Industry Trends and Directions Scenario: Transforming the Enterprise Through E-Business

1. Industry Trends and Directions Scenario:Transforming the Enterprise Through E-Business September 18, 2000 Financial Executives Institute Forum on Finance & Technology Las Vegas, Nevada William S. McNee Gartner Fellow 1-203-227-7612 bill.mcnee@saugatech.com

2. Key Issues 1. What are the key eBusiness trends that will drive new IT investments during the next five years? 2. How will technology advances and changes impact IT and eBusiness deployment decisions? 3. How can organizations harness and exploit eBusiness despite ever-increasing complexity and volatility? Business Driving IT E-Business IT Driving Business

3. 1 - 2% 88 - 93% 6 - 10% Pure Play Brick & Mortar Hybrid Global 2000 Business Model Distribution -- 2003 Key Issue What are the key eBusiness trends that will drive new IT investments? The $64 Trillion Question: Who is Right? -- Global 10 CEO -- Leading Venture Capitalist • “Dot Com Companies yield … • Completely new industries with new cost structures • Radical restructuring of industries • Real growth never seen before” • “Dot Com Companies have … • HR departments who hire without regard for real skills • Marketing people who spend millions to give away products • Executives who have never run a real business”

4. Key Issue Analysis E-Business: Drivers and Responses Key Business Challenges: • Agility and speed • Focus on core competencies and processes • Customer centricity • Mass customization • Geographic scalability • Flexible IT architectures • Interoperability of infrastructure Business Drivers of the New Economy • Global financial interdependencies • Deregulation • Unrestricted capital flows • Global workforce sourcing • Digitization • Global communication and transportation systems • New geopolitical realities • New Business Models and • Structures: • Aggregators • Portals • Info-mediaries • E-tailers • Hybrids • Virtually integrated • Mega-mergers E-Business Integration

5. Myth Truth B2B E-Commerce Forecast ($B) $8,000 $ 7,297 YE02 7,000 6,000 5,000 $3,950 E-Marketplace EC 4,000 Extranet/sell side/ Net EDI 3,000 $2,188 2,000 $953 1,000 $403 $145 $45 - 1998 1999 2000 2001 2002 2003 2004 YE02 YE02 YE02 YE02 Non-financial goods and services worldwide YE02 YE02 Opportunity/Threat Model YE99 YE99 YE99 YE99 YE99 YE99 YE99 Indep. Travel Agency Retail Groceries Retail Brokerage Music Very Low Extremely High Strategic Planning Assumption (s) By 2004, B2B e-commerce will reach $7.3 trillion, representing 6.9 percent of the total global economy (0.7 probability). By 2005, 70 percent of all product and service-based industries will be dominated by virtually integrated enterprises (0.7 probability). Pure Dot-Com Business Models Dominate 1st Mover Advantage Critical for Success Brand Is King Internet Levels the Playing Field Portals Dominate Share Beats Profit Advertising as Primary Revenue Driver Digital Products/Services Business Value (and difficulty of “Webification”) Attend Online University Physical Products Vote Online Order Prescription Drugs Conduct Financial Transactions Local Services Process Healthcare Claims Schedule Surgery Order Grocery Delivery Media Transmittal Schedule Auto Maintenance Order Books Download Music Renew Driver’s License Schedule Haircut Book Travel (e-tickets) Degree of Possible “Webification”

6. 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 05 90 95 00 10 Strategic Planning Assumption (s) By 2005, investments in e-business applications and infrastructure will drive average IT spending (in North America) beyond 10 percent of revenue (0.8 probability). By 2003, the central IS budget will represent only 40 percent of total IT spending for large enterprises in North America, and only 50 percent in Europe (0.7 probability). By 2010, at least 50 percent of the corporate capital budget will be devoted to IT for large enterprises (0.8 probability). Total IT Spending as a Percent of Revenue(Central IS Budget plus Business Unit and “Hidden” IT Spend) Web- Internet 10.0% 5.0% 0% North America Key Technology Discontinuities PC- Client/ Server Western Europe Asia/Pacific (Dev. Economies) S/360 Mainframe Accelerating Business Unit Spending 1960 1970 1980 1990 2000 2010 IT Capital Spending as a Percent of Corporate Capital Budget (U.S.-Only) Warning: A baseline of 80 percent or higher may mean you are not investing in the enterprise’s future. 12.4% 21.8% is Discretionary Spending (“Change”) 9.4% 10.6% 78.2% is IT Baseline (“Run”) 45.8% - 21.8% New Dev. Major Enhancements Applications Support/Maint. Mainframe Midrange Servers Distributed Computing Wide-Area Data Net/Voice Help Desk / End-User Support Administration/Planning/Other

7. Strategic Planning Assumption (s) Global 2000 companies that are e-business-transformed before 2002 will have 10 percent fewer workers on their payrolls than today’s levels by 2005 (0.7 probability) and 30 percent fewer by 2010 (0.6 probability). Through 2002, 70 percent of traditional enterprise e-business initiatives fail, by creating “quick-fix” Web sites that minimize the disruption of current operations (0.8 probability). Through 2003, 75 percent of enterprises will under budget e-business transformation costs by 50 percent or more, especially when trading-partner-related (0.7 probability). Four Phases of Web Activity Exploitation Presence Exploration Transformation Who is in Charge? Top Management Business Leader Various Departments Public Affairs or Marketing Business Goals? Add Value for Customers Vague or Undefined Explicit P&L Targets Reshape Our Business Augment Existing Channels Full and Equal Channel Function as a Channel? New Business Model Exists No • Channel Conflict • Incomplete Channel • Disconnected Processes • Effective Abandonment • Waste First Customer Interaction • Ignore Value Proposition • Inadequate Market Power • Stale Data • Difficult Navigation Most Frequent Mistakes?

8. Strategic Planning Assumption (s) Through 2005, only 20 percent of companies will have correctly evaluated e-business projects based upon market and technical risk assessment, commercial payback and fit to the mission of the enterprise (0.8 probability). Key Factors in Evaluating E-Business Projects • Risk • Financial • Legal • Organizational • Reputation • Environment • Technological Strategic Alignment Payback Period High: Go with care! • Build markets and share • Get closer to customers • Simplify processes • Reduce cost of goods Short Low: Start these NOW High: Move Slowly Long Short High Low: Do these High: Stop these NOW Low Low: Do some of these High: Stop these NOW Long Low: Rethink

9. Strategic Planning Assumption (s) By 2005, more than 500,000 companies will participate in marketplaces as buyers and/or sellers (0.7 probability). By 2004, at least 75 percent of B2B e-market maker revenue will be derived by transactions, subscriptions, services, data-mining and software sales/rentals (0.8 probability). B2B E-Market Maker Types Transactions Are Enabled Dynamic Marketplace Efficient Commerce Hub - Streamlines the Process Surrounding E-Commerce Transactions - Builds Efficient Markets and Assists in Market/Price Discovery Neutral Exchange Buyer Advocate Seller Advocate Transaction Enablement Channel Enabler Content & Community Portal • Prepares the Existing Channel forE-Commerce • Brings Together Communities of Buyers/Sellers Transactions Not Enabled Low Impact High Impact Impact on Pricing & Sales Models

10. E-marketplaces and their buyer and supplier customers will coexist in dynamic ecosystems in a “hub-spoke-web” model. biz service marketplace Supplier Buyer commodity marketplaces commodity. marketplaces Integration Service Marketplaces Supplier Buyer commodity marketplaces commodity. marketplaces commodity marketplaces biz service marketplace Supplier Buyer biz service marketplace Strategic Planning Assumption (s) By 2005, three dominant e-marektplace business models will survive: business services, commodities, and integration services (0.8 probability). By 2003, market markers wil need to remain technologically agnostic, as no single vendor will be able to provide all of the components necessary for success (0.7 probability). Hub-Spoke-Web Model

11. 60% + 50% 50% 40% 40% 30% 30% 2001 2002 2003 2005 <20% <20% 2007 2010 Key Issue How will technology advances and changes impact IT and eBusiness deployment decisions? Emerging Technology Radar Screen Technology Prevalence (% of enterprises that really need to care) Digital Authorization Natural Language Processing Wearables Text Mining E-Payment Flex. & LEP Displays Embedded Miniature Computers ASPs Now 2003 2006 Speech Recognition Bluetooth Smart Cards NLP & Retrieval Post-lithographic Computing Wireless Web Biometrics Webtops Voice over IP Voice Portals Enterprise Portals XML Personalization Affective Computing Synthetic Characters/ Avatars 2001 2002 2003 2005 Take-off Point (Inflection) 2007 2010

12. Internal Intelligence Competitive Intelligence Business Intelligence Inc. Strategic Planning Assumption (s) If Microsoft is forced to split, the applications company will become the strategic heir to Microsoft, with a market capitalization at least twice as much as the “Windows” company (0.8 probability); or Microsoft may be forced to equalize the split by moving development tools, certain middleware or cash to the Windows company (0.2 probability). Infrastructure Trends • Fragmentation • Personal access technology such as PCs, NCs, PDAs, and phones • ASPs • Concentration • Networking • Servers • ERP • DBMS • CRM “Supranet” E-Services Scope Typical Access Via: B2B Market, Global Enterprise XML/HTTP E-Services Small Enterprise, Complex Application MOM Services Homogeneous Application ORB Components Program Granularity Objects Data Mining Text mining DW Coarse NLP Knowledge Map Loosely Coupled Tightly Coupled Request/Reply

13. Strategic Planning Assumption (s) Through 2005, application deployment to support e-business transformation will be at least twice as complex as yesteryear’s ERP environment (0.8 probability). Through 2005, no single packaged application source will represent more than 40 percent of a company’s application requirements (0.8 probability). By 2003, 30 percent of demand for enterprise application functionality will be met through ASP channels (0.7 probability). Business Process Sourcing and Integration Type B Market-wide Type A High C-Commerce SCM ‘05 Type C “Pure Web” ‘99 Business to Consumer CRM ‘05 “Pure Web” ‘05 Frontoffice / CRM CRM ‘99 CRM ‘99 Process Scope Integration Intensity Supply Chain Mgmt. / B2B SCM ‘99 SCM ‘05 ERP ‘05 Backoffice / ERP ERP ‘99 Enterprise-wide Low Template / Component Configured Package Application Subscription BPO Built Package More Customized More Commoditized Source

14. Domain E-Commerce C-Commerce Business Paradigm Dept. Productivity ExternalTransactions Collaborative Interaction Application Focus Status Reporting Manage Transactions Share Intellectual Capital Application Architecture Hard-Wired Systems Web-Enabled Systems Web-centric/Web- Aware Systems Data/Application Integration Pre-builtIntegration Point-to-Point XML/EAI Adapters Seconds/ Real-Time Information Latency Weeks/Days Hours/Minutes Strategic Planning Assumption (s) By YE02, collaboration enabling will become the primary – and a required – value proposition of B2B e-business marketplaces (0.7 probability). By 2004, 80 percent of ERP users will have shifted the focus of their application integration investments from synchronizing internal data to enabling trading partner collaboration (0.7 probability). Collaborative Commerce: New Rules for IT

15. Key Issue Key Issue How can organizations harness and exploit eBusiness despite ever-increasing complexity and volatility? Top Ten E-Business Success Imperatives 2000 - 2001 #1: Never Plan More than 24 Months Ahead #2: Do Not Develop an E-Business Strategy Independent of the Full Business Strategy #3: Use Separate Strategies According to Industry, Geography and Culture #4: During Analysis, Give Equal Weight to the Internal and External Processes #5: Obtain Total Buy-In From the Board #6: Deliberately Execute Alternatives to Buy, Spin Off or Transform the Business Model #7: Play By the “New” Rules #8: Enhance or Eliminate Distribution Channels Based on Their Power and Value #9: Establish a Metrics Program That Measures the True Effectiveness of the E-Business Initiative #10: Speed and Ruthless Execution Are Everything

16. Redo Existing Processes (Improve to Survive) Redefine Business (Invent to Outdo) Strategic Planning Assumption (s) By 2003, 50 percent of e-business project initiatives will be based upon consensus-seeking committees – minimizing their business impact and value (0.8 probability). By 2002, the most successful e-business efforts will be czar-driven, but only when enterprise revenues are at severe risk and when the czar has unqualified, direct access to the CEO (0.7 probability). Organizational Options for E-business Transformation Total Funding Process Efficiency New Business Competency Center Czar Completely Separate (dot-com) Committee Partial Funding Competency Center:a centralized team dedicated to the task of e-business+ Yields better return on resources, since all are ‘connected’- Moves responsibility from individual business units to embrace e-business; funding more available Committee: a loose association of managers from various parts of the enterprise+ Does not threaten the rest of the organization- Moves slowly; generally does not have power to enforce recommendations Czar:a single individual who leads all enterprise e-business projects+ Promotes consistency across all enterprise projects- Has potential to create conflict with individual business units Completely Separate:a separate, spun-off (dot-com) legal entity to implement a new business model+Faster implementation; attracts talent and funding- The enterprise loses intellectual capital

17. Strategic Planning Assumption (s) By 2002, the primary focus of IT management shifts from operational efficiency and effectiveness to information exploitation and extraenterprise operability (0.7 probability). By 2002, more than 60 percent of large enterprise CIOs are sourced from “the business” or ESPs, facilitating business/IT fusion and e-process innovation (0.7 probability). By 2003, 75 percent of Type A and 40 percent of Type B enterprises will have integrated IT planning and governance as key elements of their mainstream management processes to implement strategic business goals (0.7 probability). Evolution of CIO Role and Enterprise Governance • Mainframe Era: • Conventional Plus • Functional Head • Operational Manager • Deliver on Promises • Advisor on ‘How to’ Not ‘What to do’ • On-Time delivery • Reliable operations • Automate for Efficiency • Alert Line-Mgmt. to IT Investment Opportunities • Distributed Era: • Transitional, Shifting • Strategic Partner • Expectation Manager • Technology Advisor • Align IT with Business • Access to the Executive Invited ‘Seat at Table’ • Manage IT Department • Provide Infrastructure • Manage vendors • Reduce Business Process Cycle-time • Set Direction and Secure Benefits from “Selective” Outsourcing • Web-based Era: • Hybrid, Emergent • Business Visionary • Technology Opportunist • Drive Channel Strat. • Member of Executive Team or Assumed ‘Seat’ • Jointly Develop Bus./ IT Model; Leverage Extra-structure • Integrate Client/ Supplier Value-Chain • Define Office-of-the Future; Lead effort to Customer-centricity CIO Role Key Responsibility Business Input Major Tasks System Objective Leadership

18. Total cost of ownership vs. monthly cash flow Rampant merger and acquisition activity Financial Buy vs. rent ASP Architecture Layers Network Platform Applications Operations End solutions Strategic Planning Assumption (s) The worldwide ASP market will grow from $1 billion in 1H00 to $20 billion by YE03 – with Global 2000 enterprises representing at least 50 percent of ASP revenue (0.6 probability). By 2004, 90 percent or more of the ASPs that exist today will disappear, either by consolidation or business model failure (0.8 probability). ASP Revenue IT skill shortage Cost of ASP services Broad competition Escalating for similar Staffing salaries skill base Number of ASPs High staff turnover Explosion Can not be held back by the legacy IT Market Initiation Business/ Market Consolidation Software as a service The need for speed Restructuring Extend the business boundaries 1998 1999 2000 2001 2002 2003 2004 2005 2006 ASP Trends ASP Drivers • Point solutions • Contextual integration • XML interfaces to business providers • Remote hosting • Medium cost • Low volume • Application mgt. is key • Client/server Pure plays: Corio, Applicast, USinternetworking, eAlity, Aristasoft and eOnline Net-dynamic Net-exploitive • Remote hosting • Co-location • Software as a product Qwest Communications, AT&T,GTE Internetworking, British Telecom, Equant and Sprint Communications Net-native • Just-in-time software • Other dynamic models Cisco Systems, Intel, Candle, Citrix Systems, Sun Microsystems, Xevo and BMC Software • Distributed service model • Application neutral • Deep integration of network and software • End-to-end monitoring, billing, metering Web-enabled SAP, Oracle, PeopleSoft, Microsoft and eAlity • Mass volume • Lower cost • Software as a service IBM, Exodus Communications, Verio, Digex, Hewlett- Packard and Intel Hosting KPMG Consulting, Taylor Group, Deloitte & Touche, Ciber and PricewaterhouseCoopers Vendor Segments (examples) 2000 2002 1997 1998 2004 ASP Evolution: Long Term

19. Summary • Recommendations • Business Strategies • E-business initiatives must be based on sound business strategies • Avoid the common mistakes that condemn Web initiatives to failure • If your strategy aims for high customer focus, then your organization and processes should be re-engineered • Technology Strategies • Focus attention on the emerging technologies and diversifying industry segments driven by new alternatives • Build competencies in the key areas of enterprise application integration and collaborative commerce • IT Management Strategies • Align your governance and motivators with the new workforce realities • Manage expectations as IT budgets increase as a percentage of revenues • Ensure that your ASP strategies include contingencies for the coming disappearance of many of today’s service providers