can be stored in a single place. In the most likely scenario, the information about agiven item will be held in separate databases at every point in the supply chain. This means that the whole network, not just adatabase, will need to be queried in order to get all of the product information. This implies that all the databases would needto be connected to each other; XML databases will likely be most capable of doing that. Effective standards for this type ofcommunication are being developed and the infrastructure build-up will be huge. Cisco predicts that by 2010, 80 percent of thetraffic on its network will be EPC related.

RFID will eventually revolutionize business processes throughout the supply chain and result in greater efficiency andvalue. However, simply adding smart tags before shipping will not exploit the full potential of the RFID benefits.

Source: Adapted from “ROI on RFID: Now That’s the Future.” AlwaysOn Network. January 11, 2005. Alwayson-network.com alwayson-network.com/comments.php?id=7849_0_11_0_C (accessed February 2005). Adapted with permission of the AlwaysOn Network.

Online File W15.7 The ROI on RFID