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| 6 Ways to Save Your Company Money |
| Moving business processes online can cut costs and improve productivity. |
By G. Patrick Pawling
Illustration by Guy Billout |
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Thanks to the Internet and the Web-based applications it has inspired, companies are moving business processes online and saving money—the kind of money that contributes to bottom lines. It’s true—from the supply chain to employee communications, companies are saving real money right now. They’re also gaining market share, shifting their efforts from administrative tasks to strategy, and finding success by using the Internet as a business foundation. Companies with vision can view the current economic climate as an opportunity to look inward to see where basic changes can deliver significant results.
Help Customers Help Themselves
Effective customer care boils down to four success points: Make it feel good, make it easy, make it fast, and remember the customers’ names. Doing these things is good business, and helping companies do them via customer self-service and online sales and technical support, for example, is the Internet’s strength. Web-based self-service gives customers more options and reduces the number of calls to service representatives. A lot of companies understand this concept. And a lot of companies could achieve more customer-care success with little effort. The payoffs are customer loyalty, increased revenue, and reduced costs.
"Self-service for consumers is really huge now and that trend will continue," says Kirsten Cloninger, industry analyst in the eBusiness Group for Cahners In-Stat Group. "If customers can take care of business themselves, that benefits everybody. But you can’t try to push customers to a certain avenue. You have to let the customers decide where they want to go. If I prefer to talk to somebody on the phone, I don’t want to be pushed onto a Web site."
"It’s infinitely cheaper to do things on the Web, rather than paying an internal employee to handle a phone call," says Cloninger. "But the customer has to walk away happy rather than walk away frustrated. People switch companies because of those frustrations."
To see the possibilities, consider W. W. Grainger, a 74-year-old Illinois company and a leading North American provider of maintenance, repair, and operating (MRO) products such as tools and lighting equipment. Grainger has invested heavily in its online presence, and it’s now realizing results in customer loyalty, revenue, and cost savings. The company did 10% of its $5 billion in revenues in 2000 online, and company officials say that percentage is increasing at a "robust" rate.
"We see the online customer has become more loyal to Grainger as a whole," says Carl S. Turza, the company’s vice president of E-Business. According to Turza, Grainger’s online customers buy from four more categories online on average and tend to be more loyal, buy more frequently, and spend more per order than its traditional customers. Customers who use Grainger.com also increase their business from other Grainger channels—including via branch networks and via phone—by 11%.
"The Internet tends to redefine the nature of our relationships," Turza says. "In the old days, we’d talk with the customer in person, but now we are taking that discussion to a different level. We’re sharing some awareness of the customer’s maintenance routines and tracking increased sales and demand on certain products, so we can essentially smooth out the buying process and make it more efficient."
"I believe we have become the kind of actively engaged partner that companies want on the MRO supply side," says Turza.
A typical Grainger phone customer would spend about 25 minutes with a service representative. Using Grainger.com, a customer can make and save a personal list, change items as necessary, and check product availability—all within just a few minutes. "That is a very real, very tangible, very easy-to-measure benefit," says Turza. And one that helps both the customer and the company.
"In terms of payback to Grainger, most of the time, a product goes from the customer to the shipping process untouched by human hands," says Turza. "That’s a substantial savings for the company. In days past, we would have had to physically check up on certain items to make sure they were in stock, but now Internet-based systems do that."
Beyond basic Web-site interaction, companies can offer their customers blended interactions, which link online customer self-service with real-time interaction with service representatives, using text chat and click-to-talk functions enabled by Web collaboration software. Adding live interaction to the support options gives customers the ability to ask for help at any point and has been especially effective for retail e-commerce sites including Nordstrom and Lands’ End.
Move Procurement Online
Automating the world of the professional buyer can save significant money, because repetitive motion dominates the purchasing world. Allowing employees to think strategically instead of clerically frees them to build better relationships with suppliers. Instead of routing purchase orders from desk to desk and forcing employees to dig through product catalogs, companies can create online ordering systems that automatically route approvals through the appropriate levels and include catalogs of approved products and contracted vendors from which buyers can select.
"The savings are two-fold," says Jon Derome, a senior analyst in the Yankee Group’s B2B Commerce Applications Planning Service. "You reduce process costs, and you can make the purchaser’s work more efficient by automating information gathering and analysis. And if you automate things like negotiating off-contract purchases, you will make better decisions and reduce the cost of the product."
A recent study of 1,600 companies by Hackett Benchmarking and Research shows that firms doing more than 20% of their procurement transactions online are reducing their purchasing costs by a third, according to a report by Laurie Orlov, research director of Business Applications at Forrester Research. In addition to the administrative savings, companies can claim very realistic savings on the cost of goods.
The best strategy: Pick "ready-to-run" categories such as office supplies, travel, and MRO goods. Orlov’s report notes that a fully deployed firm expecting to spend $5 million on travel a year can expect to save 5%, or $250,000, on travel and another 33% on administrative costs.
Derome says that companies implementing appropriate Web tools are helping their purchasing staffs analyze relationships and product categories. By doing so, companies can avoid the problem of people in different divisions buying similar products at rates that don’t reflect the company’s true buying power, whether those products are ballpoint pens or raw materials for manufacturing.
The first step in automating purchases is to identify the most problematic purchases. Typically, the first target area is business consumable purchases, such as office equipment, paper, janitorial supplies, and other basic items, in which the primary challenge is reducing the transaction costs. Companies often next address MRO purchasing. Then, they address direct-material purchasing, the major procurement area. Depending on industry and product dynamics, companies usually tackle either commodity purchasing or engineer-to-order relationships.
The catch: Complexity and reliability requirements increase at each level. The good news: "Once you identify the problem, it becomes pretty clear who the software leaders are," says Derome.
Companies with manufacturing operations can benefit significantly from e-procurement. "It’s all about synchronization, inventory, and quality," says Jeff Herrmann, president and CEO of SupplyWorks, which specializes in supplier-relationship management (SRM) solutions. "Most manufacturers are dealing with uncertainty, and they compensate by adding buffer inventory, which they use to cover the inevitable glitches—materials that don’t show up, suppliers who can’t deliver."
"You have to squeeze inventory out of the supply chain, and you need better information throughout the process so everybody can run lean," he says.
Companies should also try to make their parts-flow process more orderly. Reducing the need to expedite shipments saves considerable money. "Almost every manufacturing plant I run into spends a significant amount of time ordering material and an equal amount of time chasing those orders," says Herrmann. "That expends resources and leads to premium freight costs."
The idea is to allow people to be more productive. "The increasing automation of manual business process allows companies to redeploy professional labor into more efficient activities," says Herrmann. "Through automation, we can reduce the clerical component quite a bit. We can automate routine tasks to gain significant labor savings. Those savings can be plowed right back into higher-leveraged activities." Or sent to the bottom line.
Herrmann says that companies can implement Web-based applications hosted by an outside application service provider in as few as 90 days. As for the magnitude of savings, he says that companies can save up to $2 million a year on every $40 million direct spend, for example.
"Unless you are working with your suppliers to reduce costs, you are missing an important opportunity," says Herrmann. He says that a $1 billion discrete manufacturing operation could reasonably expect to save $10 million to $20 million a year from implementing SRM solutions. A large part of this comes from lower materials costs via better sourcing and supplier management. Other savings come from a streamlined purchase order process, fewer errors, better supplier performance analysis, and employees focused on higher-value-added activities.
Ship Directly to Customers
When a company is ready to solidify and tighten the bond between its suppliers and customers, one strategy is direct fulfillment. Having suppliers ship directly to customers is a way for intermediary distributors to avoid stocking inventory. If they can reduce inventory, they can reduce their costs significantly.
"There are really two tiers of savings," says Rebecca Wettermann, research director for Nucleus Research. "You’re reducing overhead, being more efficient, reducing storage space, reducing slippage, and doing a better job with inventory management."
"The second part is, how do I get more return out of each customer?" she says. Having manufacturers ship directly to customers, Wettermann says, allows for more customization, a shorter turnaround, fewer mistakes, and lower shipping costs.
Patrick Tam, supply-chain strategist for the Internet Business Solutions Group at Cisco Systems, calls true direct fulfillment the "holy grail" of outsourcing. "Ideally, a company will outsource context functions and capabilities while keeping core competencies internal," he says. More than 80% of Cisco’s product units are fulfilled by strategic contract-manufacturing partners. According to Tam, during the last fiscal year Cisco saved $30 million through direct fulfillment, and he says more than 51% of Cisco revenue comes through direct fulfillment to customers. The "customer" could be the end customer but more frequently is a channel partner or reseller.
But direct fulfillment is not for everybody, warns Derome. "One of the bigger challenges is the visibility that you lose," he says. "You gain efficiency and reduce cost, but it’s difficult to do the math to determine how much. And you lose control and visibility regarding the quality of the product and the quality of the relationship with your customer. So you have to weigh those factors. It’s kind of a scary proposition to give up that degree of control."
Companies can avoid losing visibility by qualifying vendors according to specific criteria and holding them to quality standards. Taking these steps increases control and removes variables from the equation. The new process requires fewer people, but companies remain actively involved.
"Depending on the industry and the point in the supply chain, it can make sense," Derome says. "But only if you have sufficient supply-chain authority so that the supplier can’t overstep its bounds and alter the competitive landscape. If you have the might, [direct fulfillment] is a safe bet. If you’re sort of in the middle of the food chain, it’s kind of a risky proposition."
Tam says such problems are often surmountable. "To overcome this, Cisco has networked its supply chain by establishing links with strategic fulfillment partners," he says. "With solutions such as a private information hub, an integrated network test, and a manufacturing portal, Cisco has the same information it would have if it were manufacturing the products itself. As a result, Cisco maintains centralized control but outsources for decentralized execution."
Use Video to Communicate
Video on demand isn’t just a trendy new technology, it’s a powerful communications tool. Customer presentations and Web-based e-learning are two areas where video on demand can provide natural cost advantages. One of the key advantages is that people can get the information they need when and where they want it. A company can do a live broadcast of a presentation, then post it online for people to view later.
Whether it’s new employee orientation or sales training for a new product, bringing people together online costs less than having them travel for a live meeting. And if employees can’t attend the live online session, they can get the archived video presentation to review at their convenience.
"We have 3,000 years of history of people learning in classrooms and a lot of built-in assumptions," says Chris Reed, vice president of corporate strategy for Centra Software Inc., an e-learning and collaboration solutions provider. "The online learning experience can be more intense and more effective."
A physician-only M.B.A. program at the University of Tennessee compresses the normal two-year cycle into a single year, with one four-week session on campus and the rest done online. The university found that students who used the three-way combination—traditional classrooms, virtual classrooms, and self-paced e-learning—demonstrated almost 10% higher knowledge retention than the traditional classroom alone.
"It may be possible for corporations to cut the expense of many training initiatives by 50% or more and actually improve the quality and timeliness of learning activities," the university study concluded.
Time compression is another issue. E-learning can deliver up to a 50% quicker learning experience with the same results, according to Reed. "You can translate that to salary cost savings," he says, as well as to better productivity.
Overall, the return on investment (ROI) is easy to quantify: training time is shorter, employees retain more knowledge, travel is reduced, and when new product rollout times are shorter, employees are ready more quickly to sell and support new products. Online training will never entirely replace face-to-face meetings for some companies, but some of Centra’s customers have shifted to 100% online training.
One company was able to compress training for new hires from five days to three, with the same results. That meant the company could train two times a week instead of one. Another strategy gaining popularity is providing training for new hires at their homes, via the Web, before they actually start their jobs.
Centra analyzed Sony Corp.’s ROI and found that Sony reduced annual training costs by two-thirds; eliminated training-related travel for trainers and technicians; and distributed product updates to the network faster. And with service technicians learning to repair products more quickly, the effort enhanced customer satisfaction.
Webcasting and video on demand are becoming popular ways to communicate with investors, employees, partners, and customers. Grainger, which has been training its U.S. sales force using Web seminars, has begun using Webcasting to communicate with its internal audience, according to Turza, who says salespeople can go to a Web site and watch Microsoft PowerPoint presentations to gain an understanding of Grainger’s offerings and Web-site functionality. Viewers can scroll forward and backward through the presentation and hear audio telecasts of the presenters. In live Webcasts, they can participate by posing questions to the presenters.
Build Portals for Employees
The essential idea of a portal is to make it easier for people to access the tools and information they need to do their jobs: check news about the company, competitors, and customers; collect e-mail; collaborate on projects; submit travel expenses; communicate with the human-resources department; and so on.
"When employees spend less time looking for the information they need to do their jobs, they can spend more time doing their jobs," says Rob Perry, a senior analyst for the Yankee Group. "That’s increased productivity." Likewise, fewer people are needed to field the questions employees can now answer for themselves.
"The ROI comes from a few directions," Perry says. "There is value from better communication with your employees and from making it easier for knowledge workers to collaborate, so they can do their jobs better. And there is the transactional value. Internal transactions are the self-service kinds of tasks—doing self-service human resources work . . . . At some companies, you still pick up a phone to ask somebody. And that is expensive."
A warning: Keep it simple. "Intranets are very, very successful," says Perry. "But at some companies, the intranet is as hard to surf as the Internet was five years ago because there are so many different internal sites."
The key is personalization. "When it’s personalized, [the portal] knows who you are and can present applications to you based on that," says Perry. "Personalization is gaining a lot of traction now as companies expand. And now the portal companies are moving to the next level, which is more collaboration."
Portal company Plumtree Software translated intranet use to ROI in a recent white paper. Some examples of the findings follow:
 Ford Motor Company estimates that saving the average user only four minutes searching per week could translate to savings of up to $7 million annually for the company.
A pharmaceutical company deploying a portal to help its scientists can shorten drug-product cycle time significantly, potentially gaining millions of dollars by being first to market.
For Ketchum—a unit of Omnicom Group Inc., one of the world’s largest public-relations firms—META Group estimated the four-year net present value of its portal to be at least $12.1 million from improved cash flow and productivity.
Move Travel & Expense Online
Web-based applications can also help when it comes to making travel reservations and reporting travel and expenses. A natural progression from moving to an online travel-reservations system is negotiating better rates with preferred providers. For reservations, a Web-based process not only automates the process (removing the cost of travel agents), but it allows companies to set rules about preferred airlines, approved hotels, and cost limits.
Convincing some employees that a Web application is better than picking up the phone and having a travel agent do the work is sometimes a challenge. As part of a corporate shift to a more Web-centric culture, it’s a good idea to simply talk to employees about the advantages that self-booking travel often provides the company (reduced costs) and the individual employee (increased flexibility).
While expense reporting might not jump out as a major target for cost reduction, it’s a hidden cost that consumes far more resources than are apparent at first glance. Web-based expense reporting can reduce the paperwork, time, and energy required to process the reports, thereby improving productivity. Employees enter expense information from wherever they are when they incur the expense. Setting up the system to automatically audit reports for adherence to corporate policies allows companies to track policy exceptions, evaluate spending trends, and identify unauthorized spending. Likewise, companies can set up relationships with vendors such as American Express to establish direct payment systems to streamline billing. As a result, the average cost of processing a typical expense report collapses, and the total elapsed processing time shrinks.
March/April 2002
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