ROI questions haunt dotcoms

Venture capitalists are putting the squeeze on dotcoms - placing the more vulnerable ones close to the edge

Venture capitalists are putting the squeeze on dotcoms - placing the more vulnerable ones close to the edge

A recent E.business forum has revealed that dotcoms and blue-chips are converging on the same set of problems but from different perspectives. Opportunities for traditional firms to merge with, partner or overtake dotcoms have never been greater.

The dotcom shake-up and share price collapse which began last March has changed the landscape of e-business activity for both the "clicks" and the "bricks" communities.

Venture capitalists have become incredibly tight with their money and are pressuring the dotcom companies to generate revenue and profit. This has encouraged traditional organisations to move deeper into online business.

Both communities share the basic vision and theory. Both are now having to address the serious business issues, and are grappling with making some basic assumptions work.

Last weekend's E.business Forum conference on board the cruise liner Arcadia, brought together three broad groups: "pure play" dotcom companies; corporate marketing and corporate IT directors. All are converging on e-business from very different perspectives.

The basic tensions are there. Many dotcoms focus on the new IT while lacking a true customer focus; corporate marketeers are full of ideas, feel more comfortable now with technology, but expect their IT departments to sort out the plumbing.

IT directors, who are thinking less technology and more business, are getting increasingly uncomfortable with the service role they are being assigned, and want a bigger role in direction and strategy.

Meanwhile the opportunities to overtake, merge or partner with dotcoms have never been better for traditional companies.

Despite the general perception, many dotcoms are making a profit. According to a recent PriceWaterhouseCoopers (PWC) survey of the top 150 European Internet companies, 42% are profitable.

However, dotcoms are under intense pressure as venture capitalists typically look now for returns in the region of 50% after about 18 months. This pressure is more than likely to force consolidation and inevitably more liquidations.

In contrast, PWC partner Peter Spratt said the average rate of return demanded by traditional companies, to compensate for risk, is about 25% over three years.

Although much higher than the industry average expectation of about 11% it still puts the dotcoms firmly onto the back foot.

All groups involved in e-business are now having to face up to major issues that simply will not go away. And each is trying to exploit the others' weaknesses.

So in attempting to achieve this blend many businesses find the structures and organisation charts in well-established organisations are not geared for rapid change.

If a traditional company is to extend its existing business to the Internet from within it requires an e-business director on the main board, said Fraser Pearce, research director of Forrester Research.

Reporting to this role should be the operations, strategy, IT and marketing functions, he said.

"The challenge," said one delegate at the forum, "is to be like dotcoms - where the CEOs are accessible, where they give fast but considered decisions, and where they can effect fast implementation."

Barclays Bank decided to build its e-business squarely within the organisation. "You can't do 'e' apart from the core business," said Stuart Brocklehurst, Barclays' head of e-commerce strategy. "It's harder to do it from within, but necessary, therefore we use our own brand."

Dotcoms face a different problem - poor customer understanding. They tend to neglect qualitative research and many underestimated the cost of customer service. For example, responding to an e-mail query is five times slower than responding via a call centre.

Walter Blackwood, logistics director for leading mail order Grattan, said there are still major problems with the whole dotcom concept. "Delivering the e-commerce promise fails on delivering to the last six inches - the letterbox," he said.

Blackwood analysed the basic difficulties of delivering Internet-ordered goods to the home, the impracticalities of delivering goods to workplaces, and the limitations imposed by requiring signatures on delivery. In some cases up to 60% of orders have to be re-delivered for these reasons.

Achieving industrial-strength security is another problem area for dotcoms. Being in a hurry and under severe pressure the general level of security is low.

"Dotcom people are wide open for hackers, as their programming is not tight enough," said Sten Kalenda, security officer at Dutch firm Pink Megaplex and a member of an ethical hacking group.

But the differences between traditional businesses and dotcoms will gradually fall away, according to Brocklehurst. "In the future there will be no e-business and no dotcom companies. There will only be companies that have learned how to change."

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