Int. J. Business Performance Management, Vol. 7, No. 1, 2005
Towards a framework for evaluating the business process performance of e-business investments Matthew Hinton* Lecturer in Information and Knowledge Management, Open University, Business School, Walton Hall, Milton Keynes, MK7 6 AA, UK E-mail:
[email protected] *Corresponding author
David Barnes School of Management, Royal Holloway, University of London, Egham, Surrey, TW20 0EX, UK E-mail:
[email protected] Abstract: Much business process innovation is being driven through development of e-commerce applications. But e-business requires considerable financial investment, the justification and evaluation of which requires some kind of performance measurement system. This paper reports research into the development of performance measurement in e-business order fulfilment and deliver processes. A series of case organisations have been used to develop a framework for understanding e-commerce performance, and to explore the range of specific measures organisations are currently using within this context. Keywords: performance management; evaluation; electronic commerce; business processes. Reference to this paper should be made as follows: Hinton, M. and Barnes, D. (2005) ‘Towards a framework for evaluating the business process performance of e-business investments’, Int. J. Business Performance Management, Vol. 7, No. 1, pp.87–99. Biographical notes: Matthew Hinton is Lecturer in Information and Knowledge Management at the Open University Business School. His research interests include the impact of electronic commerce on operations and information technology evaluation. Prior to this academic role he worked in the petro-chemicals industry providing computer support and IT training. David Barnes is Senior Lecturer in Management at Royal Holloway, University of London. His interests centre on the strategic management of operations and the impact of e-commerce on operations. Prior to his academic career he worked in the process plant contracting and building products manufacturing industries, in engineering and line management positions.
Copyright © 2005 Inderscience Enterprises Ltd.
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Introduction
Despite the hype surrounding e-commerce, and the subsequent backlash in response to high profile failures, organisations have continued to invest heavily in e-commerce. The allure of this new technology lies in its capability to radically transform some industry sectors and supply chains, regardless of sector or geographic constraints. Current developments are driven not by changes in production and transportation but by changes in coordination (Evans and Wurster, 2000). The dramatic increase in connectivity offered by the internet can create almost unlimited information flows within, and especially into and out of organisations. It can be conjectured that the successful adoption of e-commerce in an organisation’s operations will largely depend on the extent to which information flows can be harnessed to enhance the management of the affected internal business processes. Therefore, the implications for e-business seem to centre on the degree of integration that an organisation can achieve within and between its business process and its information systems. Industries are finding the adoption of internet-based forms of e-commerce a more complex process than they had anticipated. The move to e-business requires considerable financial investment, not just in IT but in changing processes and people. How then do companies justify such investments, and having made the investment how should they evaluate its worth? To do this requires some kind of performance measurement system for e-business. However, this is problematic as a wide range of e-business models are emerging and the degree of integration with existing processes varies widely. It is thus difficult to disaggregate the contribution of e-commerce channels from the entire portfolio of traditional business channels. Our research investigates the influence that the adoption of e-business activities has on the way that organisations measure the performance of order fulfilment and delivery processes that support e-business. As a result, the broad research objective has been to investigate the performance measurement implications of e-business and to identify how these differ from more mainstream approaches, given e-business’ role in integrating the value chain. The authors have been working with a theoretical framework to structure the empirical research (see Figure 1). This is detailed in Barnes et al. (2002) but briefly ‘integration’ is considered under three headings: Business process integration: the extent to which the business processes for e-commerce within a clicks-and-mortar organisation are integrated with the traditional business processes. External business process integration is the extent to which the business processes are outsourced. This includes the extent to which any such outsourcing for e-commerce is integrated with outsourcing for traditional business and how the external supply chain, forwards and backwards, is managed, especially any disintermediating effects of the new technology. Information systems integration: the extent to which information systems are integrated internally (both across functions, and between e-commerce and traditional activities) and externally (along the supply chain to suppliers and customers). It also needs to include the extent to which existing (i.e. legacy) information systems are able to facilitate integration or, indeed, to circumvent the internet altogether. Operating context: considers the customer context, e-commerce context, and organisational context. Customer context is the extent to which the organisation is engaged in B2B and/or B2C e-commerce. The e-commerce context is concerned with the present business model and the extent to which the business processes and information
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systems have had to change to facilitate the adoption of e-commerce. The organisational context accounts for the organisation’s objectives, size, organisational culture, and industry sector. Figure 1
2
E-commerce business process framework
Performance and e-business
The growth of the internet and the opportunities this offers for e-commerce represent the latest phase in the application of IT, which has long been used as a change agent leading to greater efficiency and effectiveness. A recent survey (Hinton and Lawrenson, 2000) revealed that the three main barriers that inhibit e-commerce development are process change, technical system legacy and implementation cost/financial barriers. These factors mean that it is difficult to evaluate such investments for a variety of reasons. E-commerce offers the potential for incremental process change (for example reduced cycle times, better sales and marketing activity), or radical process change through disintermediation and deconstruction of traditional business structures (Porter, 2001). Consequently, the degree of integration with existing processes varies widely. It is thus difficult to disaggregate the contribution of e-commerce channels from the entire portfolio of traditional business channels. Marr and Neely (2001) suggest that whilst these new business models have been explored, their performance measurement approaches and needs have not. For these reasons, creating a single benchmark or set of all-encompassing performance measures for e-commerce applications is not feasible (Jutla, Bodorik and Wang, 1999). Applegate and Collura (2000) have identified a value framework which includes operating performance, knowledge assets, community penetration and brand equity. However, this has yet to be translated into a set of measures which can be applied generically. Investment in IT generally has proved problematic as a number of intangible elements exist that cannot be measured easily if at all (Hinton and Kaye, 1996). Equally, there has been a failure to establish any relationship between IT investments and productivity gains (Lucas, 1999; Strassmann, 1999).
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Many companies have found that although setting up a website is relatively easy the fulfilment of orders offline is harder because systems are not sufficiently efficient to seamlessly pass on order information and complete the order without error or delay (Cox and Dale, 2001). Unless the goods and services required by customers are produced efficiently and delivered effectively, neither customer satisfaction nor profitability can be achieved (McGuffog, 1999). As Dedhia argues, success in the e-economy demands ‘continuous business improvements … [from] … quality and business process breakthroughs … [and] … constant improvements in responding to customers’. Proponents of Total Quality Management have long advocated its application to an organisation’s business processes as a means of achieving improvements (Dedhia, 2001). Consequently, Chou (2001) calls for the integration of TQM into e-commerce and notes the potential for TQM to ensure the effective management of key processes necessary for success in e-commerce. Based on the literature discussed above, the authors have identified four areas where the performance measurement of internal business process in e-commerce may be assessed. These are: •
investment measures surrounding the selection and implementation of an e-commerce system
•
performance measures for incremental process improvements
•
performance of radical process changes and
•
end-state measures surrounding the performance of the end product or service.
Investment measures reflect the financial appraisal organisations engage in when making significant investments, especially in new technologies. The processes that an e-commerce application will influence are not taken into account using traditional investment measures such as economic ratio appraisal or economic discounting appraisal. Irani and Love (2002) report a shift in the post-implementation evaluation of information systems from a process embedded in capital budgeting to one that recognises IT as integral to the fabric of an organisation’s infrastructure and as such a necessity rather than a choice. There appears to be little controversy that traditional capital budgeting is still valuable, but the contentious issue is the degree of involvement financial appraisal should play. There is potential to measure the performance of e-commerce applications by applying conventional process and value chain measures to internal business processes and external operational processes at various points in a supply chain. This is easier to achieve where e-commerce has created incremental process improvements, as processes are fundamentally the same as with traditional business processes. By contrast, where e-commerce leads to radical process changes, as with a reconfigured business model, it is more difficult to devise measures for performance. The radical process changes represent a slimlining of business processes which often leads to a blurring of both inter and intra-organisational boundaries, making performance identification problematic. End-state measures attempt to capture the performance of the fulfilment and delivery of goods and services. In traditional business processes this may include assessments of customer satisfaction, sales and marketing activity. For example, WebQual is a method of providing customer-focused evaluation of websites. Initial research suggests that
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WebQual can detect subtle differences in how internet stores interact with customers (Barnes and Vidgen, 2001).
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Research design
As e-business is an emerging phenomenon our research takes a case study approach where the cases cover the two key organisational classifications: new organisations that work purely through web technology (dotcoms) and traditional organisations that have adopted a hybrid approach (clicks-and-mortar). This research is qualitative in nature based on interviews with relevant managers. The sample of companies included is not intended to be representative in a statistical sense. Unlike quantitative research, which uses statistical inference to generalise from a sample to a larger population, qualitative research relies on logical inference. Case study organisations are asked to consider the formal measures they are using to assess the performance of their e-commerce activities, how these measures differ from the performance measures they use in their conventional business activities, and how useful these measures are. Twelve case studies are reported on here and Table 1 shows how these organisations break down by industry sector and e-business activity. Briefly, the cases include three manufactures, five financial service providers, one legal service provider and one retailer. Eight are in B2B e-commerce and four in B2C. Eight are clicks and mortar companies and four are dotcoms. Table 1
Case study classification B2B
Manufacturers
3
Financial Services
5
Legal Services
4
Clicks & Mortar
2
5
4
2 1
1 8
Dotcoms
3 1
Retailers Total
B2C
1 8
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Case descriptions
This section provides a brief overview of the twelve cases undertaken. Pseudonyms are used and some case material has been disguised in order to protect the confidentiality of companies. 4.1
The financial services cases
Alpha Limited: This case examines the use of e-commerce within the reinsurance and specialist insurance divisions of the UK subsidiary of a large US insurance broker. E-commerce is used mainly in business-to-business (B2B) dealings, as the company operates as an intermediary between its corporate clients and underwriters on the London insurance market.
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Rebankco: This case concerns the central mortgage office of a large retail bank. As part of the bank’s move to internet banking, it is now attempting to move some of its mortgage services online. IKS: The company is a multinational UK-owned insurance broker, placing insurance business for clients, advising on risk management and providing funds management. Two years ago, the company launched a web-based system aimed at medium-sized company customers whereby claims could be reported and their progress checked electronically. Creditinsure and e-insure: a European-owned company whose main business is export credit insurance. The company describes its e-commerce strategy as ‘dual strand’. This comprises: •
business that can be confined within the existing clicks-and-mortar processes
•
a spin-off business that offers an integrated automated online credit and risk management package for online trading companies.
MM Holdings: is a London based market-maker, primarily trading shares in small and medium-sized companies. They have moved from a bricks-and-mortar to a clicks-andmortar business model by developing a web-based information system to provide information to investors and enable them to buy and sell shares online. EFM Ltd: provides online finance and accounting consultancy for SMEs. 4.2
The retailing case
Clothingco.com sells specialist clothing, mainly aimed at the older customer, as well as those who may have difficulty finding what they require elsewhere. The internet is becoming a major new business channel for them. 4.3
The manufacturing cases
ARB: is the UK arm of a major European steel producer. They have created a specialist steel industry portal, developed in conjunction with a number of its European competitors. Its underlying principle is to offer a one-stop shopping facility for steel users, specifiers and buyers. Pharmco: develop and manufacture therapeutic pharmaceuticals. The company is not using e-commerce in sales, but rather, as a communication tool between its various sites in the UK, the US, and Australia. It needs to be able to manage documents very securely, as well as to control its inventory of raw materials. RER: manufactures a range of industrial equipment used mostly in fluid processing applications. They have developed a software tool to assist with equipment selection, quotation and order entry. The tool sits as a web-based interface between the organisation and its customers. By entering relevant required performance factors, the tool generates a fully detailed quotation to the customer. 4.4
The legal services case
Legalco: is a London based dotcom disseminating legal information via the internet. The site also enables clients to purchase reduced or fixed price packages for such things as conveyancing, will writing, etc. for individuals and personal injury claim settlements for small companies.
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Cross case analysis
This section explores the main characteristics of each e-commerce application. The key findings from each of the cases have been drawn together to cover factors concerned with the use and motivation for developing e-commerce applications, the risks and problems encountered as well as the perceived competitive advantage. This is summarised in Table 2. Table 2
Case comparisons
Case Use of E-commerce Alpha Ltd information exchange for risk placing and underwriting used for low-value highvolume business
Rebankco
IKS
Creditinsure
E-insure
Motivation to speed up exchange of information and establish contact, desire to eliminate perceived threat from competition, desire to create client loyalty, ‘stickiness’ lowering of transaction costs through client selfservice
Risks and Problems lack of industry standards, conservative attitude within the industry towards technology fit of e-commerce systems with the company’s conventional systems, risks associated with being a technology leader online mortgage acquisition of lack of conviction information, competitor whose about benefits from application, online systems are e-commerce and valuation more advanced non-interoperability of processes difficulty with need for 24/7 online claims operations, improved collaborative reporting sale of ventures, insurance products efficiency multiplicity of sales via partner channels = organisations in multiplicity of other industry processes sectors competition between achieve efficiency web-based parent activities and gains through communication e-insure activities, tool allowing credit customer-friendly applications, greater reluctance on the insurance part of some of its applications to be information clients to move to eposted and agreed transparency commerce, reliance electronically, via a on intermediaries document and may undermine messaging system further e-commerce developments use experience of conflict with the integrated, credit management to parent company over automated online leverage the role, focus and credit and risk e-commerce, fit of the e-business. management package for online differentiated trading companies business focus.
Competitive Advantage differentiation on cost and technology, attempt to create barriers to exit
no obvious source at present
responding to customer needs, exploiting nonobvious partnerships (e.g. with other sectors) process-related efficiency gains, better cost and project management
open new business channels
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Table 2
Case comparisons (Continued)
Case
Use of E-commerce
MM Holdings
online share dealing
test of connectivity using the internet channel to leverage, increased business desire to target private investors as a ‘high growth’ market
expensive investment in IT/IS cultural issues, conservative industry, negative image of share dealers
position as marketleader tapping into new and potentially fruitful markets
EFM
online information exchange for outsourced financial management
service can be provided no matter where clients are based, provide flexibility and services which can be customised to client need
internal systems integration is problematic due to legacy system issues
differentiation through flexibility and service, better coordination with customers
ARB Plc
internet portal
move away from EDI customer focus reduction of supply chain costs
resistance to change (both internal and external), ensuring successful collaboration
re-intermediation and collaboration, raised barriers to entry
Pharmco
primarily e-mail communications internally and using web-based information systems to check suppliers’ stock
to support manufacturing, production planning
better coordination recent loss of IT support following a within the supply de-merger. Would chain prefer to use surplus financial resource to increase manufacturing capability, IT/IS training and implementation
RER
software tool for ordering process
differentiation from competitors
resistance to change differentiation, (both internal and raising exit external),establishm barriers ent of priorities, cultural issues
Clothing co
online B2C clothing retail
perceived gap in the market, advantage in terms of stockholding.
insufficient internal integration, no internet links with suppliers
Legalco
online information provider for legal advice, portal to a range of legal service providers
see legal services as need to improve its essentially internal efficiency information-based, thus amenable to the dotcom business model. Create a new model for legal services
Motivation
Risks and Problems
Competitive Advantage
offer new channel to market
re-intermediation providing quality of service, benefits trade from anonymity of providing legal advice online
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The organisations display a range of uses of e-commerce, which, as Table 2 shows, covers both B2B and B2C business models. The focus of the use of e-commerce also varies. In most cases the main focus is customers (ARB, RER, MM Holdings, IKS, and Rebankco). However, over and above customers, in some of the cases, the focus is on the company’s distributors (RER), suppliers (Pharmco, Alpha and IKS) and/or its own internal users (Pharmco). The organisation’s motives for use of e-commerce can be broadly categorised as either associated with improving efficiency (Pharmco, IKS, Creditinsure) or effectiveness (RER) or both (ARB Plc, Alpha Ltd). The risks and problems in the use of e-commerce identified by the organisations can be broadly classified as either technologically related or socio-organisationally related. Technologically related problems include a lack of IT support and a shortage of skilled staff (Pharmco), the lack of agreed operating standards in the industry (Aon Ltd), problems of integrating e-commerce business processes and information systems with those of the conventional business (Aon Ltd., MM Holdings, IKS) and the costs of IT investments (Pharmco and Aon Ltd). Socio-organisationally related problems included cultural problems internally (ARB, RER, Aon Ltd, MM Holdings) and externally with supply chain partners (ARB, RER, Aon Ltd, MM Holdings, Creditinsure and IKS). Seven of the case companies seem clear about the basis on which they are seeking to achieve a competitive advantage from their use of e-commerce. These include improved supply chain coordination to raise entry barriers for competitors (ARB, Pharmco, IKS), differentiating their service offering to raise exit barriers for customers (RER, Alpha Ltd), improving customer service (MM Holdings and IKS), better cost management (Creditinsure) and entering new markets (MM Holdings, IKS). As with the clicks and mortar organisations, the dotcom start-ups cover both B2B and B2C applications. However, in all cases the applications are customer facing. Motives include improving effectiveness and flexibility (EFM) and recognising the potential for new markets or radical new business models (Legalco, E-insure, Clothingco).
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E-business performance and evaluation
In the majority of circumstances the case study companies have yet to establish a formal performance measurement or evaluation framework for determining the performance of their e-commerce systems. They see this as being hampered by difficulties in separating out the benefits of the e-commerce system from the rest of the organisational processes. In the case of IKS their e-commerce system is interwoven with their telephone operation so disaggregating benefits is difficult. Equally, the implementation of e-commerce applications demands a level of integration with existing business processes. This assimilation of the new technology is an ongoing process, which creates problems for designing performance measures (as with Rebankco). Table 3 maps out the measures in operation at each case organisation using the framework established in Section 2. 6.1
Investment measures
Generally there is a lack of investment appraisal. The majority of companies do not conduct either any investment appraisal or post-analysis of the costs and benefits of e-commerce systems. One exception is Creditinsure who analyse costs prior to,
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throughout and post project completion. These broad project investment measures are difficult to apply as invariably the scope of the e-commerce projects changes. Nevertheless, as a broad measure Creditinsure find project evaluation a useful activity. The dotcom companies tend to focus on general profitability measures for the business as a whole, rather than specific investment appraisal. However, this is a feature common to a lot of small and medium sized organisations At ARB no formal investment measures were used. However, an initial business case was produced prior to system implementation. The case centred on gaining significant advantage by improving customer experience and this has provided the backdrop for the process measures being developed. Table 3 Case
Performance measures Investment Measures Process Measures
Alpha Ltd
volume and value of e-commerce trading :number of underwriters in a given month
Rebankco
number of website visits, volume of product sales and some customer profiling , developing a measure for online applications enquiries and completions to measure customer fall off rate
IKS
no formal investment budgeting measures but problems measurement of disaggregating e-commerce e-commerce operations from other business activities processes
Creditinsure broad project investment measures
E-insure
End-state Measures
some financial measures: revenue generated as focus for performance assessment, also interested in cash burn rate. These measures relate to process
assessment of customer retention rates :customer surveys to assess customer perceptions of service, including e-commerce system efficiency number of ‘signed contracts’, number of buyers, number of transactions per buyer, number of problem transactions as percentage of total, the number of reminder letters , invoice and sales data
MM Holdings
website hit rate against turnover
EFM
adaptation of traditional performance measures: utilisation rates for staff, comparison of e-commerce systems performance through benchmarking activities
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Table 3
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Performance measures (Continued)
Case
Investment Measures Process Measures
ARB Plc
no formal investment through cost for an e-transaction, measures, instead an analysis of sales and orders initial business case was produced
RER
End-state Measures
plans for customer oriented measure that identifies if additional order volumes are linked to e-commerce application use
Pharmco
performance benefits that the system offers are recognised as being interwoven with incremental improvements in other business processes, so attempting to apply traditional measures
Clothingco
order completion measures
trying to measure customer perceptions, value and frequency of orders with a view to understanding customer retention
trying to measure the quality of suppliers feeding into their processes
customer feedback on experience , clickthrough rates
Legalco
6.2
some assessment of cashflow
Process measures
A number of organisations have tried to develop a range of process measures. Measures include the volume of e-commerce business, and the number of users. For example, Alpha record the number of underwriters using the system, while e-insure record the number of registered buyers, number of transactions per buyer and percentage of problem transactions. In addition, e-insure record the average value per transaction and the type of client that the company is serving are measured. Traditional measures that any credit management company would expect to apply are tracked closely. E-insure believe that it can provide a level of detail on all of this information that would not normally be available, and attribute this to the electronic systems that they use to track transactions and invoices. Process measures have not changed greatly for e-commerce applications within the manufacturing companies (ARB and RER) and are invariably adapted from conventional measures. For example, at ARB, every interaction they have with a customer is logged and reported on weekly at two levels. At a technical level there is a need to check the performance of the system to ensure that user experience is satisfactory and that it continues to deliver the operational utility customers expect. At account managers’ level the system provides feedback from the commercial perspective in terms of customer perceptions. So the thrust of these measures is towards evaluating customer expectations.
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It is worth noting that two organisations (Creditinsure and EFM) have been inconsistent in deriving appropriate process measures to reflect their espoused motivations for ecommerce take-up. This reflects some of the practical difficulties in translating motives into measures. 6.3
End-state measures
These commonly focus on some assessment of customer perceptions of the service they receive. For example, where a tangible good is supplied, organisations try to measure customer satisfaction with delivery and retention figures resulting from marketing activity (e.g. Clothingco). Where a service is provided, more qualitative measures are utilised. Creditinsure assess customer retention through the use of customer surveys. Legalco is experimenting with techniques to measure customer perceptions of quality. 7
Conclusions
This programme of research has identified that there is a lack of use of formal performance measurement in e-commerce, with little evidence of any evaluation of the impact of e-commerce investments or of the performance of e-commerce operations. Where formal performance measures are applied, they are used on an ad hoc basis and there is no consensus as to which e-commerce performance measures are effective. Common performance measures are frequently adapted from existing, traditional measures, where these exist. One area of interest that is emerging is the need to measure the performance of customer perceptions of using these new business channels. However, this only tends to surface where organisations can articulate their motivations for adopting e-commerce. In point of fact, before greater emphasis is placed on the search for performance measures, perhaps organisations need to reflect more on how the new technology can redesign their processes. In particular, they need to consider how this might be used to facilitate the integration of their own internal operations as well as the operations of their supply chain network. Naturally, these issues have consequences for the performance management of e-business operations. How useful are the initial, somewhat tentative measures organisations are using and how could these be refined and/or adapted for future scenarios? The benefits reported as a result of investment in e-business technology have generated savings from operational efficiencies. However, these benefits are proving hard to measure. In this respect, the framework for performance measurement has proved a useful tool for considering the performance of an e-business application. Further research is required to assess the usefulness of this framework as a way of understanding e-commerce performance, and to explore the range of specific measures organisations are currently using within this context. One way of advancing this approach might be to develop a comprehensive toolbox of measures that organisations may use as a driver for performance measurement activity. In order to further this agenda it is necessary to continue work with the existing case study organisations. An assessment can then be made regarding the specific measures in use of their applicability and robustness of over time. It is also desirable to extend the range of cases to improve representativeness and to conduct large-scale survey based
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work to discover the extent of performance measurement practice in other e-businesses. In addition, it may be appropriate to test the transferability of good practice in performance measurement between organisations, both within and beyond industry sectors. In this regard, it will be useful to assess whether the toolbox of measures is an appropriate vehicle for this transfer of knowledge.
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