India Electronic Commerce Survey Report, 1998

Executive Summary
This is KPMG India's first research report into the use of Electronic Commerce (e-commerce) by major companies.

The popular view of e-commerce is that the hype is not backed up by profitable activity on the operational level. The results contained in this research report indicate that this state of affairs is changing with a number of companies trading through electronic channels with plans of integrating them with their supply chains.

1.1 Electronic Commerce Is Very Important To Business Strategy
It was found that nearly half the organisations surveyed gave importance to e-commerce as a part of their business strategy. Only 4 per cent said that it was of no importance to their business strategy.

1.2 Improved Productivity, Improved Product Quality, & Improved Customer Service Are The Major Benefits Realised

These benefits got more than 50 per cent weightage in the ratings given by respondents while Shortened Supply Chain and Reduced Costs got about 45 per cent weightage. Only 57 per cent of organisations using e-commerce reported any significant benefit from it.

1.3 The Major Potential Benefits Of E-Commerce Are Improved Customer Service & Improved Productivity

Respondents believed the principal benefits of e-commerce to be Improved Customer Service and Improved Productivity. These 2 benefits were given much higher weightage by respondents while the other benefits like Shortened Supply Chain and Reduced Cost were given a similar lower weightage.

1.4 Companies Are Held Back By Lack Of Standard Payment Infrastructure & Trading Partner+s Technology

Although companies were keen to use e-commerce to improve Customer Service and Productivity, they believed they were being held back by the Lack Of Proper Legal Support for electronic transactions and their trading partner+s inability to set-up and manage the required technical infrastructure.

1.5 Security Not An Insurmountable Problem

Respondents cited security as another major barrier to e-commerce. However, security appears to be an overhyped concern as observed in KPMG+s survey of the European market. It was found that companies that take a pragmatic view are more successful in exploiting e-commerce, and companies that had made sales via the Internet were less likely to see security as a problem.

1.6 Integration

Senior Level Support and Budget Allocation were given due weightage as actions taken for integration of e-commerce technologies with existing processes. Committing manpower and integration with operational activities got a lower weightage.

1.7 Preferred Electronic Commerce Technologies

E-mail, www Access, and a www Website were the most widespread technologies currently implemented. Electronic Data Interchange (EDI) and Extranet were the most favoured for initial implementation within 2 years while IVR, Extranet, Smart Cards, and Debit/Credit Cards were slated for initial implementation in 5 years.

1.8 Infotech Department & Executive Committee Are The Biggest Sponsors

While the Executive Committee took the initiative in Funding (65 per cent of organisations) and Championing (33 per cent of organisations), the Infotech Department Championed (53 per cent organisations), Developed (64 per cent organisations) and Maintained (68 per cent organisations) e-commerce initiatives.

1.9 Most favoured technological features to implement security

Respondents rated Network Access Controls (95 per cent weightage), Through-The-System Tests & Audits (90% weightage), and Centralised Network Management (88 per cent weightage) as the preferred features to implement security.

1.10 Most organisations were not aware of their transaction volumes

Less than half the respondents were able to provide details of the volume of transactions done electronically, while nearly half of these said that they had zero electronic transactions. It was found that the total annual value of transactions done electronically by respondents was about Rs. 123 million.

1.11 Trading Partners Viewed Favourably

Most of the organisations surveyed were favourable to their trading partners in terms of considering their concerns, having explicit role based agreements, quality of communications, long associations, and levels of trust. While most organisations work closely with their business partners, many of these do not trade with them electronically. Hence, it is evident that there is a large, unutilised potential for Business-To-Business implementation of e-commerce in India.

2. Introduction & Methodology

2.1 Introduction

In the era of economic liberalisation and increased competition, Indian industry is attempting to harness technology to succeed in achieving its business objectives. In doing so, it has focused on balancing the benefits provided by new technologies with the associated risks in having one+s business depend on it. This has resulted in a race to be +the first to be second+ in implementing new technologies with most organisations waiting for their peers to explore new areas before venturing into them.

The basic elements required for successful business engagement are changing rapidly. Pressures to economise, speed up operations, and supply superior service are constant. One of the most visible, challenging, exciting, and ill-understood means of responding to these pressures is the use of a number of electronic channels, particularly the Internet and its offshoots.

2.2 Objective

This is KPMG India+s first annual research report into the use of e-commerce by companies. KPMG India conducted this study to evaluate the perceptions, status, and triggers on the use of e-commerce in Indian companies. This survey has been conducted simultaneously in a number of countries in the Asia-Pacific region. The results are expected to contribute significantly towards the current thinking regarding e-commerce in this region. The results presented in this report pertain to the Indian survey.

The survey sample consisted of more than 110 Indian companies, 69 of which had a minimum turnover of Rs l billion, and 17 with an annual turnover above Rs 10 billion. We chose the largest companies in the country because they were most likely to have the greatest resources to commit to e-commerce and potentially the largest benefits to reap. They are also the ones with, arguably, the greatest cultural and organisational obstacles to overcome in order to do so.

The research was carried out by KPMG India and took place during late-1998. Respondents included CEOs, CFOs, CIOs, and Heads of Marketing at the companies surveyed.

2.3 Survey Methodology

Respondents were required to classify their organisations as belonging to:

* Manufacturing (MFG),

* Financial Services (FS),

* Computers & Communications (C&C), and

* Other Industries.

A common questionnaire prepared by Nolan Norton, a specialist advisory firm and a subsidiary of KPMG, was administered in all participating countries (including India, Australia, and New Zealand) to ensure comparability of results.

2.3.1 Definitions

A very common question in this context is: ++What exactly is e-commerce+and what is the impact of the Internet?++ The Internet and its related technologies (Intranet, and Extranet) are fast gaining popularity worldwide+as like other technologies for electronic communication between organisations (like EDI and Groupware). E-commerce is a generic term to describe the way organisations trade electronically. It uses a group of technologies to communicate with customers or other companies, to carry out information gathering, or to conduct business transactions. Although the Internet is the best known of these, others include Intranet, EDI, and smart cards.

For the purposes of this survey, e-commerce was defined as ++computer-to-computer, individual-to-computer, or computer-to-individual business relationships enabling an exchange of information or value++. Hence, the survey also sought to explore the use of e-commerce through channels other than the Internet.

The main objective involved an attempt to determine the current awareness of, usage levels, and initiatives undertaken in the area of e-commerce. Identification of perceived barriers to adopting e-commerce by respondents was also a major objective. This yields a starting point to address issues related to its adoption.

The respondents consisted of people from diverse sectors of industry. The survey also aimed to identify the benefits accrued by those organisations that have already implemented such technology in one form of the other. This, along with the top potential benefits expected by the respondents, gives an indication of the thrust areas for those aiming to promote e-commerce in the country.

3. E-Commerce & Taxation+Key Considerations

The growth of e-commerce has resulted in exciting opportunities becoming available for people to adopt this medium as an avenue to market products and services globally. The potential uses of e-commerce have created implication for governments and the sovereign of their tax systems.

Some of the organisations that have taken note of this development and constituted study groups and guidelines to tackle transactions undertaken include:

* The US treasury has released a guideline on Selected Tax Policy Implications Of Global Electronic Commerce.

* The OECD has produced a report on Electronic Commerce Opportunities And Challenges For Government.

* The European Commission has also released a report constituted by a high-level group of experts on e-commerce.

There is an unprecedented level of international co-operation over such a short span of time on the challenges posed by e-commerce and this, in fact, has brought in seriousness within governments and tax authorities to tackle the tax implications of e-commerce transactions.

National governments have a disadvantage of not being able to dictate domestic policies in relation to e-commerce. Nevertheless, this issue will be addressed in the near future as e-commerce is gaining momentum and will pose tremendous challenges to the existing systems of taxation. Some of the tax issues that could arise because of e-commerce would be as follows:

Personal Tax: Individuals could escape the tax net by not declaring the income generated by providing services via the Internet.

Residence: A person using the Internet can effectively live and work in a number of jurisdictions. A similar situation is possible in the case of corporates.

E-Commerce: Companies can transfer profits from high tax jurisdictions to low tax jurisdictions, or adjust their income and expenses with branches or subsidiaries in the low tax jurisdictions via Internet transactions.

Tax On Goods & Services: By routing transactions through the Internet, it would be difficult to subject goods and services to tax. The jurisdiction where the sale or service has happened could become a matter of interpretation.

Permanent Establishment (PE): The concept of PE is important in determining a company+s business profits and tax liability in a particular country. However, business via Internet challenges the whole concept of a PE and, therefore, the question of how the business income of an enterprise is determined could become a debatable issue.

Electronic-commerce is, undoubtedly, going to pose challenges to countries as their present tax system is based on tangible information reporting and paper trials. Countries will be forced to re-think the method of taxation and adopt means to recognise transactions in an equitable manner keeping in mind the existing guidelines issued by some Western countries for taxing e-commerce transactions.

4. Analysis

4.1 Respondents To The Survey

Responses were received from 116 organisations. The organisations were asked to classify themselves under one of the following sectors of industry:

* Manufacturing & distribution.

* Computers and communications.

* Financial services.

* Retail and wholesale trade.

* Other industries.

Some of the questions were analysed by industry to highlight variations peculiar to those industries.

A significant majority of the responding organisations had global reach and marketed their goods/services to both end-consumers and other businesses.

Use of e-commerce can be classified into 2 broad areas:

* Interfacing and selling to the end-consumer or B2C (Business-To-Consumer).

* Interfacing and trading with other businesses or B2B (Business-To-Business).

The following charts show that the main target market of the organisations that responded to the survey included an even mix of both areas.

The responding organisations were quite varied in terms of size with the number of employees ranging from less than 100 to more than 10,000, and the turnover ranging from less than Rs 10 million to more than Rs 10 billion.

The annual infotech spending of the organisations also varied over a wide range. While some organisations spent less than Rs 100,000 on infotech per annum, there are others who spend more than Rs 100 million.

4.2 Strategic Importance Of E-Commerce

Over half of all respondents said that e-commerce constituted either a substantial part of, or was crucial to their, organisation+s strategy. Only 4 per cent felt that it was of no importance to the organisation+s strategy. It is clear that e-commerce is increasingly being seen as a strategic tool to gain business advantage and competitive edge.

4.3 Potential Benefits

This section shows that companies are identifying the real benefits of e-commerce in terms of opening up new markets, improving productivity, and automating their supply chains. Respondents were asked to rate the potential benefits as relevant to their organisations. The respondents rated Improved Customer Service and Improved Productivity as the Top Two potential benefits e-commerce might provide to their organisations.

4.4 Realised Benefits

The chart shows the benefits realised by organisations using e-commerce. Improved Productivity and Improved Product Quality have been rated as the Top Two realised benefits. Improved Customer Service, rated as one of the Top Two potential benefits, is a close third.

4.5 Potential Barriers

The respondents rated Lack Of Standard Payment Infrastructure and Trading Partner+s Technology as the Top Two potential barriers to effective adoption of e-commerce in their organisations.

Infrastructure Cost and Security Issues figured as major concerns although they were not as important as the first two. We found that organisations are willing to make the necessary investments in the technology as long as they could manage it efficiently and get a satisfactory return on investment.

Our research in the European market indicated that security is an overhyped concern. The tools for overcoming security risks are available but it remains subject to media hype. Those companies that are most advanced in their use of e-commerce recognise this and, so, are likely to regard it as a less significant barrier than those that have not.

4.6 Integration

Over half of all respondent companies had support at the board level and had allocated a budget for e-commerce integration. Forty per cent of the organisations are taking measures to integrate e-commerce technologies with their current operating processes and technologies. However, adapting to e-commerce will not simply mean redesigning internal processes and customer interfaces. Instead, companies will have to think of e-commerce as a new channel and not just a replacement for existing channels+which, in turn, means that they may have to start offering new services in order to maintain their market image and position. Others will find that e-commerce provides them with the opportunity to offer new services.

4.7 Implementation Of E-Commerce Technologies

The charts show the status of implementation of e-commerce technologies in different industry sectors.

Internal and Internet e-mail, Websites, and Internet access are popular in all major industry segments. Almost everyone uses internal e-mail and most organisations allow their employees access to the Web. In 2 years, respondents from Manufacturing & Distribution companies favoured implementation of Extranet, Intranet, and EDI technologies while Financial Services companies expected to have installed EDI, Extranet, and IVR systems, and Computers & Communications were planning EDI implementations.

The following table summarises the most predominant e-commerce technologies that are currently being implemented and that will be implemented over a period of time in different industrial segments.

4.8 Functions Performed Electronically

The Internet was favoured far more than all the other electronic channels with almost half the respondents using it for news and information-based uses. The table ranks the functions on the basis of percentage of respondents performing them electronically.

4.9 Transaction Volumes

Less than half of the respondents were able to provide details of the volume of transactions done electronically. Of these, nearly half said that the volume of transactions in their organisations is zero. Hence, most organisations surveyed are not able to determine the number of transactions completed through electronic channels and many are yet to use these channels.

Respondents were asked for the approximate value of transactions currently completed through electronic channels. Based on the table, the weighted average annual monetary value of e-commerce transactions is approximately Rs 123 million for the respondents surveyed.

4.10 Governance

The sponsors within a company determine the scope and success of an e-commerce project. This section reveals that infotech departments are taking the lead on e-commerce projects within their organisations. Executive committee support in the form of board approvals, and intervention to ensure that the necessary business reengineering takes place to ensure that e-commerce is integrated with business processes is critical to ensure that these projects deliver on promises.

Respondents were asked which part of the company was the principal sponsor of current or future e-commerce projects. In nearly two-thirds of the companies, it was the Executive Committee. It was observed that the infotech department champions, develops, and maintains these projects in a majority of the organisations.

4.11 Importance Of Features For Maintaining Security Of E-Commerce Transactions

The respondents were asked to rate the importance of features in establishing and maintaining the level of trust required for employing e-commerce technologies effectively. It is interesting to note that all the features have received very high ratings (a minimum of 67 per cent of respondents say that a particular feature is Important/Very Important/Critical). The highest ratings have been given to Network Access Controls and Through-The-System Tests & Audits.

4.12 trading partners

About 30 per cent of respondents had more than 5 per cent of their trading partners trading electronically, and about half of these had more than 50 per cent of their trading partners trading electronically.

4.13 Characteristics Of Trading Partners

The respondents were asked whether they agreed/disagreed with certain characteristics of their trading partners. The charts show the cumulative responses of all the organisations.

More than half the respondents felt that trading partners were not a driving force behind their adoption of e-commerce while, interestingly, trading partners+ technology was named as a significant barrier to their adoption of e-commerce (Section 5.5). This implies that although the driving force behind e-commerce was internal, its adoption was inhibited by lack of appropriate technology with the trading partner(s).

Trading partners were viewed favourably by more than half the organisations surveyed in terms of considering concerns, having explicit role-based agreements, quality of communications, long associations and levels of trust, while about a quarter of the respondents viewed them as competitors in some areas.

It is evident that most organisations work closely with their business partners creating an environment with a large, unutilised potential for Business-To-Business implementation of e-commerce.

4.14 Procedures Used By Organisations To Ensure Security And Proper Use Of Compute Resources

The chart details the procedures used by organisations to ensure confidentiality, security, and appropriate use of computer resources.

4.15 Conclusion

From the survey, it is evident that the potential benefits offered by e-commerce are far from realised. The perception that trading on electronic channels cannot make money is challenged as incorrect, at least in the Business-To-Business sector. There is also some expectation that, although trading on electronic channels may take longer in the consumer sector due to the trading barriers on the Internet, this, too, will soon follow. Electronic channels are forcing companies to re-think major aspects of the way they are organised and do business. E-commerce raises major strategic issues and is accelerating developments in areas such as globalisation, branding, customer service, and supply chain.

Markets are being transformed as barriers to entry are torn down. This survey shows that the application of e-commerce, and the Internet in particular, extend beyond marketing to all aspects of the supply chain. It also shows that the technical aspects are no longer as important as the integration of business processes and the resulting need to re-engineer them across the organisation. But companies are approaching these developments piecemeal.

If companies are to make profitable use of e-commerce, then, its champions must make their cases heard at the highest levels. This is an opportunity for the infotech and marketing departments to make their Board aware of the effect of e-commerce not just from the technical point of view, but also in terms of its impact on the bottomline. In our opinion, only those companies with an organisation-wide initiative, funded from the centre or, at least, on a joint venture basis between functions, with Board approval, will emerge as leaders in what is a rapidly changing environment.