Electronic Commerce: The Next Generation

Alan Cohen, John M. Jordan

It is impossible to inhabit the contemporary business and technology landscape and not hear the
steady buzz of interest in, and confusion over, electronic commerce. Some estimates suggest that
an annual total of a trillion dollars – economic activity comparable to today's healthcare sector of
the American economy – will be transacted over Internet-based technologies within 5 years. Other
observers point to the changes already being wrought by this emerging phenomenon in
advertising, distribution, and the nature of work. For all the discussion and activity, however, the
state of e-commerce is still maturing.
The firms represented by the two authors have a vested interest in understanding where network
commerce is headed. Cisco is widely regarded as a dominant leader in business-to-business
electronic commerce, with something over $8 billion a year – $22 million per day – in orders flowing
through the Cisco Connection Online (CCO) site. In addition, cost savings of more than $600
million annually are being recorded as the business moves increasingly to a digital platform for
doing every imaginable activity. In the case of Ernst & Young, the Ernie online consulting effort has
been a success from every angle: it staked the firm to an early lead in the services market, it
provided valuable internal learning about network-based knowledge processes, and it gave the firm
a window into many businesses traditionally range of its professional services markets.
In addition, success underscores the need for relentless innovation; e-commerce leadership is not
possible without constant infusions of new ideas. Indeed, the entire concept of „unique sustainable
competitive advantage“ may be outmoded in an environment where technological barriers to entry
are low (compared to airlines or manufacturing, for example) and where pausing for self-
congratulation provides a window of opportunity for a competitor. Looking ahead to the traits of
next-generation leadership, we see technology becoming more invisible. Instead, core business
activity will be reshaped across the three basic dimensions of interaction: discovery, negotiation,
and transaction.

Why today's e-commerce is primitive

Compared to what will happen in the near future, many aspects of electronic commerce are in
extremely early stages of maturation. In contrast to previous generations of computing, which
largely functioned to automate existing ways of doing business (such as accounts payable or order
entry), among a small group of constituents, pervasive networking is making possible entirely new
ways of doing business for large numbers of companies, customers, suppliers, and partners. For
each of the key focus areas mentioned above, the current state of the art is giving way to much
more powerful alternatives.
Discovery

The process by which a customer and a vendor find each other online is highly manual. Text-string
search engines are literal, blunt instruments that assume a base of both knowledge and, in some
instances, dumb luck on the part of the user. The ongoing controversy over the domain naming
system points up that the Web is still in a „gold rush“ phase: real estate is often claimed by
squatters. Consider that Sun Microsystems, Sun Oil, Sun Realty, and Sun Life Insurance all have
legitimate claims to the sun.com domain name, yet only one company has that privilege. The
current focus is on the vendor rather than the customer need or even the product/service offering:
generally speaking, you need to know a lot about something to search effectively for it.

In addition, identification of a customer need by a potential vendor is highly structured; imagine

using Microsoft's Windows 98 Help utility to do medical diagnosis. That clunky process, frustrating
as it is, is still better than the current state of the search engines of the Yahoo!/Excite/Hotbot sort. If
a customer wants a pair of jeans, she can't search „jeans“, but must be vendor-centric: after finding
the Gap and Levis and Guess and possibly Sears or JCPenney sites, the shopper could search for
jeans one store at a time. In the business-to-business setting, the situation is, if anything, even
worse.

Negotiation

Simply put, it is rarely possible to negotiate in online environments without extensive manual
interaction; the experience quickly drives participants to appreciate the virtues of the telephone or
face-to-face contact.
Broadcast (one-way, one-to-many) database-driven pricing is posting rather than negotiation, an
anomaly when one considers that prices have been haggled over ever since before the first bazaar
or trading post. The rise of centrally posted uniform pricing is, historically speaking, a recent
development – one that will soon, we predict, revert to form. Moreover, it reflects a retail consumer
rather than business-to-business environment. Most experts believe the great sweep of electronic
transactions over the Internet will come from business transactions in the next five years.
In addition, there are technical limits to current electronic markets outside the financial services
arena. Transaction databases, broadly speaking, are tuned to process incoming orders quickly and
reliably. Searching through past activity data to find relevant behavior by a given customer is
incompatible with this goal of throughput and reliability. The net result is that context for any given
interaction must come from human memory rather than be embedded in the structure of the
electronic interaction.

Transaction

Multiple barriers currently prevent effective completion of an Internet-based deal. Think about
walking into a store and completing a simple cash transaction, then look at the many ways in which
online shopping falls short: the person-to-person dynamics of a good shopping experience are only
rarely approached. There are several reasons for this.
Cash can't move well over networks in business-to-business transactions; the Uniform Commercial
Code has yet to address the legal status and ramifications of small-scale electronic payment the
way it has for checks and other paper instruments. Electronic Data Interchange and other
standards must be highly structured, conventional interactions; EDI essentially automates one
piece of the paper environment, much as Oracle Financials automated accounts payable. Credit
card issuers currently assume most of the risk of online transactions being compromised, but these
entities’ appetite for risk is rapidly diminishing. As more customers come online and the user base
moves out of the affluent demographic segments or early adopters, and as the increasing
sophistication of online terrorism combines with the government's failure to make stringent
encryption available to the mass market, bigger, more visible security attacks will alter the current
landscape.
Internal problems also exist. For example, the communications industry has failed to take
advantage of technology to provide customized, integrated services and billing to individual
customers or customer sets. Although certain carriers can conceivably offer onestop shopping for
local, long-distance, cellular, paging, Internet/data, and cable services – priced and packaged
based on a customer's proclivity to spend or use specific elements – these services continue to be
sold as monolithic offers within the product lines. In many cases, customers rarely know that a
given carrier sells them certain services. Indeed, regulation frequently inhibits carriers from
adopting „prism cluster“ marketing approaches, providing more granular customer-set definitions.
Yet most communications companies still do not organize or align technology to drive a customer
lifecycle approach to offering integrated services. Regardless of industry, data are almost always
arranged from an inward-facing perspective.

Shortcomings of the present environment

Because of the immature state of both the core technologies and businesses' operational
execution, the current electronic commerce environment has three major limitations for most
businesses. These relate to finding information, hand-offs between physical and virtual processes,
and the ability of e-commerce to drive market-facing growth rather than reduce internal cost.
As we have argued, search costs are still high; the capacity of customers to find information in a
format that fits real-world needs and queries is spotty at best. Part of this is the reality of dealing
with a breakthrough technology: if one considers that vastness of the information (the Web is
growing by 1.5 million pages per day; it doubles every 8 months) made available on the Web in just
the past five years, and compares that to the centuries of evolution required to generate something
as limited as a library card catalog, it is clear that the classification and organizational infrastructure
dramatically lags the ability of people and institutions to contribute content. In short, this is in some
measure a case where it will take time for the situation to stabilize.
For all the promise of „friction-free capitalism“ (in Bill Gates' phrase) and widespread electronic
markets, many transactions still aren't independent electronic events; they must leverage a
physical contact somewhere. In other words, the integration of network interaction into the overall
business architecture is uneven. Several of today's successful online vendors, for example, began
by printing e-mails and hand-carrying them across a facility to be re-entered by hand into the order
management system. In the case of forward-looking logistics providers, the integration of digital
processes into the physical movement of goods is exposing multiple opportunities to add
information value to the process (in the case of package tracking, for instance), overcoming the
objection that physical activity is less profitable, glamorous, or valuable than the new virtual stuff.
Finally, much of the current e-commerce effort is devoted to automating the existing world rather
than imagining and building the new one. The reality of the current situation is that electronic
commerce is still in infrastructure build-out mode; applications that exploit powerful networks are
still emerging. Opportunities for vendors to add value are significant when measured by a physical
yardstick, but still limited by experience and imagination. Once the network base reaches effective
ubiquity and robustness, however, breakthrough applications that redefine basic rules of
engagement and competition will increase in impact. The impulse toward innovation will show
advantages over optimization efforts.

Discovery

Given this speed of change and innovation, the currently chaotic methods for finding both entities
(persons and companies) and information requires augmentation. Directory-enabled networks, now
moving from the lab into practical application, will make for much smarter searching and modes of
doing business. From the customer's perspective, more logical categorization schemas, possibly in
conjunction with XML (extensible markup language) application, will reduce search costs. From the
seller's standpoint, customer acquisition should become more efficient and more effective. Both in
their utilization of processing power at the edge of the network and in their reliance on databases,
the coming advances in finding resources and opportunities will ride the continuing wave of
Moore's law: cheaper, more powerful processing will play a central part in the maturation of
electronic commerce.
One more important piece of discovery is identity: once a prospective buyer and seller find each
other, what is each allowed to see, given their contrasting interests? How can customers broadcast
(or, more likely, narrowcast) their interests, needs, parameters to a subset of the market so that
vendor responses can be tailored to meet them? Personalization is a widely used term for a set of
activities that are hard to do in practice, and the need for the state of privacy, security, and
personalization practice to co-evolve is only now beginning to be understood. Directory-enabled
networks will do much to accelerate more controlled, rapid one-to-one interactions.

Negotiation

Compared to the historical anomaly of centrally mandated pricing, interactive pricing in next-
generation databases will mean auction-like price fluidity. Right now, calling a human is the only
way to dynamically and interactively come to agreement on price. Soon, databases will be able to
contend with counteroffers in a structured way, making true electronic commerce possible. After
people are able to reply to the pricing on a website or similar venue, the age of interactive agents
will expand possibilities still further, though with less science fiction horror than some observers
predict.
Bundling goods, to take only one example, can quite effectively confuse software agents. In
response to a command to find the cheapest flight to Chicago from New York, the agent faces
significant barriers in the structure of today's HTML, the language that defines the presentation of
webpages. In the coming years, sellers will be able to respond to such criteria with complex
responses: the agent may find a price of $299 on site A but $325 on site B. The trick is that site B
includes a car rental. Site C, at $350, may include car and hotel, and site D could offer the flight
and the hotel for $340. This simple trick will be joined by many others, making predictions of
ruthless price war both premature and overstated.

Transaction

To effectively conduct business, one must know both the raw numbers (how many at what price)
and some sense of context (has this customer ordered from us before). Currently, transaction data
resides in „data“ bases (such as Oracle or SQL Server or DB2) and information in „knowledge“
bases (Lotus Notes or an intranet). Speaking broadly, getting the right information into a
transaction database is far easier than getting it out; to some degree, the same is true for online
knowledge repositories. Discussions in particular are extremely difficult to mine for gems. Merging
the two classes of intellectual assets into a combined effort is difficult but highly profitable.
As Amazon.com and other leaders are showing, these two elements will move more transparently
and mutually reinforce each other in online commerce. Rather than relying on batch (often
overnight or less frequent) processes, leading commerce sites are pushing knowledge processes
to respond in real-time, much like transaction systems. The other challenge is to configure the
transaction in the context of up-to-the-minute context derived from sources outside the traditional
transactional realm. Until now, „knowledge management“ efforts have been difficult to justify in
financial terms; „knowledge“ is notoriously difficult to capture and quantify. Moving forward, the
hybridization of the two poles of the database world will redefine many traditional terms.

Implications moving forward

Given the coming advancements in agents, directories, and databases, along with the rapid
increase in the capacity of both fiber optics and computation, we see four structural changes
accelerating.

Business will be increasingly forced to move in real-time. As business-to-business interaction

becomes more automated („I'll have my database talk to your database“), the slowdowns
 incurred by the movement of paper will diminish. As „information float“ is reduced, response
times will need to drop.

The normalization of online business processes will become both more and less important. As
real-time market signaling obviates the need for standard operating procedures that were
necessary when the customer/market was invisible inside a functional area, actual market
signals will be felt deeper and deeper within the enterprise. At the same time, responding with
ad hoc efforts to global market signals will be less tenable: „I'll get back to you“ is already
unacceptable to many customers.

The lines of where „The enterprise“ starts and ends will get fuzzy as extranets connect vendors
into networks of capabilities. The trend toward web-based outsourcing of office supply and
other MRO procurement (enabled by such vendors as Ariba) serves as an early indicator of the
future shape of business.

A corollary is that opportunities will exist for emerging roles in business-to-business space: as
the environment changes, new entities emerge within an ecosystem. Nets Inc. and other big
market integrators have failed in their attempt to link knowledge, transaction, and community
after finding that execution of such grand plans was far more difficult than they proposed to
their funders. Now, such startups as Fastparts and established players like American Express
are dramatically reshaping corporate procurement.

The question is not whether these structural changes are coming, but when. We believe that within
the next 18 months, most of these inhibitors will give way to advances in technology and
acceptance to changes in decades-old business processes. Companies will miss these trends at
their own peril: yet coordinating business and technology change at unprecedented speed will test
most corporations' capability as never before. The winners in the new environment will have to
earn their mantle the hard way.

Reprinted with Permission

The Ernst & Young Center for Business Innovation