COMMONWEALTH OF AUSTRALIA

Copyright Regulations 1969

WARNING

This material has been reproduced and communicated to you by or on behalf of

Deakin University pursuant to Part VB of the Copyright Act 1968 (the Act).

The material in this communication may be subject to copyright under the Act. Any further
reproduction or communication of this material by you may be the subject of copyright
protection under the Act.
Do not remove this notice

Course of Study:
(MIS712) Ebusiness Strategies

Title of work:
Strategies for e-business: creating value through electronic and mobile
commerce : concept and cases, 3rd (2014)

Section:
Case study 4 - American well: the doctor will e-see you now pp. 402--423

Author/editor of work:
T Jelassi, A Enders, FJ Martinez-Lopez

Author of section:
T Jelassi, A Enders, FJ Martinez-Lopez

Name of Publisher:
Pearson
 MULTIPLE READINGS
Source: Jelassi, T, Enders, A & Martinez-Lopez, FJ 2014 Strategies for e-
business: creating value through electronic and mobile commerce:
CONCEPTS AND CASES, Pearson, United Kingdom.

Due to copyright compliance issues it is necessary to combine these readings into one
electronic file.

First Reading:
Case study 2
From e-banking to e-business at Nordea (Scandinavia): the worlds biggest clicks-
and-mortar bank
pp. 373-388
Second Reading:
Case study 4
American well: the doctor will e-see you now
pp. 403-423

Third reading:
Case study 15
Spreadshirt: mass-customization on the internet
pp. 577-596

Fourth reading:
Case study 19
Novartis SMS for life (A): a public-private collaboration to prevent stock-outs of
life-saving malaria drugs in Africa
pp. 639-652
From e-banking to e-business at Nordea {Scandinavia)
The world 's biggest clicks-and-mortar bank
Nordea company background
Our philosophy is both high tech and high touch, not
either or.
(Bo Harald, Head of Electronic Banking, Nordea) 1
Customers entering Nordea's main branch in Helsinld
at lunchtime on a busy weekday encounter something
very different from what is typically seen at banks in
other capital cities. Those long lines in front of the coun-
ter, so common at its competitors, have disappeared -
even during peak hours.
During the past two decades, Bo Harald, Nordea's
Head of Electronic Banking, has steadily and patiently
moved the bank into the electronic age. As Business
Week pointed out: 'Forget flash, fanfare and giant
ambitions. This small Scandinavian outfit [Nordea]
has quietly built the world's most successful Internet
bank.'2 Now that e-banking has become a reality at
Nordea, the next big challenge for Harald is to move
the bank into e-business:
We are moving from e-banking to e-business. We are not
moving into market places as such. What we are doing is
taking our e-banking services and bringing them to the
e-business value chain. We are an enab ler for e-business. 3
This case study was written by Albrecht Enders, Research Fell ow at INSEAD (Fontainebleau), under the supervision of Tawfik Jelass i,
Affil iate Professor ofTechnology Management at INSEAD, and Charles Waldman, Senior Affil iate Professor of Marketing at INSEAD. It is
intended to be used as the basis for class discussion rather than to illustrate effective or ineffective hand ling of a management situation .
This case study was made possible by the cooperation of Bo Harald, Head of Electronic Banking at Nordea.
Copyrigh t fl;) 2004 IN SEAD, Fontainebl eau, France.
Company history
Nordea Bank is the product of several mergers
between banks from four Scandinavian countries.
Domestic mergers in Finland accelerated after a sus-
tained economic crisis in the early 1990s caused by
the collapse of the Soviet Union and the downturn
of the global economy. The crisis strained Finland's
timber-based economy and forced banks to cut costs.
The mergers took place over several years (see
Exhibit 1). In 1997, the Swedish Nordbanken and the
Finnish Merita merged to form Merita Nordbanken.
In 1999, the Danish Unidanmark acquired TRYG
and, later, Vesta. In 2000, Unidanmark and Merita
Nordbanken merged to form Nordic Baltic Holding,
which became Nordea after merging in 2000 with the
Norwegian Christiania Bank Og Kreditkasse.
1 Nordea company presentation at Caisse d'Epargne Group,
13 June 2003.
2 'The dynamo of e-Banking', Business Week online,
16 April 2001.
3 Unless stated otherwise, quotations from Bo Harald were
gathered during company interviews made in Helsinki in
September 2003.
373
Part 4 Case studies

Exhibit 1 The creation process of Nordea through mergers of Scandinavian banks

1998 1999 2000 2001

Sweden Nord ban ken
JMeritaNordbanken
Nordic Baltic Holding
PostGirot

I
Finland Merita
1
Denmark Unidanmark } - Urn.d anmark
TRYG J
J Nordea

Vesta
Norway Christiania Bank
Og Kreditkasse

Source: Nordea Bank.

On completion of the merger process at the end
of 2002, the market capitalisation of Nordea reached
12.6 billion, making it the fifth largest company in
the Nordic region and the fifteenth largest bank in
Europe. Today, it is the largest financial group in the
Nordic region with approximately 262 billion in total
assets. Its market share in the Nordic banking markets
ranges from 40% in Finland, 25% in Denmark, 20%
in Sweden, to 15% in Norway. In the life insurance
market, Nordea has a market share of 35% in Finland,
10% in Denmark, 9% in Norway and 6% in Sweden.
Retail banking represents the most important busi-
ness area, constituting 74% of Nordea's income in
Exhibit 2 Evolution of Nordea customers
and e-banking
12
,..._
r 10
2002. Corporate and institutional banking accounted
for 19%, asset management for 4%, investment bank-
ing for 2%, and group treasury for 1%.
At the end of 2002, Nordea had 10.6 million private
customers, which the bank considers to be its main
asset. Some 45% of the total population in the Nordic
countries has either a main or secondary account
with Nordea. At least 3.2 million customers are active
e-banking customers (see Exhibit 2). In addition to its
retail business, the bank also serves 950,000 corpo-
rate customers. Nordea employs 35,000 people and
has 1260 branches throughout the Nordic and Baltic
region (see Exhibit 3).
To outline the bank's purpose and goals, Nordea
has formulated the 'Nordic Idea' and the 'Nordea
Vision'. Its Nordic Idea states that:
We share and exchange Nordic ideas.
(.0
0 We are Nordic in operations while personal and local
in delivering services. We think Nordic and act locally.

8
co
c.O
cO
Our market is of a size that makes it worthwhile to
c develop joint concepts, products and services. 4
~ 6
~ Nordea's Vision for the future is built upon three main
4
"": pillars:
q
2
We will be valued as the leading financial services
0
u..... Ol
z0al Ol
.-
co ~
co
al 0
.c C\J
0 ~o
Ill
(.)
0
~
ea
- 0
C!J C\J
Ct)
oo C\J

al 0
group in the Nordic and Baltic financial market
with a substantial growth potential.
c: + 1ii
Q) C\J
:
..... :::i 0 ~
Q) a.. 0 We will be at the top of the league or show superior
~ +
+ z
profitable growth in every market and product area
D Personal and corporate customers in which we choose to compete.
D e-Banking customers
Source: Nordea Bank. 4 Taken from Nordea company website.

374
 Case study 2 Fro m e-banki ng to e-business at Nordea (Scand inavia)

Exhibit 3 Nordea's European branch network

Branch or subsidiary
e Associate bank

_..//.>

Moskva

:__..... ..
Berlin \ Radom ...

.. -...........
' . Fra~.~f~-~i"': .. >. . . / :
Luxemb~rg ,-::... :....."L:_,.......... ,.~~,- ............,_-_ ':
..
.. J - ~ : ,

Source: Nordea Bank.

We will have the leading multi-channel distribu- and white compared to the co lor Internet, but it was a start
tion with a top world ranking in e-based financial and it gave us the experience.7
services and solutions.5 Starting out early also helped to keep costs down.
Harald says:
1
Nordea s approach to e-banking e-Banking is not expensive if you start early and you bui ld it
up gradua lly.. . .. However, it can be very expensive if you
Bo Harald has been the main architect of Nordea's wake up in the middle when things are already happening,
approach to e-banking. He joined the Union Bank of because then you need to ask expensive con sultants for
Finland in 1975 after studying law and economics, and advice and you end up buying al l the expensive bells and
opened the bank's first foreign office in Luxemburg in whistles to outsh ine your competitors.

1977 and in Asia in 1980. His job assignments pushed With the advent of the Internet, Bo Harald became
him to use computers to carry out banking transactions: Head of Internet Services at Merita Bank with the
While away from home, I started using the computer to au- explicit mission to put as much business as possible on
thorize payments. The beginn ing of PC banking in 1984 was the Web in order to reduce costs and free up branch
a blessing for me. It became so much easier to do things employees to focus on selling complex, higher-margin
from a distance. 6 financial products.
Union Bank introduced electronic payment systems
and started to phase out cheques in 1982. 5 Taken from Nordea company website.
6 'Online extra: Q& A with Nordea's Bo Harald', Business
I think the secret of our success was to start early. We started Week online, 16 April 2001.
back in 1982 with te lephone voice commands. By 1984, we 7 'Online extra: Q& A with Nordea's Bo Harald', Business
added PC banking w ith a dial-up modem . It was like black Week online, 16 April 2001.

375
Part 4 Case studies
Nordea's e-banking strategy evolved through dif-
ferent stages. The first was the creation of an 'e-habit'
among its customers. To achieve this it was crucial
to involve the 35,000 branch staff who enjoyed the
trust of customers and were in frequent face-to-face
contact with them. In addition, the bank strived to
keep e-banking simple to understand and use in
order to create a higher level of customer satisfac-
tion. The underlying principle was that the bank's
website should be designed in a way that would be
easy even for 65-year-old customers to understand.
Harald explains:
I met the CEO of an important corporate customer. He had
said before that he would never use a PC and that he would
never retire. Now, at the age of 78, he had decided to retire.
Then he came to me and said: 'Now that I am retired, I don't
have my secretary doing my banking transactions anymore,
so I have to do it myself. And I started using your Solo serv-
ice [the Nordea online banking system] and it works ex-
tremely well.' Now he is really fond of our basic e-banking
service. He is even talking about it to the people of his own
age group. They tested it [Solo] themselves, and they also
like it. That's how it works: first, our customers become be-
lievers [in e-banking] and then they become preachers.
The goal of the second stage was to interconnect
customers by integrating the different banking
channels: e-banking, mobile e-banking (or m-banking),
branch-based banking, contact centre and providing
different types of e-services such as e-payment,
e-billing, e-signature, e-ID, e-salary and e-invoicing.
All the Internet services are concentrated in Nordea's
Internet bank, 'Solo', which provides the following
banking services: account management, transfers
between own accounts, domestic and foreign invoice
payments, equity (domestic and foreign), mutual funds
and bond investments, electronically signed credit
facilities, as well as life and general insurance.
The goal of the third stage is to personalize fur-
ther the e-banking services and customise offerings
by tapping into the value of data-mines. But for Bo
Harald, when developing new products and services
at Nordea: 'We avoid asking customers directly. We
would rather use our colleagues and their experience
in the branches.' 8
Getting top-management support for e-banking
has not always been easy, Harald acknowledges:
Either you have a CEO who supports e-banking right from
the beginning and has the staying power to see it through,
or he lets you take care of it yourself. I can't say that our
CEOs early on were particularly excited about it. If you have
376
someone on a high enough level who pushes e-business,
then the CEO does not have to do it Actually, I am a little bit
afraid if CEOs become too obsessed with something. They
have such a big voice that it might be overdoing it. It must
be planted somewhere in the bank, and I have been lucky
to have that role at Nordea. I would love to have had more
support in the past, though. We would have taken off much
earlier!
While Nordea and other Scandinavian banks were devel-
oping their e-banking know-how, their e-customers
simultaneously built up other assets important for the
success of e-banking. These included 'e-trust' (in the
security and reliability of electronic banking channels)
and 'e-habit' (the routine use of the Internet for bank
transactions).
Sustaining Nordea's Internet lead:
from e-banking to e-business
The e-trust and e-habit have prompted Nordea to
leverage the competencies built up for its e-banking
services to also provide e-business solutions. In fact,
Harald believes that e-banking alone is no longer a way
for a bank to differentiate itself from its competitors:
e-Banking services are kind of passe. Every bank offers
them. The really important thing is launching e-banking
services for e-business. It's a huge market! Banks are get-
ting their acts together but very slowly. So I am worried
that banks are losing their opportunity to earn substantial
income from e-business.
Nordea started to move into e-business by leverag-
ing the capabilities it had built up for e-banking. Bo
Harald explains:
The underlying principle is that we try to reuse technologies
that we already have. For instance, we have file transfers for
accounts, so why not have file transfer for bills as well?
The main e-business services that Nordea currently
offers to its private and corporate customers include
e-identification, e-signature, e-billing, e-salary and
e-payment.
e-ldentification
Through Nordea's e-identification services, Nordea
customers can identify themselves on the websites
of other participating companies and governmen-
tal agencies. For the latter, the Finnish Ministry of
8 'Learn from the largest Internet bank of the world',
accessed atwww.tietoenator.lv
 Case study 2 From e-banking toe-business at Nordea (Scandinavia)

Finance has officially stated that if customers need
reliable identification, they can and should use the
bank's identification standards. For example, consider
the case of citizens who want to access the state pen-
sion system to find out the balance of their pension
in order to decide how much to save for retirement.
Initially, they access the state pension system's web-
site with links to all major banks in Finland that pro-
vide e-identification services. They then choose their
bank, access the respective website and identify them-
selves with their one-time password. Upon registering
there, they can switch to other services, including the
state pension service, while staying within the identi-
fied area. 'This state pension site is accessed 2000
times a day', says Bo Harald.
Our e-identification service is so convincing that the Finnish
post office has stopped its own identification service. They
use banks because it's very expensive to have a reliable
identification service only for the post office. Why should
they do it themselves?
e-Signature
The e-signature service came about 'by accident'.
When Bo Harald told executives from Sonera, the
largest telecom operator in Finland, that customers
could get a loan online, they said: 'Look, if you can
sign up for loans through your system, you should
also be able to sign a phone subscription contract.'
Within a few weeks, Nordea reached an agreement
with Sonera to send all interested customers an
online phone contract through a link to Nordea's
Solo Internet bank website where they could identify
themselves and then sign the contract. This system
was later extended to other businesses that wanted to
provide e-signatures for their contracts.
e-Billing
Through Nordea's e-billing services, companies can
send their invoices electronically to the bank, which
then forwards them to their customers who have
e-banking agreements, while those customers without
e-banking accounts automatically receive a printed
invoice via the mail (see Exhibit 4). Customers who
get their invoice through their e-bank connection are
asked: 'Do you want to pay this bill?'; they approve
the payment with a mouse-click and the bill is paid.
This service was first used in 1998 by Finland's main

Exhibit 4 Nordea switchboard for invoice processing

Other domestic banks I Other domestic banks

Other foreign banks Other foreign banks

Other service providers Other service providers

Large Invoice circulation:

corporate acceptance
Large
Nordea reconciliation
corporate
switch book-keeping
Service
payment initiation
bureaux 1-----==---~
SME ,' '' SME
customers Invoices ' customers
'
\~
", -, ''
@Template Salaries ''
Public sector ~
'"1~,
'
''
Entrepreneurs Archive

Source: Nordea Bank.

377
Part 4 Case studies
telephone companies to send invoices to customers
via Internet. Bo Harald comments:
In Europe, there is a cost of $50 billion every year for
paper invoices. Who pays for that? In the end, it is always
the customer. We can eliminate that when we go to elec-
tronic invoicing. In Sweden, we are sending out invoice files
to a Nordea switch, which are then distributed to private
and large corporate customers [e.g. a telecom company
that sends invoices to its customers]. In the future, you will
see it with other banks as well. What's fantastic about this is
that if you are an entrepreneur you can pay your bills online
and you can also send out your invoices easily and quickly.
The party that is sending the bills doesn't have to worry. Isn't
that the obvious way? We are already sending these bills
to other banks in Finland, Sweden, soon to other banks in
Denmark and Norway, and later to the rest of Europe.
e-Salary
Through the e-salary function, companies can send
income statements straight to the e-bank of their
employees, thereby eliminating the need for printed
salary statements sent via mail.
If you have enough staff, say 10,000 employees, it makes
sense for the employer to send out e-salaries instead of pa-
per salaries. That's where getting to a critical size really starts
to matter.
e-Payment
Thee-payment function is an adaptation of the invoic-
ing function, which online merchants on the Solo
platform can use for settling payments. It allows cus-
tomers to go to the website of any online store in the
Solo marketplace, place an order and click on a link
to Nordea's e-payment system where they request an
electronic invoice. After approving the payment with a
mouse click, the amount is instantly transferred to the
seller's account. This method has a twofold benefit:
the merchant does not need to send out paper invoices
or to worry whether the buyer pays. To ensure that
there is no fraud on the merchant's side, Nordea con-
ducts a reliability check on all 2000 merchants who
sell goods in the Solo e-marketplace. Says Bo Harald:
For corporate customers, the value of the Solo e-market-
place grows exponentially with the increase in the number
of retail customers ... We have achieved a critical mass
among our retail customers so we now have people who
want to buy all kinds of things - from CDs and stereo systems
to kitchen appliances and bicycles. That's what we need for
the e-marketplace. As part of this move into e-buslness,
we see the evolution of value chains in which the banks
are supplying essential parts. In the future, this is the most
378
important reason for going into e-banking because each
and every company and governmental agency is increas-
ingly moving to digital value chains and the bank has a big
role to play there for customer identification, direct payment
in real time, invoicing, e-salary, e-pension and e-signature.
Banking channels at Nordea
After introducing online banking in 1984, Nordea
continued to introduce new customer interfaces
such as Internet banking, 1V banking, WAP-enabled9
mobile phones and digital TV (see Exhibit 5).
According to Bo Harald:
When adding channels, a bank's main goal should be to add
value ... But it is also crucial that all channels and services
have the same look and feel so as to offer customers a con-
sistent user experience. The key is to have one core to our
electronic bank and then to keep adding doors to it.
Kaisa Juhanni, a Nordea customer from Finland, con-
siders Nordea's reliable multichannel services to be a
major asset of the bank:
I like the quick and instant access without having to queue
up at a branch. I also like the flexibility of being able to do
my banking any time and any place, be it from home, the
office or through the mobile phone. The Solo system is
also very reliable. The system has probably been down just
once during the past six and a half years. Finally, Nordea
has also a very large installed base of users in Finland
which allows me to transfer money to them without any
delays.
ATMs and pay terminals
Automatic teller machines (ATMs) and pay terminals
still play an important role in cash withdrawal and
other transactions. However, as card payments and
Internet transactions become more important, the
role of ATMs and cash in general becomes less rel-
evant (see Table 1). Bo Harald explains:
In our Danish organization, we have the highest number of
card payments per capita in the world; the second highest
is our Finnish organization. Actually, Finland has the lowest
amount of cash in relation to GNP [gross national product].
As a result, ATMs have become less important. Earlier this
year, we saw a fantastic development in Finland, which we
consider as a laboratory. Compared to 2002, cash withdraw-
als have gone down by 15-16% in our branches and 8% from
our ATMs. That's excellent because ATMs are very expensive:
9 Wap stands for Wireless Application Protocol, a secure
specification that allows users to access information
instantly via handheld wireless devices.
 Case study 2 From e-banking toe-business at Nordea (Scandinavia)

Exhibit 5 Evolution of banking devices at Nordea

c 2002
0
:;::
0
2001
~
~
... 1999
Q)
E
~::I 1998
()

1992

1982 Devices

>ource: Nordea Bank.

you have to keep the money there, you need to protect them m-Banking
and sometimes they are destroyed. Cash is actually the most Nordea's wireless service started out with WAP phones
expensive way to pay for things. Transactions at pay terminals
in 1999. Through WAP-enabled phones, Nordea cus-
are also quickly decreasing. We have started to charge peop le
for using these terminals, so thi s year they shou ld go down tomers can track their account and credit card trans-
quite drastical ly.Just like ATMs, pay terminals are also unprof- actions, transfer funds between accounts, pay bills
itable. Actually, I don't want to see them at all five years from both domestically and abroad, trade equities and
now. People shouldn't be paying their bil ls in the street; th ey read customer mail. The WAP service extends to the
shou ld do it at home. Why shou ld people use cash at al l? It's
mobile phone Nordea's Internet services originally
unhygien ic, it's unsafe to carry around and there is a high risk
of counterfeit money. It's irrational! available through Solo. In 2000, Nordea introduced
stock trading and bank transfers via mobile phone and
fab le 1 Household transactions in Finland also made it possible for customers to purchase movie
tickets which are debited directly from their Nordea
Transactions % account. Adapting Internet services to the WAP cost
~~~~~~~~~-
(millions) change Nordea less than 500,000; it mainly required adding
1999 - a server for wireless services. However, Harald sees a
1999 2000 2001 2002 2002 lot of potential for wireless banking:
Manual transactions 184.9 163.9 141.0 125.3 -32.2 I firm ly believe that, with Nokia, Fin land wil l continue to
Pay terminals 35.5 35.6 34.3 31.7 - 10.7 play a leading ro le world-wide in mobi le phone technol-
ogy. I was recently on a trai n from Arlanda airport [in Stock-
Card payments 234.3 263.l 306.9 363.0 +54.9
ho lm] and I saw a group of teenagers all using their mobi le
Cash-withdrawal ATMs 197.9 202.5 207.2 204.4 +3.3 phones. These are our future customers. 10
Direct debit 69 75.3 78.5 81.5 + 18.1
Solo payments 32.7 58.2 78.2 97.6 + 198.5
Total 754.3 798.6 846.1 903.5 + 20
10 'Online Extra: Q & A with Nordea's Bo Harald', Business
Source: Nordea Bank. Week online, 16 April 2001.

379
Part 4 Case studies
In January 2002, Nordea expanded its wireless
services by providing a more elaborate m-payment
version for Finnish customers who have GPRS 11
handsets and are connected with Telia's, Sonera's or
Radiolinja's wireless communication networks. This
service was made possible via a joint launch with
Nokia of a dual-SIM 12 handset for mobile transac-
tions. The phone has two separate slots: one for the
operator's SIM card, the other for the m-payment
card issued by Nordea, which is based on wireless
identification module (WIM). 13 Harald believes that
customers should be free to choose the supplier of
their banking services:
You don't buy groceries from a furniture store, so why
should you buy your banking services from the mobile op-
erator? Plus, it's really not a big deal nowadays to make a
handset with two chips. 14
PC banking
Wells Fargo, Citibank and Bank of America have, similarly,
as many customers as our Internet Bank 'Solo'. But with
124 million payments over the Internet in 2002, no other
bank can keep up [with us]! This number might be about
twice as large as those of the previously mentioned banks
combined.
(Bo Harald)1 5
Online banking at Nordea started as early as the
mid-1980s when Nordea allowed its customers to start
doing transactions from computers at their workplace.
Harald explains:
In the mid-1980s, people didn't have computers at home,
and if they did, they didn't have modems. So we asked our
large corporate customers: 'Can't you allow your employees
to log on to their banking account through the workplace
computer? That will save you a lot of time and money be-
cause people won't have to go to the branch any more.' Ever
since, workplace access has been a very important pillar for
our e-banking.
e-Banking and bricks-and-mortar banking have never
been in competition at Nordea. Rather, they are con-
sidered to be complementary, as Harald emphasizes:
One of the main reasons for our success is the fact that we
made e-banking already part of our branch business in 1982.
We never considered it to be a competitor. e-Banking is not
a separate profit center. That is important in order to quickly
achieve a crucial size. Without the support of the branch
employees, one is not able to reach that goal. 16
However, direct online consultation from bank employ-
ees either in a branch or a call centre is kept to an abso-
lute minimum:
380
Nordea decided consciously to offer no consultation on
the Internet and very little on the phone. You must keep
your offer simple to succeed in Internet business and to
gain the necessary confidence and trust of your custom-
ers. That's difficult but necessary, and if your offer is simple,
you don't need to provide expensive instructions over the
Internet. For complex [financial] products, customers go to
the branch anyway. However, the shift of transactions to
electronic channels frees up resources for improved service
levels in the branch.17
Tuukka Seppa, a Nordea customer from Finland, is
fond of Nordea's banking services:
What l really like is the simplicity of the authentication proc-
ess and the website itself. It is also very helpful that it offers
immediate transactions between two Nordea accounts.
Today, all Internet banking activities at Nordea take
place through Solo, the company's online banking
service, which has become increasingly popular (see
Table 2). This is demonstrated by the following statis-
tics (figures correspond to the highest month of usage):
Student loans: 84% of all student loans are com-
pletely paperless. Students apply online by provid-
ing information about their financial status and the
loan is approved within one hour through a com-
puterized scoring system. Once approved, students
sign by keying in their customer number once more
and a one-time password. 18
Equity orders: 80% of all equity orders are made
through Solo.
Mutual funds: 65% of all mutual funds are man-
aged by Solo.
11 General Packet Radio Service (GPRS) is a technology used
to send and receive data via packet delivery over a wireless
network allowing the user to stay connected to the Internet.
12 A subscriber identity module (SIM) is the smart card
inside a mobile phone that identifies the user account
to the network, handles authentication and provides
data storage for user data such as phone numbers and
network information. It may contain applications that
run on the phone.
13 WIM allows users to identify themselves with digital
signatures to confirm their banking transactions.
14 'Two slots are better than one', Silicon.com, 23 May 2002.
15 'Learn from the largest Internet bank of the world',
accessed at www.tietoenator.lv
16 'Learn from the largest Internet bank of the world',
accessed at www.tietoenator.lv
17 'Learn from the largest Internet bank of the world',
accessed atwww.tietoenator.lv
18 For more information on the one-time password, refer to
the authentication section below.
 Case study 2 From e-banking toe-business at Nordea (Scandinavia)
Table 2 Evolution of on line usage at Nordea
Jan-July 00 Jan-July 01 Jan-July 02 Jan-July 03
Log-ons
Denmark 6 091 418 8 924 759 11 721 765 14 659 759
Finland 17495518 20 582 125 24 671 753 28 199 328
Norway 1 595 000 3 562 704 4 528 822 6118 581
Sweden 4 640 100 11 562 033 16 738 683 22 863 322
Nordea 29 822 036 44 631 621 57 661 023 71 840 990
Online payments
Denmark 2773192 5 186 359 7 220 065 8 781 289
Finland 20 774 000 26 293 637 30 712 994 35 626 067
Norway 2 150 000 4 121 013 5 236 914 6 641 027
Sweden 6 660 147 18845501 25 202 502 31 401 953
Nordea 32 357 339 54 446 510 68 372 475 82 450 336
Source: Nordea Bank.
Foreign payments: 59% of all private and small
business foreign payments take place via Solo.
Customers key the account number of the recipi-
ent into their computer (or mobile phone) and the
money is received as fast as international transfers
travel - within Nordea one day at most. Fees are
15 in a branch and 7 for online payments.
Currency deposits: 30% of all currency deposits take
place through Solo.
Foreign exchange: 35% of all foreign exchange
transactions occur with Solo.
Car finance: 25% of all car financing takes place
through Solo.
Home mortgages: 24% of home mortgages come in
through the Internet.
Bo Harald summarizes Nordea's challenge for
2005: 'All the numbers mentioned should be up to
80% or 90%. That's the challenge in our bank.' 19
TV banking
TV-based banking was launched in 1996 through
the use of a set-top box that connected to normal
household TVs. Through this box, Nordea customers
could log on to the Nordea banking system and carry
out basic banking transactions. The underlying idea
was that those people who disliked computers would
use the TV to write emails and to check their account
balance. However, as it turned out, TV banking ha,S
not so far fulfilled the high expectations associated
with it. Says Bo Harald:
Clearly, every family has a TV in their house, so in principle
it should work well ... but we believe that people just do
not want to check emails or do their banking in front of the
whole family. Those are rather private things and that's why
the TV in the living room is not well suited. That's the reason
why we haven't invested more in this channel. We only offer
basic services fore-payments. With the continuing conver-
gence of the TV and the PC this might change, though.
Branch-based banking
The role of branch offices at Nordea has changed in
recent decades. While in the past bank clerks spent
most of their time keying in transactions manually,
this has drastically decreased (see Table 1). For 2003,
Bo Harald expects a further reduction of 20 million
manual transactions:
If every transaction takes one minute, what can you do
with this time once customers start banking online? It frees
up the branch staff to give customers advice. We use our
branches primarily for establishing personal relationships
with our customers, which is important when making a big
decision (such as purchasing insurance or a pension scheme)
that requires personal trust. In a sense, banking is local but
it doesn't always require an expensive branch. Sometimes
an office is enough. You don't have to offer transfers there
but you will never be able to replace either the personal
sales nor the fostering of personal relationships. To achieve
this it is absolutely paramount not to create separate profit
centres for Internet and branch banking because the two
have to feed each other. There mustn't be competition but
co-operation between the two channels. Combining and
leveraging high-tech and high-touch is the key to success.
Nonetheless, the number of Nordea branches in
Finland decreased significantly during the last decade -
down from 1300 in 1991 to 400 in 2000. The number
of employees shrunk to less than half during the same
period, falling from 22,000 to 10,600 (see Exhibit 6).
Getting strong and influential labour unions to agree to
such staff reductions has not always been an easy task.
Bo Harald recalls:
We had to speak to the unions in great length and we had
to hand out very generous packages since no employee
was actually fired ... But we also tried to show that Solo
[the Nordea Internet bank] had led to a great increase in
customer satisfaction and that this would make Nordea a
more competitive and stable institution in the future. We
19 'Learn from the largest Internet bank of the world',
accessed atwww.tietoenator.lv
381
Part 4 Case studies
Exhibit 6 Evolution of Nordea's staff and branches in Finland
1400
Ill
Q)
.c
Q
1200
c 1000
E
.c
.... 800
0
...
Q)
600
.c 400
E
:;,
200
z z
Source: Nordea Bank.
also showed the [labour] unions that Finland is absolutely
world-class when it comes to Internet banking and that it
was necessary to make changes in our organizational struc-
ture in order to maintain this lead. Finally, we pointed out
that it was problematic to have people do this type of man-
ual, repetitive, low-paid work and that it would be much
more valuable if we educated these people to do a more
creative and interesting job.
Today, Nordea operates 1,288 branch offices through-
out the Nordic region and employs 34,600 people
(full-time equivalents). In addition to the Finnish
branches, there are 267 branches with 8,500 employ-
ees in Sweden, 151 branches with 4,400 employees in
Norway and 348 branch offices with 9,400 employees
in Denmark Says Bo Harald:
We have been cutting branches for a long time, partly
thanks to mergers and now thanks to the internet ... Finland
used to be over-branched, but now it is almost under-
branched. The future is to change the way branches work:
we are now opening teller-less branches in places such as
shopping centers. The idea is to use the branch to sell and
provide services, not to make transactions. The branch staff
should add value for customers. They shouldn't do routine,
uninspiring work. 20
Marketing
Due to its early start in e-banking, Nordea has spent
little on marketing its Internet initiatives in com-
parison with other online banks. From 1996 to 2001,
Nordea spent about 18 million to market its Finnish
Internet initiatives. This money was not directed pri-
marily towards attracting new customers but instead
towards getting the nine million branch customers to
move to the Internet.
382
Ill 25 000
Q)
~ 20 000
a.
E 15 000
Q)
0... 10 000
Q)
.c
E 5000
:;,
O'---'-~L.....-'-~L.........._~...__..____.._____,___.~
P.>\::J P:>" P.><t- Qi.) ~ P.><i::i P.><-0 ~ P.><o P.>-' ~\::J
"Oj "Oj "Qi "-Qi "Qi "-Ql "OJ ,OJ ,OJ "OJ ci,O
Because of its large size, Nordea takes a mass-
market approach to its banking activities. Bo Harald
explains:
If you are as big a bank as we are, you can't afford not to
target all customers ... There is also a misconception that
there is a clear distinction between profitable and unprofit-
able customers. Of course, there are customers who come
to the branch every day. They are unprofitable, but there
is no way to get rid of them, so you might as well not even
try. Another typical feature of less profitable customers is
that they are young. However, soon enough they'll need a
mortgage and a retirement plan. If you look at the older
segments, you don't find that many unprofitable customers.
Thus, when you want to talk about profitability, you really
need to take a dynamic view of customers.
In its marketing activities, Nordea differentiates
between two types of customer:
Internet believers. These customers have been
online for years and have the know-how and trust
to navigate the Internet, to shop online and to
do their banking online. To them e-banking is a
normal day-to-day activity; something that is not
worth talking about with their friends. From a mar-
keting perspective, these customers are therefore
considered to be 'infertile'.
Non-believers. These customers are just starting
to surf the Internet. They require substantial con-
vincing to build enough trust and know-how to
start doing e-banking. Friendly branch employees
are best suited for removing that insecurity. Once
20 'Online extra: Q & A with Nordea's Bo Harald', Business
Week online, 16 April 2001.
 Case study 2 From e-banking to e-business at Nordea (Scandinavia)
they are online, however, these customers are
amazed and proud of their accomplishments and
want to pass the news on to their friends. After
turning them into believers they take the next
step and become preachers - a viral marketing
effect where customers acquire more customers, as
Harald emphasizes: 'When you get a critical mass
of customers, they are the best sales force for you.'
At Nordea, the importance of a branch cannot be
under-estimated when it comes to turning non-
believers into believers. Says Harald:
just imagine an enthusiastic clerk serving a client, who says,
'Hey, why don't you also do e-banking? Everyone else does
it' and then convincingly seals the deal ... The value of the
branch network is absolutely fantastic. That's why you need
to get employees to like it. Otherwise they won't move busi-
ness into the on line channel.
In spite of having achieved a high penetration rate
throughout Scandinavia, Harald still sees significant
potential for the bank's e-banking services, especially
among senior citizens:
Even if you are the largest e-bank in the world, of course
you still have a lot to do in the 60-year-old-plus sector. We
feel a social responsibility to organize evenings - especially
in the countryside - where senior citizens learn how to use
the Internet. For those people, we organize senior citizens'
clubs. We just had one in the east of Finland that was origi-
nally set up for 100 people. In the end, 1500 people wanted
to participate. When someone in that age group finds out
that they can send an email to their children or their grand-
children, that's a big deal. The sooner they come on board,
the better it is. And then they can take part in online com-
munities and discussion forums. Finland is a country of as-
sociations; there is an association for everything, even for
Siamese cats. Whatever it is they like, they can find it on
the Internet. And they need e-payment, e-invoicing and
e-identification. All those services are required to manage
your Siamese cat association! Then, those senior citizens
will get so much more out of their lives, because there is
such a huge window that opens up into the world - a new
dimension. And e-banking is just one part of it.
While targeting senior citizens with its e-banking,
marketing these services to the younger, Internet-
savvy generation is not at the top of Nordea's agenda.
Bo Harald says:
I wouldn't spend any money on marketing to people young-
er than 30; there is no need for that ... You can start with
e-banking when you are 15; to get the message through
to these people, you let them know what's possible. That's
worthwhile putting some marketing money into. But from
18 to 30 or 40, there is not much you need to do. Instead, I
would put all my money into the 60 years and above group.
Pricing
e-Banking is not free because every transaction has a cost.
Customers who use it should pay for it, not those who don't.
If a bank comes out and says that their e-banking services
are for free, they are lying. It is only a question of who pays.
(Bo Harald)
Nordea's rates for retail customers contain fixed and
variable elements. The monthly fee for basic services,
regardless of usage, is 2 per month. Access to the
credit card balance costs an additional 40 cents, and
mobile WAP services an additional 30 cents; these
charges are now being removed. Customers who want
to do equity trading pay from 4 per month for a basic
version and up to 20 for the most advanced version.
Nordea's competitors tend to be cheaper. E*Trade, for
instance, charges a fee of 10 per trade, a quarter of
Nordea's price. However, Nordea's fees seem still to
be reasonable, as Magnus Grann, a 40-year-old soft-
ware engineer, points out: 'Nordea's fees just aren't
high enough to make a difference.' 21
But other customers struggle with the pricing of
Nordea. Tuukka Seppa, a Nordea customer from
Finland, points out:
Nordea is definitely not cheap and charges some fees for
every additional service. For instance, I really don't like it
that there are additional monthly payments for accessing
my investments. 22
Tomas Bauer, a Nordea customer from Sweden, goes
even further:
I think Nordea's pricing practices are a little dubious. I actu-
ally feel that they tricked me into opening a savings account
when they offered me an interest rate slightly above market
level. After one year they dropped the rate to almost 1%
below the comparable market level. 23
On average, for its online services, Nordea generates
revenues of slightly more than 2 per customer, which
amounts to 7 million per month. These revenues
cover all costs for the online banking channel and also
generate a profit (which is not disclosed).
Corporate customers pay from 20 to 5000
depending on the level of service. To be a member of
the e-marketplace, merchants pay a 200 connection
charge up front and a monthly fee of 20. For each
21 'The dynamo of e-Banking', Business Week online,
16 April 2001.
22 Personal interview, S October 2003.
23 Personal interview, S October 2003.
383
Part 4 Case studies
transaction, an additional fee of 35 cents is levied.
In contrast to credit cards, the transaction fee does
not depend on the volume of the purchase. This is
due to the fact that with credit cards, the bank has to
finance the period - up to 30 days - between when
the merchant gets the money and when the customer
pays the bill. Since the Solo direct payment is similar
to a debit card, there is no time gap to be refinanced.
Merchants benefit because they no longer have to
send out invoices by mail. In addition, while previ-
ously they had to wait to be paid, they now receive
payment in real-time before even shipping the goods,
thereby eliminating their credit risk.
We pay attention to the profitability of our e-banking op-
erations. Our basic principle when introducing new ap-
plications is that we don't give added value for free. Our
customers pay a monthly fee for Internet banking. If fur-
ther services are taken up such as brokerage, credit card
reporting or WAP, then it costs more. Customers accept it
if they benefit from it, for example, if a transfer becomes
more favorable and simpler. The added value which is cre-
ated here cannot be free. Many companies have just started
to understand it. 24
The pricing of banking services is also used as an effec-
tive tool for steering customer business into certain
channels. Bo Harald shares his personal experience:
In 1983, we introduced a charge of 10 cents for all cheque
forms, which were very popular atthattime and my wife was
very good at writing these cheques. But once this fee was in-
troduced, she didn't write out one single cheque any more.
In fact, chequebooks just disappeared because it wasn't
worth even 10 cents to the people. Instead, they started to
pay with a debit card and afterwards they used the debit
card at payment terminals to pay bills. Those same people
later on started using computers at their workplace to do the
transactions .... In the US, people write somewhere around
50 billion cheques a year. That amount of paper is
transported by airmail to the banks and back. It costs
somewhere around $75 billion a year to pay for these
transactions and, on top of that, it's an environmental
problem. It takes a lot of time and costs a lot of money. If
you don't put an upfront price tag on costs, you still have
to pay for them and you don't direct the activities of your
customers. Showing the customer what it really costs al-
lows the customer to make rational choices because they
are paying for these costs.
Nordea has implemented similar pricing structures
between branches and Internet banking to entice
customers to move online. For instance, a foreign
currency wire costs $7 online but $14 in a branch. Bill
payment is free online, whereas it costs $3.50 per bill
in a branch.
384
Customer authentication
Nordea's customer authentication procedure has
been in place since the early 1980s. For all contact
with the bank, whether via the Internet, mobile
phone or call centre, customers use one identifica-
tion number: the one-time code (OTC). These OTCs,
which are printed on a card, are comparable to the
transaction number which customers use for trans-
fers. To access their bank account through any one of
the above-mentioned electronic channels, customers
need to have the OTC handy. Bo Harald considers
the Nordea authentication approach to be superior to
most others:
To connect to Nordea, customers need to have their code,
which is given after opening an account with us. The latter
can be done only if the customer shows up in person at the
bank branch and presents an ID document. Other banks,
especially Internet banks, are not so rigorous. There, all you
need to do is send in a phone bill where you can see the
customer's address. That's easy to forge and then you can
get into the money laundering business quickly.
He points out additional advantages of the OTC:
With the one-time-password and the identification
number they [the customers] get access to a safe e-business
marketplace, which they can visit from everywhere and
on which they can do much more than traditional bank-
ing transactions. For example, they can sign contracts
with their energy and telecom suppliers, buy credit on-
line, or assign attorneys. Plus, they don't need any pe-
dantic installations of card readers or programs. At the
moment, we have a very interesting situation since the
Ministry of Finance recommends that for future trans-
actions in the public sector which require an electronic
identification this should be done through e-banking
platforms. Again, that's trust, which upholds our services.
'You want to know something concerning your pension?
Please click here.' We - and the other banks in Finland -
offer the use of OTC to everyone who has to offer identi-
fication and signature possibilities. Millions of customers
already have this code, and for them it's an additional
service if they can interact with other companies or gov-
ernmental agencies. 25
However, the OTC is not popular with everyone. Kaisa
Juhanni, a Nordea customer from Finland, points out:
'What I really dislike about the Nordea online banking
24 'Learn from the largest Internet bank of the world',
accessed atwww.tietoenator.lv.
25 'Learn from the largest Internet bank of the world',
accessed at www.tietoenator.lv
 Case study 2 From e-banking toe-business at Nordea (Scandinavia)
is that you always need to carry the pass-code list with
you in order to access the service.'
For the future, Nordea plans to develop a public-
key infrastructure (PKI) 26 that would allow customers
to log on to PCs or mobile phones using smart-cards
equipped with chips.
Technology
The evolution of the technological platform at Nordea-
the backbone of all its e-banking operations - has been
strongly influenced by the original individual banks
which all had different technology platforms. For
instance, the Finnish Merita bank had an e-banking
infrastructure that allowed customers to log on to
their system with just a browser and a simple pass-
word system. At the Swedish Nordbanken, on the
other hand, customers needed to install special soft-
ware and get a smart-card reader before going online.
After the completion of the merger, Nordea was
faced with a very complex IT infrastructure which
included the following:
Production: four main production centres with
multiple platforms.
Exhibit 7 Change of business structure to support the integration of IT and processes
Nordea
Retail Corporate and
banking institutional banking
Electronic Global operations
banking services
Production and
productivity
Source: Nordea Bank.
Applications: roughly 9,000 applications.
Networks: four different branch networks.
Since then, Nordea has undergone efforts to integrate
the various IT systems and organizational structure to
streamline its activities. For example, real-time process-
ing systems, which have been in place since 1985,
needed to be aligned. On the organizational side, the
changes are reflected in the increased importance of the
group processing and technology unit (see Exhibit 7).
The electronic banking and production and productivity
units were moved over from retail banking. The cor-
porate and institutional banking unit handed over the
26 Public key infrastructure is an electronic framework for
trusted security. Participants in a PKI each obtain a dig-
ital certificate from a trusted certificate authority (CA),
which then authenticates their identity when initiating a
secure transaction. Individual transactions are encrypted
by each participant using their own pair of electronic
keys, one of which they keep for their own private use,
while the other - the 'public key' - is made available to
other participants. PKI has been widely adopted as the
basis for secure Internet and web services transactions.
Group processing
Group staff
and technology
Group IT Group IT
Electronic
banking
Production and
productivity
Global operations
services
385
Part 4 Case studies
global operations services while group staff handed over
the group IT. Several reasons led to this concentration
of technology functions in one unit, including focusing
on integration and cost efficiency, releasing time for
business areas to focus on customers and capitalizing on
change management.
Today, IT costs correspond to 20% of total
expenses, averaging around 200 million per quarter.
These costs are almost evenly divided between devel-
opment costs (47%) and production costs (53%).
Nordea has formulated a philosophy to drive its IT
operations, which includes the following elements:
A comprehensive governance and control structure
on IT development and IT production.
Business-driven development, Le. business decides
the 'what', IT decides the 'how'.
Strict prioritization of development to support inte-
gration and cost efficiency.
Gradual creation of common Nordic platforms,
including consolidated production and applica-
tions.
Business-case-driven approach to consolidation,
assuming that the integration of all systems will
most likely not be profitable.
In relation to overall IT costs, e-banking expenses
were low. From 1981 to 2000, the Finnish arm of
Nordea spent a cumulative total of 19 million on its
e-banking technology. However, today expenses are
significantly higher because 17 different e-banking
systems throughout the Nordea group need to be
maintained and improved. The main cost item is
the development of an integrated e-banking system,
which Nordea is jointly pursuing with TietoEnator, a
Finnish company specializing in consulting, develop-
ing and hosting its customers' business operations.
The annual e-banking costs are in the 'two-figure mil-
lions' range.
In the late 1990s, at the peak of the dot.com years,
Nordea considered selling its technology systems to
other banks in Europe. Bo Harald explains:
In the end we didn't do it because all banks are very
different and it would cost a lot of effort to make them
work. Banking is a complicated business and if you really
want to have the best return on equity, you should have
high-touch and highctech. We ended up making money
but it wasn't enough to justify the effort of selling our
technology. Instead, we decided to focus all of our energy
on our customers.
386
Competition
Even though Nordea has achieved a dominant role in
the Nordic region, a number of Swedish and Finnish
banks compete head-on with Nordea - also with
regards toe-banking services. Swedbank, for instance,
which had 1.3 million online banking customers in
2002, is planning to allow its m-banking customers to
view their mobile phone account statements, update
their subscription contracts and access itemized calls.
Okobank in Finland has 720,000 retail custom-
ers on the Internet. Matti Korkeela, Executive Vice-
President at OKO, believes in the quality of the bank's
e-offerings:
We have estimated that active users of the system make up
approximately 80% of our Internet-banking clients. I be-
lieve this figure is higher than that of our competitors. With
OKO Bank, Internet banking per customer is more intensive
than with most other banks. To be honest, I do not believe
in pure Internet banking. We at OKO have a multi-service
concept, where the banking outlet still plays an important
role. 27
In 2002, the bank saw a 48% increase in web-based
transactions. In total, 40% of 110 million invoic-
es were handled online. Other competitors with
sophisticated e-banking services include Rabobank,
Enskilda Banken and Svenska Handelsbanken. Says
Bo Harald:
There has been no real price competition ... Cost savings
have been passed on in two ways. Flrst, if you pay your bill
in a branch today, you pay a lot of money, but if you pay it
online you only pay the monthly charge. Second, competi-
tion has moved to housing mortgages. All the cost savings
have been pushed into mortgages with margins down from
1.6% to 0.8%. Most banks have done the same thing and
have passed on the cost savings, so it's always the customer
who, in the end, wins the most.
At Nordea, pure online banks are not viewed as a
major threat:
We haven't lost a significant amount of business to pure
e-players ... They may be cheaper than us but an e-ban.k
has no personal selling capabilities, no customer base, and it
costs them a fortune to acquire customers. I am convinced
people value the safety of branches and a trusted relatio~
ship. Our vision is to be high-tech and high-touch. That will
make us invulnerable to cyber-attacks. I believe traditional
banks will play a central place in thee-economy. They have
trust. They have established brands. Today, nobody would
27 'The massive e-habit as a natural resource', Nordicum.
com, No. 1, 2003.
 Case study 2 From e-banking to e-business at Nordea {Scandinavia)
try to set up an Amazon.com-type bank any more. It's just
too expensive and it doesn't work in our business. 28
Customers who have been clients of Nordea for a long
time are a major asset for the bank. Tuukk.a Seppa said:
Initially, I was a customer of Kansallis-Osake-Pankki (KOP),
which became Merita in 1976. For personal purposes, I
started using the Solo online service in 1995. Through it I
pay all my bills, review my account transactions as well as
my credit card charges. I also use it to authenticate access to
my electronic mailbox which is hosted by the Finnish Post. 29
Where will new competition for Nordea come from?
Will it be from software houses, large international
banks (such as Citibank or Deutsche Bank) or others?
Bo Harald replies:
These companies don't have the local branch structure
and they don't have our cost-income ratios ... Telecom
operators that have very broad access to their mobile
phone customers might enter the competition.
However, contrary to popular belief, he does not
believe that customer retention has gone down as a
result of e-banking:
The idea that the next bank is only one click away is abso-
lutely not true. To become a customer, you need to go to
the bank and open up an account. When you are used to
one system, you don't want to change.
Growth opportunities
In its domestic markets, where Nordea operates its
branch network, there is limited opportunity for
growth. Bo Harald explains:
We can't grow very much in Finland. In Sweden, we are the
second biggest bank. In Denmark and Norway, we are still
too small in private and corporate banking, which leaves
plenty of room for growth. In neighbouring markets such
as Estonia, we are already the third largest bank with sub-
stantial growth potential. In Poland, we bought four banks,
which we now need to consolidate before we can start
thinking about further growth.
Moving into other European markets as a puree-bank
without a branch network is not a real option for
Nordea:
As a pure play, you might be able to attract the tech-savvy
people who are constantly checking interest rates. Those
guys easily sign up for anything new but this market seg-
ment is very small. Our experience has been that if you don't
have a strong brand name and a solid branch structure that
allows you to get in personal contact with your customers,
you will have problems addressing the mass market. I mean,
if we went to southern France and said, 'Hi, we are Nordea.
Come and do your banking with us on our great website!' -
what would people say? That's why we have never tried to
penetrate foreign markets where we don't have a physical
branch network.
In addition to expanding geographically, another
main growth area for Nordea is expanding its service
range:
Even in our Finnish market, we can expand quite a lot by
offering new services that we didn't have before. If you look
at these services, you can only offer some of them over the
Internet, but not at a branch. For instance, customers won't
come to the branch to check the balance on their credit
card but would like to do it through their mobile phone.
For Nordea, there are two promising future e-business
opportunities. First, to develop further customer rela-
tionship management, the bank is turning towards
triggered data mining, which works as follows: when
there is a change in a customer account - for instance,
a large incoming money transfer, change of address or
marital status - a trigger in the database is set off and
informs the bank of the change, which then raises a
number of questions: what does it mean for financing,
for long-term payments, for insurance and e-services?
Based on the answers to these questions, Nordea
plans to make an offer either via mail or face-to-face
in a branch. While Bo Harald sees substantial value in
this approach, he wants to go a step further:
Triggered data mining is not enough because it looks into
the past. Instead, we should ask the customer directly: What
are you going to be doing next? What's your next life event,
as we call it? For instance, the most important thing that can
happen to a man in Finland is the purchase of a new car. We
want to invite the customer to tell us about it and then ask
ourselves: What can we do? What can the private sector do?
What can the public sector do? Well, he'll have to look for a
car. Our Solo partners can send him car offers. He'll have to
buy the car and sign a contract - this can be done through
e-signature. He'll have to pay for the car - this opens up
the opportunity for financing arrangements. He'll have to
have his car inspected - again an opportunity for one of
our partners on the Solo marketplace ... Of course, when
we think about these services, a major concern is always
the issue of data privacy, to which we are very sensitive.
Nordea never shares any information with anyone outside
the bank. Customers voluntarily decide to share informa-
tion with, say, the car seller. During the initial stage it's even
possible to have a protected identity which is unknown to
the merchant.
28 'Online extra: Q & A with Nordea's Bo Harald', Business
Week online, 16 April 2001.
29 Personal interview, 5 October 2003.
387
Part 4 Case studies
The second major opportunity is risk management
services fore-businesses:
In the electronic world, business partners do not know
each other well. At the same time, market volatility is very
high, which has led to numerous big crashes. Therefore
you shouldn't trust anybody. To accommodate this you can
either use direct payment [e-payment as explained above]
or get credit ratings. Today. most companies have a lot of
people working in risk management. They pay tens of
miHions for credit information and insurance in order to
reduce credit loss. In general this works well but it raises the
question: How much should you pay? If you could use the
bank's knowledge and its ready-made credit information
and integrate it into the billing process, you could save a
lot of money. That's what we plan to make available in the
future. Every company in the world has a bank and usually
the bank has made a credit evaluation of that company and
established a credit line. These banks have the most in-
depth information and therefore it's probably the best credit
evaluation anybody can get. If all banks made these evalu-
ations available electronically by issuing trade-related bank
guarantees on the Internet, companies could save a lot of
money. It would be a lubricant on thee-business machinery.
This is a very obvious idea but sometimes the things that are
so simple and self-evident don't take off. That's the way the
world works - never quite perfectly.
Future outlook
In spite of its successful e-banking and e-business ini-
tiatives, Nordea's stock performance has been below
average in the last few years, falling 28% in 2002. This
was due, in part, to a drop in the bank's total income
388
which fell by 4% while expenses increased by 2%.
However, Harald believes that another important fac-
tor is that investors do not value e-banking activities
appropriately at the moment:
Those who know e-banking know that we are the number
one in the world. During the dot.com bubble we had invest-
ment bankers and analysts here every single day- I could've
spent all my time just talking to them! They told me: 'You
shouldn't really be classified as a bank, you should be an IT
company and have a valuation that is ten times higher than
your current valuation.' Actually, our valuation went up quite
a bit. But now, how many analysts come to see us? What 1
am complaining about are the analysts. Now that the real
thing is happening, why are they not interested in it? They
were only interested in sensation. The underlying problem
is that people tend to overestimate new technology in the
short run but underestimate its influence in the long term.
Regarding the future, he sees the importance of
e-banking and e-business in a broader perspective:
Getting people accustomed toe-banking is really a social task
to make Europe more competitive. We can't afford not to do
it. e-Banking services can be used to make people more pro-
ductive to compete with the US and the Far East. Due to our
high costs and our powerful [labour] unions, we can't afford
not to increase productivity. To achieve this, the all-important
thing is the national resource of e-habit that we have been
building up [over the years]. That's the key to the future. None-
theless, you can't plan or foresee the future, you can only cre-
ate it - and that's exactly what we want to do at Nordea. 30
30 'Learn from the largest Internet bank of the world',
accessed at www.tietoenator.lv.
American Well
The doctor w ill e-see you now

On a crisp morning in November 2009, Ida Schoenberg
was walking briskly through Boston's Logan Airport
when he spotted his brother, Roy Schoenberg, stand-
ing in line to board a flight to Washington, D.C.
The two brothers, cofounders of American Well,
the Online Care company, were taking a flight to
Washington to deliver a presentation at the World
Health Care Innovation and Technology Conference
(WHIT) . With the debate over health-care reform rag-
ing in Washington and with Bill Clinton as the keynote
speaker, this year's conference was sure to be a big
event. As the flight lifted off, the view from the plane's
window revealed the historic Boston cityscape, where
many significant events leading to the American
Revolution had taken place. But as they settled in for
the short 90-minute flight, Roy and Ida had a different
revolution on their mind.
Just three years ago, Ida and Roy founded American
Well in an attempt to forever change health-care
delivery and improve the way patients interact with
physicians. Traditionally, patients had two primary
choices when seeking medical care - to show up at an
emergency room or a similar acute-care facility, or to
submit themselves to the schedule of their physician,
which could result in weeks of waiting for an office
visit. American Well's vision was to use the Internet
and telephony to connect physicians and patients,
within minutes in real time. Since its founding, the
company was successful in developing the necessary
technology platform, and its efforts to market the
vision to major health insurance companies (also
called health plan providers) in the U.S . had started to
yield results. In fact, Blue Cross Blue Shield of Hawaii
was the first to roll out the service earlier in the sum-
mer on a statewide basis, and so far the implementa-
tion of the platform had gone well.
American Well management faced several press-
ing questions regarding where the company should
go next. Although focusing on a nationwide rollout
and adding more health insurance companies to the
service would be a monumental task for any start-up
company, Ida and Roy were already considering new
applications for their platform. Being well aware
of the first-mover advantage that American Well
enjoyed, they were thinking about the next service
concept, called "Team Edition." While the service
offered in Hawaii facilitated connectivity between
patients and physicians, the next generation of serv-
ice, if developed, would add connectivity between pri-
mary care physicians (PCPs) and specialists. Patients
would no longer have to wait for weeks to see the
specialist and then more time before coming back to

Professor Elie Ofek and Dr. Ron Laufer, Adjunct Professor, Indiana Un iversity Ke lley School of Bus iness, prepared th is case. HBS cases
are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright 2010, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-S45-7685. write Harvard Business
School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted , or
transmitted, without the permission of Harvard Business School.

403
Part 4 Case studies
their PCP for follow-up. Instead, Team Edition would
connect the PCP and specialist instantly during the
patient's initial office or online visit.
Ido and Roy were also contemplating new cus-
tomer segments for American Well's platform, includ-
ing hospitals, retail clinics, and pharmacies. While the
platform held the potential to boost efficiencies and
revenues for each of these would-be customer chan-
nels - and for American Well-pursuing these markets
would divert resources from the company's existing
efforts. Having been approached by a number of
non-U.S. health insurers, expanding into interna-
tional markets was also a possibility worth exploring.
Although Roy and Ido were confident that American
Well's platform had revolutionary potential even
beyond the health-care industry, they wondered: if
they invested resources in new markets and product
launches too early, would they undermine American
Well's opportunity to become the definitive leader in
Online Care?
Health-care delivery in the U.S.
In 2009, U.S. health-care expenditures were esti-
mated to top $2.5 trillion and were projected to
reach $4.3 trillion, or $13,100 per resident, by 2018. 1
This outlay represented 17.6% of gross domestic
product (GDP) - a greater percentage than in any
other country - and reflected the fragmentation
and complexity of a system that was the subject
of intense reform debate in public policy circles in
2009. Chronic diseases (e.g., cancer, diabetes, and
heart disease) were leading causes of disability and
caused 7 of every 10 deaths each year in the U.S. 2 The
prevalence of chronic disease made it a focal point
for health-care providers, who were also bracing for
the significant demographic shift expected to occur
over the next two decades, by which time Americans
over age 65 would comprise 20% of the population. 3
(See Exhibits 1 and 2 for a breakdown of U.S. health
spending in 2008.)
Players
The key players in the U.S. health-care system were
patients, providers, public and private payors, and
suppliers (of products such as therapeutic drugs and
medical devices). Other supplier subsectors included
health-care information technology (IT) providers,
private equity and venture capital (VC) firms that
404
Exhibit 1 U.S. health expenditures by source of funds,
2008 ($ billions)
2008
Private
Consumer out-of-pocket $277.8
Consumer private health insurance $783.2
Other private (e.g., philanthropic sources) $171.1
Public
Federal
Medicare $469.2
Medicaid $201.3
Other federal $146.4
State and local
Medicaid $143.0
Other state and local (inc. SCHIP) $146.8
Total health expenditures $2,338.7
Source: Adapted from "National Health Expenditure
Data-Historical-NHE Web Tables (Table 3)," Centers for
Medicare and Medicaid Studies, http://www.cms.hhs.gov/
Nati onaf H ealthExpend Data/02 _National H ealthAccou ntsH istorical
.asp#TopOfPage, accessed December 2009.
Note: Numbers may not add to totals due to rounding.
financed health-care ventures, and academic and
other institutional researchers.
Providers included entities involved in delivering
care, such as hospitals, nursing homes, and health
clinics, as well as physicians and other health profes-
sionals. Of the approximately 5,500 hospitals provid-
ing inpatient and outpatient services, close to 90%
focused on acute care, while the remainder special-
ized in rehabilitation, psychiatric care, and other spe-
cialties.4 Institutional providers also included nursing
homes, assisted-living facilities, home-based care pro-
viders, and others.
1 "Trends in Healthcare Cost and Spending, March 2009,"
Kaiser Family Foundation, http://www.kff.org/
insurance/upload/7692_02.pdf, accessed December 2009.
2 "Chronic Diseases and Health Promotion," Centers for Dis-
ease Control and Prevention, http://www.cdc.gov/chron-
icdisease/overview/index.htm, accessed December 2009.
3 "Wireless Health: State of the Industry 2009 Year
End Report, December 16, 2009," Mobile Health
News, p. 4, http://mobihealthnews.com/wp-content/
Reports/2009Stateoftheindustry.pdf, accessed January 2009.
4 Jeffrey W. Englander, "Healthcare: Facilities," October 8,
2009, p. 10, Standard & Poor's Industry Surveys via
NetAdvantage, accessed December 2009.

Exhibit 2 U.S. health expenditures by type,
2008 ($ billions)
Hospital care
Physician, clinical, and other professional
services
Dental services, other personal health-care
Horne health-care
Nursing home care
Prescription drugs
Durable medical equipment, nondurable
medical products
Gov. admin and public health work,
private insurance net cost
Investment in research, structures, and
equipment
Total health expenditures
Source: Adapted from "National Health Expenditure
Data-Historical-NHE Web Tables (Table 2)," Centers for
Medicare and Medicaid Studies, http://www.cms.hhs.gov/
NationalHealthExpendData/02_Nationa1HealthAccountsHistorical
.asp#TopOfPage, accessed December 2009.
Note: Numbers may not add to totals due to rounding.
Approximately 990,000 physicians worked in the
U.S., 40% of which were PCPs: 5 generalist physicians
who served as the first point of contact for their patients'
physical and mental health needs. 6 Nonphysidan pro-
viders included 2.5 million registered nurses, 74,000
physician assistants, 147,000 nurse practitioners, and
others. 7 Some physicians were employed by hospitals,
while others ran private practices comprising one or
more physicians. On average, family doctors earned
$168,000 per year (about $81 per hour), registered
nurses earned $67,000 ($32 per hour), and pharma-
cists earned $107,000 ($51 per hour). 8
Delivering and paying for patient care
The type and quantity of care delivered to patients
depended on several factors, including health insur-
ance coverage (if any) and geographic location. 9
Patients with health insurance typically had a PCP
who served as their chief contact for health con-
cerns, and who referred them to specialists (e.g.,
cardiologists, dermatologists, surgeons, etc.) as
needed. For patients without insurance, hospital
Case study 4 American Well: the doctor will e-see you now
emergency rooms often served as the main source of
care. There were regional shortages of some special-
ists (e.g., mental health, obstetrics, and gynecolo-
gy); as such, the patient experience of receiving care
2008
varied between and within states. Insufficient access
$718.4
to care was especially problematic in rural areas,
$561.9
where provider shortages, low population density,
and disproportionate reliance on self-employment
$169.3
and low-skill jobs - which had low rates of employ-
$64.7 er-sponsored health insurance - created barriers
$138.4 to care. 10
$234.1 The U.S. system for financing patient care was
$65.5 a complex web of public (federal and state) and
private-sector payors. Coverage requirements, pre-
$229.0 mium limits, reimbursement levels (for Medicaid),
and other constraints imposed on insurers varied
$157.5 by state. As of 2008, 53% of health spending was
funded by private payors, including health insurance
$2,338.7 companies, individuals, and philanthropic sources. 11
Health insurance companies offered several types of
health plans at different price and coverage levels.
Individuals with private coverage either purchased
plans independently or received coverage through
their employer. Most firms with 50 or more workers
offered health coverage; smaller companies were less
likely to do so. 12 The format of employer-sponsored
5 "State Health Facts - Providers & Service Use," Kaiser
Family Foundation, http://www.statehealthfacts.org/
comparecat.jsp?cat=8, accessed December 2009.
6 "Primary Care," American Academy of Family Physicians
website, http://www.aafp.org/online/en/home/policy/
policies/p/primarycare.html, accessed January 2010.
7 "State Health Facts - Providers & Service Use."
8 U.S. Bureau ofLabor Statistics, "May 2009 National
Occupational Employment and Wage Estimates, United
States," http://www.bls.gov/oes/current/oes_nat.
htm#29-0000, accessed June 2010.
9 Englander, "Healthcare: Facilities."
10 Jon M. Bailey, "The Top 10 Rural Issues for Health Care
Reform," March 2009, no. 2, pp. 1, 3-4, Center for Rural
Affairs, http://files.cfra.org/pdf/Ten-Rural-Issues-for-
Health-Care-Reform.pdf, accessed January 2010.
11 "National Health Expenditures Aggregate," Centers for
Medicare and Medicaid Services, http://www.cms.gov/
NationalHeal thExpendDa ta/downloads/tables. pdf,
accessed June 2010.
12 "Employer Health Benefits - 2009 Summary of Find-
ings," Kaiser Family Foundation and Health Research
and Educational Trust, p. 4, http://ehbs.kff.org/
pdf/2009/7937.pdf, accessed December 2009.
405
Part 4 Case studies

Exhibit 3 Community hospitals' payment-to-cost ratios by payor (%), 1980 to 2007

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

- Private Payors - - Medicare - Medicaid

Source: "Fast Facts- Costs/Insurance-Commun ity Hospital Payment-to -Cost Ratios, by Source of Revenue, 1980- 2007," Kaiser Family Foundation,
http://facts.kff.org/chart.aspx7ch= 179, September 16, 2009, citing American Hospital Association and Aval ere Health analysis of 2007 American
Hospital Association Ann ual Survey data, for community hospitals, Trendwatch Chartbook 2009, Trends Affecting Hospitals and Health Systems,
Table 4.4, p. A-35, accessed December 2009.
'Note: Ratios illustrate the extent to which each payors' reimbursement to hospitals covered the hospitals' cost of providing patient care. They
cannot be used to compare payment levels across payors, however, because the service mix and intensity vary. Medicaid includes Medicaid
Disproportionate Share payments.

insurance varied, but typically involved employees
paying a portion of premiums (periodic payments to
the insurer) and employers covering the rest. In 2009,
the average annual premium for employer-sponsored
insurance was $4,800 for individuals (17% paid by
employee) and $13,400 for family coverage (27%
paid by employee) .13
The balance of health spending (47%) came from
public payors, chiefly Medicare (federal program for
Americans age 65 and over) and Medicaid (state pro-
gram for eligible low-income and disabled residents),
as well as the Department of Veterans Affairs (for mili-
tary personnel) and SCHIP (State Children's Health
Insurance Program). In some cases, public payors did
not cover the full cost of care delivery, leading provid-
ers to rely heavily on revenues from privately insured
patients. (See Exhibit 3 for community hospitals'
payment-to-cost ratios from different payors from
1980 to 2007.)
Patients without health insurance - about 17% of
Americans under age 65 - paid for care out of pocket
and, in many cases, went without: one survey found
that 14% of Americans did not see a doctor due to cost
concerns in 2008.14 This was even true of many who
had insurance, because their plans had high deducti-
bles - the required out-of-pocket payment before
insurance kicked in - or had limits to the services or
dollar amount that would be covered.
Health-care IT background
American Well's novel service model, which the com-
pany termed Online Care, came on the heels of a
number of developments in the use of telecommuni-
cations and computer-based tools to collect, manage,
and communicate health-care-related information
and transactions. Examples included computerized
decision-support and order-entry systems for physi-
cians, electronic health or medical records (EHRs or
EMRs), and tools for searching for health informa-
tion (e.g., WebMD). Patients' use of health-related
13 "Employer Health Benefits - 2009 Summary of Findings."
14 "State Health Facts - Providers & Service Use."

406
 Case study 4 American Well: the doctor will e-see you now

Exhibit 4 Private health insurance net administrative costs' per person covered, 1988 to 2008 ($)

r
$500 $471
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
1988 1992 1996 2000 2004 2008

Source: Adapted from "Fast Facts- Costs/Insurance-Private Health Insurance Administrative Costs Per Person Covered. 1986-2008," Kaiser Family
Foundation, http://facts.kff.org/chart.aspx?ch=217, January 7, 2010, citing the KFF calculations NHE data from Centers for Medicare and M edicaid
Services, Office of the Actuary, National Health Statistics Group; and private health insurance en rollment data from Centers for Medicare and
Medicaid Services, Office of the Actuary, National Health Statistics Group, accessed February 2010.
' Note: Data show the net cost of private health insurance per private enrol lee {includi ng Blu e Cross/Blue Shield, commercial insu rance, HMOs,
and self-insured plans). as calculated by the Centers for Medicare and Medicaid Services (CMS). Net cost of insurance is the difference between
premiums earned and benefits incurred, and incl udes insurers' costs of paying bills, advertising, sales commissions, and other administrative costs;
net add itions/subtractions from reserves; rate credits and dividends; premium taxes; and profits or losses. Private enrollment is estimated by CMS
using the National Health Insurance Survey and the Current Population Survey.

websites increased through the 2000s, and by 2006,
80% of respondents to a survey of Internet users
reported searching online for health-related informa-
tion.15 Other electronic exchanges included bill-pay
services, appointment scheduling, and communica-
tion of lab results. Many of these innovations aimed
to reduce the administrative burden facing provid-
ers and payors. (See Exhibit 4 for private insurance
administrative cost data.)
online communication was on the rise: one survey
of Internet-using physicians in the U.S. noted that
from 2001 to 2008, physicians who communicated
with patients online increased from 23% to 36%. 17
Some data suggested online communication created
efficiencies by reducing the number of patient visits
to physicians and decreasing the volume of phone
calls to physicians' offices; for example, a 2007 study

Electronic patient-physician interaction
By the mid-2000s, patients and physicians were
becoming more comfortable communicating elec-
tronically through e-mail and secure messaging (also
referred to as e-visits). In 2006, a survey found
that 74% of respondents wanted to communicate
with their doctors using e-mail, but only 4% were
actually doing so, largely because such a service
was not offered. 16 Concurrently, physicians' use of
15 "US Internet Users Who Have Searched Online for
Health Information, 1998-2009 (%of respondents)," via
eMarketer Digital Intelligence, accessed December 2009.
16 "Is There a Doctor in the Chat Room? " October 4, 2006,
via eMarketer Digital Intelligence, accessed December
2009.
17 "US Physicians Who Own a PDNSmartphone, 2001-
2008 (%of respondents)" and "US Physicians Who
Communicate with Their Patients Online, 2001- 2008
(%of respondents)," via eMarketer Digital Intelligence,
accessed December 2009.

407
Part 4 Case studies

Exhibit 5 Survey responses by U.S. consumers on advantages of e-mailing their PCP or family doctor regarding
an illness or condition, August 2009 {%of respondents)

Saves me time because I don't have to see the doctor

There is less time waiting for an appointment

I do not have to go to a waiting room with other ill people

Is quicker than a regular consultation so
the doctor has more time to see patients
It would be cheaper
I would have a written set of instructions
from the doctor that I can refer to
Saves on transport costs

I do not have to miss work

I may feel too ill to travel

It is less embarrassing

None of the above

Source: "Hassle-Free Healthcare, Delivered Digitally," November 9, 2009, via eMarketer Digital Intelligence, citing "Consumers Would Embrace
Email Communication with Their Doctor," Lightspeed Research press release (Basking Ridge, NJ, September 29, 2009), Chart 2, p. 2,
http://www.lightspeedresearch.com/pdf/LSR_PR_ConsumersWould EmbraceEmailCom mu nication.pdf, accessed December 2009.
Note: n = 1,000

of Kaiser Permanente, a large health-care system,
found that e-mail-using patients were 7% to 10% less
likely to schedule an office visit, and physicians offer-
ing e-mail communication received about 14% fewer
phone calls. 18 (See Exhibit 5 for consumer attitudes
about e-mailing their PCP in 2009.)
Yet, many doctors were reluctant to engage
patients via e-mail, as an April 2008 article noted:
Some [physicians] say they worry it will increase their work-
load, and most physicians don't get reimbursed for it by
insurance companies. Others say they fear hackers could
compromise patient privacy - even though doctors who
do e-mail generally do it through password-protected Web
sites. There are also concerns that patients will send urgent
messages that don't get answered promptly. And any prob-
lem raises the specter of legal liability. 19
HIPAA
The market success of health-care IT innovations
depended on their compatibility with HIPAA (Health
Insurance Portability and Accountability Act), enacted
in 1996 to address privacy and security risks stemming
from increasing use of electronic channels to transmit
patient information. The act applied to providers,
insurance companies, group health plans, govern-
ment payors, and health-care clearinghouses (entities
that processed other entities' health-care transac-
tions). 20 HIPAA's Security Rule set national standards
for protecting electronic health information, and its
Privacy Rule dictated how patient information could
18 "Patient E-Mail Cuts Office Visits," July 10, 2007, via
eMarketer Digital Intelligence, accessed December 2009.
19 Alicia Chang, "Is Medical Advice Just an E-mail Away?
Not for Many; It's No LOL: Few US Doctors Answer
E-mails from Patients," The Virginian-Pilot & The
Ledger-Star, April 23, 2008, via Factiva, accessed
January 4, 2009.
20 "Understanding HIPAA Privacy," U.S. Department
of Health and Human Services Office of Civil Rights,
http://www.hhs.gov/ocr/privacy/hipaa/understanding/
coveredentities/index.html, accessed January 2010 ..

408
 Case study 4 American Well: the doctor will e-see you now
be used and disclosed. 21 Since1996, HIPM had been
revised in light of technological advancements, but
users of new health-care IT remained wary about
HIPM compliance and malpractice risk.
Payment
Physician adoption of new technology was also con-
tingent upon payors' willingness to reimburse for
electronic communication with patients. Physicians
were typically reimbursed on a fee-for-service basis.
For classification and billing purposes, services were
"coded" by the American Medical Association (AMA)
in conjunction with federal payor agencies. AMA
assigned a descriptive phrase and numeric code to each
medical service, and issued new codes periodically as
the nature of services evolved. Payors would not reim-
burse services without a code. As such, the issuance of
codes was critical to the success of new health-care IT
innovations. In 2009, codes had been issued for some
forms of health-care delivery via IT platforms, and the
number of health insurance companies covering such
care was increasing. However, most insurers remained
reluctant to cover online services due to concerns over
security, privacy, and uncertain patient demand. 22
Recent developments in health-care
prov1s1on
Tele-medicine services
The term "tele-medicine" described a range of pro-
grams and services that involved health-related elec-
tronic exchanges with the objective of improving
patient care. A number of companies offering such
services are described below.
RelayHealth
Founded in 1999, Georgia-based RelayHealth offered
online solutions for facilitating patient-physician com-
munication.23 Through RelayHealth, patients could
schedule appointments, update their health records,
and request lab results, prescription renewals, and
referrals. For nonurgent issues, patients could com-
plete interactive online questionnaires describing their
symptoms; 24 this information was then transmitted to
the patient's physician, who determined whether an
in-person office visit was necessary. 25 Most provid-
ers replied within eight business hours. RelayHealth
pioneered the use of secure (HIPM-compliant) e-mail
between patients and providers. In 2006, McKesson
Corporation, a health-care IT and automation supplier
acquired RelayHealth. Bymid-2009, 50 health-care sys-
tems and hospitals had contracted with RelayHealth. 26
Medfusion
North Carolina-based Medfusion, founded in 1996,
also facilitated online physician-patient communi-
cation through its Virtual Office Suite, a secure,
HIPM-compliant web-based platform through which
physicians could connect with patients by phone or
online. 27 This included appointment requests, bill
payment, prescription renewal, and other services.
Medfusion also offered virtual office visits, employing
an interactive questionnaire similar to that used by
RelayHealth. 28 In 2009, Medfusion served more than
28,000 physicians, including over 4,000 practices,
in various specialties across the U.S., and had over
1 million patient accounts. 29 "We are committed to
21 "Security 101 for Covered Entities," HIPM Security
Series 2, no. 1 (revised March 2007): 1-4, Centers for
Medicare and Medicaid Services, http://www.hhs.govI
ocr/privacy/hip aa/administrative/securityrule/
securitylOl.pdf, accessed December 2009.
22 Jonnelle Marte, "Doctor Is In - Online," Wall Street
Journal Online, August 9, 2009, via Factiva, accessed
June 2010.
23 "Future Health 100 - Giovanni Collela," http;//healths-
pottr.corn/fhlOO; and "Contact Us," RelayHealth web-
site, https://www.relayhealth.com/ general/contact Us/
default.aspx, accessed January 2010.
24 Anna Wilde Mathews, "The Doctor Will Text You Now;
Patients Visit With Their Physicians Online as More
Insurers Begin Paying for Digital Diagnoses," Wall Street
Journal Online, July 9, 2009, via Factiva, accessed
December 2009; and "Patient Quick Tour," RelayHealth
website, https://www.relayhealth.com/ general/
onlineQuickTour/html/PatientQuickTour.html, accessed
January 2010.
25 "Provider Quick Tour," RelayHealth website, https://
www.relayhealth.com/general/onlineQuickTour/html/
ProviderQuickTour.html, accessed January 2010.
26 "RelayHealth; 50 Health Systems and Hospitals Use
RelayHealth's Information Exchange Capabilities to
Create Connected Communities," Biotech Week,
October 28, 2009, via Factiva, accessed January 2010.
27 ''About Medfusion," Medfusion website, http://
medfusion.net/medfusion_about.html; and "Corporate
Overview," Medfusion website, http://medfusion.net/
docs/MF%20Co%200verview%200707. pdf, accessed
January 2010.
28 Mathews, "The Doctor Will Text You Now."
29 "Corporate Overview," Medfusion website.
409
Part 4 Case studies
meeting our clients' demands to optimize communi-
cation with their patients .... [Medfusion offers] a
self-service technology providers want to make avail-
able to their patients so that patients can be more
involved in their care," noted Medfusion CEO Steve
Malik in 2009. 30
TelaDoc
Founded in 2002, TelaDoc offered patients year-
round, 24-hour by 7-day phone access to a network
of physicians in a call center model. 31 In a 2007
interview, TelaDoc CEO Michael Gorton described
the question that had driven the creation of TelaDoc:
"What percentage of primary care visits could be han-
dled with just a telephone and an electronic medical
record?" 32 The company suggested patients use the
service when their PCP was unavailable (e.g., after
normal office hours), when traveling, for short-term
prescription refills, and to obtain physician advice to
supplement that provided by their PCP. To request a
medical consultation, which cost $38 or less, TelaDoc's
more than 1.6 million "members" could access their
online account or call TelaDoc. 33 After reviewing the
request and the patient's EHR, a physician licensed
to practice in the patient's home state phoned the
patient, typically within one hour. 34 After the consul-
tation, physicians updated the patient's EHR, which
could be viewed online by the patient and her PCP.
Cisco TelePresence
Founded in 1984, Cisco was a leading global provider
of networking technology. 35 Cisco's TelePresence,
which enabled live video conferencing and collabo-
ration, was adapted to the health services setting to
create HealthPresence, which combined TelePresence
with medical devices to enable real-time interaction
between health-care providers and patients. Using
HealthPresence, patients could interact with physi-
cians over video conference while also sending data
(e.g., blood pressure) collected from medical devices
to the physician, enabling a real-time evaluation. At a
specific time and location where the HealthPresence
technology was set up, trained professionals oper-
ated the medical equipment and helped the patient
communicate with the remotely located physician.
In 2009, Cisco was creating a nationwide network
based on HealthPresence technology in collaboration
with UnitedHealth Group, a large U.S. health insurer
410
whose provider network included nearly 600,000
physicians and 5,000 hospitals. 36
Convenient "Offline" care
Nurse practioners (NP)
The idea for NPs was conceived in the 1960s to
address the problem of PCP shortages in rural areas.
NPs underwent more training than registered nurses
and were licensed to perform many of the same tasks
as physicians. 37 In 2009, NPs worked in numerous
settings, including hospitals and emergency rooms,
private practices, retail clinics, nursing homes, and
schools. In addition to clinical care, NPs engaged in
health promotion and education, disease prevention,
and counseling. Each year, NPs engaged in approxi-
mately 600 million patient visits. 38
30 "Medfusion Maintains Leadership in Patient Portal
Performance," Medfusion press release (Raleigh, NC,
December 18, 2009), http://www.medfusion.net/docs/
Medfusion%20Maintains%20Leadership%20in%20
Patient%20Portal%2012-17-09F.pdf, accessed January
2010.
31 "What Is TelaDoc?" TelaDoc website, http://www
.TelaDoc.com/what-is-TelaDoc/; and ''About TelaDoc,"
TelaDoc website, http://www.teladoc.com/
aboutteladoc/overview/, accessed December 2009.
32 Michael Gorton, as quoted in "Interview: Michael
Gorton, TelaDoc," Scribemedia.org citing Consumer
Heath World, January 2007, http://health.scribemedia.
org/2007/01/15/michael-gorton-interview/, accessed
January 2010.
33 "What Is TelaDoc?" TelaDoc website.
34 "How Does It Work?" TelaDoc website, http://www
.TelaDoc.com/how-does-it-work/, accessed January
2010.
35 "Fact Sheet," Cisco website, http://newsroom.cisco.
com/dlls/ corpinfo/factsheet.html, accessed March
2010.
36 Chris Payatagool, "UnitedHealth Commits 'Tens of
Millions' to Cisco TelePresence Health Initiative,"
Telepresence Options website, http://www.
telepresenceoptions.com/2009/07/unitedhealth_
commits_tens_of_m/, accessed March 2010.
3 7 "A Comparison of Changes in the Professional Practice
of Nurse Practitioners, Physician Assistants, and
Certified Midwives: 1992-2000," U.S. Department
of Health and Human Services Health Resources
and Services Administration, http://bhpr.hrsa.gov/
healthworkforce/reports/scope/scope 1-2.htm, accessed
January 2009.
38 "FAQs about Nurse Practitioners," American Academy of
Nurse Practitioners website, http://www.aanp.org/NRI
rdonlyres/6 7BE3A60-6E44-42D F-9008-DF? C1F09 5SF7/
0/2010FAQs WhatisAnNP.pdf, accessed March 2010.
 Case study 4 American Well: the doctor will e-see you now
MinuteClinic
MinuteClinic was a provider of walk-in health clinics
based primarily in large pharmacy or grocery chains
(e.g., CVS, QFC, Cub Foods), as well as malls and cor-
porate and government offices. In 2009, MinuteClinic
had locations in 25 states offering medical care for
nonemergency needs, as well as preventive care
and vaccinations. 39 Clinics were open seven days a
week, including evening hours, and patients were not
required to make an appointment. In a visit that typi-
cally lasted no more than 15 minutes and cost $62,
a physician assistant or NP could examine a patient
for issues stemming from a minor illness or injury.4
Patients often paid out of pocket, though many health
insurance companies covered MinuteClinic services.
RediClinic
Like MinuteClinic, RediClinicwas a walk-in, retail-based
clinic offering treatment for routine health issues, as
well as vaccinations and certain health tests and screen-
ings. RediClinics were located in the stores of Texas-
based grocery and pharmacy chain HEB and staffed by
physician assistants and NPs. 41 "Research over the past
30 years has consistently shown that the primary care
provided by nurse practitioners is comparable in quality
to that provided by physicians," said Webster Golinkin,
CEO of RediClinic. 42 Several insurers covered RediClinic
visits-treatment of conditions such as ear infection and
common cold cost $79-though many patients paid out
of pocket. 43 Golinkin noted that, "research shows that
as many as 50% of the people who seek care at over-
burdened emergency rooms could be treated much less
expensively in convenient care clinics."44
Take care clinic
Part of Take Care Health Systems, a wholly owned
subsidiary of convenience and pharmacy chain
Walgreens, Take Care Clinics were located inside
certain Walgreens locations throughout the U.S.
Take Care Health Systems also managed workplace-
based health services through its Take Care Employer
Solutions division. In 2009, there were more than
340 Walgreens-based Take Care Clinics and some 370
workplace-based health centers.45 Offering walk-in
appointments starting at $65 for treatment of com-
mon ailments, Take Care Clinic claimed to "deliver
healthcare that fits your life."46 Illustrating the grow-
ing role of the "retail clinic" industry in delivering
direct-to-consumer health care, Walgreens pharma-
cies and Take Care Clinics began offering walk-in vac-
cinations for the HlNl flu virus in December 2009. 47
The entrepreneurial roots of
American Well
Before becoming an entrepreneur, Ido Schoenberg
was trained as a physician at the University of Tel
Aviv Sackler School of Medicine in Israel. In 1996,
Ido and his wife, Phyllis Gotlib, cofounded iMDsoft,
a health-care enterprise software company. iMDsoft
was among the first to recognize the opportunity for
IT to have an impact on the nature and quality of
critical care. Initially focusing on adult, pediatric, and
specialty (e.g., burn, cardiac) intensive care units,
iMDsoft developed an expert system that monitored
critically ill patients. Previously, doctors and nurs-
es had to continuously observe several monitoring
devices and integrate the information on the fly in an
attempt to translate independent clinical measure-
ments into a comprehensive clinical assessment. The
software of iMDsoft integrated the separate meas-
urements, enhanced the quality of decision making,
reduced errors, and improved the financial perform-
ance in one of the most high-cost units of any hospi-
tal. The company then expanded its product line to
cover the full peri-operative environment and general
wards. In 2000, Ido left the company but continued
39 "Locations," MinuteClinic website, http://www.
minuteclinic.com/en/USNClinics.aspx; and "Services
and Costs," MinuteClinic website, http://www.
minuteclinic.com/services/, accessed January 2010.
40 "Services and Costs," MinuteClinic website.
41 "Frequently Asked Questions," RediClinic website, http://
www.rediclinic.com/faq.asp, accessed January 2010.
42 Web Golinkin, "Health Care When You Want It," Wall
Street Journal, August 2, 2007, via Factiva, accessed
January 2010.
43 "Frequently Asked Questions," RediClinic website.
44 Golinkin, "Health Care When You Want It."
45 ''About Us," Take Care Clinic website, http://www
.takecarehealth.com/about/, accessed January 2010.
46 ''About Us: Our Commitment," Take Care Clinic website,
http://www.takecarehealth.com/about/ our-commitment.
aspx?tab=tc_our_commitment, accessed January 2010.
47 "Walgreens Offering HlNl Vaccine in 27 States,
Assisting Federal and State Governments in Nation-
wide Inoculation Effort as Many States Lift Priority
Group Restrictions," Take Care Health Systems press
release (Deerfield, IL, December 16, 2009), http://
www.takecarehealth.com/about/press-release.
aspx?id=12.16.09_1, accessed January 2010.
411
Part 4 Case studies
to serve as chairman of its scientific advisory board.
Gotlib stayed on to lead the company in becoming a
global leader in hospitalwide acute care information
systems.
In 2001, Ida became CEO of CareKey, a provider
of electronic health management systems that his
brother Roy founded the previous year using capital
raised from angel investors. A graduate of Hebrew
University Medical School, Roy had worked as an
internal medicine physician in Israel before pursu-
ing a research fellowship at the Center for Clinical
Computing and a master's of public health degree
from Harvard University. As a fellow, Roy published
a scientific paper in the British Medical Journal that
described a hypothetical online system of personal
health records (PHRs).
The brothers envisioned CareKey as a model for
enabling more direct interaction between patients
and health insurance companies. CareKey was first
to provide patients with Internet-based PHRs coupled
with a comprehensive personalized set of tools to self-
manage certain health and wellness issues, as well as
communicate effectively with nurses and other staff
members at their health plan. CareKey's platform
greatly assisted health insurance companies in tran-
sitioning from the episode-of-care model - simply
paying for each covered service an insured member
received - toward an advanced care-management
model, which sought to minimize members' long-term
health costs through prevention and early detection.
In the typical approach to care management, in which
nurses phoned patients when they were due for a test
or checkup, patient compliance was poor. CareKey
helped narrow this compliance gap by giving patients
access to a personalized, on-demand platform for
self-management and transactional communication
with health plans' staff and resources. After growing
CareKey over the next five years, Roy and Ido sold
the private company to the TriZetto Group, one of
CareKey's early corporate partners. By the end of
2009, more than 45 million people were using the
CareKey system (renamed CareAdvance).
After selling CareKey, Ido and Roy frequently met
to discuss the remaining gaps in health care and ways
IT could help bridge those gaps. Both agreed that
insufficient access to affordable, quality health care
constituted a major opportunity.
In the summer of 2006, Roy returned to Israel for a
few months. He recalled:
412
I settled in an apartment in Herzliya, Israel, overlooking the
Mediterranean, and got into the vacation routine of relaxing
on the beach in the morning, enjoying Jong lunches, and
hanging out with friends. The problem with taking time off
in your thirties is that all your friends are working during the
day and available only at night, so l had lots of time on my
hands. I started to reflect on all that we had learned through
our CareKey experience about health-care IT. Of all the
ideas ldo and I di~cussed, the issue of affordable, conven-
ient access to quality care, particularly in terms of place and
time of delivery, was an area where technology could really
make a difference. I thought about my own experience as
a clinician. Health care for patients is still perceived as see-
ing a doctor. That is how it has been for centuries- physi-
cally bringing the pain to a health-care professional. I asked
myself whether someone is developing the technology to
imitate that interaction with a doctor online. But everyone
still thought the Internet was about redistribution of medi-
cal records. People did not recognize that you can redis-
tribute medical services. And there was the opportunity. At
that point, we decided the vacation was over. It was time to
found a new company.
Online care: from concept to reality
The two brothers formed American Well in 2006.
As chairman and corporate CEO, Ido oversaw the
company's business strategy and affairs, while Roy,
who served as president and CEO of American Well
Systems, was in charge of product development and
operations. The cofounders believed technology could
be leveraged to extend traditional health care into
people's homes and workplaces. They envisioned
a brokerage system that used web-based technolo-
gies and telephony to bring patients and physicians
together in real time. "In most health care today,"
explained Ido, "supply and demand is geographically
and temporally constrained - by the physical location
and time availability of physicians and patients. We
devised a service that eliminates these restrictions and
links excess supply, wherever it is located and when-
ever available, with excess demand."
Physicians who were enrolled in the system would
be able to log on essentially any time they wanted to
conduct 10-minute sessions with patients. A patient
would log on to the system, provide her credit card
information, indicate what type of doctor she would
like to consult with, and instantly get a choice of the
current doctors online that matched her request. The
chosen doctor would receive access to the patient's
medical records and then interact with the patient
via the phone or the Internet (including video or live
 Case study 4 American Well: the doctor will e-see you now

chat options). Once the interaction ended, the system working as usual. but on the weekend will be able to make
would manage the billing process seamlessly. Ido additional money. Young docs will be able to add a secon_d
shift in the evening time, in case they have to leave their
explained the novelty of the American Well solution:
office early to pick up their kids from day care or sc~ool.
"All health-care today is point-to-point: doctors and Even retired docs will be able to come back to practice -
patients need to be at a specific place at a specific people that quit midlife and didn't want to llve the life of a
time in order for the service to take place. We've built traditional clinician.
a platform that is many-to-many: there is no appoint-
ment, no specific time and place, but rather care can
Choosing a customer
be delivered from any place at any time. The American
Given the value to patients and doctors, a direct-to-
Well marketplace coordinates this."
consumer (DTC) model, where American Well would
The novel system was designed to provide different
directly sign up patients and doctors to a nationwide
value propositions to the different parties involved. For
system run by the company, was definitely conceiv-
patients, the focus was on immediacy, convenience,
able. As Yael Glassman, vice president of marketing,
quality, affordability, and choice. The company rec-
noted, "if we were running the service on our own,
ognized that there would likely be skepticism about
as a DTC company, we would have total control over
whether physicians could effectively assess patients'
the user experience. Not to mention that we would be
health needs without a hands-on physical examination.
able to establish ourselves as the one and only place to
However, there were other dimensions that American
go to for Online Care." Yet, there were also significant
Well would be adding: there would not be a need
benefits to building American Well as a B2B company
to schedule the appointment in advance, the patient
that marketed to health insurance companies. Selling
would be able to take the appointment at her location of
to insurers would be similar to a franchise model,
choice (as long as it had a phone or Internet connection,
"though the end product is different between states
preferably with a webcam), and it would offer a new
and health plans. We can adapt the platform and the
form of privacy, thus eliminating potential elements
interfaces for patients and physicians for each health
of shame. (For example, it was believed that many
insurance company," Glassman explained.
of those with symptoms of depression did not seek
One argument for pursuing a DTC model was that
medical attention because of the social stigma associ-
adoption by insurance companies could be hampered
ated with the disease.) 48 In addition, patients using
by the volatile U.S. health-care environment, com-
American Well's system would enjoy a much greater
bined with the economic recession. President Obama
choice of providers and could seek a second opinion
had committed to reforming the health-care system,
immediately after receiving a diagnosis. The patient
and it seemed he might actually be the first president
experience was also more personalized: patients could
to do so in decades. However, 11 months after Obama
access and manage their online medical information,
took office, it was still unclear what such reform
personal self-management tools, and records of care
would look like. As a result, a wait-and-see attitude
before and after connecting with a physician. (See
started to dominate the health-care services industry.
Exhibit 6 for a description of the patient experience.)
Many health insurance companies had implemented
For doctors, the value proposition was different.
spending freezes, and it remained unclear when such
Having been clinicians themselves, Roy and Ida were
restrictions would be lifted.
well aware of what a service provider needed to put
Danielle Russella, executive vice president of sales,
in place before she could practice medicine. That
argued that opting not to be a DTC company could be
included accreditation, leasing and equipping an
a competitive advantage: ''I'm not saying we can't do
office, hiring and training staff, setting up a transac-
DTC, but there are other companies which are trying
tion system, purchasing necessary insurance, and so
to do that with call centers of doctors. In fact, that
on. The American Well system would alleviate the
[could be] a differentiator for us."
need for much of that infrastructure and provide doc-
tors with a new level of flexibility, as Roy explained:
Docs that have had a clinic for many years and are fed up 48 M. Goodman et al., "Industry Overview: A Bright Out-
with the routine will be able to work in their clinic less days look for Depression," Morgan Stanley Equity Research,
and make up the revenue from home. Others will keep June 7, 2002.

413
Part 4 Case studies

Exhibit 6 American Well consumer experience: description and screen shot

American Well makes it easy for consumers to talk to physicians, immediately, from home. Consumers don't need
to call ahead or wait for a doctor. By logging on or using their phone, consumers can connect to a physician of
their choice immediately. Of the many doctors available on American Well, the service helps consumers choose
the physician who is right for them. Consumers can review doctors' credentials, satisfaction ratings, and even
watch personal video introductions. Once the consumer selects a physician he or she is comfortable with, a live
conversation begins.
Some consumers may be unsure about what kind of physician to talk to or may have difficulty describing the exact
nature of their symptoms or conditions. Consumers may present with a symptom, (e.g., headache) and need help
identifying the right type of provider to see. American Well guides the patient to the most appropriate provider
and helps articulate discussion topics for the conversation. By helping to structure the consultation process, the
service ensures that consumers maximize their time with the physician.
Once connected, the consumer can interact with the physician using online chat, live web-conferencing,
or phone. The consumer can also share relevant medical information and past conversations. American Well
maintains a full record of the discussion, allowing consumers to forward comprehensive care reports to primary
care physicians, ensuring continuity of care.

AMERicAN WELL .. '

!Q ckat
... , ~
;;
x
8 ~a, :a~l:i:~~:~:'!'~: to IN riue~e~ c-f 1.ho d')
1
ta!,. t
""ii
~
:z:
SJ, ~~~::.::~~~~:te:l fe'l ~ .
IJ " ; t'-! ~,. ~ , -~e~.
i. ;>-/, ;;, t."C .;
lfift ~~:e1~:1 ,~ ~u s~,t~1ed a ful1c ... uP c.oo~~ 'Wtc (f e "Ft1ov de tr~r ts"
1
~
ab: ~

8 ::~~~:es~.:,~~~' ct r~: ~
i
/;.

[l ~~'9""':~~~,bed " ti:'J t is r.oc.ensr/. ~

:i
;,
~ ~:e,.::tl~~a~a.:l::ftj t''C~c1";-: o:n (~e PTo. Cu er,r~e:":' "d::. .2
s.
.
$o I! ,, 9roboNy ces C' let
.schoe.iu'c!: an apt,er:n"ent
"'ct~ dt~S.S ttus .,.r.h .i rufse thar. t~ ~
l
t
a
v

Source: Company documents.

Ultimately, American Well decided health insur-
ance companies should constitute its primary target
customer. Although the industry's spending freeze
was worrying, Ido believed insurers would view
American Well's service as part of a solution to their
problems. Moreover, these customers could serve
American Well as "aggregators," providing easier
access to large pools of patients and doctors. They
could also facilitate ac:;cess to patients' medical records,
and, importantly, they could sponsor online medi-
cal consultations directly or indirectly (via employer
groups that would promote its use). Insurance com-
414
panies had internal resources they could commit to
the marketing efforts needed to encourage physicians
and patients to use Online Care. In addition, because
health insurance companies were financially strong,
they represented a more lucrative customer chan-
nel than individual patients. (See Exhibits 1 and 8
for major health insurers' 2008 revenues and net
incomes, respectively.) The value proposition for
health insurance companies had a clear economic
component, as online visits would cost less than in-
person office visits. Under available health plans,
health insurance companies paid PCPs depending op
 Case study 4 American Well: the doctor will e-see you now

Exhibit 7 Top publicly owned managed care organizations, 2008 revenues($ millions)

$90,000
$80,000

-Ill
c:
$70,000

~ $60,000
E $50,000
~
Ill
<II $40,000
:I
c:
~ $30,000
/!}.
$20,000
$10,000
$-

~Q # e~
<:-'b ~'b
~,,_o 9.o ~'li
~
~"<:-
~ ~"
~
e1f.
~e
# I
.:J~
J
Source: Adapted from Phil lip M. Seligman, "Healthcare- Managed Care- Industry Profile," April 16, 2009, Standard & Poor's Industry Surveys via
NetAdvantage, accessed February 2010.

Exhibit 8 Top publicly owned managed care organizations, 2008 net income($ millions)

(
$3,500

-
Ill
c:
$3,000

~ $2,500
e
~ $2,000
<II
E
0
v $1,500
.5
....
<II
z $1,000
$500

$-

$(500)
.:,.Q ...~ -<:'-'b ~'b
<- ~o e"
~
~?i
~"<:-
q,1>
~e ~"
~e
#
.:J~

Source: Adapted from Phi llip M. Seligman, "Healthcare- M anaged Care- Industry Profi le," April 16, 2009, Standard & Poor's Industry Surveys via
NetAdvantage, accessed February 2010.

415
Part 4 Case studies
Exhibit 9 Breakdown of costs for commercial health plan and estimated savings using on line care
The actuarial model estimated that Online Care would enable a $3.36 net difference in first-dollar costs
per-member-per-month, representing a 9.3% difference on a starting cost estimate of $36.06 in traditional
service on a per-member-per-month basis.
Service Utilization per
1,000 Members
Estimated first-dollar values
Emergency department facility 161.05
Emergency department physician 142.59
Acute physician office visits 2.762.99
O/P psychiatric visits 286.81
Urgent care visits 79.81
3,433.25
Source: Adapted from Art Wilmes, FSA, MMA, "What if Healthcare Worked Like iTunes?" The Actuarial Digest, Summer 2009, p. 10.
the complexity of the visit, geographic location, and
other factors; but on average, PCPs were paid about
$100 for new patients and $75 for existing patients.
Most specialists were typically paid at levels well
exceeding those earned by PCPs (from hundreds to
thousands of dollars). The typical copay (portion of
cost paid by the patient) for a primary care office visit
was approximately $15 to $20, and for a specialist
visit was approximately $25 to $30, though these
varied depending on the patient's health plan.49 For
emergency room visits, payors reimbursed hospitals
and physicians also according to the complexity of
care delivered. This could vary extensively - from a
brief visit to multiple tests (e.g., X-rays and CT scans)
to complex surgery- and cost hundreds to thousands
of dollars. A 2009 analysis from The Actuarial Digest
estimated that Online Care could save insurers $3.36
per patient per month (see Exhibit 9).so
Roy elaborated on that point:
One of our main value propositions to health insurance
companies will be significant savings. The amount they re-
imburse the physician per 10-rninute online consultation,
expected to be roughly $25, will be less than the reimburse-
ment of an office visit and significantly less than that of an
emergency room visit. Being able to resolve health prob-
lems online, at the cheapest point of care, will create those
savings. In addition, our platform will allow treating medical
conditions earlier because of the immediacy of receiving
professional medical attention. For patients, this will mean
better health outcom~s. but for the health insurance com-
panies, it will mean less costly complications.
Another value proposition will be the ability of health in-
surance companies to "open their doors" to nonmembers.
416
Allowed Cost Allowed per
per Service Member per Month
$933.58 $12.53
142.25 1.69
82.33 18.96
100.92 2.41
71.26 0.47
$126.05 $36.06
Health insurance companies have a valuable asset, their
network of doctors, but few ways to monetize that asset.
The American Well platform will allow offering online con-
sultations to anybody willing to pay out of pocket. Health
insurance companies will be able to determine how much
they want to charge for that service, with $45 to $50 seem-
ing quite reasonable, and generate revenue from a market
they never pursued before.
Ido added, "Health insurers offering Online Care
could also see significant revenue and strategic gains
by opening their physician network to nonmembers.
Offering such a service to nonmembers can facilitate
a dialogue with potential new clients often covered
by the competition." Health insurance companies
would also see benefits from the improved provider-
driven care management enabled by Online Care. Ido
explained:
Rather than a nurse working for the health insurance
company calling the patient at home out of the blue at an
inconvenient time to explain how taking future steps could
improve their health, our system can alert physicians or
other providers during an active online session that the
patient's gaps in care warrant discussing certain interven-
tions. Patient compliance is likely to be much higher when
a physician recommends a certain test or service to a
patient-and when the patient is ready to receive guidance
11
( a teachable moment") in a session she originated. Access
49 "Kaiser/HRET Survey ofEmployer-Sponsored Health
Benefits, 2009," Kaiser Family Foundation website,
http://ehbs.kff.org/, accessed February 20010.
50 Art Wilmes, FSA, MMA, "What if Healthcare Worked
Like iTunes?" The Actuarial Digest, Summer 2009, p. 10.,
 Case study 4 American Well: the doctor will e-see you now
to personalized content and tools before and after theses-
sion is also helpful. Employer groups are much more likely
to sponsor this new type of highly targeted care manage-
ment versus the existing model.
Ido believed health insurance companies would
also see a reputational benefit by offering Online
Care. Historically, the public image of health insur-
ance companies had often been unfavorable. This
was especially true recently, as health-care reform
advocates argued in editorials and on nightly news
programs that insurance companies were out of
touch with average Americans and primarily driven
by profit. By offering a novel, convenient, afford-
able, and personalized care service, insurers could
build goodwill with their members. Most important-
ly, insurers could improve their image by offering
Online Care to nonmembers, including underserved
populations, individuals living in remote locations,
disabled patients, and uninsured Americans whose
lack of access to health care was frequently blamed
on insurance industry greed. Insurers could be seen
as proactive in solving other health-care issues, such
as clogged emergency rooms.
Lastly, health insurance companies could use
Online Care to address one of the most intractable
problems they faced: aligning their financial incen-
tives with those of physicians. Because physicians
were usually paid on a fee-for-service basis, they were
often incentivized to increase the number of services
they delivered; meanwhile, more services resulted
in higher costs for insurance companies. However,
health insurers' costs could decrease if physicians
encouraged their patients to use Online Care for non-
emergency and follow-up appointments. American
Well believed that by arranging to share these new
cost savings with physicians, insurance companies
would encourage greater Online Care utilization by
physicians, resulting in a win-win situation for both
parties. Moreover, Online Care could improve reten-
tion of PCPs and other providers by offering them a
more attractive way to practice.
Employers also stood to gain from the American
Well model. Most medium-size and large compa-
nies provided health benefits to their employe.es and
negotiated with health insurers for an attractive ben-
efit plan at the lowest possible cost to the employer.
The value proposition to employers was threefold:
first the convenience and choice of American Well's
' mainly raised capital from high-net-worth individuals who
service would likely boost employee satisfaction and
improve retention; second, because faster access to
care would enable discovery of health issues at an
earlier stage, employers would probably see higher
employee productivity and incur less cost associ-
ated with catastrophic illness and time off from work;
and third, kiosks with webcam-equipped computers
could be added to worksite health clinics, afford-
ing employees the convenience of American Well's
service and avoiding the need to take time off to visit
a doctor. Early trials had shown high employee utili-
zation of Online Care-equipped worksite clinics. Ido
commented, "Because of the strong value of Online
Care to employers, health plans offering the service
can be significantly more attractive when competing
for employer group business, especially in the 'open
enrollment' period."
Capturing value for American Well
As far as the business model was concerned, American
Well would seek a combination of upfront and recur-
ring revenues. Health insurance companies offer-
ing Online Care would pay a one-time fee for each
"addressable life" (individual members and nonmem-
bers) who would have access to the service, an annual
maintenance and support fee for each addressable
life (a percentage of the one-time fee), and an annual
hosting (on computer servers) fee per addressable
life. While this revenue stream was independent of
utilization, American Well would also earn $2 to
$7 for every Online Care transaction (a session that
lasted longer than 10 minutes would be prorated).
In addition, if the health insurance company wanted
continued tailored assistance in IT or marketing,
American Well would provide these services on a per
project basis (as a consultancy).
Rolling out the plan
With a business plan in hand, Ido and Roy set out to
finance their new company. However, their previous
experiences led them to shy away from traditional
financing practices. Ido recalled:
J would urge entrepreneurs not to think sequentially. The
"salami financing" of seed, early, mid-stage, and late-stage
rounds makes management focus on milestones that may
not be relevant after a while. Every round creates anxiety
and distraction and is bad for the company's development.
It is better to over-finance and worry less about dilution. We
are sophisticated investors, many of whom invested in our
417
Part 4 Case studies
previous companies. Financing is not an event; it is a mark
of a relationship. So you need to look for investors that are
like minded. High-net-worth investors are often entrepre-
neurs who made their money the same way as we are trying
to. They are like minded.
We raised capital twice - the first round took 10 days, and
the second round, a week. But that is the result of long-term
relationships and preparing people. When it was time, we
put a fair term sheet on the table and did not open it for
negotiations.
Having secured financing, the company began the
daunting task of building the platform. While many
of the ideas in the business plan required novel tech-
nology solutions, those were also an opportunity
for the company to develop proprietary intellectual
property that could serve to block competition in the
future. American Well invested $70 million to create
a sophisticated technology platform that enabled phy-
sicians and patients to transition seamlessly among
communication modalities - phone, video conference,
and live online chat - and also allowed asynchronous
communication (e.g., leaving a voice or e-mail mes-
sage). Using this platform, a patient could begin chat-
ting with a physician online, then, without any time
lag, reroute the conversation to his phone by simply
pressing a button. In addition, the technology allowed
patients to view the queue for a specific doctor online,
and, if the patient wished to speak to that specific doc-
tor, she could add herself to the virtual queue. When
the doctor became available, the patient would be
notified by phone or e-mail. "The platform eliminates
clinical waste," explained Ido. He continued:
Not just with respect to wasted cost, but also getting the
wrong service. Today, many patients see a doctor when their
issue could be handled by a nurse practitioner, and patients
often see nurse practitioners when they could just be get-
ting advice by accessing personalized content or tools. By
offering a prescreening tool, our system can also improve
the match between medical need and care recommended,
with tiered pricing and reimbursement depending on the
level of care provided.
From a marketing standpoint, the company put an
emphasis on anticipating potential future barriers
to adoption and addressing them ahead of time.
For example, physicians' fear of malpractice litiga-
tion was one such anticipated barrier. Matt Jarman,
American Well's vice president of corporate develop-
ment, elaborated:
We worked with a leading insurance company in develop-
ing unique malpractice coverage for Online Care at the cost
418
of a few dollars per session. It will cover physicians using our
platform on a per consultation basis, regardless of whether
their regular malpractice coverage includes Online Care or
not. What was interesting to realize was that the cause of
malpractice insurance claims is often something physical
which the doctor did to a patient during the office visit. By
keeping the interaction on line, less is likely to go wrong.
Once the platform was near completion, Ido, Roy, and
Russella started to present the concept in industry
circles. As Russella recalled:
Prior to American Well, I worked for one of CareKey's com-
petitors. In fact, ldo and Roy were my formidable competi-
tors and that's how I got to know them. As a result, we had
complementing Rolodexes in an industry that values rela-
tionships and track record. We started to meet with execu-
tives from the large health insurance companies. Initially,
they had several challenging questions for us. First, they
had concerns about overutilization-giving people a new
"hobby" that will lead to overconsumption of health-care
services. Second, they were concerned about the ability
to recruit doctors into the system. They would often ask:
"Aren't our doctors already overworked?" Third, there were
questions about practicing medicine without being able to
perform a physical examination. But we had answers for
all those concerns. For example, we acknowledged that
the system is not for every medical condition. In fact, we
facilitated a major study by the firm that sets the industry's
insurance guidelines to determine which medical condi-
tions are most appropriate for Online Care [see Exhibit 10
for selected episodes of treatment]. For the rest, there is still
the office or the emergency room.
American Well made a point of attending and often
speaking at industry-related conferences. Roy's and
Ida's past track record and the desire of health-care
executives to learn about how they could innovate
often resulted in packed sessions whenever they
spoke. At the 2007 WHIT conference, Ido and Roy
delivered a talk and hosted a dinner, inviting select
health-care industry players as guests. Among the
attendees was an executive from the Hawaii Medical
Service Association (HMSA), a member of the Blue
Cross and Blue Shield (BCBS) Association. Ido and
Roy had established a positive rapport with BCBS
during their time at CareKey, and they believed
Hawaii would be an ideal environment for launch-
ing American Well's service. First, access to care was
an issue in Hawaii: due to the unique geography
of the state, HMSA often had to fly doctors from
one island to another to meet its members' needs.
Second, the state was small and isolated, the perfect
setting to experiment with the new service. Ida con-
vinced the executive to seriously consider American
 Case study 4 American Well: the doctor will e-see you now

Exhibit 10 Selected episodes of treatment potentially suitable for online care

Acute Maintenance (cont'd) Maintenance (cont'd)

Minor infectious disease Benign hypertension, Ongoing Rx therapy w/o provider
Tonsillitis, adenoiditis or pharyngitis, w/ or w/o co-morbidity intervention (cont'd):
w/o surgery Chronic sinusitis, w/o surgery Parkinson's Syndrome therapy
Allergic rhinitis Asthma, w/ or w/o co-morbidity Neurology
Acute sinusitis Chronic bronchitis, w/ or w/o Glaucoma therapy
Other ear/nose/throat infection, complication, w/ or w/o co-morbidity Ophthalmology
w/o surgery Emphysema, w/ or w/o chronic Anticoagulant therapy
Minor ear/nose/throat inflammatory bronchitis Anti platelet therapy
conditions, w/o surgery Inflammation of the esophagus, Antiarrhythmic therapy
Acute bronchitis, w/o co-morbidity w/o surgery Hypertension/Heart Disease
Minor infectious pulmonary disease Ulcer, simple therapy
other than acute bronchitis Irritable bowel syndrome Cardiology
Gastritis and/or duodenitis, simple Hiatal hernia, w/o surgery Fluoride therapy
Monilial infection of the vagina (yeast) Hemorrhoids, simple or complicated Sinusitis/Rhinitus therapy
Minor burns w/o surgery Otolaryngology
Minor skin trauma, except burn Adult rheumatoid arthritis, Asthma therapy
and open wound w/o co-morbidity Bronchodilator therapy
Major orthopedic trauma other than joint degeneration, localized, Emphysema/COPD therapy
fracture or dislocation, w/o surgery w/o surgery Pulmonology
Minor orthopedic trauma Ongoing Rx therapy w/o provider Inflammatory Bowel Disease
Bursitis and tendinitis, w/o surgery intervention: therapy
Other minor orthopedic disorder Non-HIV Antiviral therapy Irritable Bowel Disease therapy
Exposure to infectious diseases HIV/AIDS Antiviral therapy Acid Peptic Disease therapy
Prophylactic proc. other than inoculation Leprosy therapy Gastroenterology
& exposure to infect. disease Infectious diseases Benign Prostatic Hypertrophy
Poisonings and toxic effects of drugs Diabetes Mellitus therapy therapy
Hyperuricemia/Gout therapy Incontinence therapy
Maintenance Impotence therapy Urology
AIDS Antihyperlipidemic therapy Vaginal Antifungal therapy
HIV sere-positive without AIDS Nutritional therapy Gynecology
Insulin dependent diabetes, Pancreatic enzyme replacement Acne therapy
w/ or w/o co-morbidity therapy Antifungal/skin therapy
Non-insulin dependent diabetes, Respiratory Enzyme Deficiency therapy Topical Retinoid therapy
w/ or w/o co-morbidity Thyroid Hormone Replacement Dermatology
Female sex gland disorders therapy Arthritis/Anti-inffam matory
Male sex gland disorders Testosterone Replacement therapy therapy
Gout Weight Reduction therapy Osteoporosis/Bone Disease
Hyperlipidemia Endocrinology therapy
Obesity, mild Colony Stimulating therapy Skeletal Muscle Spasm therapy
Obesity, morbid w/o surgery Hematology Orthopedics & Rheumatology
Minor depression Anxiety/Panic Disorder therapy Contraceptive therapy
Anxiety disorder or phobias, minor Depression therapy Hormonal Replacement therapy
Migraine headache, common Mania/Affective Disorder therapy Preventative and administrative
Eating disorder Psychosis/Schizophrenia therapy Insomnia therapy
Psychosexual disorder Psychiatry Pain therapy
Alcohol dependence, w/o complication Anticonvulsant therapy Isolated signs and symptoms
Migraine headache, common Alzheimer's Disease therapy
Congestive heart failure, Migraine therapy
w/ or w/o co-morbidity Multiple Sclerosis/ALS therapy

Source: Compiled from Arthur l. Wilmes, FSA, MAM, "An Actuarial Analysis of Online Care-Appendix: Chart F.5," Milliman, pp. 1-17.

419
Part 4 Case studies
Well's solution, and after a series of meetings in
Hawaii, in January 2009, HMSA became the first
health insurance company to offer Online Care using
American Well's platform. Although HMSA had only
750,000 members, the company purchased 1.3 mil-
lion "addressable life" licenses, as it anticipated utili-
zation by nonmembers and, subsequently, an increase
in membership.
Moving forward: important decisions
ahead
By the fall of 2009, American Well was still busy
supporting its first launch in Hawaii and prepar-
ing to launch for three other customers. BCBS of
Minnesota was the first health insurance company
in the continental U.S. to adopt, initially rolling out
the system to its own 10,000 employees and family
members, with the intention of making it available
to employer groups and additional consumers later.
BCBS of Minnesota was also the first to deploy
virtual worksite clinics based on American Well's
platform. At the same time, TriWest Healthcare
Alliance, a provider of health-care benefits for U.S.
military personnel and their families, decided to
use American Well's platform to connect its mem-
bers with psychologists and psychiatrists. Lastly,
Optum Health, a UnitedHealth Group company,
was getting ready to go into production with its
"Now Clinic" service in Texas (with plans to expand
nationwide) and use American Well technology.
American Well was also in the process of business
discussions with other health insurers and other
companies across the U.S.
Everyone at American Well agreed that current and
future launches by health insurers needed to be flaw-
less and demonstrate the potential of the American
Well solution. Glassman explained:
We work closely with our clients and provide them access
to our knowledge and experience, as well as materials we
developed as part of our Go to Market Center of Excellence,
so that they will succeed in their launch, We assist them in
recruiting physicians to the service, in marketing to patients,
and in communicating with the media. We provide channel
management and consulting services by a dedicated team
of American Well employees.
As these promising developments were unfolding,
management was considering several new opportuni-
ties for expanding American Well's reach.
420
Product development
Roy and Ido had begun developing the concept for
American Well's next-generation product. Code-
named Team Edition, the new product would revolu-
tionize the interactions between doctors and provide
value to the entire health-care chain.
Traditionally, patients who needed to be evalu-
ated by a specialist would receive a referral from
their PCP, see the specialist per his or her scheduling
availability, and then typically return to their PCP
for further follow-up, again per their availability.
The professional dialogue between the specialist
and the patient's PCP would be conducted via visit
reports and could take weeks to complete. With
Team Edition, once a PCP determined that a con-
sultation with a specialist was in order, the PCP
would be able to log on to the system and reach out
to any of the specialists who were available online.
The consultation would take place right then, with
the patient still in the PCP's office. The cycle time
from the patient's initial visit to the follow-up with
her PCP would be reduced from weeks or months to
minutes. Team Edition could also improve the qual-
ity of care. Resolving medical problems early, before
further complications arose, would offer patients
a better quality of life and deliver significant sav-
ings to health insurance companies. (See Exhibits
11 and 12 for average waiting times for patients to
see a family practice physician and three specialties,
respectively.)
Team Edition would also relieve some medical
licensing barriers that most states had tradition-
ally put in place. Most often, state governments
limited the access of their residents to physicians
who were licensed to practice in their own state.
However, PCPs were typically free to consult regard-
ing their patients with specialists from anywhere in
the United States.
Team Edition seemed to Ido and Roy like a natu-
ral extension of American Well's business plan. It
would leverage the company's existing technology
platform, add value to its existing stakeholders, and
further drive the company toward its ultimate goal:
being the market leader in enabling Online Care.
However, they were less certain about the right
timing for such a rollout. Trying to push multiple
services in one sales pitch could be too confusing for
certain health insurance companies and might delay
adoption of the core product.
 Case study 4 American Well: the doctor will e-see you now

Exhibit 11 Average time new patients wait for appointment with family practice physician, selected
cities, 2009'

I
Miami I
l
Seattle l
Portland
Dallas
I
=
Philidelphia
Atlanta l I

Minneapolis
Detroit
I
I
I I I
Denver I
I !I II
Houston ! II
San Diego I I
New York
I
II I
Il
I
Washington, D.C. I
I
Los Angeles

Boston
I I
--e------~-~ ~----~J

0 10 za 30 40 50 60 70

Average Time to Appointment {days)

Source: Adapted from "2009 Survey of Physician Appointment Wait Times," Merrit Hawkins & Associates, p. 9, http://www.merritthawkins.com/pdf/
mha2009waittimesurvey.pdf, accessed February 20? O.
'Data reflect results of phone survey of physician offices (10-20 per metropolitan area) conducted by Merrit Hawkins & Associates from September
2008 to March 2009.

Market opportunities preliminary information about his ailment. Many

Although they had focused solely on the health insur-
ance market to date, Ido and Roy saw several other
potential customers along the health-care value chain.
They believed delivery networks-hospitals, chains of
health clinics, and other systems of providers-could
achieve cost efficiencies, provide better customer
service, and boost revenues by adopting American
Well's platform.
Hospitals, for instance, could install an Online
Care kiosk in emergency rooms, allowing patients in
the waiting area to consult with a physician online
while waiting to be seen. Instead of sitting idly (and
growing increasingly frustrated), patients could take
advantage of excess physician capacity through the
online system. Moreover, by the time hospital per-
sonnel could see the patient, he would already have
patient visits could thus be expedited, and the hospi-
tal's overall efficiency improved. Similarly, patients
could consult a physician online from home, before
leaving for the hospital. Beyond the ability to bal-
ance loads across facilities, hospitals in low-demand
geographic locations could leverage their physicians'
excess capacity using Online Care; doing so would
also build relationships with patients, who might then
be more willing to visit the particular hospital despite
the distance.
Retail clinics could also augment their services
by installing Online Care kiosks. American Well's
research had revealed a patient preference to receive
care - even Online Care - at dedicated health-care
sites such as retail clinics. Because NPs were usually
the highest-level clinical staff at retail clinics, offering

421
~
N Exhibit 12 Average time new patients wait for appointment for cardiology, dermatology, and obstetrics/gynecology {OB/GYN), .,,
Ill
N
selected cities, 2009 ;::i.
.j:>.

n
~

70 -
Ill
"'c:
0.
iii'
. "'
60
Cardiology Dermatology OB/GYN

so
iii
~
-
"'C
QI
E 40
'

I=
.~

::"'
QI 30 - -
bl)

"'...
QI

~
20 --- - - - ----- .,_____ -
- -
-
10 - - -----I
-
----- f--
- - - - ..._ - .....__
----- .....__ -

0
J_ - ..__
- _[_ -
'!f.,"b ~o~ ~tS'
e._ c,~ o~ -::..,e"' ~
:-..
~"' ~ ~ ~ 0 ':\.e (.,
~'l>~ Q~ ~~ ~ ~ -~~ ~o ~o ~ ~'I><:> e~ ~.... Q
~
~o~ <:f Qe V:-0~ ~~~ ~ e~
~<::> ~e
~ ;;."r.
'{$-~ ~o
~....
~~
Q~ ,e o~'
'Vo"' ~ ~ ~'(" ~ ~~
.~'("

Source: Adapted from "2009 Survey of Physician Appointment Wait Times," Merrit Hawkins & Associates, p. 8, http://www.merritthawkins.com/pdf/mha2009waittimesurvey.pdf,
accessed February 2010.
Data reflect results of phone survey of physician offices (15-20 per metropolitan area) conducted by Merrit Hawkins & Associates from September 2008 to March 2009.
 Case study 4 American Well: the doctor will e-see you now
access to physicians through an online service could
boost patients' perceptions of the legitimacy of retail
clinics. Retail clinics could also use the Online Care
platform if the NP was not able to address a patient's
issue or if the patient wished to obtain an immediate
second opinion.
Pharmacy chains represented yet another potential
customer base. Pharmacists provided expertise on
prescription medicine usage, potential side effects,
dangerous drug combinations, and other important
information. However, many patients failed to ask
questions of pharmacists in person, whether because
they were embarrassed to do so in front of other cus-
tomers or simply forgot to ask at the time of the trans-
action. If pharmacists were available online using
American Well's platform, patients would have the
freedom to ask pharmacists questions at the time and
place of their choosing.
Finally, American Well was considering expand-
ing its service internationally; would-be customers
in Australia, Germany, and the United Kingdom had
already expressed interest. Pursuing this route would,
of course, require extensive changes to American
Well's organizational structure. The company would
also have to tailor its service to each individual
market, as regulations governing privacy and online
transfers of health information varied from country
to country.
As they considered these options, Ido and Roy rec-
ognized that any new venture would require a sig-
nificant marketing investment and divert resources
from the U.S. health insurance market, where
American Well was just starting to make inroads.
Moreover, serving both the insurance and deliv-
ery network markets could create conflicts of inter-
est with respect to noninsured patients. If nonmem-
bers accessed American Well's platform through the
insurance company channel, the insurer would reap the
revenues; however, if this patient population accessed
physicians or pharmacists through a hospital, retail
clinic, or pharmacy channel, the insurance company
would lose out.
A change of direction?
Ido and Roy were pondering these questions as their
flight began its descent into Washington, D.C. To
both brothers, it seemed that the Team Edition serv-
ice offered a value proposition that would appeal to
patients, providers, and payors alike. Team Edition
held the promise of alleviating some of the greatest
frustrations in a health-care delivery system fraught
with costly inefficiencies. Roy and Ido also agreed
that American Well could offer significant value to
health-care delivery networks. But with only limited
adoption of its core service so far, was it too soon for
American Well to launch a major new undertaking?
Furthermore, pursuing any of these opportunities
would likely require additional hiring (at the end of
2009, the company had under 100 employees) and
securing additional funds.
Ido and Roy believed that the essence of American
Well's model - linking real-time excess capacity with
real-time excess demand - had applications well
beyond the health-care industry. Numerous types of
expertise -legal advice, accounting services, even reli-
gious counseling - could be delivered using American
Well's platform. As they weighed the benefits and
disadvantages of pursuing the almost endless oppor-
tunities they envisioned, Ido and Roy kept returning
to the same quagmire: diverting resources to focus
on new ventures could undermine the company's
initial Online Care rollout, but if American Well
waited too long, would another company seize these
opportunities? They agreed that the most important
thing was to maintain excellent client satisfaction,
concluding that "you are only as good as your first
failure."
423
Spreadshirt
Mass-customization on the Internet

Introduction Rhine-Westphalia), where he studied business admin-

Spreadshirt has an unrealistic business model which is char-
acterized by arb itrary investment planning and decl ining
market development.
Oury statement at the NUK Business Plan Competition 1 in
February 2002 in Cologne [Germany])
Today, five years after the Cologne event, the
jury's decision could be questioned, especially with
Spreadshirt being now the European market leader
in micro-merchandising 2 and one of the top three
players worldwide with an accumulated sales amount
of more than 5 million customised merchandising
articles. 2006 turnover was EUR 15 million, and the
company currently employs more than 250 people in
Europe and the United States.
Company background
Idea
Spreadshirt's CEO and founder Lukasz Gadowski3
has always been interested in entrepreneurship.
He founded his first company during his third
semester at the University of Paderborn (in North
istration and information technology and worked for
Campus Consult, one of the largest student consultan-
cies in the world.
I was very much involved with Campus Consult from the first
day on. So I didn't spend a lot of time in the lecture rooms.
Instead, I carried out consulting projects, participated in
internal seminars, and was a member of the management
board. But particularly through the consulting projects I
learnt what was really going on in the business world.
(Lukasz Gadowski, CEO Spreadshirt)
1 NUK: Netzwerk und Know-how (Engl.: network and
know-how). The annual NUK Business Plan Competition
is organized by the non-profit association NUK Neues
Unternehmertum Rheinland e.V. based in Cologne
(Germany) .
2 Micro-merchandising enables consumers to create their
own merchandise by putting their own logos, slogans, and
designs on apparel and other articles.
3 Lukasz Gadowski was born in 1977 in Upper Silesia
(Poland) and emigrated with his family to Germany at the
age of seven.

This case study was written by Sebastian Bartz, International Business Master student, under the supervision of Dr Albrecht Enders,
Assistant Professor of Strategic Management, Harald Hungenberg, Chaired Professor of Strategic Management (all three from Uni -
versity of Nuremberg). and TawfikJelassi, Dean and Professor of e-Business and IT at School of International Management of Ecole
Nationale des Ponts et Chaussees {ENPC, Paris). It is intended to be used as the basis for class discussion rather than to illustrate
effective or ineffective handling of a management situation.
This case study was made possible by the cooperation of Lukasz Gadowski, Chief Executive Officer, Spreadshirt and Konrad
Marx, Country Manager (Germany, Austria, Switzerland), Spreadshirt.

577
Part 4 Case studies
Along with other Campus Consulters (that is what
the members call themselves), Gadowski did market
research projects, built and sold websites and content
management systems. They founded a limited liability
company and started selling and implementing con-
trolling software; however, long-term success was
not in sight. One semester later, Gadowski founded a
mobile commerce company, but again it did not suc-
ceed. Market conditions were not favorable since it was
right after the Internet bubble burst. He remembered
the idea he had been thinking about for some time:
In 2000, one of our first clients was a small textile printing
company in Hesse. Through this project I got to know the
printing technology and market. And the Spreadshirt idea
popped right up. [... ] I was also inspired by the Amazon af-
filiate program that enabled people to put adequate books
on their websites. So if it worked with books, why should it
not work with shirts?
{Lukasz Gadowski)
Realizing that his strengths lay within management
rather than IT, Gadowski first went to the University
of Mannheim (Baden-Wuerttemberg) to study busi-
ness administration, but later decided to pursue a
diploma programme at the Leipzig Graduate School
of Management4 that is renowned for its entrepre-
neurial focus.
Foundation
In the summer of 2001, the first website bearing the
name Spreadshirt was launched. Gadowski explains
where the name stems from:
I chose this name because the business model was to
spread shirts via the Internet. Furthermore, the company it-
self would be spread on the web through all the shop part-
ners, which would also spread the word about us. l didn't
want a central portal where people could only go to order
their shirt. I wanted thousands of other mini-entrepreneurs
to create their own products in their own shops using my
platform.
The first website version, however, did not allow users
to create their own shop by themselves. Gadowski had
to do it manually and thus concentrated on the most
important customers - requiring at least 100,000
page impressions 5 per month in order to set up a
Spreadshop for them.
Late in 2001, one of the first Spreadshop owners,
Michael Spiess, joined. Gadowski, and both founded
Spreadshirt GbR6 based in Leipzig. Henceforth, Spiess
took charge of the IT development while Gadowski
578
was responsible for marketing and business proc-
esses. In May 2002, the first fully automatic version
of the website went online. Now, people interested
in a Spreadshop could open it themselves online and
offer merchandising articles they designed. This was
the enabler for the subsequent growth in the follow-
ing years. In order to finance this growth, Gadowski
attempted to raise some capital:
Throughout the year, J was trying to get in touch with
business angels in order to convince them of our busi-
ness model. However, I never succeeded. Very often, I was
already turned down by the secretary saying: 'We don't do
Internet anymore.' It was such a waste of time.
Growth
Spreadshirt's growth had to be financed internally,
resulting in a business that hit break-even right from
the start. The innovative business model even won a
business plan competition in Saxony in October 2002.
The FutureSAX 2002 award was very important to us be-
cause it generated a lot of attention right from the begin-
ning. Furthermore, the 2004 HP Business Vision Award
meant a lot to us because it was the first international one
we received.
(Lukasz Gadowski)
By the time Gadowski finished his studies at HHL in
June 2003, Spreadshirt already registered more than
5,000 shop partners. Since the number of orders and
sales volumes grew exponentially, Gadowski and
Spiess hired more staff - especially for customer
service. Potential candidates were found quickly
via placards or Internet ads. The first job interviews
took place in the HHL lecture rooms because at the
time the company had no office. All candidates had
to pass several tests like writing service emails, fig-
uring out brainteasers, solving maths problems, and
designing t-shirts. A lot of students were grateful for
the opportunity to work for a dynamic and success-
ful start-up. There were not many student jobs in
Leipzig that offered such a broad range of interest-
ing tasks.
4 In German: Handelshochschule Leipzig, HHL (Saxony).
5 A page impression is a request to load a single page of a
website. It serves as an indicator for a site's traffic and
thus is often used to evaluate the expected revenues from
advertisements on the page.
6 GbR - Gesellschaft buergerlichen Rechts (Engl.: civil-law
association).
 Case study 15 Spreadshirt: mass-customization on the Internet
In May 2004, counting more than 25,000 shop
partners, Spreadshirt opened its own production and
logistics centre with a surface area of 130 m2 next to
its office building in the west of Leipzig. It enabled
the company to be independent from the former ful-
fillment partners and to produce as well as pack the
articles for faster shipping- now within 48 hours. Also,
the Spreadshirt Designer, an online customization
and order tool, was launched, first in German, then in
English, French, Spanish, Dutch, Italian, Norwegian
and Swedish. Now most European and North American
customers are able to customize their own articles
directly at Spreadshirt without having to open a shop
themselves or having to search for an existing shop
that might have a similar article as desired.
Later that year, former HHL colleague Michael
Petersen returned to the company and joined
Gadowski and Spiess on the management board after
having worked for McKinsey for some time.
I knew Michael from HHL. Very often, we had worked
together and felt that we got along very well. It was also
planned that he would start working at Spreadshirt after his
studies. However, he was a little sceptical about our sales
forecast and thought we wouldn't achieve our goals. And
when he got the offer from McKinsey, he accepted it, but we
kept in touch. Before Michael went to McKinsey, he had two
months to help us out. There he really saw his impact on
the company. He never forgot that and eventually returned.
(Lukasz Gadowski)
At the same time, Spreadshirt Inc. was founded
in Louisville, Kentucky, as a 100% subsidiary of
Spreadshirt GmbH - the limited liability company that
had been created out of the GbR in December 2003.
The years 2005 and 2006 were characterized by
winning awards and relocating facilities:
Personal awards for Lukasz Gadowski
2005, Saxony's Founder Champion of the year
2005, Entrepreneur of the year of Middle
Germany
2006, Internet Entrepreneur of the Year
Awards for Spreadshirt
2005, German Internet Prize
2005, FutureSAX Business Plan Competition
2005, Nomination for the renowned German
Founder Prize
2006, Red Herring 100 Europe Award
(Europe's 100 most innovative companies)
Relocation activities
Spring 2005, Spreadshirt Inc. moved from
Louisville, Kentucky to Greensburg/Pittsburgh,
Pennsylvania
Fall 2005, Spreadshirt moved into the new
production and logistics centre in Taucha, just
east of Leipzig, tripling its production capacity
Spring 2006, Spreadshirt also relocated its
Leipzig headquarters to a neighbouring build-
ing, which allowed the company to house all its
departments in a 1,200 m2 surface area.
In July 2006 as the first European company in its
industry, Spreadshirt closed a deal with London-
based Accel Partners, which invested several million
euros of venture capital. Gadowski makes an interest-
ing comment about this in his personal blog: 7
We don't really need venture capital, and above all, not that
much. But a little bit of it makes sense, especially when you're
expanding internationally and simultaneously trying to en-
hance product development. However, the major part of the
money is cushion which will be used in case of catastrophes
or for seizing certain opportunities such as acquisitions.8
In October 2006, the business organization
Entrepreneurs for Growth9 published its new list of
Europe's 500 strongest growing mid-sized compa-
nies. It includes the most successful businesses in 28
European countries and is sponsored by KPMG and
Microsoft. In total, these 500 companies have shown
a 57% staff increase and a growth of 67%. Spreadshirt
has ranked among the top 1% of this list and even
finished number one in Germany. Between 2002
and 2005, the Leipzig-based online merchandiser
increased its turnover from about EUR 100,000 to
more than EUR 8 million, and its staff from 2 to 200. 10
Spreadshirt's superior ranking among the top 5 strongest
growing mid-sized companies in Europe is very impres-
sive. This award shows that business success can stem from
Germany.
(Rezzo Schlauch, Chairman of Spreadshirt's
supervisory board)
7 http://www.gruenderszene.de.
8 http://www.gruenderszene.de/?p= 19.
9 For information on the organization visit: http://www
.entrepreneursforgrowth.org.
10 http://www.spreadshirt.net/26_10_2006.1004. O.html.
579
Part 4 Case studies

Exhibit 1 Spreadshirt's production facilities and offices

Taucha
(Production)

Leipzig
(HQ)

Cork Paris
(Marketing/Sales) (Marketing/Sales)

Source: Own illustration.

At the end of 2006, Spreadshirt operated three pro- Business areas

duction plants, four marketing and sales offices, and
Exhibit 2 gives an overview of Spreadshirt's different
sales offices and one development centre in Europe
business areas. The original ones on the left have a
and the United States (see Exhibit 1).
mass-customization approach and would probably

Exh ibit 2 Spreadshirt's business areas

Spreadshirt
(sprd.net AG)

Mass-customization Mass production Marketplace

~~-~-spr-ea-dsh-irt~ ~-x__des-lg_n_er~
Shop partner
EJ ~ 00 I I Design Bulk
sozeug
Handmade
End customer platforms
platform competition orders things

Source: Own illustration.

580
 Case study 15 Spreadshirt: mass-customization on the Internet

be considered the core business. However, the three The process of opening and operating a Spreadshop
remaining business areas (La Fraise in particular) also works as follows (Exhibit 3 visualizes the process):
contribute significantly to the company's success. potential shop partners need to register online before
they can start creating and selling their own merchan-
dise. Currently, there are about 80 different types of
Spreadshirt.net
merchandising articles and several hundred designs
The award-winning Spreadshirt business model d if-
to choose from. Additionally, shop owners can upload
fers substantially from the traditional textile print
their own vector or digital graphics. At the end, they
shop around the corner, although at first sight it
determine the margin for every customized article,
may appear as if Spreadshirt, too, only refined shirts
i.e. a price equal or above the base price charged by
and other articles. However, the company uses the
Spreadshirt (currently EUR 12.90 for the Men's Slim
Internet to enable virtually anybody to become an
Contrast Tee, EUR 9 .90 for the mug, EUR 3.00 per motif
entrepreneur and sell merchandise; or, as Gadowski
or text) . The assortment (see Exhibit 4 for examples)
puts it simply: 'We enable users to do their own thing. '
ranges from classic t-shirts, casual, trendy apparel, and
He is referring to the so-called Spreadshop system
sportswear, to accessories and gifts including mugs,
that has been offered at spreadshirt.net from the
mousepads, badges, and bags. Commission levels are
beginning:
uncapped and earnings are paid out quarterly. Also,
Our business model is that we offer everybody the poss ibi l- shop partners have the option to personalize the shop
ity to open their own shop and to start selling cu stomized
itself in terms of colors or fonts , for example.
merchandising articles within minutes. Since shop manage-
ment is done onl ine, all you need is an Internet connec-
By December 2006, the company had about
tion to get started . Spreadsh irt takes care of all the rest: the 200,000 shop partners including private individuals,
shop software, inventory manageme nt, printing, packaging, associations, companies, sports teams or artists. Very
shippi ng, payments, and after-sales service. Thus, our value often these are people interested in a specific niche
creation lies within the order fulfi llment where we generate
which they want to promote online, or webmasters
revenues per unit.

Exhibit 3 The process of opening and operating a Spreadshop

I ~
t- t- t- t-
,[)''
spreadshirt.net
~ ~ rr@
Open your Create your Set the Start Collect your
shop product price selling commission

Register at Choose from Determ ine the Spreadshirt Spreadshirt

spreadshirt.net about 80 market price by takes care of pays the
merchandising choosing your the whole commission to
Upload your its shop
articles commission fulfillment
motive partners on a
level process
Create your quarterly basis
product within
seconds

-----
Source: Spread sh irt.

581
Part 4 Case studies

Exhibit 4 Spreadshirt merchandise assortment examples

Promodoro Lady
Sonar Retro Shirt Winter Cap Messenger Bag
Leisure Jacket

~
0
a.
en
t:
:c
(/)
"C
<II
~
a.
en Nike Park Plus Adidas Avantis

J
Jako Short Cardiff Puma Stirrups
Jersey Jersey

Source: Own illustration.

who simply want to earn some extra money with their
website.
Once a regular Spreadshop is set up and is running
successfully in terms of sales, a shop partner may con-
sider upgrading it to a premium shop. For EUR 10.00
a month, a premium shop operator benefits from sev-
eral advantages:
Offering the shop in 13 languages,
Running the shop without Spreadshirt advertising,
Having almost unlimited motif uploads,
Including a personal logo on invoices and delivery
notes,
Offering limited editions, and
Offering sales discounts to best customers.
Some of Spreadshirt's most famous premium shop
partners include: Harry Potter, BoingBoing (see
Exhibit 5 for screenshots) , Eurosport, Ryanair,
Napster, Tiscali, Linkedln, Texas Instruments, RTL,
and Coca-Cola.
The success of spreadshirt.net is due to the easy
handling of the shop by its owners and users as
well as the completely risk-free profit opportunity it
582
offers. Regular shop partners do not encounter any
fixed costs, and therefore do not need to sell any
articles. Only when items are sold are they paid the
individually selected commissions. Like Spreadshirt
itself, every regular shop hits break-even right from
the start. Premium shop sales, however, will have to
compensate the monthly fee charged for the extra
functions.
Spreadshirt Designer/Spreadshirt Sports
The Spreadshirt Designer allows.online users to create
their customized apparel, accessories and gifts with-
out opening a shop. Personalized designs and texts
are printed on any item in the Spreadshirt assortment.
It is an on-demand solution that does not require
any minimum order quantity. The company does not
define a typical Spreadshirt Designer customer; any-
one looking for a gift can use it.
A special form of the Spreadshirt Designer is
Spreadshirt Sports. Here, the product line is adapted
to the needs of people interested in sports. Among
the different types oft-shirts, users also find several
jerseys, shorts, and socks that are not available at the
regular Designer.
 Case study 1S Spreadshirt: mass-customization on the Internet

Exhibit 5 Big account Spreadshop screenshots

~ .. ~i-~~~l~~~~~~~~;:~~~;_;~---~~~~~~~=~~=--==~-~=--~~=-~ i, ~- ~~~;~~~-~~~~~~~~~~~~=~-~] .P
~ <Sr ~~~:-,;;;-------- --------------~ 0 ~ ~ $ ,.., O ""n - G ifJ. 8
..... -~--- -----~~---.-~-------~-~~-~~--~...--...-----

Source: Screenshot taken from http://harrypotter.wbshop.com.

Screenshot taken from http://www.spreadshirt.com/shop.php?sid=3533.

Konrad Marx, Spreadshirt's D-A-CH 11 Country Man-
ager, comments on the importance of having the Desig-
ner and Spreadshirt Sports next to the Spreadshops:
The shop partner platform is the core of Spreadshirt's
bus iness. It is the main reason why we were able to grow
exponentially in the past. However, the designer shops are
important, too. Internally, we call them the 'own shops' that
independently promote our customized merchandising
articles. They account for more than 40% of the sales. But
they have a big disadvantage: Online shirt designer plat-
forms are dime a dozen on the market. So every one of
them has to buy customers through marketing campaigns
and hope they will stay loyal and come back. In contrast.
shop partners are businesses themselves. They want that
their products sell. We only provide the platform for it.
The three business areas presented above resort to the
same fulfillment process displayed in Exhibit 6. After
11 Germany, Austria, Switzerland.

Exhibit 6 Spreadshirt's mass-customization fulfillment process

Customer
Order receipt Preparation Warehousing Operations Logistics
service

Digital receipt Preparation Optimization Transfer of Attractive Multi-lingual

of motive(s) of the printing of stock the motive shipping service center
and article(s) depending on onto the conditions based at
Avoid running
the printing article Leipzig HQ
Receipt of out of stock Shipped by
technology
payment E.g. pressing Deutsche Currently:
Minimize
Technologies: of the flex Post, OHL service by
Forwarding to working
flex, flock, motive onto email by
production capital
digital, offset, a shirt native
transfer speakers
J
Source: Spreadshirt.

583
Part 4 Case studies
receiving the individual order, production prepara-
tion takes place, depending on the printing technol-
ogy used. In the case of flex or flock printing, the
motifs are plotted on colored plastic foils and then
separated from the foil rests. In the warehouse, motifs
and their corresponding merchandising articles are
brought together and a first quality check takes place.
Thereafter, the motifs are transferred onto the articles.
Flex and flock motifs, for example, are pressed onto a
garment under strictly controlled conditions of heat
and pressure. In a second quality check Spreadshirt
employees meticulously examine the operations' out-
come and take action where necessary. Then, the cus-
tomized articles are packed and ready for shipping.
International after-sales customer service is done by
native speakers from Leipzig headquarters.
The Derby/La Fraise
The Derby is a continuous online t-shirt design com-
petition, which was introduced by Spreadshirt in
April 2006. All amateur and professional designers
are encouraged to upload their motifs which are then
subject to popular voting. Every two weeks, the win-
ning designs are eventually awarded a certain amount
of money, produced in a limited edition, and offered
to the public in the Derby online shop. The Derby
customers are typically fashion-orientated individual-
ists who do not fall for brands and want something
special.
After only two months in business, Spreadshirt
decided to back up its Derby by going offline and
opened its very first bricks-and-mortar shop in
Berlin 12 , called The Derby Store. Since then, the
Derby winner shirts could not only be ordered online,
but also picked up at the store. CEO Lukasz Gadowski
explains this move:
The Derby Store is an additional channel that distinguishes
us from our competitors. Furthermore, our shop partners
and design contributors at The Derby like the shop. Now we
are able to present their motifs offline. We can even imagine
expanding this [physical] channel. But this is not our priority
number one right now. We'll only open more stores in case
of special opportunities.
In July 2006, it became clear what Spreadshirt would
use a part of its venture capital for: the Leipzig-based
merchandiser acquired Europe's number one online
t-shirt design competition La Fraise. Patrice Cassard
had launched La Fraise in 2003 from his apartment
in Saint-Etienne (France). With only EUR 10,000
584
to get set up, he began selling t-shirts aiming at the
geeks and gamers community. Within only a short
time period, he started receiving the first submissions
from community designers visiting the online shop
and blog - the design competition was born. Cassard
explains how it works:
Designers submit their drafts directly on the website. The
following week, the designs are subject to the visitors'
votes. At the end of the grading period, and in concord-
ance with several criteria, we award a EUR 1,000 cheque
to the selected designer and print a limited edition of 500
shirts. Usually, we pick between 16 and 20 new designs
every month.13
This model strongly benefits from viral effects because
users generate the content and each one of them has
the incentive to gain new users, e.g. by saying: 'Hey,
can you vote for my design please? Thanks!' Also,
users have a different relation to the shirts produced-
after all, they have voted and thereby influenced their
fate. Most important to the leveraging of viral effects
is the quality of the products, i.e. the quality of the
designs. And thanks to the active and professional
community of more than 70,000 users, the designs
are usually very fancy, funny as well as graphically
appealing.
Cassard knows the reason why the community is so
active in contributing content:
I always made sure to take their opinions and comments
into account. The website is all about its community. It isn't
limited to marketing but is an everyday reality. In a way, a
sort of huge board of directors. 14
According to Gadowski, the success of La Fraise is due
to several factors:
One thing is that it came to market relatively early. Also,
its website is really simple and pleasing. Last but not least,
there is Patrice [Cassard] who composed the very popular
'boss blog' of La Fraise and who simply has the talent to
build a community. 15
After months of meetings with Spreadshirt, Cassard
decided to sell his company and signed the contract
in July 2006.
12 The Derby Store is located at GabelsbergerstraBe 16,
Berlin Friedrichshain.
13 http://blog.spreadshirt.net/uk/index.
php?itemid=6222&catid=32.
14 Ibid.
15 http://www.gruenderszene.de/?p=20.
 Case study 15 Spreadshirt: mass-customization on the Internet
Patrice's motivation [to sell La Fraise] was probably to do
something different. Furthermore, there is a big difference
between starting an enterprise and running it on a day-to-
day basis. The latter makes different demands on the organ-
ization, administration, and logistics. Not everybody wants
to be bothered by this. 16
(Lukasz Gadowski)
For Spreadshirt, however, acquiring La Fraise was
an important move into this new market segment of
online t-shirt design competitions. In addition, La
Fraise would foster Spreadshirt's shop partner busi-
ness. Designers whose drafts do not make it to market
will most likely open up their own Spreadshop and
sell their work there. This leads to additional shop
partners and additional sales for Spreadshirt.
We are proud and feel honored that Patrice decided to sell
[La Fraise] to us. That's indeed a great sign of confidence.
And such a takeover is by all means delicate because, after
all, it's a community business.[...] Thus, there was some tur-
moil [within the community] after Patrice's announcement
[of the deal], but which he was able to 'blog-manage' with
calmness.17
(Lukasz Gadowski)
For a short while, Spreadshirt was thinking to keep
both design competitions - The Derby and La Fraise.
But it became obvious that one of them would even-
tually lose. In terms of usability and high profile,
La Fraise was the better platform, so it was decided to
phase out The Derby and to refactor and internation-
alize La Fraise instead.
DDS
DDS 18 is the bulk order service of Spreadshirt which
offers the whole range of merchandising articles for
quantities starting at 25 pieces. Ironically, it was never
intended to engage in such a business, as Konrad
Marx explains:
We didn't plan to take part in the classic textile printing
business because of the fierce competition. There are thou-
sands of textile printers in the world and probably around
30 in Leipzig alone. Usually, the customer invites offers from
10 companies and decides upon the price. However, we re-
ceived so many requests with order quantities of 100, 200
or more, and many of our proposals were even accepted
by the customers - which surprised us. Then, the requests
became so relevant that we decided to form a separate unit
to deal with this business. So we hired a bunch of people
who created the DDS in early 2004.
Orders fulfilled by DDS - which very often come from
larger corporations - do not resort to the company's
own production capacities, since these are reserved
for small-scale orders where delivery time and flex-
ibility are essential, but are sourced out to partner
print shops. The same measure holds true for the
La Fraise limited editions that do not require a mass
customization approach either. Spreadshirt benefits
from a strong bargaining position with its textile
suppliers because of its huge purchasing volume.
Therefore, Spreadshirt is able to compete on the price.
We probably have the best purchasing conditions of all
textile refiners in Germany. Thus, small print shops cannot
compete with us at all. On top of that, we hardly need to
actively acquire any customer because most of the requests
come from our shop partners. Our competitors do not pos-
sess this enormous customer network. And there is another
beneficial side effect: The more articles we process at DDS,
the better our conditions get because the typical orders are
always significant in quantity. Recently, for example, we sold
15,000 shirts to General Motors.
(Konrad Marx)
Sozeug
Sozeug is a German online platform for buying and
selling handmade things which went online in March
2006. But according to its founder Hannes Diedrich,
it differs considerably from established online market-
places such as eBay or Amazon. At Sozeug, designers,
artists, and others do not just buy or sell products.
Instead, they are the focus themselves, acting and
communicating with each other - corresponding per-
fectly to the first of the 95 cluetrain theses: 'Markets
are conversations.' 19 People can leave comments or
write messages to each other. The products for sale
online, and thereby their creators, are linked via
tags. Thus, the conventional hierarchical structure is
replaced by a more flexible mode. 20 Revenues are not
generated by charging the offering of a product, but
by a 7% sales commission to the company.
Diedrich came up with the Sozeug idea after
observing many designers in Berlin who had at best
their own small stores, but mostly sold their self-made
products at the weekly market. On the one hand, he
realized that this is a business that works. On the other
16 Ibid.
17 Ibid.
18 DDS stands for Deutsche Druckservice (Engl.: German
Printing Service).
19 http://www.cluetrain.org.
20 http://www.sozeug.de/pressematerial/sozeug-
pm230306.pdf.
585
Part 4 Case studies

hand, he thought an online platform would connect Organization

supply and demand on a much larger scale. Also, he
found out about Etsy21 and decided to launch a simi-
lar enterprise in Germany. In October 2006, Diedrich
posted a comment in his corporate blog carrying the
title 'Friendly Takeover':
I'm happy to announce that, henceforth, Spreadshirt [.. .]
will take over sozeug.net. [...] Spreadshirt's experience and
knowledge only promise the best for the future of sozeug.
net. Some exciting things have already been planned. 22
(Hannes Diedrich)
One may wonder why Spreadshirt decided to buy
a company that does not have anything to do with
textile printing or merchandising. Additionally,
Sozeug may seem somewhat irrelevant to traditional
online shoppers. But it has a quite homogeneous
community- possibly a creative class - that Spreadshirt
is obviously interested in. Sozeug shows what social
shopping could look like in the future.
Organizational structure
Spreadshirt is organized in a matrix structure as
shown in Exhibit 7. Its second management level
represents a functional and a regional specialization.
Thus, every organizational unit reports either to its
area manager, country manager, or both.
Interestingly, Spreadshirt does not have an explicit
organization chart. According to Konrad Marx, the
company simply does not need it:
The responsibilities of every single employee are put down
on our Intranet.[. .. .] The whole organizational chart is writ-
ten down if you will. You can read who is responsible for
what and who is everyone reporting to. Basically, you don't
need anything else.
21 http://www.etsy.com.
22 http://sozeug.net/ blog/2006/ 10 + 09/ freundliche-
uebernahme/.

Exhibit 7 Spreadshirt's organizational structure

CEO coo CIO CEO USA

Lukasz Gadowski Michael Petersen Matthias C. SpieB Jana Eggers

Online Product Customer

Branding Graphics IT
Marketing Management Service

D,A,CH

UK

Scandinavia - - -

PL

USA --

Source: Own illustration.

586
 Case study 15 Spreadshirt: mass-customization on the Internet

At.Spreadshirt, there is the so-called owner principle of
responsibilities. Everyone can assume as much respon-
sibility as desired. At all times, there is a list of project
proposals posted on the Intranet. Everybody can take
what they want. The area or country manager then
simply activates the budget for it. If someone seizes a
project, nobody is going to mind as long as the project
is managed in a professional way. However, if the
project does not advance well, others will try to get it.
Open Logo Project
In December 2005, Spreadshirt launched the Open Logo
Project (OLP) in order to refresh its corporate design. As
the name suggests, the design development process was
not conducted confidentially with a professional design
agency as most companies do it. Instead, Spreadshirt
And what's more obvious than resorting to the ideas and the
joy to create of our on line community? 24
As Milles states, the OLP was aimed at the vast inter-
national Spreadshirt community which, at the time,
represented more than 100,000 shop partners, many
of whom were either professional or amateur design-
ers. Before giving the starting signal, Spreadshirt
framed several important guidelines for the project
(see Exhibit 8).
Besides defining the OLP's objectives and require-
ments, Spreadshirt explained how it would proceed
with the submissions and what the awards for the
winners would be.
Spreadshirt will choose up to 10 winners from all entries.
The grand prize of EUR 5,000 (USD 6,000) will be spl it
among the winners. In addition, there will be a special prize

set up a blog platform23 and invited everybody to

submit design proposals. Andreas Milles, Spreadshirt's
so-called Brand Evangelist, comments on the decision:
23 http://olp.spreadshirt.net.
For our new corporate design we didn't want any long- 24 http:// www.spreadshirt.net/28_03_2006.809.0.html?
winded bids. After al l, we've got our numerous shop partners. lang=de&locale=DE.

Exhibit 8 Guidelines of the Open Logo Project

( Logo I Trademark Color Scheme Text Logo

The logo should: Finding a color "atmosphere" Developing an international

Ill that represents and text logo
G> Look and function like a label
> characterizes Spreadshirt
~
Definition of a font to use
Show our internationality and internationally
in-house and for
"E make sense internationally
0 advertisements and claims
Reflect what Spreadshirt offers

High international recognition, Cross-media, credible Matches with the logo

able to function as an international application
International recognizability
independent icon
Clear specifications in
Memorability, can function
Cross-med ia usability: pantone/CMYK/RGB color
independently
.l!l optimized for intergration/ systems
c recognition online, also in
G> Broad acceptance
E smaller presentations
I!! Expresses the Spreadshirt
ser Simple and flexible combination
values: reliability, speed ,
G> possibilities with a claim
a: freshness
Positive and negative
presentation options
Single-color reproduction
possibilities
J
Source: Spreadshirt.

587
Part 4 Case studies

for the most original design. Copyrights must be passed on Exhibit 9 The Fingerprint - the winning design of the
to Spreadshirt before any prizes are distributed. Until prizes Open Logo Project
are awarded, all designs remain your property. Spreadshirt
employees are excluded from entering the competition. 25
(Andreas Milles)

The design collecting period ended in February 2006.

The response to the project was enormous: within
only two months, 600 participants submitted a total
of 1,100 designs. All proposals were published on the
official website for the community to comment on. An
average of 1,500 users viewed this website every day.
The OLP was posted more than 140 times in other
blogs. Therefore Spreadshirt estimated that several
hundred thousand people have read at least one of the Source: Spreadshirt.
blog entries, making the project a great success.
Following the design collecting period, the OLP circles that spread when something hits the water
team had the difficult task of narrowing down the vast surface. The curves make it look very dynamic-which
amount of proposals to a maximum of ten as they had the young company really is. Colin was awarded EUR
announced before. Eventually, six concepts made it 1,000 and a design tablet worth EUR 2,500.
to the finals. Through the OLP we've learnt how our customers perceive
us, and what they think is important about Spreadshirt.
We picked 6 drafts of which we thought they'd have the What I liked best about the OLP was that a very interesting
potential to represent Spreadshirt in the future. We could international community was created. 29
also have picked more designs because we had received so (Andreas Milles)
many sophisticated concepts. But in the end, we just had
to make a decision: We picked 3 drafts that had a fresh and The original draft was subsequently enhanced into
dynamic signet, a very clear and strong logo. On top, we four additional versions of the fingerprint - shown in
picked 3 more drafts that had a very interesting concept as
well as the potential to be developed further. 26
Exhibit 10 - that are used at random for any occasion.
(Andreas Milles) Their names only distinguish them from each other.

These six designs were then presented and discussed

in a number of forums and weblogs for the interna-
tional community to vote on their favorite one. Two
weeks later, the winner - with 25% of the votes - was
chosen: Maxime Colin, Junior Art Director from Lyon
(France). Ironically, Colin was an actively contribut-
ing designer to La Fraise, which Spreadshirt acquired
only a few months later. He had submitted the design
Business strategy
Spreadshirt's long-term goal is 'to become the glo-
bal market leader for customized merchandise.' 30
Exhibit 10 The five different versions of The Finger-
print used by Spreadshirt

Jl]~[j]~~I
called The Fingerprint (see Exhibit 9), which not only
the community liked, but also Andreas Milles: 'The
result [of the voting] thrills us. The Fingerprint is a
perfect metaphor for Spreadshirt.'27 I, Leipzig Taucha Greensburg Paris London J
Colin's logo concept managed to combine vari-
ous important issues of Spreadshirt and its busi- Source: Spreadshirt.
ness model: First, the fingerprint clearly symbolizes
uniqueness, which is exactly what Spreadshirt's mass- 25 http:/I olp.spreadshirt.net/wordpress/? addon =brief.
customization approach enables. At the same time, it 26 http://olp.spreadshirt.net/wordpress/?p= 1485.
also represents the first capital letter 'S' of the com- 27 http://www.spreadshirt.net/28_03_2006.809.0.html.
28 http://olp.spreadshirt.net/wordpress/index.
pany's name; or, as Colin puts it: 'That's the logic link php?p=lll3.
between the design and the [... ] word'. 28 Third, the 29 http://companice.twoday.net/stories/1818009/.
logo also symbolizes the viral effect, resembling water 30 http://www.spreadshirt.net/About_Us.124.0.html.

588
 Case study 15 Spreadshirt: mass-customization on the Internet
Exhibit 11 Spreadshirt growth summary (2002-2006}
260 15m
2 100k
Staff* Turnover
Figures taken from January 2002 and December 2006.
Source: Own illustration.
Since Spreadshirt already is the European market
leader and has grown tremendously during the past
years (see Exhibit 11), the company seems to be on
track. Gadowski anticipates that Spreadshirt will have
become number one worldwide by 2010.
Success stems from many factors: we are just different and
we execute well. We have a strong long-term perspective
and we think about real customer value. We have a good
software and, above all, excellent people. That's probably
why so many companies have failed and we're sti ll around.
[.. .] Also, right from the start, we've approached the right
customer segment and got something across - a message
that was commercial but that people could identify with .
(Lukasz Gadowski)
The Spreadshirt people
For Gadowski, it is the Spreadshirt people who make
the difference. That is why it has always been of
utmost importance to him to identify the ones that fit.
We really expect much from our employees - during the
interviews and on the job. Our motto is: 'Good is not good
enough.' This means that everybody, including the service
personnel, has to contribute more than just the ordinary.
Especially during the first two years, we have been rigorous
with our staff. I've even fired people who did their job quite
well. So I guess, even today, there are still some people in
Leipzig who think I'm a lunatic.
(Lukasz Gadowski)
Gadowski believes that if a company in its early stages
is not able to pay exceptional people, it must wait until
200,000
11
2002 2006
100
Shop Partners*
it is. A start-up cannot afford to work with average
staff for a very good reason:
Excellent people replace [corporate] rules. You can't set up
as many rules as you would need. That's why you definitely
need excellent people. 31
(Lukasz Gadowski)
In order to find excellent employees, Spreadshirt has
developed a multi-level recruiting process. Incoming
applications are analyzed and promising ones imme-
diately forwarded. Before inviting a candidate to
a personal interview, a telephone conversation is
arranged to evaluate the applicant's basic social fit.
The first personal interview usually takes place with
the participation of Human Resources staff and two
or three department managers. If the candidate is
convincing, a second personal interview is conducted
only days later, led by a division manager and/or a
member of the management board. Thereafter, the
final decision is quickly taken and communicated
to the applicant. Although Spreadshirt is currently
having trouble filling all the vacancies with excel-
lent people, the Leipzig area offers a well-educated
labour pool.
Sometimes venture capitalists are sceptical and ask me:
'Do you get the talent in Leipzig?' They th ink the only place
where you can do business is Silicon Valley. That's nonsense!
(Lukasz Gadowski)
31 http://www.connectedmarketing.de/ cm/2006/11/
besuch_in_leipz.html.
589
Part 4 Case studies
After a new employee has joined the team, the so-
called Spreadshirt Academy program fulfills important
on-boarding functions, ensuring immediate knowl-
edge transfer during the first days on the job. It con-
sists of different modules that a mentor can combine.
Each module contains a set of tasks whose execution
creates interaction with other Spreadshirt people.
Some introductory tasks only require getting a login
and a password. Others, for example, assess the
knowledge about Spreadshirt's products and competi-
tors in the form of a written test. Furthermore, newly
hired employees working at the Leipzig headquarters
carry out a so-called Production Day in order to learn
how the customization is done. They take part in each
stage of the entire fulfillment process, from plotting
the motifs on the flex and flock plastic foils to the
packaging of the refined articles for shipping.
As job motivation is crucial, Spreadshirt regularly
organizes informal get-togethers in bars or other loca-
tions. There, employees get the chance to talk about
other than work-related issues. More professional
topics are addressed in the monthly general assembly
where latest news is spread and future objectives
announced. Good communication as one motivat-
ing factor is also guaranteed by frequent intra- and
inter-departmental meeting sessions. Moreover, the
company intends to motivate in monetary form: Most
of Spreadshirt's employees receive a performance
bonus besides their base salary. For the sales staff,
performance is quite easily quantifiable, but for oth-
ers it depends on the quarterly 360 degree feedback
based on the following six criteria:
Responsibility,
Results/Effectiveness,
Efficiency,
Organization,
Innovation, and
Leadership.
Also, in the future, there will be chances for an
employee share pool to be set up, whereby identifica-
tion with the enterprise is planned to be intensified.
The Spreadshirt processes and systems
What I really like about Spreadshirt, an.d what you can
hardly see from the outside, is that in terms of manage-
ment processes we perform better than many other SM Es.
590
Especially job candidates often arrive with the expectation
that we're only a start-up and everything must be chaotic.
But then, they're surprised.
(Konrad Marx)
Project management, for example, is very important
at Spreadshirt. Everything that takes longer than one
day requires a project plan which is created on the
company's Intranet - based on a Wiki32 platform - and
defines the main project parameters:
Project team and leader,
Project objectives,
Milestones,
Deadlines,
External contacts,
Internal/external dependencies, and
Possible risks.
There is also a mandatory debriefing in order to share
all the lessons learnt from the project. Furthermore,
Spreadshirt employs sophisticated performance
measurement systems. Marketing Overview, for exam-
ple, gives control over the use and efficiency of mar-
keting channels. Cockpit is used regularly to provide
relevant key performance indicators on a monthly
basis. Additionally, Spread.Reports is a reporting sys-
tem (based on open-source SQL) that supports vari-
ous queries to Spreadshirt's database (see Exhibit 12).
Competitive advantage
Our competitive advantage is just a better seNice level. No
other competitor is able to deliver as fast as we do.[...] More
than 80% of the articles ordered are ready for shipment
within 24 hours; the rest within 48 hours at the latest. [...]
The secret lies within our back-end. It's our people, our proc-
esses, and our management.
(Konrad Marx)
Capitalizing on its staffs competencies and skills,
Spreadshirt pursues a strategy of differentiation
in terms of quality and time, based on its strong
Spreadshop platform. The well-designed processes
32 A wiki is a website that allows visitors to add, remove,
edit, and change content. It also enables linking among
any number of pages. This ease of interaction and
operation makes a wild an effective tool for mass col-
laborative authoring. For more information visit http://
en.wikipedia.org/wiki!Wiki.
 Case study 15 Spreadshirt: mass-customization on the Internet

Exh ibit 12 Spread Reports screenshots A marketplace,

User-generated content involved,
A community,
R1.11orl Grcnip!i 1 Uj (: Sprt:mlri:porls - t:lmrts Mass-customization, and
1~ 1~

- . - - ... c1 .. un ... w. ....--~r ,1, . A fun or entertainment brand.

ltt<"trt ~tr(~ WH"'

w<u.t <fflhtC- l'n<l"""- D.itJ

6..Cllut OrdttC - "' J. P ....eocrs.. ~
c_,..,,,v.... On1o<C-.--,.--,
V.-<tNo-o/ft'flot .. ":tt'\r-tlh~>

C:~O:-_.,~,.....,....,..,.._,_,

..C ll lon Ordt'l"C-l.Pf~ WHkl f C: __ .... ,,.... ~--~< H '1

t>i.CU11 (~- yJl"f H"5+<> v-, .... ,.,.._.,,_,,,.._,--.c01_......,,..t

n..<i.....O.dorC- J.~O*lf c:--..i:-.0rv.c_..._~,.......-.....:..1,
Core business competition
Spreadshirt's main German competitor is Shirtcity. 34
Sp readshlrt Re1,orl -
H" ' "'""'t( I?!'-:
hitn s
11~:. 1 - 1 ::~.~
The Bavarian-based company was founded in 2002
...
"'
'.~
and is active in all of Spreadshirt's core businesses:
U
IH the online shop platform, the end customer business
'"
and the design competition. It also has a bulk order
service. However, according to Gadowski, there are
)It

!'.I
more important competitors to be watched closely
oU
(see Exhibit 15 for a table of Spreadshirt's most impor-
.,
tant competitors):
."
u

In the beginning we observed Shirtcity a little. [. . .] But today,

we are rather keeping an eye on Cafepress and Zazzle in
Source: Spreadshirt. the US.

Cafepress , 3s headquartered in Foster City

(California), was set up in 1999. It was the first
enable the company to achieve short fulfillment times.
company to succeed with a business model similar
Also, Spreadshirt has been expanding its markets and
to that of Spreadshirt. It offers print-on-demand and
business areas. Exhibit 13 shows its market penetra-
e-commerce services that enable individuals and
tion for the years 2002, 2004, and 2006.
organizations to create, buy, and sell customized
In order to enter the Eastern European micro-
merchandise online. The company has a network
merchandising market, the company took over the
of 2.5 million shopkeepers who have created over
Polish market leader Butik33 in the fall of 2005,
35 million unique products on customizable mer-
enabling the Eastern European shop partners to oper-
chandise such as apparel, home and office accesso-
ate on the Spreadshop platform. Lukasz Gadowski
ries, posters and cards.36 Currently, about 50 major
stresses the strategic importance of this move:
accounts (such as Dilbert, Wikipedia, and Startrek)
We've acqu ired Butik for strategic reasons. We didn't want use the Cafepress platform for their own merchan-
a direct competitor to grow up in a neighbouring country
dising projects. Despite its large size, Cafepress has
having a totally different cost structure combined with an
expansion strategy. not yet entered the European or Asian markets. The
website is only available in English and fulfillment is
Exhibit 14 illustrates Spreadshirt's diversification exclusively done in Kentucky. International orders,
strategy which relies on either organic growth or on however, can be made with the goods being shipped
acquisition of new businesses. This strategy was oper- out of the USA to their destination abroad. Unlike
ationalized in 2004 and 2006 by the creation of the Spreadshirt, Cafepress offers neither a design com-
DDS, Spreadshirt Sports, the Spreadshirt Designer, petition nor a bulk order service.
and The Derby as well as the acquisition of La Fraise
and Sozeug.
According to Gadowski, the choice of business
partners depends on the industry Spreadshirt wants
33 http ://www.butik.pl.
to step into . However, for business areas to become 34 http ://www.shirtcity.com.
relevant, they should meet certain criteria. There 35 http://www.cafepress.com.
should be: 36 http://www.cafepress.com/ cp/ info/ about/.

591
Part 4 Case studies

Exhibit 13 Spreadshirt's worldwide market penetration in the past

2002

2004

2006

Source: Spreadshirt.

592
 Case study 15 Spreadshirt: mass-customization on the Internet

Exhibit 14 Spreadshirt's diversification strategy allows people 'to create, share and celebrate [ ... ]
unique interests and passions'. 38 Zazzle started in
1999 producing on-demand products with automated
2002 2003 2004 2005 2006
manufacturing systems; however, it did not go online
Spreadshirt.net
until 2003. Today, customers can shop at zazzle.com
and choose from existing designs and products, cre-
DDS ate their own customized merchandise, or publish
their product in a gallery earning a 10% commission
Spreadshirt Sport every time their creation is purchased. According to
the website, Zazzle combines 'innovative manufactur-
Spreadshirt Designer ing, a robust community, the largest online collection
of customizable digital images and unmatched per-
The Derby sonalization tools to empower [customers] to create
apparel, posters, cards, stamps and more.'39
La Fraise i The main international competitor to La Fraise is
Organic growth Threadless 40 - the initial project of Skinny Corp, 41
Sozeug which was launched in 2000. Today, the Chicago-based
Acquisition

Source: Own illustration.

37 http:/ /www.zazzle.com.
The second major competitor of Spreadshirt, 38 http://www.zazzle.com/ welcome/ first/ aboutus.asp.
39 http://www.zazzle.com/ welcome/ first/ aboutus.asp.
Zazzle, 37 uses the same business model of on-demand 40 http://www.threadless.com.
manufacturing and an e-commerce platform that 41 http://www.skinnycorp.com.

Exhibit 15 Spreadshirt's main competitors by origin and business area

- . - --------- --
Shop partner End customer Design
platforms shops competitions

Shirtcity Shirtcity Shirtcity

Germany, Personello Personello Cajong
Austria,
Switzerland eQuisto Shirtalarm
Shirtinator

Comboutique Comboutique Teetonic

Europe
TShirtStudio Split the Atom
(except Divao StyleTax
D,A, CH)
Koalala

Cafepress Cafepress Threadless

Zazzle Zazzle
USA
Printfection Printfection

Source: Own illustration.

593
Part 4 Case stud ies
ongoing design competition is probably the most
famous one in the world. Since La Praise's founder
Cassard was inspired by Threadless, the two concepts
are very similar. At Threadless, the submitted designs
get scored for seven days, usually receiving between
2,000 and 3,000 votes. Then, the four to six top-scoring
designs are picked, printed in a limited amount, and
sold online. The winning designers are awarded up
to USD 2,000 in cash and prizes. Although Threadless
may appear very US centric, its large and active com-
munity is actually international: 35-40% of all orders
and 50% of the winning designs come from abroad.
The 2006 sales are predicted to be near USD 20 million,
with a sales volume of over 80,000 shirts a month. 42
Future outlook
Spreadshirt's future business strategy focuses on the
following four factors:
Conquering the Asian market,
Pushing the offline model,
Creating new business areas, and
Growing through small acquisitions.
Exhibit 16 Spreadshirt's future market penetration goal
Source: Own illustration.
594
In order to expand on the Asian market, Spreadshirt is
currently planning to build its own production capaci-
ties in Beijing in 2007. By doing so, the company will
not only be able to operate in Japan (as it already does
today), but also in China, Taiwan, and South Korea to
achieve its 2008 worldwide market penetration goal
(see Exhibit 16). According to Gadowski, by 2010
Spreadshirt's turnover could be made up of 40% from
Europe, 35% from North America and 25% from Asia.
Spreadshirt is continuously enhancing its prod-
ucts and processes in order to sustain and further
strengthen its market position. The focus is put on
the Spreadshop platform. From January 2007 on, not
only big accounts but also premium shop operators
will be able to integrate the Spreadshirt Designer
interface into their website, thereby increasing the
customization features for buyers. There are also
plans to further interconnect the tens of thousands of
Spreadshops via an online social networking platform.
Currently, shop partners can create their own profiles
and send messages to each other. However, the
objective is to set up a central motif database through
42 http:// boetter.dk/podcast/category/customermade/.
 Case study 15 Spreadshirt: mass-custom ization on the Internet

which the participating shops' content becomes avail-
able to everybody. 43 This adds value to most of the
partners, as Konrad Marx explains:
Imagine you're a shop partner, but you hard ly have any traf-
fic on your site. Now you can make all your designs avail-
able to the whole community. If somebody buys a product
with your design, the earnings are split between you and
the selling shop.
By these new initiatives, Spreadshirt aims at becom-
ing a Web 2.044 business. Exhibit 17 illustrates the
network effects generated through this business
model as well as its distinctive features compared to a
classic shirt shop and the initial Spreadshirt 1.0 busi-
ness model. Likewise, it assigns the various success
factors to each business type.
With the right technology, a classic shop can offer
mass-customized products to its customers, either in
bricks-and-mortar stores or online. Via its Spreadshop
technology, however, Spreadshirt 1.0 capitalizes on
viral effects by spreading the company's front office
online. Konrad Marx explains how this may function
in practice:
Suppose you're a Harry Potter fan and one day you find
out that the official online shop is run on a Spreadshirt
platform which anybody can use for personal merchandis-
ing purposes. So you decide to open your own shop selling
43 An early beta version has already been launched at
www.spreadshops.de.
44 The term Web 2.0 suggests a new Internet generation
after the bursting of the dot-com bubble in 2001 and be-
came popular in 2004 when the first Web 2.0 Conference
was held in San Francisco. For a definition of the term
by its creator Tim O'Reilly visit http://radar.oreilly.com/
archives/ 2005/ 10/ web_20_compact_definition.html.

Exhibit 17 Business model enabled success factors

Classic shop Spreadshirt 1.0 Spreadshirt 2.0

Mass-customization

E-commerce

Viral network effects

Entrepreneur partners

User-generated content

Social network

Creativity generation

Growth potential

Source: Spreadshirt.

595
Part 4 Case studies

jerseys of your soccer club, for example. Then, one of your
team-mates likes the idea, starts running a shop for his dog-
breeding association, and tells his friends about it.
Through this approach, all shop partners become
entrepreneurs and promote their ideas and designs
within their social environment - or even beyond
by using Google ads, for instance. In the end, such
actions lead to higher sales for Spreadshirt because
fulfillment can only be done with them. Furthermore,
the Spreadshirt Designer tool allows users to gener-
ate their own content which many make use of, again
leading to higher sales.
Spreadshirt's next step is to develop a Web 2.0 busi-
ness model driven by the effects of a social network
through which people not only communicate with the
hub, but also with each other. The other main pillar of
Spreadshirt 2.0 is the creativity generation whose basic
assumption is that people are creative, but that they
do not (or rather did not) have the means to express
their creativity. Spreadshirt 2.0 not only enables users
to generate their own designs and thereby express
their creativity, but also to find a market for their
products through the Spreadshops' network. By this
social network, shop partners can inform potential
customers about their products and the ideas behind
them, exchange experiences with each other and
recommend certain designs, sell products at a self-
determined margin and let Spreadshirt do the rest -
all without any upfront costs. If Spreadshirt 1.0 is
the showroom for one's creativity, Spreadshirt 2.0 is
the marketing platform that will bring in visitors and
potential buyers.
Growth opportunities are obviously far greater for
Spreadshirt 2.0 than for the classic shop. There are far
more individuals on-board, i.e. the tens of thousands
of Spreadshop partners involved in creating value for
customers. All of them have the incentive to promote
their shops in order to achieve higher sales, thus lead-
ing to higher sales for Spreadshirt. Connecting them
via a social platform will result in even higher growth
opportumt1es. Intra-community communication
should make trends emerge more quickly and spread
further, again leading to higher sales for Spreadshirt.
Users will be able to make recommendations about
their designs and products, or about Spreadshirt.
Peers trust each other much more than any company
slogan.
Moreover, Spreadshirt sees future growth oppor-
tunities by:
Educating its shop partners - especially in terms of
self-marketing,
Pushing its brand,
Promoting La Fraise design competitions, and
Acquiring more corporate customers, especially
among small and medium-sized enterprises.
Through the above measures, Spreadshirt aims
at doubling its worldwide sales in 2007 and 2008
respectively (see Exhibit 18 for its sales perform-
ance until 2006), while keeping its market focus and
innovation drive. Regarding the company's future,
Gadowski says:
What keeps me up at night are rather internal questions like
'How are we going to enhance our organizational structure,
keep high quality levels and organize our product develop-
ment?' We are not afraid that somebody attacks our mar-
kets and threatens our position. [ ... ]One day. there might be
someone who emerges with an innovation. But it will be up
to us to respond quickly.
Exhibit 18 Spreadshirt's sales performance
(in EUR million)
15
8
2.5
2002 2003 2004 2005 2006
Source: Spreadshirt.

596
-~=====================~------~--
----------===============----------
Novartis SMS for Life (A}
A public-private collaboration to prevent stock-outs of
life-saving malaria drugs in Africa
Every 30 seconds a child dies of malaria. Over 40% of
the world's children live in countries in which malaria is
endemic. Each year, approximately 300 to 500 million
malaria infections cause about one million deaths,
most of them African children under the age of five .
Increasing resistance to anti-malarial drugs, coupled
with widespread poverty, weak health infrastructure
and, in some countries, civil unrest mean that mor-
tality from malaria in Africa continues to rise. The
tragedy is that the vast majority of these deaths are
preventable. The main reason why malaria is still such
a threat, despite the existence of drugs to cure the dis-
ease, is a supply chain problem. Supply does not meet
the demand where it occurs, and stock-outs of drugs
to treat malaria cost lives.
Jim Barrington, former chief information officer
(CIO) at Novartis and current director of the SMS
for Life project, had been trying to solve the problem
since 2006, when he first heard about the "last mile"
problem from Silvio Gabriel, executive vice president
(EVP), Novartis Malaria Initiatives. At the end of
2008 Jim decided to commit 100% of his time and
effort to an initiative to solve the supply chain prob-
lem and, after receiving the green light from Novartis
to leave his current job as CIO, embarked on this new
Research Associate Anna Moncef prepared this case under the supervision of Professor Donald A. Marchand as a basis for class
discussion rather than to illustrate either effective or ineffective handling of a bus in ess situation.
Copyright \ti 2010 by IM O, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced. stored in a retrieval system or transmitted in any form or by
any means without the permission of IMD.
adventure. By January 19, 2009, he was sitting alone
in an empty office, with only his computer, a phone
and a solitary desk and chair. It was a few days after a
US Airways pilot had successfully landed his plane in
the Hudson River after birds flew into the engines. Jim
described his thoughts at the time:
I was tremendously motivated. I was excited. I felt inside
that this was a problem I could so lve. I thought about the
pi lot, who did such a fantastic job landing that plane in the
Hudson River and I remember him saying afterwards that
he felt his whole life, everything he did, all his training, was
preparing him for this one moment. I can really relate to
that, and I fe lt that this project was someth ing that wou ld al-
low me to utilize all the skills, training and experie nces I had
gained from 40 years in IT. If I could apply all those learnings
to solve this one problem, this wou ld be just magic.
Malaria as a disease
Malaria is a mosquito-borne infectious disease caused
by the plasmodium parasite. The species Plasmodium
falciparum is the most common cause of infection and
is responsible for about 80% of all cases of malaria,
and about 90% of deaths.
Malaria is a public health problem in over 100
countries worldwide, inhabited by over 2 billion
people. It occurs in tropical and subtropical regions,
639
Part 4 Case studies
including parts of the Americas, Asia and Africa.
About 85% of the 300 to 500 million cases annually
occur in Africa, over 50% of them in five countries:
Nigeria, Democratic Republic of the Congo, Ethiopia,
Tanzania and Kenya. 1 The African region accounts
for 90% of malaria deaths globally, of which 85% of
deaths are of children under five, especially in remote
rural areas with poor access to health services.
Causes and symptoms
Malaria is transmitted to humans by the bite of an
infected female Anopheles mosquito, which injects
the parasites into the bloodstream. 2 The parasites
travel to the liver, where they grow for six to nine
days. They then leave the liver and invade red blood
cells, where they multiply rapidly until the cells burst,
releasing thousands of parasites into the bloodstream,
which then attack other red blood cells, and the cycle
continues.
It takes between 7 and 21 days for symptoms to
appear. These include waves of fever (when the blood
cells are attacked), followed by shivering (when the
blood cells burst), plus other symptoms such as sweat-
ing, headache, joint pain, vomiting, anemia and con-
vulsions. If not treated within 24 hours, P. falciparum
malaria can progress extremely rapidly and cause
death within days or even hours. Overall fatality rates
in endemic areas can be as high as 10% of all malaria
cases. Young children and pregnant women are espe-
cially vulnerable.
Malaria is a major cause of anemia in children and
pregnant women, of low birth weight, premature
births and infant mortality. Infants and children who
have suffered from severe malaria may also develop
mental impairments and even brain damage.
Economic burden
Malaria is a disease that primarily affects the poor,
but it is also a cause of poverty and a major hin-
drance to economic development. The gap in prosper-
ity between countries with and without malaria has
become wider every year. 3
The economic impact of malaria has been esti-
mated to cost Africa US$12 billion each year. This
includes the cost of health care and medication,
publicly managed mosquito control, education and
research, work and school days lost due to sickness,
decreased productivity due to brain damage from
640
cerebral malaria, and loss of investment and tour-
ism.4 In some countries with a heavy malaria burden,
the disease may account for as much as 40% of public
health expenditure, 30% to 50% of hospital admis-
sions, and up to 50% of outpatient hospital visits. 5
The fight against malaria
Although malaria is preventable and fully curable, it
is a challenging task for African countries to control
and eliminate it. In the last few years some progress
has been achieved, with 9 countries in Africa and
29 elsewhere documenting reductions in malaria
cases of more than 50% in 2008 compared with 2000.
However, the number of cases fell least in countries
with the highest incidence rates. 6
Malaria prevention
Malaria can be prevented by the use of prophylactic, or
preventative, drugs; by mosquito eradication through
indoor spraying with insecticides; or by avoiding
mosquito bites by using mosquito nets impregnated
with insecticide. The first method is recommended to
short-term visitors and travelers to countries where
malaria is endemic. Intermittent preventative treat-
ment is also recommended for pregnant women in
areas of high transmission, where a single curative
dose of an anti-malarial drug is administered at least
twice during pregnancy. It is not practical and too
expensive to be used for all full-time residents.
Vaccines for malaria are currently under develop-
ment, but no effective vaccine is yet available.
1 The WHO World Malaria Report 2008, http://www.who
.int/malaria/publications/atoz/9789241563697I en/
index.html
2 A mosquito becomes infected by biting an infected person
and sucking up some blood containing malaria parasites,
which undergo further development before being passed
on when the mosquito feeds.
3 Sachs, J. and Malaney, P., "The Economic and Social
Burden of Malaria." Nature, 415, February 7, 2002.
4 Greenwood B.M., K. Bojang, Ch.J.M. Whitty and
A.T. Geoffrey. "Malaria." The Lancet, Vol. 365, Iss. 9469.
5 http://www.rollbackmalaria.org/cmc_
upload/0/000/015/363/RBMinfosheet_lO.pdf
6 WHO World Malaria Report 2009, http://www.who.int/
malaria/world_malaria_report_2009 I en/ index.html

Diagnosis and treatment
Malaria can be diagnosed by examining a patient's
blood under a microscope, but this is often not prac-
ticable in Africa, particularly in remote areas where
there are no laboratories. Rapid diagnostic tests are
a possible alternative. They are simple to use, require
only a drop of blood and display results in a few
minutes. The World Health Organization (WHO)
recommends that malaria be confirmed by this type of
diagnosis before treatment is given, but some coun-
tries that cannot afford rapid diagnostic tests often
use symptoms as the indication to treat for malaria.
The best available treatment for P. falciparum
malaria- and the only one recommended by the WHO
- is artemisinin-based combination therapy (ACT). It
contains the basic compound artemisinin, which is
isolated from a herb used in Chinese traditional medi-
cine, before being chemically modified and combined
with other drugs, for example lumefantrine. ACT is
very effective when used within 24 hours of symptoms
occurring. The WHO explicitly discourages the use of
artemisinin by itself as a monotherapy as there are
signs that malarial parasites are developing resistance
to the drug, which makes the highly effective artem-
isinin derivatives and their partner drugs vulnerable
to the same risk, endangering future malaria control.
Drug producers
The pharmaceutical company Novartis, based in
Basel, Switzerland, was the major producer of ACTs
in the world. In 2001 the company began a program
to produce and distribute a treatment called Coartem
without earning any profit on these costs. By 2010 the
company had produced and distributed over 320 mil-
lion doses. To ensure a dependable supply and meet
rising demand for Coartem, Novartis invested heavily
to expand production in China and the United States,
scaling capacity up to 100 million treatments annu-
ally. Since 2001, production efficiency gains enabled
Novartis to halve the price per treatment, greatly
increasing patients' access to the drug.
Novartis supplied Coartem in color-coded packages
with doses to suit different ages. In 2008 the company
developed Coartem Dispersible, a cherry-flavored
sweet formulation of Coartem for children, which
dissolved easily in a small amount of water. It eased
administration and helped ensure effective compli-
ance. Coartem Dispersible was the result of a public-
private partnership between Novartis and Medicines
Case study 19 Novartis SMS for Life (A)
for Malaria Venture, a non-profit foundation dedicated
to the development of affordable new anti-malarials. 7
Institutions and funding committed to
eradicating malaria
The key institution in the fight against malaria was the
Roll Back Malaria (RBM) Partnership, 8 founded in
1998 by the WHO, the United Nations Development
Programme, the United Nations Children's Fund and
the World Bank, in an effort to provide a coordi-
nated global response to the disease. It has since
become a global movement of more than 500 partners
organized in eight constituencies: malaria endemic
countries, multilateral development partners, the pri-
vate sector, foundations, ex officio members, non-
governmental and community-based organizations,
research and academic institutions, and OECD donor
countries. It forged consensus between key actors in
malaria control, harmonized action and mobilized
resources to fight malaria in endemic countries.
The RBM Partnership together with the World
Health Assembly, the decision making body of the
WHO, established goals to reduce the number of
malaria cases and deaths recorded in 2000 by 50% or
more by the endof2010, and by 75% or more by2015.
These were further emphasized in the Global Malaria
Action Plan launched by RBM in September 2008,
which defined the necessary steps to accelerate
achievement of these targets. Two other very impor-
tant targets were outlined in the Abuja Declaration, 9
committing African governments to an intensive effort
to halve the burden of malaria in Africa by 2010, and
the United Nations Millennium Goals. 10 Goal no 6
was about combating HIVI AIDS, malaria and other
diseases and one of its targets was to have halted by
2015 and begun to reverse the incidence of malaria
and other major diseases.
Another important organization in the fight against
malaria was the Global Fund, 11 a public/private part-
nership created in 2002 and dedicated to attracting
7 http://www.corporatecitizenship.novartis.com/
patients/ access-medicines/ access-in- practice/
malaria.shtml
8 http://www.rollbackmalaria.org/docs/AMD/
RBM_Background.doc
9 http://www.rbm.who.int/docs/abuja_declaration_
final.htm
10 http://www.undp.org/mdg/basics.shtml
11 http://www.theglobalfund.org/en/about/
641
Part 4 Case studies
and distributing financial resources to prevent and
treat HNIAIDS, tuberculosis and malaria. This part-
nership between governments, civil society, the pri-
vate sector and affected communities represented a
new approach to international health financing. The
Global Fund worked in close collaboration with other
bilateral and multilateral organizations to supple-
ment existing efforts dealing with the three diseases.
It provided three quarters of all international funding
for malaria, with an allocation of $1.8 billion over
the next five years. Every year a round of funding
was conducted and grants were awarded to countries
based on the assessment of the programs requesting
support. In 2010, the 10rh round of funding opened for
applications. The funding came from about 50 donor
governments and private sector donors, for example
the Bill & Melinda Gates Foundation.
Despite the increased funding from international
sources (from $0.3 billion in 2003 to $1.7 billion in
2009) there still was a major gap. 12 The estimated
global requirement to eradicate malaria by 2015 was
about $3.2 billion a year.
Exploring the problem at Novartis
In June 2006 Silvio Gabriel, EVP, Novartis Malaria
Initiatives, spoke at an internal Novartis IT confer-
ence in Basel designed to bring Novartis IT employees
closer to the company's patients. He talked about the
problem of malaria and the existence of Coartem,
which cured over 95% of cases after only three days
of therapy. At the same time he mentioned the death
statistics in Africa and the huge problem of matching
patients with the pills. The in-country supply chain
did not work very well, and there were many stock-
outs in rural health facilities, where patients received
free drugs, as opposed to having to pay for them from
pharmacies or private clinics. African countries found
it difficult to accurately forecast the usage levels of
the drug, which resulted in Novartis receiving a lot
of emergency orders. This meant it had to ramp up
production and ship everything by air in order to meet
this sudden demand. The pharmaceutical company
could not hold too much stock of Coartem because it
guaranteed that when the drugs were delivered they
would still have a shelf-life of at least 18 months, out
of the original 24 months.
As CIO, Jim Barrington, participated in the confer-
ence and thought that IT could help solve the supply
642
chain problem. He thought it would be a good chal-
lenge for his team to take on and asked Rene Ziegler,
head of Global IT Governance and Operations, to
go to Zambia, where Novartis had been supplying
Coartem to the public sector since 2001, to explore
the situation.
Rene met with the Zambian Ministry of Health and
visited medical stores, hospitals, dispensaries and the
like. He looked at the healthcare system, in particular
at the processes for drug distribution, consumption
reporting and needs forecasting, as well as the avail-
able technology and telecommunications. He discov-
ered that the stock-out problem was huge, there was
no consistent forecasting and consumption reporting
in place, and ordering was paper based and sporadic.
He produced a report with his main findings which
highlighted two main problems. First, the informa-
tion and communications infrastructure was still very
poor - especially in rural areas- computers were not
readily available, there were frequent power cuts, and
the mobile phone coverage was not sufficient at that
time but it was growing very fast. Second, Novartis
could not assume responsibility for the in-country
distribution of Coartem, since this was the primary
responsibility of the Ministry of Public Health in each
country. They concluded that there were no practical
solutions to these issues.
Defining the solution
In March 2008 Jim found another opportunity to
explore the issue further, in an !MD/Novartis execu-
tive development program called IT Excellence (ITX).
Silvio once again made an inspiring presentation to
the participants. Several of them were so moved by
the story that they formed a voluntary project team
(ITX team), headed by Cathy Hein, senior project
manager, to tackle the problem. Cathy recalled:
A personal belief in the impact we could make as a whole to
save lives was more than enough motivation to be persist-
ent in overcoming all hurdles. It was particularly rewarding
to know we were contributing to the fight against malaria.
They went back to their home countries and contin-
ued working on the project remotely. Because they
all had other work commitments their resources and
12 The WHO World Malaria Report 2009,
http://www.who.int/rnalaria/world_rnalaria_
report_2009I en/index.html
 Case study 19 Novartis SMS for Life {A)

time for the project were limited. At around this time, to help explore problems and find solutions. The pro-
Rene and Jim made a presentation to Silvio, recom- gram enlisted the help of students, who were valued
mending that the SMS 13 cell phone technology was for their fresh thinking, which was uncontaminated
the only viable IT solution for the rugged African by the "corporate way'' of solving problems.
environment. Jim and Silvio agreed to act as sponsors and to
Rene then spoke with Jim about asking for help share the expenses and finance the students from their
from IBM, Novartis's major outsourcing partner, and departmental budgets; IBM agreed to provide people
specifically from the Value Creation Centre, a joint to lead the project. There was no time to lose. It was
Novartis and IBM activity to drive innovation with already May 2008 and they had to find and hire eight
IT in the pharmaceutical company. They contacted students for a summer internship. Charlotte and Jorg
Charlotte Newton, chief innovation officer at the started recruiting immediately. From 66 candidates,
Value Creation Centre, and Jorg Sprengel, Global they chose a diverse team of 4 undergraduates and
IBM R&D Client Manager on the Novartis Account. 4 graduates, 4 male and 4 female, from various back-
Charlotte was convinced about the project: grounds and nationalities; 3 of them had malaria.
Corporate responsibility projects carry something indefin-
On July 1, 2008, they kicked off the 12-weekproject
ably motivating to allow people to reach into their own self with the sponsors and the ITX team. They started by
and to make a contribution that they are truly al igned be- mapping the existing supply chain, in particular "the
hind. And this was the case with this project, where you are last mile" problem (refer to Exhibit 1), and investigated
essentially saving babies' lives.

The IBM team proposed using the Extreme Blue

method, which it had used successfully for 10 years 13 SMS = Short Messaging Service, text message.

Exhibit 1 The last mile problem

. -,,r
-lliiimriililliiiMi..tllil...
.,, -
,:-..-::~!t

:::::. :.~. . .-4

n:-:::. . :., .;.:::;..
..,..."' ., r .,._,.,,,..,'"".. '"'"'"
..... ~.-<"'"" ~ ' " I JlltOU ol do
.................. ~ . .... ..

;~:
~ .!
41 U - . . I
' ......... n....,.,
--"
"'" - ~ .,,..... .,.,
:.--=> ::::. :;_,;;.. : .. ::::::.:.

__f - .....}
4;....,.. 1.Afi:ur: Ntll'JL'"l~H.~ ,_. 1 /
VH..:_"'~En 1' rJ >r~ t1At..1J l\):r- _..

Source: SMS for Life project team.

643
Part 4 Case studies
possible improvements to the Coartem in-country
supply chain in Nigeria and Tanzania. Typically, once
stocks of drugs arrived in the country by airplane from
abroad, they were transported in trucks to a central
medical store (MSD in the exhibit). From there they
went to zonal medical stores, then district warehouses
and, finally, health facilities or health posts, which
each served a large number of villages. Distances
were great and the poor condition of some roads and
climate complicated matters. At each step in the chain
there was a lack of information flow.
Coached and facilitated by Charlotte and Jorg,
the students brainstormed 142 ideas, reduced them
to 80, refined 42 of them and produced 10 possible
solutions, which were combined into 5 final ones:
SMS-based stock management, malaria schools initia-
tive, a distribution coordination service, the year-out
program, and community healthcare access.
In September 2008 the students presented beauti-
ful posters with drawings explaining the five proposed
solutions in detail and their value assessment to Jim
and Silvio, who chose SMS-based stock management
as the preferred solution. The essential idea was to
create an in- country forecasting system based on
the use of SMS messaging between the health posts
that dispensed Coartem and the district and regional
warehouses that distributed the drug. A data manage-
ment system with a reporting interface using charts
would provide stock level information from all facili-
ties to facilitate stock movement and supply, as well as
improving stock forecasting and planning.
Finding the right partners
At the end of September the students went back to
their universities and Jim continued thinking about
how to move the project forward. By December 2008
he had decided to resign from the Group CIO position
and his boss Raymond Breu, Novartis's CFO, agreed to
sponsor him for 12 months until his early retirement
to focus solely on special projects. Jim recalled:
Before this project, I had already made up my mind to re-
sign from the CIO position for personal reasons. And the
agreement with Raymond Breu was that I would be work-
ing on any special project he gave me. But this project was
certainly at the back of my mind and one of the areas that
I was going to target like crazy. And I persuaded him that
I would like to progress it and see if I could make it hap-
pen. He didn't really think I could: He was very skeptical;
it required funding. it was highly political; and I would get
caught up in bureaucracy, he thought. But he said: Fine, try
644
it and we will see. Which I did. He gave me the approval in
January and I purposely didn't go near him again until I had
everything in place.
Enlisting the Roll Back Malaria Partnership
In January 2009, in his new and empty office on the
Novartis Basel campus, Jim set to work preparing what
he called the "SMS for Life" project proposal to present
to Professor Awa Marie Coll-Seek, executive director
of the RBM Partnership. His idea was to establish a
partnership project under the leadership of RBM in
order to take ownership of the project away from
Novartis and give him credibility and legitimacy when
bringing other partners on board. When he presented
to her and her team on February 10, 2009, they were
quite excited about the project. They liked the fact that
it tackled a major problem, and that both the problem
and the potential solution were clearly defined.
Finding corporate partners
While waiting for RBM to commit, Jim started sell-
ing the idea to potential corporate partners based
on the proposed project governance. The concept
was that each selected partner would undertake to
provide skilled resources and a financial contribution
of approximately $200,000. This would provide a
project team of five or six skilled people and an overall
budget of $1 to $1.2 million.
By the end of February 2009, Jim had secured the
funding and resources from Novartis, a project man-
ager and the use of LotusLive project management
software from IBM, funding and advisor resources
from Sara Lee, and initial interest from P&G. Sara
Lee and P&G were both interested based on their
logistics experience in African countries selling low-
cost essential products like Kiwi Shoe Polish and
soap. He still needed a mobile telecommunications
company, an IT company to develop the system, and
some type of visualization or mapping technology. He
started talking to three companies: Zain, a mobile tel-
ecommunications company founded in Kuwait with
operations in 17 African countries and 6 in the Middle
East; Vodafone, the world's largest 14 multinational
mobile telecommunications network company with
operations in 31 countries; and Google, whose map
14 Based on revenue.

service was of interest. Their responses and the ways
these companies approached the potential coopera-
tion were quite different. What was similar was that
they all wanted to do everything by themselves, with-
out other partners. Jim recalled:
Google, which was by far the most enthusiastic, put six
people on the project. I was sure they would be the most
successful. After the initial contact I talked to them twice a
week, but by April we still had nothing in writing. With Vo-
dafone's team we had an initial meeting in London with the
director of intellectual property, the scientific director and
the head of corporate research. After that they kept con-
tacting me and disappearing for a while as they discussed
the project internally. Zain kept quiet.
He also started to look for a potential country in which
to pilot the project. Two were on his list, Tanzania
and Zambia, and he started to talk to their Ministries
of Health.
Setting up a steering committee
In April, Professor Coll-Seek agreed to support the
project and to chair the steering committee. Other
members of the committee, from a broad range of
backgrounds, were:
Dr Alex Mwita, Tanzania National Malaria Control
Program (NMCP) manager
Dr Desmond Chavasse, PSI 15 vice president and
Global Malaria Control director
Professor Marcel Tanner, director of the Swiss
Tropical Institute
Professor Klaus Leisinger, CEO of the Novartis
Foundation for Sustainable Development
Silvio Gabriel, EVP of Novartis Malaria Initiatives
Jim Barrington, who became the "SMS for Life"
program director.
At the first steering committee meeting on April 20,
2009, Jim had to present the commitments from
potential partners. By this time, he had received writ-
ten confirmation from Vodafone that it would partici-
pate. It committed to cover all the costs of developing
the software, for which it would hire an external soft-
ware house, MatsSoft Ltd, 16 as well as costs related to
implementing the pilot, including providing handsets
and covering the SMS costs.
The other partners were not ready. Google was
unable to obtain internal approval in time. Zain did
not respond. Sara Lee withdrew its commitment after
Case study 19 Novartis SMS for Life (A)
the financial crisis meant it had to cut funding of all
non-essential activities. After many discussions with
P&G, the company wrote back to say that it would not
participate in the project.
The initial concept of obtaining donations from
a number of partner companies changed to having
fewer partners, who each would finance their own
parts of the project. They all agreed to fund their own
travel costs and their people, eliminating the need for
a central project budget.
Getting ready
With the partners on board, the work on designing the
system solution and preparing for the pilot began. In
April, Jim hired Olympia Wereko-Brobby, one of the
students who had taken part in the Extreme Blue proc-
ess earlier in 2008, to help him coordinate the project.
Other members of the team were three part-time
project members from Novartis (Tara Cook, associ-
ate director, IT, sales & marketing US; Marty Putenis,
executive director, healthcare compliance US; and
Peter Buesch, head of IT project office Germany);
Kevin Ferriday, project manager, from Vodafone; and
Peter Ward, project manager, from IBM.
Field trips to potential pilot countries
The team started to refine the project scope, technical
requirements and desired outcomes, as well as plan-
ning the project in detail. In May, they departed on a
three-week field trip to Tanzania to meet with National
Malaria Control Program (NMCP) representatives on
the ground, including the manager Dr. Alex Mwita
and the senior health officer Winfred Mwafongo. The
NMCP would be the main owner and user of the SMS
for Life solution in Tanzania. The team visited hospi-
tals, health centers, dispensaries and warehouses in
the three districts that the NMCP had chosen to partici-
pate in the pilot, namely Lindi Rural, Kigoma Rural and
Ulanga (refer to Exhibit 2 for the location of the three
districts). The three districts covered a population of
over 1.2 million people in 226 villages and 129 health
facilities. They were chosen because of their situation
15 PSI provides malaria control support to national Ministries
of Health in over 30 countries around the world, tailoring
its programs to the environment in each location.
16 MatsSoft had previously worked with Vodafone on
developing an SMS-based banking solution.
645
Part 4 Case stud ies

Exhibit 2 Map of Tanzania and the three pilot districts

J60 38'>
'lhll~fnd---lht~-UIS#
Ollaitmop<i>l>dlrlpy.-.--0'~

"'""'"""'-

40

:ieMOCll\11C
Rll'tBll C
Ol' TI!l. M8rt1/.
CO GO ~
ao Sumbowanga r
.. ----
\I II I Y \
0 hl PtJI (
District Lindi Rura l
....,, :ftiunya
Reg ion Lindi
ZAMRIA \,.
....,....J.I./
.

Zonal Store in Mwtara
je
Tundurne Live I st Oct 2009
T<A<uyu
UNITED REPUBLIC~ l~""'...... District Ulanga
48 Health Faciliti es
OF .., Region Morogoro
1
00 TANZANIA \ Zonal Store in Dar es Salaam
0 NatiO<>ol c.iptal \ Live I 5th Oct 2009
'i) Pmvirdal Cllpial i ti_es_ _ _~
.-/ __3_o_H_e_ai_th_ Fa_c_il _
0 TOIMI, vllage
\ ~ H l \ l 1'1 .-\
+ A.rport

Source: SMS for Life Tanzania Pilot Project Report, p. 8.

in three different regions that were representative of of NGOs 17 that worked in Tanzania and understood
the country and supplied from different zonal medical the health system well, in order to benefit from their
stores; malaria was the most common cause of death experience. Based on the inputs from all stakehold-
there; and there were no other pilots running at the ers, the team modified their project. The feedback
same time, which might have skewed the results. received gave them a high degree of certainty that the
Thus, Lindi Rural represented an "average" district in designed solution would work. Once they were back
Tanzania; Ulanga was one of the top 10 most difficult in the UK, MatsSoft started to develop the system.
districts to work in, because of its remoteness and staff At the beginning of June, Jim went to Zambia to dis-
shortages and skill levels; and Kigoma Rural was so cuss implementing the pilot there. Google representa-
large that the zonal medical store was a one-day drive tives joined him on the trip to explore the possibility
away from the main town, Kigoma, and the furthest of doing the pilot in that country in place of Vodafone.
health facility was a 12-hour boat trip away.
The team explained the pilot to all stakeholders, 17 The Mennonite Economic Development Association
showed them the draft solution and obtained their (MEDA) and PSI Social Marketing & Communications
agreement to participate. They also met with a couple for Health (PSI) .

646
 Case study 19 Novartis SMS for Life (A)

They also met with a representative of Zain, which Countdown to launch

had temporarily regained interest in the project. 18
After the trip, Google withdrew. Internal changes at
google.org had led to a revised strategy and the reas-
sessment of all projects in the pipeline, and the SMS
for Life project no longer fulfilled the new selection
criteria. In further discussions with the head of the
NMCP in Zambia, it was agreed that Zambia did not
need to run a separate pilot, as it could benefit from
the Tanzanian results because the healthcare system
organization in the two countries was very similar.
Over the summer of 2009, the team focused all
their efforts on getting ready to launch the pilot in
Tanzania. They prepared training sessions for 157
health workers, in both English and Swahili, printed
training materials including wall posters (refer to
Exhibit 3), designed and ordered branded T-shirts
18 On June 8, 2010 Zain sold its operations in 15 African
countries to the Indian company Bharti Airtel, keeping
only those in Sudan and Morocco.

Exhibit 3 Training poster

"SMS for Life"

r
Improving medicine access through innovation

A Roll Back Malaria Partnership Initiative

1 Receive a text message

requesting stock information
2 Count stock

Oo<..,,.t.trCT i>witt..nGtt.l>.,h
Oot~.1~lrkl'I '*'*'' ~p..I' '"' '

x ' '~
Oo"61C.O..'"l \:kO.oi1d ..,,.111"f..,
Dolt(lt-.1"109t11bc.tn

D11~;1~ lls4 ail &.11tokt1 0 """1M

l'!j,ttb!>!e .... ... both . .... ~iof
a'ld l.,4l'f"Mff

> oc

3
Compose and send an SMS
message to: 15009
4 Receive free air time credit

B
Your mobUe phone will be
~-- topped up wrlh credit after
R we htve recelvt>d
,_..---~ your eorn~ct meu.ag:e
y
1"--"---...,,1
Q ~~-11!.-l\-~:::-;~11

Me-ssage enters central Stock Information is vlslble Appropriate action is tak@n

database on Google Maps

ROil BACK $.
UAlARll {l NOVARTIS "-----
...
-~__,.. .....,_~ vodofone W>dc:rro-n

Source: SMS for Life project team.

647
Part 4 Case studies

with the logos of the RBM Partnership and the other
partners. They also prepared a project website that
was hosted on the RBM website. The SMS/mobile
phone system, the Web-based reporting system and
Google mapping were readied and tested.
On August 5, the second steering committee meet-
ing took place. It endorsed the start of the pilot in
Tanzania, despite the fact that the memorandum of
understanding with the Tanzanian Ministry of Health
had not been signed.
register their phones in the system and send the SMS
messages (refer to Exhibit 4 for training details). The
training included pharmacy best practices, which
were well received by the health workers who had
very little training.
On October 1, the pilot was launched in the first
district, Lindi Rural. Subsequently it was launched
in Ulanga, on October 15, and Kigoma Rural, on
October 22. The pilot ran for 21 weeks to cover two
quarterly order and delivery cycles.

Piloting the solution
At the end of September 2009, the first trammg
sessions took place. The training was tailored to
three different user groups: (1) central management,
including NMCP and MSD employees, (2) district
management, including district management officers
(DMO), district pharmacists and zonal MSD repre-
sentatives, and (3) health facility workers, who were
trained on how to store medicines, count stock levels,
How it worked
The solution consisted of two components: an SMS
management application and a web-based reporting
tool. All of the data was collected in a central system
housed in the UK in the Vodafone MatsSoft data center.
The SMS application stored the locations of the
health facilities and the personal mobile phone num-
bers of the health workers, which were registered in
the system to ensure that information was only sent
by authorized workers. Every Thursday at 14:00 the

Exh ibit 4 Training of user groups

r -
Central management

NMCP (Dar es Salaam)

District management

District
Health facility workers

District

NMCP OMO 1 health facility worker

from each of the 129
MSO MFP health facilities
Additional Staff DP
Zonal Store
representative

-English English Swahili

-1/2day 1/2 day 1/2 day

Understand and Understand how to use Register health facility

support the objective the reporting system phones
of the project
Understand how to Understand how to count
Understand how to use take action from stock leve Is
the reporting system information provided
Understand how to
Understand how to Understand how to compose the SMS message
take action from educate and assist
information provided health facility workers Conduct live simulation
of counting, composing
and sending text
Understand stock
management best practices
---- --
Source: SMS for Life Tanzania Pilot Project Report, p. 13.

648
 Case study 19 Novartis SMS for Life (A)

Figure 1 SMS stock levels and interpretation

Y4: Coartem Yellow, for babies 5- 15 kg: 4 boxes

B3: Coartem Blue, for ch ildren 15-25 kg: 3 boxes
R2: Coartem Red, for children 25-35 kg: 0 boxes
Gl : Coartem Green, for children above 35 kg and adults: 2 boxes
Q99: Quinine injectables: 99

system sent a weekly stock request message to all the
registered mobile phones. The health facility workers
had to count the level of stock in quinine injectables
and four different dosages of Coartem and send back
an SMS with the stock count message, as shown in
Figure 1. In order to ensure maximum response rate, a
free phone number was established and the costs were
covered by the pilot.
On Friday at 14:00, the SMS system sent an auto-
matic reminder message to all health facility workers
who had not yet responded. At 17:00, the system
sent a credit of 1,500 Tanzanian shillings (the usual
top-up amount in the area) to all mobile phones that
had submitted a stock level SMS message. Late mes-
sages were accepted but no credit was awarded. The
mobile phone credit was an incentive to motivate
health workers to send the message on time and also
to recognize the additional tasks they had to perform
for the pilot above their normal workload. Because
health workers were using their personal phones, the
credit was for their personal use.
Every Monday at 12 noon, the system sent an
automatic message to the DMO indicating the health
facilities that had not sent a message and the details
of all health facilities with a stock-out. The web-based
reporting tool enabled access to the data through a
secure reporting website (refer to Exhibit 5), which
was available via the internet or Blackberry mobile
phones. It enabled the users, namely the NMCP dis-
trict and central management employees, to view the
current and historical stock levels at both the health
facility and the district level. It displayed the facilities
on Google maps, showed the SMS messages sending
statistics, as well as any errors, and indicated the
web-reporting usage statistics - e.g. how many times
the web tool was accessed. Jim commented:
One of our criteria was to design and build a solution that did
the minimum necessary and was stripped of all complexity.
We felt that this was necessary because in Africa it is quite
difficult to work: remote locations, varying levels of educa-
tion and literacy. We had to come up with something that is
very simple. We designed a system that collects just five piec-
es of information every week in a very simple SMS message.
Pilot support and monitoring
Each DMO appointed one person to take the lead in
driving corrective actions resulting from the stock
level visibility. This person received a Blackberry
device to access the system and was responsible
for registering new users, educating them, assisting
workers experiencing difficulties, and ordering and
redistributing medicines in response to the stock-outs.
An additional salary was paid to the district lead per-
son for the duration of the pilot in recognition of the
extra tasks he/ she was asked to perform.
The project team monitored the pilot in two ways.
There was a daily review of the online information
available through the web application. In addition, for
the duration of the pilot, the team conducted surveil-
lance visits to 116 out of the 129 pilot health facili-
ties. There they registered physical stock counts and
matched them against the most recent data entered
in the SMS for Life application. They also checked the
GPS positioning of the health facilities and provided
answers to any questions the health workers had, as
well as gathering their feedback. In total, the team
spent over 370 man days on the ground supporting
the pilot. These follow-up visits were very important

649
'
V1
0

Exhibit 5 The web-based view of the information reporting from the system

Sl!.,Sfor life
Suppl!H
B G 0 Y8RG
+ ""lMl.~C"410tHt1t,'Yt::f:.oa~Af'd~irra

+ O!Jlot :~c~r'1r.u:~"ea:e3ttoa,.,...,.,,"~ ....

+ 0.111...,..,otoe'.oe ..i~so;;eolCuri

OiWkts
s;
Alldistntts
Kigoma Rural
' ,, "9
" 20
ltnd1Rural
Ulanga " 2J

Focllltles G
Basanta 0
Bigatwo
Bitale RHC 1 18 2l
Buban go 0 390 120 ~10

Chagu 0
Chakulu 0
ChankabYl1mba
Chankele 0 18
Ch1kon11 10 0
Ch1rombola
Ch1uia "
01mba J 12
Ebuyu 12
He1embe norepo<r.stK&IVfld
Hingawale 1 2 1 1 106
ldunda ) 0 0 15
lgalu!a 1orepor.:s~e:;ed

lgawa 8 Q 0 0 85
lgotaVA
lhawan1a ,,.
19 0 2 6

11-..i ..

Source: SMS for Life proj ect team.

 Case study 19 Novartis SMS for Life (A)

for the health care workers' perception of the project
and its significance. Olympia recalled:
To me, the most important part of the training was the vis-
its we made to individual health facilities throughout the
pilot. This process often involved long and difficult journeys
to very remote areas, but the opportunity to catch up with
people we had met at the centralized training, to experience
their daily working environment and get their feedback on
the project in an intimate setting, was amazing. They were
also motivated by the visits and in having their feedback
taken into account for the countrywide scale-up. I am sure
this contributed to both the accuracy and the frequency of
their SMS messages. The project is as much about the peo-
ple you meet and learn from as it is about technology.
On December 17, 2009, the third steering committee
meeting took place, at which the pilot's progress and
initial results were discussed. The members also dis-
cussed handing over the pilot to the Ministry of Health
and Social Welfare in 2010 and the possible imple-
mentation of the solution in other African countries.
To do this, they agreed to organize meetings with the
Global Fund, WHO and UNITAID.
Pilot results
The pilot had three objectives:
1 To demonstrate that visibility of stock levels will
prompt action to reduce stock-outs, thereby im-
proving access to anti-malarial drugs.
2 To demonstrate that a data-gathering infrastruc-
ture can be made available via simple tools that
can be used by people in the most remote
locations.
3 To demonstrate the effectiveness of a public -
private partnership model.
By the time the pilot concluded at the end of
February 2010, all three objectives had been ful -
filled. The SMS for Life application provided, for the
first time ever, reliable weekly stock information
about anti-malarials in the health facilities. This
enabled the district management to act upon the
information and reduce or eliminate the stock-outs.
At the beginning of the pilot, all three districts had
high stock-out rates of one or more of the five drugs.
During the pilot the stock-outs of all drugs were
reduced from 57% to 0% in Lindi Rural, from 87%
to 30% in Ulanga, and from 93% to 4 7% in Kigoma
Rural (refer to Exhibit 6). At the beginning of the
pilot, 26% of facilities had no stock of any dosage
of Coartem; this figure was reduced to 0.8% by
the end.
The average response rate over the 21 weeks across
all three pilot districts was 95%, never dropping
below 93%. The data accuracy rate was 94%. The
average usage of the system per user group was more
than once per day.

Exhibit 6 Pilot results

Total

pt
week
Last
week
Lindi Rural

1st
week
Last
week
Ulanga

1st
week
Last
week
Kigoma Rural

pt
week
Last
week
l
ACTs

Stock Level 2696 4411 541 1692 1422 1927 733 792

O/o Stock-out 77 O/o 24 O/o 55 O/o 0 O/o 87 O/o 22 O/o 93 10 47 O/o

Quinine

Stock Level 12536 16981 6158 9694 4536 2273 1842 5014

O/o Stock-out 18 O/o 4 O/o 7 O/o 00/o 3 O/o 7 O/o 36 O/o 4 O/o

Source: SMS for Life Tanzania Pilot Project Report, p.28.

651
Part 4 Case studies
In the final report19 the team made a recommen-
dation to implement the solution in all districts of
Tanzania and other African or non-African countries
to bring visibility to drug stock levels, which could
be used for all priority drugs, depending on national
environments. The solution could also be applied to
disease surveillance and the public-private partner-
ship model could be used to tackle other societal
problems.
The pilot results and recommendations were for-
mally presented and the final report handed over to
the Minister of Health, Professor David Mwakyusa, in
Dar es Salaam on World Malaria Day, 20 April 25, 2010.
He said:
If I only had that system before it would have made my life
so much easier. I wanted to say: Thank you.
Dr. Alex Mwita, NMCP manager, commented:
The SMS for Life project has demonstrated that it is pos-
sible to overcome the challenge of stock-outs by employing
existing communications technologies. The use of mobile
phones to inform about the stock position for anti-malarials
has prompted the supply chain to replenish those medi-
cines on time and thereby avoid stock-outs. The outcome
has improved malaria treatment, patient satisfaction and, I
have no doubt in my mind, has saved hundreds of lives in
the districts where the pilot project was implemented.
Looking back
The team wrote the following in their final report:
The SMS for Life pilot created a unique public - private
partnership model that enabled the problem to be precisely
identified and a technical solution to be designed, built and
implemented in three rural districts in Tanzania in about
one year. In the end, no formal budget, legal contracts or
memorandums of understanding were developed between
any of the partners. The team working on the project was
very lean but combined all the expertise, skills and influence
necessary to tackle a complex problem. Each partner com-
mitted their unique resources and covered their associated
project costs, eliminating the need to source and manage
budgets on a project level. This model also made it easier,
faster and more efficient to obtain results, bypassing the of-
ten lengthy and difficult approval process for project fund-
ing allocation and transfer.
When asked about the rules of collaboration between
the partners, Jim responded:
652
The collaboration with them has been absolutely excellent;
we managed to establish a team withoutthe need for a con-
tract, without the need for a budget, without any need for a
formalized memorandum of understanding or agreements.
The goodwill coming from those companies was amazing.
And there are external partners that collaborated, for ex-
ample British Airways gave a substantial discount on our air
travel, which was a major cost in the project.
He continued talking about their motivation to work
for the project:
The most Important was to establish the emotional connec-
tion with what we were trying to achieve. All the people in
MatsSoft, Vodafone and IBM, they know about malaria and
they know that they are involved in a project that is directly
contributing to saving people's llves. That's what drives us
and keeps us all together.
Post-pilot strategies
The pilot was successful, but Jim's work did not stop
there. Three issues had to be resolved:
How to keep the pilot alive in the three districts and
continue funding it for a "transitional" period?
How to find support and financing for a full roll-out
in Tanzania?
How to approach a pan-African roll-out?
Asked what he would do next, Jim replied:
ln the end the only single barrier is the funding. I believe that
we can exercise tremendous power and influence through
the donors such as the Global Fund, the WHO, UNICEF, the
Bill and Melinda Gates Foundation. The donors are giving
millions of dollars to buy the drugs and they would be very
disheartened to hear that a country is running with a 76%
stock-out rate and is happy to do so, and not make an in-
tervention. So, I need to talk to the donors to make them
aware of the potential to solve the stock-out problem with
a small amount of funding. Maybe they would be prepared
to divert some of the drug funding to managing the supply
of drugs on the ground.
19 SMS for Life Tanzania Pilot Project Report.
20 World Malaria Day was declared in 2007 by the World
Health Assembly after Africa Malaria Day, which was
adopted in Abuja at the African Summit on Malaria in
2000.