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Lessons from the e-side

Lessons from the e-side

E-commerce pioneer Toby Warren talks successes and failures in online business

Toby Warren is circumspect when it comes to defining his Southfresh software offering. No, it is not a portal application because that term tends to indicate more than trading. And, no, Southfresh would not call itself an application service provider — that term simply doesn’t indicate what the software does. It’s definitely not outsourcing. You might describe it as a supply chain business, but even that term doesn’t tell the full story. What it is, in some cases, is a marketplace, although Warren is nervous about that word as well. The definition — or lack of one — is important. Warren has a clear idea about what he wants his business to do. He has no desire to have it tarred with the faults of the other online wannabes.

In fact, Warren’s online brokerage/marketplace/exchange software business has continued to grow — perhaps a little more slowly than he hoped it would — through all the dot-com turmoil. It’s not exactly booming yet, but the company’s traditional seafood brokerage is being allowed to dwindle as its marketplace software income grows. “We started off being brokers and we are slowly pulling back from that,” he says.

So what is a marketplace? Warren should know — he is a marketplace veteran, starting 22 years ago. For the past 10 of those years he has been, essentially, operating the same seafoods brokerage system in various forms online. “We have been largely food distributors or food middlemen,” he says. “We have been doing the online part of our business for two-and-a-half years. But the concept of using software to trade products we have been doing for some 10 years. Before that, we did it on the phone.”

One company that uses Southfresh’s Varenti software — the name has no inherent meaning — is seafood supplier Moana Pacific. This business supplies directly to supermarkets Pak ‘n’ Save and New World. “In Moana Pacific’s case, we are allowing the company to access our software, for which it pays a monthly fee,” says Warren. “That speeds up the sales process and delivers some visibility as well to the supermarkets.”

Warren describes the Moana Pacific business as a marketplace. “But I am very cautious about the concept of electronic marketplaces because they haven’t tended to work ….” The reason for their past troubles, he says, is that the people who set up the original e-marketplaces imagined people doing business with strangers. The reality is that they don’t. It’s not the way people do business together.

“The original marketplace developers devised all sorts of ways of getting strangers to pay strangers,” he says. “And they sought to devise all sorts of ways of guaranteeing quality of goods. But those are the two reasons why strangers don’t do business together. One isn’t sure of the quality of the goods and the other isn’t sure if they are going to get paid.”

Warren’s concerns about marketplaces doesn’t mean that there aren’t some great success stories. M-Co, for example, operates electricity and gas marketplaces and Global Econet runs a palm oil marketplace.

“The exchanges that are operating now tend to be closed exchanges — they are operated among people who know one another. In the case of Southfresh, for example, the buyers are only seeing the people they want to see.”

Warren says Southfresh’s only success so far in the marketplace arena has been with seafood. “And the reason it has had some success is that we have participated in it ourselves. What we mean in creating a marketplace is a central product list and some management of the people involved in the operation. We can’t manage the quality of the goods and we are not interested in managing the prices. But we make sure descriptions of the goods match. If someone wants to buy, say, boneless chicken legs we have to ensure the marketplace uses the same description — that one party doesn’t call them thighs, or whatever. Then they can compare one item against another.”

Southfresh’s online application, Varenti, arose out of Warren’s experience as a food broker. The company originally tied together its outlying offices into its server by using PC-to-PC software called Reach Out. Operating this way was difficult at best, almost impossible when Warren tried to stretch it to include third parties. One supermarket tried connecting in this way but eventually gave up. Southfresh found itself spending more time re-engineering the supermarket’s PCs than it did selling fish. The internet was the only sensible way to operate such a system.

“We are now into our third iteration of Varenti,” says Warren. “We started 10 years ago by building an order entry module in FoxPro for an accounts package known as SBT. We built our second version by modifying The Great Elk software, now known as StayinFront. Because our modifications were built in FoxPro and we had a very modifiable front-end, customers were continually demanding that we make changes for them. When the time came to develop the internet version we chose to work with QED Software and rebuild the application from scratch in Progress and WebSpeed. It is now hosted by Unisys. We maintain the software ourselves and have a technical team who keep it polished and buffed.”

That leaves the application to be populated with seller information, buyer information and pricing. “We’ll assist a company such as Oceanic Seafoods to set up, but in truth what we’ll probably do is take a file of customers, their products and their prices from their accounting package, convert it to Excel, load it into Varenti and then we are ready to roll. Now, when they want to make changes or add data, they can do that over the net.”

Isn’t that the very definition of an ASP model? “It is hosted,” says Warren. “I am a little nervous about the term ASP. It is a hosted or rented application.”

But wait, there’s more. At the time we speak, Warren is negotiating to sell a copy of Varenti to a large New Zealand business. In this case the company will pay a one-off price and an ongoing monthly fee for Southfresh to host it, maintain it and support it. Warren does not think it would be a smart move for a company to host the application itself, although Southfresh would accept such a move in this case. “But remember that e-commerce is like owning your own telephone exchange,” he says. “It is a fairly dumb idea. You actually want to use somebody else’s telephone exchange in order to communicate best. If you and I both owned telephone exchanges and we wanted them to talk to each other, we would have to set up protocols for that to happen. If we used Telstra Clear’s exchanges or Telecom’s exchanges we would have no difficulty communicating.”

It’s the same with e-commerce, he says. Third-party providers of the infrastructure are almost essential. It is for this reason that Southfresh uses Unisys to host Varenti.

Warren says that, relatively speaking, size of business is not an issue when it comes to using an application such as Varenti. He sees the business being used by small- to medium-sized businesses — and that means just about every company in New Zealand except, perhaps, a conglomerate like Fonterra.

For small businesses — those with just a handful of people — the issue that stops them from moving forward is, surprisingly, not related to their familiarity with computers or the internet, although there are some bandwidth issues. “With supermarkets, for example, it is not that they don’t have some very sophisticated software systems. But they might not necessarily choose to make the internet available to their staff. Alternatively, the buildings they are in might have been built without allowing for the ubiquitous use of the internet. That means that if they want to order fishmeat, chicken, whatever, they generally have to go somewhere else, outside the area they are operating in. Another major issue I blame partly on Year 2000. I think the industry did itself a huge disservice by delivering Y2K costs on industry at large. Industry at large is now treating software purchasing decisions very cynically. They’re almost asking, ‘Would I die if I don’t buy this?’ And the answer inevitably is no.”

At the same time, Warren believes that within five years everybody acknowledges they will be using computers to transact most of their business. The question is whether to start now or later.

“We also have issues where e-commerce is about transactions. It is not about selling, it is not about business, it is not about strategy. It simply does the selling, what accounts packages did for accounting.”

Warren believes people on the executive floor don’t necessarily understand what it takes to get a lemon from a tree to the shelf. And, frankly, they don’t care. That means explaining to them why they should care for processes they don’t understand or care about can be difficult.

So why should managers care? Warren offers an example involving a supermarket chain and a meat supplier. Imagine a supermarket has organised a rump steak deal with Meat Company No 1. The meat operation contributed to help push sales and went long on rump steaks in order to supply the supermarket chain. Meat Company No 2 soon learns about the deal and immediately goes long on rump steaks as well. Meat Company No 1 now has a problem: it is being undercut by Meat Company No 2, which was not part of the advertising promotion. Because all this has happened so quickly, category managers at the supermarket HQ don’t know about the undercutting until too late. Meat Company No 1 has lost out badly and is not happy. Now, if that supermarket chain had been using good supply chain software the category managers could have seen straight away what was happening. They could have acted in time to ensure Meat Company No 1 got the business.

“That’s huge from a management point of view,” says Warren. “It is management in the right way. No one is dictating who should buy from the meat supplier — it is just that the deal was done with one particular company.”

Warren also says he has built into Varenti a module called Vendor Refill that enables users to set up an optimum stock level. Then, as it receives scans from the tills, it knows when to create orders for new supplies. No one is using this module yet but Warren believes he has a potential buyer.

On the issue of return on investment, Warren says he worked out long ago, when perishable goods were his main business, that the cost of transacting a sale, managing the freight, placing the order, fixing the errors, invoicing, receiving payment and entering that payment into accounts was somewhere between 10-11% of business. “We think most of these functions can be automated, or some can be passed back to the buyers. In fact, we have proved that’s the case. Now the cost of a transaction has been reduced down to 2-3%, and that includes the software cost.”

Buyers benefit too. Warren talks of one customer who has increased sales by 40% and has not needed to replace two staff.

When he talks about the future, Warren espouses the idea that the focus will be on evolution rather than revolution. “I think most people will do business this way fairly quickly once the floodgates open. It’ll be like the growth of fax machines. Once we worked out that faxes weren’t going to hurt us, we worked out they were going to help us and we all went for it. The big difference, however, is that the smart people, the early adopters of products like ours, will learn to exploit the software far more effectively than those who come later.”

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