What Would E

By Larry Barrett  |  Posted 2002-03-18 Print this article Print

What's the use of standardizing on one vendor? Just ask Osram Sylvania, which took a chance on SAP's untried customer relationship management software.

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What Would E-Business Be Worth?

Osram's decision came as it confronted the promise and peril of the Internet.

Osram Sylvania makes almost $2 billion worth of light bulbs, ballasts, and other lighting equipment a year. But it operates in an industry where margins are modest, about six or seven cents on the dollar, after taxes. Even small efficiencies in Osram's supply chain could gain precious dollars on the bottom line and share points in the never-ending battle against Philips Lighting and General Electric for a piece of a market that grows about 3% to 5% a year.

While Philips was investing in the dot-com www.lighting.com and GE was building its own elaborate public Web site, the managers on Osram's newly formed e-business committee weren't sure exactly how to proceed in 1998 and 1999. Osram didn't sell to consumers, and its rivals did—but Langford and his managers knew Osram had better do something.

Every day, Osram employees were gathering competitive intelligence on f__company.com, the Web site where disgruntled employees of high-tech companies unburdened their secrets.

Had any dot-com company gone out of business that day selling lightbulbs online? How many online sites were acting as portals for information about the lighting industry and planned to ask Osram to contribute—for a fee? How many proposed to make money through online marketplaces that delivered Osram's customers to Osram's competitors?

"These guys were threats … and you had to be prepared," says Rick Wilson, Osram's e-business manager. "Some guy in China is spending 15 hours a day selling lightbulbs, goes home ... gets up the next day, and does it all over again. The competitiveness of the industry is very difficult."

But going directly to the consumer made no sense to Laghaeian. "How were we going to make money selling lightbulbs that cost a buck each, and then spending four to five dollars to ship breakable items?"

Two-and-a-half years later, Osram Sylvania has an elaborate online catalog and a more efficient tool to process orders coming primarily from a recurring customer base—customers can check orders, pricing contracts, and product availability on pages targeted to them; architects and others who specify products have page views as well. But the success of Osram's CRM software is hard to track.

Osram's North American sales—which are almost exactly half of its worldwide sales—improved only 4% from fiscal 1999-2000 to fiscal 2000-01. That meant an increase from $1.92 billion to $2 billion. In the previous four fiscal years—without CRM—Osram Sylvania's sales had improved by more than 10% a year on average.

In the same period, gross profit margins inched up 1 cent to 31 cents on the dollar, meaning the North American operation's profit after taxes, as best as can be estimated, essentially were flat at $115 million one year, $114.5 million the next year. But even this flatness was a disappointment after a four-year run that saw Osram's estimated profit after taxes storm up 57%, jumping from $72.6 million in fiscal 1996-97 to $115 million in fiscal 1999-00.

Laghaeian and company had hoped the new emphasis on communicating with customers electronically would help it boost sales online, improve its sales efficiency and even get product through warehouses more effectively.

In a high-volume, low-margin business such as selling lightbulbs, the only thing worse than not selling the bulbs is having to warehouse and "maintain" the merchandise for months or years on end.

Its estimated inventory on hand increased to $385.4 million in fiscal 2001 from $356 million in 2000, up 8%. Sales in North America, by contrast, were essentially flat, at $2 billion.

"Managing inventory makes everyone happy," Greg Schmidt, vice president of e-business systems, logistics and distribution for Osram, said. "We did what we do best. We set a plan and we stayed on plan. That's what you get from a good German company."

But, even if the deployment stayed on track, it didn't guarantee an uptick in orders. By February 2002, more than 10,000 registered users were logging on to mySylvania.com to access Osram's catalog, check on a particular product's availability, or simply check the status of their orders. That was a testament to the benefits of electronic ordering—but not the choice of the eXtensible Markup Language as the means of formatting data to exchange electronically. To date, Laghaeian says, "still a very low percentage" of the company's customers have adopted XML as the underlying means of tagging data for exchanging with Osram.

Nonetheless, for the estimated $5 million Osram spent on mySAP applications and the installation (software, hardware and man-hours combined), the company appears to have achieved one overall tangible goal—increase its share of the North American lighting market, to 25.7%, from 25.2% in 1997. But the share had flirted with 27% in between.

Less directly, the system has allowed salespeople to focus increasingly on sales, reducing the amount of time they spend on administrative activities to about 15% of their day.

Osram officials say CRM has improved other facets of their day-to-day operations, namely a more efficient and accurate invoicing system, and that Web sales are increasing 73.4% per month. But these improvements have yet to show meaningful improvement of the bottom line. Profits in North America, as estimated by Baseline, have held steady at approximately $115 million each of the past two years.

But even getting this far has not been so simple. Because Osram's business and IT staff had to manage not just their own interests, but those of their enterprise software vendor, SAP.

In fact, when it came to choosing how to proceed into e-business, Osram's business and information technology departments were not even united on whether to go forward with SAP.

For technology managers, it was simpler and cheaper to keep working with the vendor whose software already held its production data. Indeed, not to do so might have endangered what Laghaeian considers the company's architectural principles.

"The source of your data is always in one place. You never replicate the data—you don't have two owners of a piece of data. You work like crazy not to have interfaces. Interfaces are inherently a partnership between two vendors that don't work with each other. To me, partnerships are problematic," he said.

But some of Sylvania's business executives had a different view. "We thought long and hard about making this commitment to one vendor," Schmidt says, because locking oneself into another big project with an enterprisewide vendor increases a company's dependency on that vendor.

In this case, SAP was not even delivering a product it had already built. Laghaeian's e-business strategy would be dependent on the creation by an outside vendor of a wholly new software product. And software projects, where new code is written, tested and debugged, have a long history of defying development deadlines.

Adds Wilson, "When we first considered whether or not to use SAP for CRM, my initial feeling was that we shouldn't, mainly because it's a very complicated software. The business guys will say, 'Yes, we considered other options and vendors.' The tech guys will tell you there was no choice all along."

Laghaeian attributes the nervousness among business managers to their need to fully understand where Osram was headed. After all, SAP had no product. Just slides. "It was 13 months of intangible something," he remembers. "CRM—what is it? The package isn't here yet."

The business processes were not well-defined because the users that help define them, he said, "are thinking of them as we speak."

Which is why Laghaeian went through 13 months of stress, trying to get SAP to a constantly redefined goal line. "[We were dealing with] technologies that were not in place, standards that were not in place, and an IT environment that has never been truly 24x7, but one Sunday [someone was] going to put in an order for a very important something and that's the day you're not around," says Laghaeian. "I knew where I was going, I just didn't know how to get there, (because) it hadn't been done."

Despite Laghaeian's predisposition toward SAP, there were issues that Osram considered deal-breakers. In particular, Osram developers insisted that SAP support LDAP, the Lightweight Directory Access Protocol, which was emerging as a key Internet security standard and which Osram deemed superior to a similar SAP offering. "Even if you [SAP] know best, it will hurt me in the future … you're not controlling the Internet," Laghaeian would say.

Senior Writer
Larry, of San Carlos, Calif., was a senior writer and editor at CNet, writing analysis, breaking news and opinion stories. He was technology reporter at the San Jose Business Journal from 1996-1997. He graduated with a B.A. from San Jose State University where he was also executive editor of the daily student newspaper.

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