Management consulting

Box 16.1 British Telecom entering new markets

Deregulation and international competition in the telecommunications industry has put increased downward pressure on prices for voice and data transmission. The search for new sources of revenue by previously state-owned telecommunications companies, such as British Telecom (BT), has created new entrants in a number of market sectors. BT, for instance, is applying some of its core competencies in managed business services, and in management consulting is using what it has learnt from “e-enabling” itself.

Managed business services

Few in IBM or Accenture would have considered BT a potential new entrant in the market for managed business services in the mid-1990s. Managing complex computer networks, high network availability, strong security and software expertise are the core competencies in this sector. This is in fact BT’s core expertise, and it has entered the market by offering Internet-based business services, such as supply chain management, customer relationship management, IT services etc. Sitting as a spider in the networked economy is a great vantage point and BT is working hard to capitalize on this position.

Consulting services

BT is a large organization with more than 100,000 employees. To meet the new challenging environment they have had to adjust their strategies, implement sweeping changes and move swiftly at the strategic level. The need to reduce costs has resulted in the goal to have 4000 of its employees working from home and a large part of the staff learning how to operate as a roaming workforce. To do this BT has used technology extensively and is now converting what it has learnt to a growing management consulting service, helping organizations harness technology and implement organizational change.

The BT.com web site provides an extensive list of case studies on home working, implementing communications technology and general business advice.

Source: www.BT.com (11 March 2001).

have the critical knowledge and skills that a new business environment requires. An example of new competition is British Telecom’s entry into the consulting and managed business services (outsourced and new services) arena (box 16.1).

The analysis of substitute products and services is more challenging in an Internet environment due to the reliance on technology and IT systems. Rapid development means that current technology may be obsolete much sooner than expected. As a consequence, good consulting advice requires excellent knowledge of technological trends both as products and as business support infrastructure.

Where the Internet certainly imposes major challenges for advisers and consultants is in analysing new services and business models. This is the known dilemma of asking potential customers and business partners about a new product or service they have never seen before. The classic anecdotal example is of a major

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consulting organization advising Ericsson in the early 1980s that mobile phones, which at that time weighed one kilogram and had a battery life of a few hours, were unlikely to be important mass-market products in the future!

Despite the difficulty of predicting the future, the traditional tools of marketing consultants – focus groups, mock-ups of products and services, scenario-building processes – continue to be useful techniques for evaluating markets for new products and services.

New business models

The response to new business models may have more scope to draw on existing experiences than the current debate would indicate. All the so-called “new” market models that have been connected with the Internet “model” have in fact their equivalent in the off-line world (see box 16.2).

What is “new” is that these models are applied in new business environments, and the global connectivity of the Internet offers very fast growth and business development in new segments. The nightmare scenario of many CEOs is that someone will enter his or her market with a different business model and change the financial dynamics of the market overnight. An example of this is offering high-value content for free on a Web site that generates revenue from another source, such as e-commerce transactions and advertising.

One of the first actions in an e-business strategy consulting assignment should be to address the question of potential new business models. The fundamental question that must be answered is which part(s) of the organization’s business environment and markets is or could be digitized, i.e. could be transferred to and stored on a computer. Let us take, as an example, retail sales of petrol. Clearly, the actual product cannot be transferred to a computer. However, the service of providing petrol has considerable information value, i.e. where the nearest petrol station is, the most convenient way to it from the current position of the car, and the current price of petrol. The mobile Internet services in development are addressing exactly these questions and therefore have the possibility of entering the value chain of petrol retailing. To ensure that the current retailers of petrol are not marginalized, with new players taking value out of the value chain, the major oil companies are investigating how this new technology is likely to affect their business and what should be their strategic response. Taking the analysis a step further, car and truck manufacturers have a prime position as the driver is likely to be in the car or truck when requiring information on the nearest petrol station. Consequently, the manufacturers are investigating what type of in-car connectivity and services they could offer, hence taking value out of the petrol retail market’s value chain.

As this example suggests, there is still a traditional value chain involved, with the various players capturing value depending on their bargaining power. The barriers to entry, building of potential switching costs, competencies required to compete, and establishing the value to the user are traditional strategy questions that need to be addressed also in the Internet-enabled business environment.

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Box 16.2 Pricing models

	1		5
(other offers/	2		6
timing/volume/etc.)
	3		7
(buyer/seller)		4

In different business models, prices are set in different ways. In the “traditional economy”, there are examples of all the methods represented in the figure. Traditional retailers generally offer a fixed price (box 1), though some also use contingent prices (e.g. “5 for the price of 4”) (box 2). House sales are typically in box 3, along with many consumer-to-consumer private sales (“offers in region of” or “offers in excess of”). As the indicative price becomes less firm and more of an invitation to haggle, pricing shades into box 4, as in the classic bazaar. Box 4 is also used for the letting of complex contracts, where pricing options may be explored around different detailed specifications, trying to establish where there is greatest scope for overall value creation. Box 5 is used for sealed purchase bids, for example, and box 6 is used in the traditional auction, where the buyer offers a price contingent on what other buyers may offer. The infamous “exploding” employment offers of consulting companies to MBA graduates (where the offered salary or bonus dropped with every day of delay in accepting the offer) would also fit in this box. Finally, box 7 is sometimes used in commercial invitations to tender or, more mundanely, in the “hopeless shopper” case (I’m looking for a present for about $30).

E-business models frequently use enhanced and speedier data management to move towards more buyer-driven and interactive pricing mechanisms. The “reverse auction”, heralded as a major Internet innovation, is simply another example of box 5 for “e-tailers” such as Priceline.com. It is only “reverse” in that the buyer specifies what is wanted as well as a price, but it has direct parallels in some traditional media such as “classified advertisements”. The impact of the general shift “down and right” is to promote more differentiated and value-based pricing. Some expect this to lead to more efficient value capture from the demand curve, others simply see it as a means of increasing buyer power. Two critical issues concern the transparency of different prices to different buyers, and the extent of justifying differences by having various versions of a product.

Source: Marcus Alexander, Ashridge Management College.

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Value-chain integration

One of the biggest sources of impact on business is the potential for value-chain integration. The Internet’s universal connectivity is opening up standardized and cost-effective global communication channels outside the corporation. The areas of high growth in e-business consulting are supply-chain integration and collaborative working, which both lead to outsourcing opportunities in new areas of the business process.

The extension of the supply chain is primarily a question of making available information on movements of products, forecasts of demand and just-in-time delivery. An example would be the seamless flow of information when a can of drink is purchased from the supermarket, via the drinks packager to the manufacturers of cans, suppliers of ingredients and transport providers. The goal is for every partner in the product flow to have the same information at the same time. The benefit is faster throughput and reduced material in the supply chain, i.e. increased asset turnover and reduced working capital requirements, but also reduction in “old” inventory and slow-moving goods. It is a complex process, involving numerous IT systems, software platforms and communications protocols. Few firms would (or should) have the expertise to design and implement such systems, hence there is ample scope for large e- consultancies to offer integration services and advice. The specific skills that are valued by clients are:

●integration of enterprise resource planning (ERP) systems;

●procurement expertise;

●contracts negotiations and service-level agreements (SLAs);

●logistics expertise;

●linking of payment systems via banks and payment providers.

A very specific application of value-chain integration is the development of online market places and exchanges. These are intermediaries in vertical or horizontal markets, which facilitate trade between buyers and sellers. The historical comparison is the market square, where local produce was sold and bartered. The logical extensions to this are markets for trading shares and financial products, such as foreign currency, government and corporate bonds, and commodities markets such as the Chicago commodities exchange, which is trading products like coffee, orange juice, and meat products.

The development of marketplaces for industrial products such as chemicals, plastic, office materials and engineering products has forced companies to learn how to interact and trade with their customers and suppliers in new and different ways. At the time of writing few organizations have the experience and knowledge required to handle the new dynamics of the online marketplace. Consulting advice on strategy is important, as is advice and implementation support when punching a channel through the internal IT system’s firewall to reach the marketplace. The potential consequences for the internal organization, either in the sales

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department or in procurement, are substantial, and change management support should form part of the implementation of new ways of running the internal business processes.

Value-chain connectivity is relatively well established in some industry sectors, such as the automotive industry, where fixed connections through dedicated electronic data interchange (EDI) links have been around since the 1970s. The difference between EDI and the Internet as a platform is that the Internet is an open architecture in contrast to EDI’s dedicated connections between two parties.

One benefit of EDI is that the two parties operate a common data standard, hence integration with their ERP systems is relatively straightforward. The HTML language used on the Internet is not well suited to integration with ERP systems, since it is a text-based description of the interface with the user and directions to a database rather than a description of the content. New languages, such as XML (extended markup language), BizTalk, etc. are required to integrate Internet-based communication with a multitude of systems and users. XML uses tagging principles to describe the type of data the information contains. In many industry sectors, such as financial services, chemicals and the semiconductor industry, discussions are taking place to define industry standards to describe commonly used descriptions and data. As a consequence, consulting advice is required for many medium-sized and small organizations to follow developments in their sectors.

Developments in mobile Internet technology are a relatively new area of connectivity between customers and organizations. With the expectation of continued growth in the use of mobile devices and investments in highbandwidth wireless network technology, companies are developing products and services that will meet a new set of needs. Again, technology is driving commercial developments.

Providing consulting advice in the mobile Internet market is challenging. It is about predicting needs and offering benefits from products and services that do not yet exist. The most challenging aspect is to understand who is going to make money from these products and services and how. It is a classic consulting assignment, using scenario-building, learning from other similar markets, and customer-testing of new concepts and ideas to predict the right products and marketing strategy.

A considerable amount of technology consulting will be required to bring together the disparate technologies connecting the Internet with content providers, mobile network operators, billing systems, handset manufacturers and end users, ultimately on a global scale.

Mergers, acquisitions and alliances

Integration of the value chain and increased information flow raise the possibility of forward and backward integration of processes and value-adding activities. An important opportunity for consulting is advising companies on the strategic implications of potential mergers and acquisitions. The acquisition

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route was very attractive until early 2000 as dot.com shares were highly valued; hence there were opportunities to acquire companies and pay with shares.

An example was AOL’s acquisition of Time/Warner in 2000. Time/Warner had a very large physical presence and traditional assets compared with AOL; on the other hand, being a dot.com, AOL had highly rated shares but was very small in terms of comparative turnover. Ultimately, value creation in mergers and acquisitions depends on successful integration of the organizations. AOL, as a fast-moving and flexible dot.com, is integrating a large and established organization encompassing many different businesses; commentators are following the process with great interest. Consulting companies that seek to get involved in this type of transaction need solid experience of both the dot.com culture and the more traditional culture of established large organizations.

Mergers and acquisitions are often driven by financial engineering benefits as much as by market rationale. Since dot.coms rarely have a large balance sheet to leverage debt, corporate activity more often involves alliances and partnerships rather than mergers and acquisitions. The speed of development and a need to shift direction quickly make alliances and partnerships suitable ways of acquiring skills, technology or customer access, rather than acquiring another organization outright. Strategic e-consulting advice is often used to assist in finding partners and for mediating in negotiations.

The potential for outsourcing

Value-chain integration, alliances and partnerships begin to raise questions about which parts of the organization are the absolute core assets and what could be outsourced. In addition, the pace of technological development and the need to move quickly make outsourcing an effective means of staying competitive (see also section 22.7).

Traditionally, outsourcing has been common for IT and this trend is likely to continue with increased use of application service provider (ASP) solutions. However, with the universal connectivity offered by the Internet, there are now few areas within any organization that have no potential for outsourcing. Examples of potential areas are:

●eProcurement: Outsourcing the complete procurement process to an intermediary, particularly procurement of non-production-related input.

●eHRM: Outsourcing of all administrative processes relating to personnel such as payroll, benefits, expenses, information, advice and online training. Early experiences suggest that significant savings can be realized.

●eR&D: Specialist organizations are available to carry out contract research and development projects. This is established practice in software development but the scope is increasing substantially in industries such as pharmaceuticals, technology and medicine.

●eFinance: Accounting and order processing are IT-heavy applications and there is a trend to outsource low-value administrative work and data processing.

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Few organizations would claim that their finance function is a core activity. One issue holding back the outsourcing of the whole function is concern about security and confidentiality; however, there is little doubt that there will be further developments in this area over the coming years.

●eSales: Contracting out of sales activities is traditionally done through agents and distributors. The pharmaceutical industry uses this approach in particular for some of its generic products. Connections via the Internet offer new possibilities to increase the scale of sales activities by combining products and services from several suppliers in a market sector or geographical area. The traditional middleman could well rebound by bundling products and selling through electronic channels.

●eProduction: The drive for scale and focus is pushing organizations to outsource production of parts and subsystems. The industry often quoted in this regard is the automotive industry, which relies heavily on submanufacturers and acts in large part as a product development and marketing company, assembling the final product in response orders from customers and dealers. The critical Internet-related aspect is to have interconnected systems and to share data and information in an efficient and cost-effective way. The large automotive procurement hub, Covisint, suggests that one of its valueadding functions is the creation of a common platform for sharing data and information on current and future products among a large number of suppliers and manufacturers. The sensitive aspect is of course the business intelligence held by Covisint, which will have detailed information on materials flow and projections for a large part of the world’s automotive industry.

Outsourcing of traditional activities on the scale indicated above is no small challenge. It requires a fundamental rethink of how organizations will be managed and led in the future. The relationships between employers, employees and partners are becoming less clear-cut and, for many organizations, this is uncharted territory.

In summary, the rapid development of the Internet is creating major changes in value chains and in the way business interacts with customers and partners. Few organizations have the experience to devise strategic responses to the developments; the role of consulting firms is to transfer learning from other organizations as well as to apply rigorous processes in challenging the existing practices and evaluating alternatives.

16.3Bricks-and-mortar and bricks-and-clicks: internal processes

A number of areas in the internal processes of organizations have opened up with the advent of the Internet. Some of the opportunities mentioned above, such as procurement and online marketplaces, are affecting the internal

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organization in fundamental ways. This reflects a trend towards outsiders having a much clearer view of an organization’s inner workings. This could be the supplier managing the inventory of strategic inward goods by having access to production planning data; or it could be customers having the possibility to book production capacity to suit their own scheduling. The following sections describe some of the trends in different functional parts of the value chain where e-business consulting is often required.

IT infrastructure

This is the obvious and traditional area of IT consulting (see Chapter 13). An important development is the application of data warehousing to make data from many sources available to the internal organization as well as to selected outside partners, suppliers, or customers. Data warehousing is one means of overcoming incompatibility between computing platforms and software packages, but it also allows cross-tabulations and assembly of differing sets of data.

One important drawback is that the data warehouse is not updated in real time, hence an understanding of the business process is critical if the system is to be of benefit. A classic example is a regional bank in Germany that was an early provider of Internet banking services. The Web site was designed and customers were logging on at an impressive rate and considered the site very good. However, after a few months customers began to complain that the system was inaccurate. It turned out that the Web site was connected to the bank’s regular back-office system, which was updated once every 24 hours during the night. This meant that, if a customer entered a transaction in the morning and went back to the site in the afternoon, the receiving accounts would not have been updated to include the transaction. It sounds simple, but the team had not thought that customers would use the system so often, hence a 24-hour processing frequency was deemed sufficient. Predicting customer behaviour is one of the core skills of the e-business consultant.

Finance and administration

These are traditionally IT-heavy functions within organizations. However, the emergence of the Internet has put new demands on this part of the organization. Two of these are:

●remote access to financial information via the Internet by executives and staff who are away from the office;

●the opportunity to outsource the finance system function to an ASP.

In both cases, one of the critical aspects is security of access. Many companies are reluctant to provide access to business-critical systems, such as accounting information, because of the risk of hackers destroying data or

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unwelcome visitors having access. Both large consultancies and skilled individuals can charge high fees for highly specialized advice in this complex technical environment. The general question of outsourcing the accounting function was covered in the previous section.

Sales force automation

Software-based sales management tools began to be developed in the mid1990s and are now an established market. Consulting activity in this area is around management of sales resources and implementation of effective systems, as well as on the IT aspects. The field is increasingly complex because of the proliferation of devices used, from laptop personal computers and palmtop computers to personal digital assistants (PDAs) and mobile phones. It is likely to become even more difficult to keep pace with the introduction of high-bandwidth devices from 2003 when the third-generation mobile networks become available. The sales force of the future is likely to demand connections to the organizations’ ERP systems with real-time information on prices, stock availability and delivery.

A major challenge for sales management is the emergence of online trading exchanges. This new type of intermediary is changing the relationship with customers. It requires new skills from the sales organization and challenges the process and added value offered by a sales force. It can be predicted that sales organizations in many market sectors will move towards an advisory and consultative selling role, with automated systems dealing with transactions and taking orders online directly from the customers’ ERP systems. The biggest risk is that the organization will lose its close relationship with and understanding of its customers in a drive to reduce costs and automate processes, and this must be guarded against.

Customer relationship management

A subject closely related to sales force automation is customer relationship management. A recent survey showed that managers thought the future development of the Internet would benefit their organizations most in improved customer relationship management.2 Briefly, this is about technology linking together all internal and some external information about a customer and seamlessly delivering it to the customer interface, irrespective of the delivery channel, i.e. via call centre, Web site, field sales, etc. This is a complex process that requires good understanding of computing and software platforms, database design and business processes.

The trend is to offer multichannel delivery to customers. The customer may interface with the organization several times and often via different channels. The challenge is to make sure that the same data are available and to manage the cost, since the cost of delivery can vary in a ratio of 100:1 between a field visit and interaction via a Web site.

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