Advancing with e-commerce September 2001 A summary of 34 case studies of small business e-commerce ventures.
Introduction Early in 2001 the National Office for the Information Economy (NOIE) commissioned professional services firm Ernst & Young to examine small businesses in Australia that had introduced e-commerce into their operations. The purpose of the project was to demonstrate the business benefits of e-commerce and assist small business to undertake their own cost-benefit analysis of e-commerce. The result of the project is 34 case studies in which small businesses, from a wide range of industries around Australia, share their experiences with e-commerce. To provide more information to small business about the costs and benefits of adopting e-commerce, these case studies show how some small businesses introduced e-commerce, overcame challenges and enhanced their profitability. The case studies were not designed to represent all e- commerce activity in Australian small businesses. This report summarises the case studies by looking at the common e- commerce experiences of these small businesses, including the main hurdles encountered, establishment costs, ongoing costs and the financial and non-financial benefits of e-commerce. It also examines different experiences according to the level of e-commerce investment. About Ernst & Young About NOIE NOIE is the National Office for the Information Economy - Australia's lead Commonwealth agency for information economy issues. It was established in 1997. NOIE is helping Australians create a world-class online economy and society through its work developing, overseeing, and coordinating Commonwealth Government policy on electronic commerce, online services and the Internet. The Ernst & Young Entrepreneurial Services group is a global leader in providing specialised advisory services to emerging growth markets. Our Australian team has over 10 years experience in the entrepreneurial marketplace and a dedicated team of over 20 partners and 300 staff to provide integrated business solutions. The Ernst & Young Entrepreneurial Services team specialises in developing, coordinating and delivering professional services around the performance dynamics of successful entrepreneurial growth companies and the SME market. Advancing with E-commerce
Contents Key findings 2 The idea 3 The investment 4 Implementation hurdles 5 Revenue and cost savings 6 Non-financial benefits 7 Ongoing costs 8 The future 9 About this study 9 Commonwealth of Australia 2001 ISBN 1 74082 004 5 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without the prior written permission from the National Office for the Information Economy. Requests and inquiries concerning reproduction and rights should be addressed to: The Chief Executive Officer National Office for the Information Economy GPO Box 390 Canberra ACT 2601 Australia www.noie.gov.au 1
Key findings Objectives For the majority of participants in the case studies (62 per cent) e- commerce was viewed primarily as an opportunity to improve the efficiency of their business operations. For the remaining businesses (38 per cent) the primary opportunity was potentially higher sales to new and existing markets. Financial investment The majority of companies (65 per cent) invested less than $15,000 in e-commerce which includes the value of their time (46 per cent of these companies spending less than $5,000). Thirty five per cent of businesses spent more than $15,000. For all businesses the biggest component of establishing e-commerce was the cost of developing a website (59 per cent). Most businesses outsourced this task to a professional web developer but some constructed their own websites. The most significant hurdle for businesses was finding the right website developer. In a number of cases businesses were dissatisfied with the work of their first web developer and needed to use a second developer to get the right result. On average 55 per cent of the gross benefit of e-commerce came from efficiency savings and the remaining 45 per cent from additional revenue. On average the largest ongoing cost as a proportion of total ongoing costs was website maintenance (54 per cent) although this applied much more to businesses that made a medium or large e-commerce investment than those that made a small investment. The highest cost for small investors was the value of time spent responding to e-mail correspondence generated by the website. Revenue & cost savings Businesses that made small and medium-sized investments in e- commerce saw a higher proportion of their return come from additional revenue while those making a large investment reaped the most benefit from business efficiencies. Efficiency savings generally came from leveraging electronic communications, using the website as a marketing tool, and using the Internet to conduct financial transactions online. A combination of these efficiencies allowed some businesses to grow without having to employ more staff or to otherwise engage staff in more satisfying and profitable activities. 2 Advancing with E-commerce
Non-financial benefits The key non-financial benefits were improved customer service and improved relationships with other businesses such as suppliers. Likely future outcomes Businesses that established an Internet presence as a way of marketing their products and/or services are typically now looking to introduce electronic ordering to their websites to capture more orders from customers that are looking for the convenience of Internet shopping. Some are capturing customer details to improve marketing efforts. As a logical next step those businesses that have introduced e-commerce may also seek to capture further efficiencies by using e-commerce to better integrate their business processes particularly those processses involving the management of their supply chain. The idea For the small business owners in these case studies the challenge of introducing e-commerce was daunting because most initially had little or no knowledge about e-commerce. In their minds e-commerce was somewhere between a risk worth taking and a compelling business case. A common perception of e-commerce is that it involves selling products or services over the Internet. For more than a third of businesses in the case studies (38 per cent) the lure of potentially higher sales to new and existing markets was indeed the main influence for introducing e-commerce. However for the majority of businesses (62 per cent) e-commerce was viewed primarily as an opportunity to improve the efficiency of their business operations. This proved true, as within the typical two year timeframe of e-commerce adoption an average of 55 per cent of the gross benefit has come from efficiency savings. A usual path for e-commerce involvement was for the business to connect an existing work computer to the Internet in order to use e-mail. This was followed by a small investment in developing a website as a new way of marketing the business. In some of the case studies this is the point where e-commerce involvement ceased. For others this experience triggered greater involvement and more investment to: expand existing customer bases both locally and internationally, with many using their website as an alternative to brochures; source more competitive suppliers and gain direct access to customers without the need for intermediaries; and/or offer online invoicing and billing, conduct direct marketing by building and leveraging customers databases and expanding market presence by using electronic exchanges. 3
In a small number of these case studies e-commerce represented one of a number of different strategies for expanding the business. For these businesses the investment in e-commerce was large by comparison to other case studies but chosen because it was a low-cost alternative compared to buying another business or establishing a new outlet. The investment To gain a more meaningful insight into the challenges faced by different businesses that introduced e-commerce, the case studies are categorised into three groups according to the level of e-commerce investment. E-commerce investment bands for businesses in the case studies Small less than $5,000 (30%) Medium $5,000 to $15,000 (35%) Large greater than $15,000 (35%) The average investment for all businesses in the case studies was about $24,000. However the majority of companies (65 per cent) spent less than $15,000 and nearly a third spent less than $5,000. Generally the higher the turnover of the business the greater the investment in e-commerce. As a proportion of total e-commerce establishment costs, hardware and software costs were low for businesses in the small investment category (24 per cent) as most used existing computer equipment that already had software suitable for e-commerce. Those in the large investment category often bought new equipment specific to their e-commerce requirements and consequently hardware and software costs comprised a higher proportion of their investment (41 per cent). E-commerce establishment costs (percentage of total) All Small Medium Large Web development (including staff training) 59 60 74 56 Domain name 1 7 1 1 Telephony 3 11 3 2 Hardware and software 38 23 22 41 For all businesses the biggest component of establishing e-commerce was the cost of developing a website (59 per cent of establishment costs). Most businesses outsourced this task to a professional web developer but some, particularly those in the small investment category, constructed their own websites. The cost of developing these websites has been determined by calculating the amount of time the business spent creating the site multiplied by the value of that time. Other standard start-up costs include registering a domain name, setting up a dedicated telephone line and time spent on e-commerce education and training for staff. 4 Advancing with E-commerce
Implementation hurdles The first hurdle faced by business owners in the case studies was finding information about e-commerce. In the majority of cases e-commerce research was limited to looking at other businesses' websites and sourcing information from friends, relatives or from professional web developers. A third of business owners found it difficult to find information about the different business applications of e-commerce. Many found the Internet itself to be the most useful e-commerce research resource. The next hurdle was finding the right person or company to construct their website. The case studies reveal this was a significant hurdle for many businesses, especially those in smaller cities and rural areas where there are fewer web developers. In a number of cases businesses were dissatisfied with the work of their first web developer and needed to use a second developer to get the right result. For businesses selling high volume/low value products or services over the Internet an important success factor was found to be keeping their website fresh to encourage customers to return. For these companies, maintaining and updating websites was widely recognised as either a costly or timeconsuming task, especially where a dedicated resource could not be appointed. For businesses in regional areas of Australia other challenges were getting cost-effective access to Internet Service Providers due to the higher cost of connecting at STD rates. Those businesses that used e-commerce to venture into exports faced a number of unique challenges. These issues included finding the right logistics solution for delivering products and selecting an ordering system that was both easy for customers to use and secure. For some small businesses another impediment was the high cost charged for electronic transactions through internet payment gateways offerred by banks. A key inhibitor of e-commerce growth, which prevents some small businesses from gaining the full benefit of e-commerce, is the lack of widespread use of this new business channel. Numerous case study participants could not maximise their e-commerce initiative, as many of their suppliers and customers were not yet using the Internet to transact business. However as more and more people adopt e-commerce, the benefits of the medium will be greater for all. Revenue and cost savings Because the net benefit from e-commerce initiatives varied widely amongst the businesses analysed in the case studies, this report focuses on the gross benefits derived through revenue and cost savings. The two essential financial benefits of e-commerce are revenue generated by additional sales and savings generated by business efficiencies. 5
The sales result from online marketing activities or direct sales of products and services over the Internet. Business efficiencies are derived from electronic transactions that improve productivity or lower costs. On average 55 per cent of the gross benefit of e-commerce in the case studies came from efficiency savings, and the remaining 45 per cent from additional revenue. Interestingly, businesses that made small and mediumsized investments in e-commerce saw a higher proportion of their return come from additional revenue while those making a large investment reaped the most benefit from business efficiencies because their initiatives were typically aimed at generating these types of efficiencies. Gross benefit of e-commerce (percentage of total) All Small Medium Large Additional revenue 45 69 65 32 Business efficiencies 55 31 35 68 Although a handful of businesses in the large investment category sell products and services directly through their website most use their Internet presence as a marketing tool. Consequently most additional revenue was generated from sales made to customers who had discovered the business by visiting its website. Efficiency savings generally came from leveraging electronic communications, using the website as a marketing tool, and using the Internet to conduct financial transactions online. In many cases a combination of these efficiencies allowed businesses to grow without having to employ more staff. It also allowed them to engage staff in activities that were more beneficial to the business' profitability and more satisfying for the employee. This last benefit has been separated out under the category of staff productivity. E-commerce efficiencies (percentage of total) All Small Medium Large Staff productivity 45 3 22 51 Communication 33 39 43 31 Marketing 12 17 12 12 Transactions 10 41 23 6 Communication efficiencies encompass time and money saved using e-mail instead of other communications channels such as telephone, fax or face-to-face discussions. This saving was consistent across businesses making small, medium and large investments in e-commerce. Marketing efficiencies include savings made by businesses that effectively use their website as a business brochure. These businesses now print and post fewer brochures and save their staff considerable time by enabling them to direct customers to the website rather than engage in lengthy telephone explanations. This cost saving as a proportion of total savings was greater for businesses making a small investment in e-commerce. 6 Advancing with E-commerce
Transaction efficiencies include savings made by using online banking to pay staff and suppliers. Other efficiencies were gained by using the Internet to source new suppliers, and in some cases buying goods and services directly over the Internet. A number of businesses found the Internet a very powerful, cost-effective procurement tool that led to a complete change in their supply chain arrangements. Once again these savings were proportionately much higher for businesses making a small investment in e- commerce. The biggest efficiency component for businesses making a large investment in e-commerce was staff productivity gains (51 per cent). For most of these businesses, the combined efficiencies created by using e- commerce for communication, marketing and transactions meant fewer staff were required to expand the business. Non-financial benefits The intangible benefits for small businesses using e-commerce are numerous. The key non-financial benefits indicated by the businesses participating in the case studies were improved customer service and improved relationship with other businesses such as suppliers. E-commerce can improve customer service in a number of different ways. Some businesses effectively use their website as an educational tool for customers, allowing them to gain a better understanding about products and services so they can make more informed purchase decisions. In addition, communication between businesses and customers over the Internet using e-mail is often speedier and more reliable than telephone, fax or mail. Another benefit is that a website can be accessed 24 hours a day, offering greater customer convenience than traditional business hours. This is particularly advantageous for businesses with international customers and suppliers. Some businesses have interactive websites that allow them to collect information about customers and potential customers. This information can become useful market research that allows products and services to be tailored to better meet the needs of customers. Another benefit discovered by many businesses featured is the ability to link their websites to the sites of their key suppliers or to other associated businesses. This linking helps cement relationships with other businesses and gives more useful information to customers. Where reciprocal links exist, there is also more potential for new customers to find their website. A website can also provide a professional image and add credibility to a small business that may be competing with more fully resourced and larger competitors. 7
Ongoing costs The costs associated with maintaining e-commerce are numerous and vary greatly across the different businesses in the case studies. The key differentiating factors appear to be the size of the e-commerce investment and how each business used e-commerce. Ongoing e-commerce costs (percentage of total) All Small Medium Large Website maintenance 54 7 51 57 Telephony 19 4 10 22 ISP and website hosting 9 27 22 4 Direct costs 5 0 0 6 Responding to e-mail 4 59 15 0 Advertising 3 1 1 4 License fees 3 0 0 3 Opportunity cost 2 0 1 3 Bank fees 1 1 0 1 On average the largest ongoing cost as a proportion of total ongoing costs was website maintenance (54 per cent) although this applied more to businesses that made a medium or large e-commerce investment than those that made a small investment. The highest cost for small investors was the value of time spent responding to e-mail correspondence generated by the website. Telephony was a significant cost for all businesses, especially those making a large investment as many of these businesses needed to install additional phone lines. Most of the telephony costs relate to the rental of additional bandwidth to accommodate the needs of e-commerce. Internet Service Provider (ISP) charges combined with website hosting were the third largest cost although the larger the investment the less significant this cost becomes. Businesses that sell products through their website face additional costs directly associated with those sales including staff time required to fulfil those orders and transaction costs charged by banks and other Internet payment gateways. On average these direct costs account for five per cent of all ongoing costs. Advertising costs rank relatively low on the list of e-commerce expenses. Most businesses featured indicate the main way they advertise their website is on company stationery or vehicles and through registration with popular Internet search engines. In two of the case studies e-commerce was chosen as the preferred way to expand the businesses, against other alternatives such as buying another business or opening an additional sales outlet. In these case studies the opportunity cost has been calculated as the cost of financing the business investment in e-commerce. 8 Advancing with E-commerce
The future The positive experience these businesses have had with e-commerce means that most are looking to expand their e-commerce involvement in the future. These plans vary according to the level of e-commerce sophistication adopted by each business. Businesses that established an Internet presence as a way of marketing their products and/or services are typically now looking to introduce electronic ordering to their websites. In this way they hope to capture more orders from customers wanting the convenience of Internet shopping. Those businesses that already have sophisticated websites are now examining ways to better integrate the information generated from online sales into their supply chain management systems to capture further efficiencies and to improve customer service. Some businesses are looking to improve the quality of information on their website by using new software which allows products to be viewed in a three dimensional format. Others are looking to upgrade their hardware to give staff wireless access to the Internet, allowing them to send and retrieve business information remotely. Information security and privacy is also an important issue recognised by some businesses that plan to collect information from customers and potential customers that visit their websites. These businesses are considering introducing a password system for customers as one way of protecting their privacy. Just as the businesses in these case studies evolved by introducing e-commerce, the new business channel itself is also evolving. The businesses that take up the challenge of e-commerce are those best placed to keep track of this evolution. They are also those most likely reap to the rewards as more and more people turn to the Internet to complete everyday transactions. About this study The National Office for the Information Economy (NOIE) commissioned Ernst & Young to undertake a series of case studies on the adoption of electronic commerce (e-commerce) by small to medium enterprises (SMEs) in Australia. The study involved interviews with 34 SMEs from different industry groups. The participants were chosen from all areas of Australia including rural and regional areas. 9
For information please visit our website at http://www.noie.gov.au The business The idea The investment Hurdles Results Future MELB_015875