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The pitfalls of e-commerce
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January 21, 1999: 1:51 p.m. ET
Insiders caution companies to do their homework before taking Internet plunge
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NEW YORK (CNNfn) - As a six-month veteran of online retailing, Toys R Us thought it was prepared for anything.
The purveyor of children's playthings entered the e-commerce scene last summer with relative ease, patting itself on the back for its innovation and efficiency in filling Web site orders.
But that all changed in December, when traffic volumes grew 1,000 percent and expectations were shattered.
"We went from a small number of [online shoppers] to a phenomenal number of visits in a week's time," said company spokeswoman Rebecca Caruso. "We had to shut down the site for a few hours early in December to add additional servers and customers service representatives."
Toys R Us has since boosted its capacity to keep up with Web site demand, she said.
"I think we are like a lot of companies in this same boat," Caruso said. "You don't really know what to expect."
She's right.
Toys R Us is among thousands of companies nationwide diving head first into cyberspace - the new frontier of commerce - and all too often getting in over their heads.
"If you put up a Web site and it's successful you often find you need more servers and an updated database," said Tim Horgan, vice president of technology for CIO Communications Inc. "All of a sudden you have these other costs that no one warned you about."
Going global
For businesses that operate regionally, or even nationally, the prospect of going global via the Internet may seem exciting, but Mary Cronin, professor of management at Boston College, says many forget that by doing so, they have changed the rules of the game.
"The smaller companies don't know about the export regulations they might run into, especially if they've just been a regional operation before jumping onto the Web," she said. "When they get their first international order they celebrate and then think, 'Oh my gosh, what do we do now?'"
As an example, she said, Europe is far more restrictive than the United States in protecting privacy online, with strict requirements for how marketing information is used and transported - the standard profile information required for entry on some Web sites.
"That causes real headaches for companies that have servers in the U.S., customers in Europe, and a branch in Japan," Cronin said. "How they move the data around is now actually subject to government regulations in all these different countries."
Customer satisfaction is another issue.
Companies that conduct business over the Internet are often unable to answer customer complaints efficiently or interact with potential customers online. In many cases, the management tier that deals with customer relations and that which focuses on order fulfillment are in different buildings, and even cities.
"That's a pretty big challenge and it requires both technical retrofitting of databases that didn't used to have to talk to each other, and rethinking of the management structure," Cronin said. "There's a lot of effort behind the scenes that companies typically don't anticipate when they open up their Web site."
Such was the case for Buy.com, an online superstore that sells computer products, books, videos games and music. The company estimates it was losing 1,000 potential customers a day at one point from its inability to keep up with customer calls.
The company's vice president of finance Murray Williams, who said business grew 3,000 percent last year alone, said Buy.com has since outsourced its customer-service operations and is now easily able to keep up with the calls.
"Initially we tried to keep customer service in-house, but that resulted in 1,000 hang-ups a day," he said. "We just didn't have the bandwidth to support them."
Be prepared
International regulations and customer-service operations are just a few of the potential pitfalls facing companies in cyberspace.
David Elliott, director of The Web Academy in Cupertino, Calif., said many companies underestimate the expense and time involved in maintaining an e-commerce site.
"Part of the major thing small businesses don't think about is maintenance of the site," he said. "They think of it as putting out a catalog, but the Web requires constant monitoring to see what works and what doesn't. They have to be able to react quickly to make changes."
Like Toys R Us, many successful online retailers find they are ill-equipped to handle the barrage of orders flooding in, he said. They either don't have enough personnel to collect and fulfill the orders, find their servers are short on capacity, or that they lack the warehouse space to store their product - all of which lead to Internet logjams, distribution difficulties and frustrated customers.
As a result, many e-commerce sites have begun outsourcing their back-office work to third-party administrators, like CyberSource, The Complete Package and even Federal Express.
"In order to meet order fulfillments, you need to have someone taking those orders, otherwise you lose business," said Joe Unger, president of The Complete Package in Wisconsin, which supplies order-taking services, storage, and credit-card processing for customers. "All of this stuff is very expensive to do on their own. In the long-run, shipping and handling and monthly minimum storage charges could be a lot."
Indeed.
Horgan, of CIO Communications, said he's talked with numerous e-commerce executives who began peddling their wares in the international market and later lamented that shipping costs turned out to be as much as manufacturing the product itself.
FedEx got the message. The package delivery company got into the business a few years ago, and now offers a range of e-business tools from consulting services to managing global supply chains for clients.
The Memphis-based company also provides "parts plants," or warehouses, where it stores and ships customers' products with a focus on fast inventory turnaround - the cost-effective "Just In Time" delivery model that is beginning to take hold in corporate America.
The Legal Trap
Lastly, there are the legal concerns.
"There are so many traps these companies can fall into," said Holly Towle, a partner with Preston Gates & Ellis LLP, a Seattle and San Francisco-based law firm that specializes in commercial law and intellectual property rights.
Towle said the most obvious pitfalls center around intellectual property rights.
A common scenario involves companies that hire a photographer to shoot photos of their CEO for an annual report, or for advertisements to run in the local newspapers.
"If you take those photos and put them up on the Internet, then you may be infringing the copyright of the photographer," Towle said. "Your license may only be for use in print media."
Linking to related sites using another company's logo can get you into trouble, too.
"The business owner may be trying to make it easy on their customers by using the corporate logo of another business," Towle said. "But that's their trademark and the company might view that as a dilution of their trademark. I've seen large corporations fall into that trademark trap by giving customers the opportunity to link to the Nasdaq or New York Stock Exchange to check a price quote."
But if they use those trademarked logo, she said, they need to get permission.
Towle said the list goes on, from the pitfalls of changing the geographic scope of your sales reach to the debate raging over what technically constitutes a signature on electronic contracts.
- Insurance agents are governed by state laws, some of which block the agents from selling and soliciting business outside their state.
- Must a consumer type in their full name, simply hit "Yes" or just mark an X?
And unless well researched, Towle said, changing the way a business accepts payments can be fraught with peril too.
"A company may decide that they'll let their new online customers pay for their products in several separate payments, with a finance charge," she said. "But there are laws and consumer protection statutes that govern consumer contracts. As a business owner, I may not go looking for those laws because I never had to do that before."
In summary, industry insiders advise Internet newcomers to do their homework and develop a carefully constructed plan before taking the Internet plunge. Most importantly, they say, e-commerce business owners should not be afraid to learn from their mistakes.
"The Internet is still pioneer territory, and pioneers end up with a lot of arrows," said Court Lorenzini, a former Cisco Systems employee and co-founder of the Nth Dimension Corp., which publishes an online shopping guide for wireless phone service seekers. "So always be on the lookout for the big picture and don't be afraid to change directions regularly. It will save your business."
-- by staff writer Shelly K. Schwartz
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