TO e OR NOT TO e
In this first installment of a two-part series on electronic commerce, CFO Asia looks at how the Internet is transforming back-office functions.
By Tom Leander

The room was packed. Sunny Lee, chief information officer at Hong Kong-based Town Gas, walked up to the podium to tell his contractors - workers who install gas appliances - about the wondrous benefits that e-business would bring them. Lee had spent months putting together the new technology program - all part of a Town Gas reengineering drive which CIO Lee is in charge of. During the months before, the utility's top tech executive had gotten everyone in the company's management - from the CEO down to the most junior assistant controller - to sign on to his plan to E the company. Now it was time for the mop up: to get the guys "with tattoos on their arms" to back the plan.

Lee has never worn a tattoo. He studied in the US and spent years in operations at Bank of America before coming to Town Gas in 1996. At Town Gas, he not only oversees the company's IT department, but also runs its Total Quality Management program and continuous improvement initiatives. He is, in short, a polished, well-educated corporate manager.

The polished corporate manager looked out at the room, smoothed out his notes, and began coolly trumpeting the virtues of e-business. The room exploded. "They almost threw chairs at me," Lee recalls. "They yelled things back like "Why change the way things are now? What benefit would there be for us?'" Taken aback, Lee pressed on. He explained that he was going to give the contractors PCs for free, give them real training, push them into the modern world. He was going to catapult them ahead of other Asian companies. He noted that e-business would allow them to reduce the cycle time of order-to-installation of gas appliances. Contractors, he told them, would have more responsibility, more ability to control their own jobs and the cash flow of their businesses. "But they shouted 'No!'" Lee remembers. "To them, it simply meant more work."

Lee finally got control of the meeting, and remarkably, managed to get the contractors on board. But he retreated a few hours later, wings clipped. "I underestimated the amount of teaching that I would have to do," he says, adding: "Everyone talks about this revolution in e-commerce in the most technical terms. But it's the human element - how e-business affects the economics of the company and people's lives and jobs - that makes the difference."

The Most Curious Animal

Make no mistake, e-business represents a tremendous economic force of change. And like all economic forces of change, it affects a simple but fundamental aspect of business life.

E-commerce eradicates the middle. It erases the need for the broker, the wholesaler, the exporter, the importer - all businesses whose essential service is to connect demand to supply. "The Internet is a curious animal," says Alberto de Larrazabal, the chief financial officer at San Miguel, the Philippine food and beverage company. "I wouldn't be surprised that by the time it's through with us, all of our jobs will be very different."

Indeed, if e-business changes the economics of commerce, it also changes job descriptions. It shortens cycle times, so the contractor becomes a salesman. It allows customers to tap into the Web to gauge availability and the status of orders. Therefore, the salesman needs to become a customer relationship manager. "The effect of e-business is much greater speed and availability, that much is obvious," says Soohaeng Oh, director of e-business and Internet operations for Intel (Asia Pacific) "But the subtle change is that it tends to push everyone's job to a higher level."

And the CFO's job? In this two part series, CFO Asia explores how e-business is changing the finance function - both inside and outside the company walls. Already, CFOs in the region are reporting that digital commerce is substantially affecting their relationships with suppliers, customers and staff. E-commerce is also presenting exciting new business opportunities for bold managers - and prickly new responsibilities for finance managers charged with assessing the risk of those opportunities.

How will these dramatic changes play out? Some observers predict there will eventually be a blurring of the lines at corporations, particularly between the finance function and IT. Some day, they say, the company CFO and CIO will be one and the same.

The Middle Vanishes

The Internet hands information to buyers that once belonged exclusively to middlemen, effectively turning buyers into brokers. This, of course, doesn't work in all businesses. It will probably never come to pass, for instance, that managers at a shipping company will no longer need a middleman to turn to when they want to add a supertanker to the fleet. There's still something to be said, after all, for kicking tires.

But in dozens of businesses, the buyer's relationship with the middleman, once all-important, is now changing. At Town Gas, Lee says the finance staff used to spend a lot of time on the phone to various banks, searching out the highest yielding money market instruments for the company's excess cash. But Lee now requires his banks to post rates daily on the Town Gas extranet. "That's what the Internet is powerful for," says Lee. "We give them a password and we give them a Web-site, and essentially, everyday they bid for the placement of our money."

In fact, the industry that is threatened the most by the Internet is banking. With companies like Microsoft, Singapore Telecommunications and Cable & Wireless HKT beginning to offer services such as e-procurement, it's no wonder that bankers in Asia are starting to lose sleep. Money has become electronic. When anyone transfers enough of it, they also have it on had to lend. By any definition, that's a financial service.

Savvy bankers have been preparing for this contingency for a long time, however. "E-commerce is a natural extension of cash management - so it's not too far off from what we have been doing as our natural business," notes Francis Kong, head of cash management in Asia/Pacific for ABN-Amro. "But we're also seeing new players now going into the Internet, and we're facing new modes of competition." Kong believes settlement will always belong to banks, but admits that other aspects of cash management can be adopted by non-bank companies.

Those non-bank competitors will be far less relaxed and clubby than some financial institutions. Explains Nicolas Franck, director of CFO Solutions, a Singapore-based treasury and finance consultancy: "GE and Microsoft have no cartel to protect them. They have a very good understanding of what they have to do to keep a satisfied customer base."

E-Helium?

If all this seems like Internet entrepreneurs have declared open season on poaching other people's business, there's a reason for it. According to market research firm International Data Corporation, the number of Internet users in Asia will nearly quintuple to 95.2 million in 2004. Those 95 million or so users will spend US$88 billion a year on electronic commerce. That's a staggering increase from the US$2.2 billion e-consumers spent in Asia in 1999.

What's more, e-commerce enables brash upstarts to wrest market share away from more established players. Hong Kong's adM@rt, for example, has leapt into the marketing, selling and delivery of consumer goods by opening a commercial Web-site - a relatively inexpensive proposition. Conversely, companies throwing off the yoke of state ownership have turned to browser-based solutions to smooth their entry into the competitive marketplace. Managers at Thailand's PTT Exploration and Production have implemented an e-procurement system to better control the amount of chemicals and equipment the company has on hand at a given time.

This is not to say that the coming of e-commerce signals the end for gigantic, multi-billion dollar corporations. Far from it. The Internet allows such companies to be more centralized in managing their operations - while expanding the scope of those operations. That means that global competition is becoming intensely local in a new and more threatening way. One example: Intel, a manufacturer of microprocessors, uses its servers in the US to connect to the nearly 100 designated buyers of its chips around the world. But the information these companies get from Intel's e-business sites is very specific to the local market. A corporate customer in Taiwan can, via password, log on to Intel's site to check on chip supply. That, in turn, helps the company in Taiwan calibrate supply and production operations.

If there seems to be a trend here, you're right. E-commerce is coming fast, and the question is not so much whether to E or Not to E, but when and how. "Asian CFOs and their companies will have to decide whether they want to control the game or simply follow," says Francis Kong of ABN-Amro. "If you want to lead in the market," he adds, "you will have the advantage of being first. You'll be able to expand your reach. But if you follow, you may avoid the expensive mistakes of those in the lead."

Dharma and Web

Put another way, Asian CFOs will have to decide how speedily they want to move up Rex Clementson's path to digital enlightment.

Clementson, a partner in the e-business services group at consultancy PricewaterhouseCoopers, sees a four-fold path to e-commerce - a kind of Dharma of E. Organizations, Clementson argues, evolve through four stages of e-volution. The first stage Clementson calls "presence." It describes a rudimentary electronic presence in e-business, usually a Web-site, which presents information about the company and its products. The corresponding stage in the business-to-business side is typically the use of electronic channels such as EDI to connect with suppliers and key partners.

With integration - stage two - a closer interaction between customers and suppliers emerges. Exchange of critical information brings greater understanding and value for all players. In the third stage, an actual organizational transformation begins. E-business allows corporate managers to more easily unbundle operations, retaining only those critical to market position. The final stage is convergence. A converged company achieves true integration with other organizations both within and outside their own industries. Over time, Clementson predicts, these converged companies will produce cross-industry supply chains that will come together to create networked organizations and markets.

Right now, most companies in Asia are just at the first stage. That's no surprise. Most companies in the world are. Pillsbury, for example, a member of the Diageo Group of corporations that includes such global brands as beverage concern Guinness, has no e-procurement structure in Asia. Says a company manager: "We have trouble matching financials from one office to the next, particularly in China." The source notes that one large US food and beverage company only decentralized its purchasing in Asia last year. According to the source, the company has no local e-procurement system. "I think you'll find," says the manager, "e-commerce hasn't made much of an inroad at consumer goods companies, like food and beverage companies."

Not necessarily. San Miguel in the Philippines is already at Clementson's integration stage. Alberto de Larrazabal, who was appointed CFO last year, is currently deciding just how much of the company's development should involve e-business. "Where e-business will be most effective for us now is collections," he says, meaning that retailers that buy San Mig's beer have no excuse to dawdle if they can pay on the Web. E-commerce also allows de Larrazabal's accountants to keep tighter tabs on who's paying and who's not.

Controller Ferdinand K. Constantino also notes that he is busy working with San Miguel's banks testing a pilot cash management system. Eventually, the system will link procurement between the company's operations in the Philippines and Hong Kong. "We're very interested in taking the excess cost out of the company's structure," says De Larrazabal.

Despite the obvious benefits, San Miguel is moving up the e-commerce ladder one rung at a time. The company buys malt for its beer from Western Europe and Australia, then ships it in bulk to storehouses in local markets where the company produces its lager and pilsner. San Miguel's managers keep tabs on supply every day by simply picking up the telephone. To de Larrazabal, going slow is not necessarily a liability. "There's no point in doing something you don't completely understand," he argues.

Throw Money, Not Chairs

For his part, Town Gas's Lee knows exactly what e-business can do for his company. Lee casts the introduction of e-commerce at the utility as part of a larger rengineering plan that will dramatically alter the way the company does business. "You really can't separate e-business from our push for continuous improvement and total quality management," he explains, "because it's so central to our program of increasing our position as a customer service organization."

Indeed, it didn't take long for Lee's chair-wielding contractors to catch on to the advantages of the new system. By redefining the job, Lee effectively transformed contractors into surveyors and on-site sales representatives. That, in turn, gave the contractors an opportunity to earn a commission on additional sales. Now, Town Gas's contractors are not only solidly behind the program - they actually keep a stockpile of appliances in their trucks so, if a sale is requested, they can deliver the goods immediately.

The result? It used to take seven days for Town Gas to respond to a customer request for installation. But Lee's new Web-based system has knocked that cycle time down to two days. "By simplifying the process we deliver gas earlier," says Lee. "And if we're in one day earlier, then we've sold one day's more supply of gas."

Lee has introduced e-business into other crucial operations of the utility. He uses the company's extranet for e-tendering, or putting out a request for purchase and inviting bids from suppliers - a practice that is commonplace in the US but still relatively new in Asia. And since last year, Lee has been converting the company's SAP R/3 enterprise-wide resource planning (ERP) system to interface with the Web. As a pilot program, he set up a procurement link with the company's main supplier of appliances, Renai. The Web-enabled R/3 system automatically generates data that is available to Renai. Thus, the ordering process doesn't require any intervention from a middleman at Town Gas. Says Lee: "Over the Internet, we check the shipment status of what we ordered. By doing that, we are able to expand the warehouse and include the warehouse into our planning." Since all the information is digital, it can be captured at any time, greatly increasing the utility's ability to manage the cost of its supply chain.

And how do the utility's suppliers react to being shoved into the brave new world of digital commerce? About the same way Town Gas's contractors first responded. "They can be reluctant, but they know they don't have a choice," Lee points out. "It's the ISO 9000 of a generation ago. You'd say to suppliers, ÔIf you don't have it, we won't buy from you.' Now we say, ÔIf you don't do e-business, we won't buy from you.'"

Revolution? What Revolution?

Not surprisingly, the few corporations in the world that are moving closer to Clementson's convergence stage are high-tech companies. Asia is no exception. Taiwan Semiconductor, the chip maker, offers three different Web-sites for its customers. The most sophisticated, TSMC Online, allows customers to actually go onto the Web-site (after a security check) and "get hold of the merchandise," notes CFO Harvey Chang. At any point in the manufacturing cycle, a buyer can find out the status of an order. "They can find out which step we've arrived at," Chang says. "They also have direct access to our technical documents." This represents a stage on the road to convergence, in which companies and their customers and suppliers become so intertwined that the actual business relationships get altered. "We now have the capability for our engineers and our customer's engineers to work simultaneously on the same Web-site," says Chang. "It solves problems with greater speed."

Speed is the key word. E-commerce not only speeds up manufacturing processes, it also sparks sudden - and dramatic - changes in business relationships. Mimi Ho, enterprise marketing manager for Microsoft Asia, directs a team that sells software that supports all aspects of e-business throughout a company. But Ho says that while the decision to purchase tends to ride with the CFO, many finance directors are only beginning to fully grasp the implications of e-commerce for their businesses. Ominously, CFOs stand at the nexus of the e-revolution - a revolution that many do not fully comprehend.

So where does a CFO begin? Ask Bill Kurtz, the CFO of Scient Corporation, the California-based technology company that sells e-business systems and has just boosted its operations in Asia. Kurtz has seen the introduction of e-business from the point of view of both finance and provider. In his previous job, in the finance department of AT&T, he says he discovered a lifetime supply of costs to cut. "I cut US$5 billion out of the cost stream in two years, and I knew that was not the end of the line," he notes. "But I also saw the power of growing the top line and how that would sustain other costs."

His advice for CFOs runs counter to the prevailing notion that companies should start with back-office e-applications. Instead, Kurtz believes CFOs should start with front-office e-applications, then expand out. Once a company establishes e-business at the front end, he says, it can then begin to bring change throughout the entire value chain. "Attacking the middle of the value chain - on a cost basis? That's not the first place to show the power of e-business," he argues. "If you haven't equipped the company to grow its top line, then at the end of the day, the company can't sustain itself."

At the end of the day, growing the top line is what e-business is all about. Just ask Sunny Lee's contractors.

(In part two of this series, CFO Asia will show how Asian companies are porting the front end of the value chain to the Web, what e-business delivers in terms of cost savings, and how it is changing the relationship between supplier and customer.)

Tom Leander is a contributing editor at CFO Asia.