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					    Electronic Commerce
       Eighth Edition



           Chapter 12
Planning for Electronic Commerce
                        Learning Objectives

In this chapter, you will learn about:
• Planning electronic commerce initiatives
• Strategies for developing electronic commerce Web
   sites
• Managing electronic commerce implementations




Electronic Commerce, Eighth Edition                   2
          Planning Electronic Commerce
                    Initiatives
• Information technology projects
     – Keys to successful implementation
           • Planning and execution
• Electronic commerce initiative business plan
     – Included activities
           • Identifying initiative’s specific objectives
           • Linking objectives to business strategies
• Setting electronic commerce initiative objectives
     – Consider strategic role of project, intended scope,
       resources available

Electronic Commerce, Eighth Edition                          3
                      Identifying Objectives

• Typical business electronic commerce objectives
     –   Increasing existing market’s sales
     –   Opening new markets
     –   Serving existing customers better
     –   Identifying new vendors
     –   Coordinating more efficiently with existing vendors
     –   Recruiting employees more effectively
• Objectives vary with organization size



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           Identifying Objectives (cont’d.)

• Resource allocations for electronic commerce
  initiatives
     – Decisions should consider:
           • Expected benefits and costs of meeting objectives
           • Risks inherent in electronic commerce initiative
           • Comparison of inherent risks to risks of inaction




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           Linking Objectives to Business
                     Strategies
• Downstream strategies
     – Tactics to improve the value businesses provide to
       customers
• Upstream strategies
     – Focus on reducing costs or generating value
           • Working with suppliers or inbound shipping and freight
             service providers
• Web use for businesses
     – Attractive sales channel for many firms
     – Complement business strategies, improve
       competitive positions
Electronic Commerce, Eighth Edition                                   6
           Linking Objectives to Business
                 Strategies (cont’d.)
• Electronic commerce activities difficult to measure
• First-wave e-commerce activities
     – Existed without setting specific, measurable goals
     – Did not face much competition
     – Successes and failures measured in broad strokes
• Second-wave e-commerce activities
     – Businesses take closer look at benefits and costs
     – Good implementation plan
           • Set specific objectives for benefits achieved and costs
             incurred

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                         Measuring Benefits

• Tangible benefits of electronic commerce initiatives
     – Easy to measure
     – Example: increased sales or reduced costs
• Intangible benefits of electronic commerce initiatives
     – More difficult to measure
     – Example: increased customer satisfaction
• Identifying objectives
     – Set measurable objectives even if for intangible
       benefits


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              Measuring Benefits (cont’d.)

• Using Web sites to build brands or enhance existing
  marketing programs
     – Set goals in terms of increased brand awareness
           • Measured by market research surveys, opinion polls
     – Companies selling goods or services online
           • Measure sales volume in units or dollars
     – Complicated to measure brand awareness or sales
           • Increase may be due to other things company is doing
             at same time or general improvement in the economy



Electronic Commerce, Eighth Edition                                 9
               Measuring Benefits (cont’d.)

• Using Web sites to improve customer service or
  after-sale support
     – Set goals of increased customer satisfaction, reduced
       costs of providing customer service or support
     – Example: Philips Lighting
           •   Provided Web ordering system for smaller customers
           •   Primary goal: reduce cost of processing smaller orders
           •   Built pilot Web site and had smaller customers try it
           •   Results: customer service phone calls from test group
               dropped by 80 percent


Electronic Commerce, Eighth Edition                                 10
              Measuring Benefits (cont’d.)
• Measurements of other electronic commerce
  initiatives
     – Supply chain managers
           • Measure supply cost reductions, quality improvements,
             faster deliveries of ordered goods
     – Auction sites
           • Set goals for number of auctions, number of bidders
             and sellers, dollar volume of items sold, number of
             items sold, number of registered participants
     – Virtual communities and Web portals
           • Measure number of visitors
           • Measure quality of visitors’ experiences
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              Measuring Benefits (cont’d.)
• Metrics
     – Measurements companies make to assess value of
       benefits
           • Use online surveys
           • Use estimates: length of time each visitor remains on
             site, how often visitors return
• Benefit unit of measure
     – Convert raw activity measurements to dollars
           • Can compare benefits to costs
           • Can compare net benefit of a particular initiative to net
             benefits provided by other projects
     – Difficult to measure value in dollars
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                            Managing Costs
• Information technology project costs are difficult to
  estimate
• Web development uses rapidly changing hardware
  and software technologies
     – Most changes in hardware costs are downward
     – Increasing software sophistication
           • Provides ever-increasing demand for more newer,
             cheaper hardware
           • Yields net increase in overall hardware costs
• Web technology can quickly destroy manager’s
  best-laid plans
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                 Managing Costs (cont’d.)

• Total cost of ownership (TCO)
     – Includes wide variety of costs related to activity
• Electronic commerce implementation TCO includes:
     – Costs of hardware, software, design work,
       outsourcing, salaries and benefits for employees
       involved in project, maintaining site once operational
• Good TCO number
     – Includes assumptions about how often site would
       need to be redesigned in the future


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                 Managing Costs (cont’d.)
• Change management
     – Information system projects involve change
     – Employee concerns
           • Ability to cope with changes, ability to continue to do
             good work, job security
     – Concerns lead to increased stress
     – Change management: process of helping
       employees cope with changes
           • Includes tactics designed to help employees feel
             involved with change
           • Helps employees overcome feelings of powerlessness

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                 Managing Costs (cont’d.)

• Opportunity costs
     – Largest and most significant costs associated with
       electronic commerce initiative
           • Cost of not undertaking an initiative
     – Foregone benefits that company could have obtained
       from electronic commerce initiative not pursued
     – Lost benefits from action not taken




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                 Managing Costs (cont’d.)

• Web site costs: based on International Data
  Corporation and Gartner, Inc. surveys
     – Estimated cost to build, implement adequate entry-
       level site (large company): $1 million
           • 79 percent labor, 10 percent software, 11 percent
             hardware
     – Building site comparing favorably to leading sites
           • $2 million to $5 million
     – 10 of top 100 e-commerce sites spent over $10
       million

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                 Managing Costs (cont’d.)
• Web site costs (cont’d.)
     – Small company Web site costs: under $4000
     – TCO: site with full transaction and payment
       processing capabilities
           • Difficult to keep under $8000 per year
     – Smaller companies’ surveys indicate that costs of
       commerce Web sites average $110,000
           • Industry estimate: $100,000
     – Gartner estimate for basic electronic commerce
       operation
           • Between $100,000 and $1 million
           • Site noticeably ahead of competitors: over $15 million
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                 Managing Costs (cont’d.)

• Web site costs (cont’d.)
     – Web technology evolving at rapid pace
           • To remain competitive, businesses must take
             advantage of technology
     – Annual cost to maintain and improve site once up and
       running
           • Between 50 percent and 200 percent of initial cost
     – Implementation decisions’ significant factor
           • Ongoing maintenance costs
           • More so than initial cost of building site


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                 Managing Costs (cont’d.)

• Web site costs (cont’d.)
     – McKinsey & Company
           • Estimated start-up and ongoing costs for magazine
             publishers’ Web sites
     – Two types of magazine sites
     – Full portal site served as a destination in itself; cost
       estimate
           • $2.4 million to build
           • $4.3 million per year to maintain
           • Staff of 35 people


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                 Managing Costs (cont’d.)

• Web site costs (cont’d.)
     – More limited magazine companion site
       complementing printed magazine cost estimate
           • $150,000 to build
           • $270,000 per year to maintain
           • Staff of two people
     – Both estimates
           • Exclude site content development costs
           • Assume existing IT infrastructure for print publishing
             business
           • Subscriber base of 300,000
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                 Managing Costs (cont’d.)

• Trends in Web site costs
     – New online businesses
           • Trending toward lower costs of entry
           • Operations launched for dollar amounts in low end of
             range for each category
     – Reasons
           • Lower costs for broadband access, equipment
           • Decreasing cost of developing and maintaining
             software to run online business
     – First successful startup (Netscape): $40 million
     – Newer startups (Digg, Facebook): under $500,000
Electronic Commerce, Eighth Edition                                 25
                 Managing Costs (cont’d.)

• Funding online business startups
     – Early Web businesses
           • Started by individuals with knowledge of computers,
             technology, business
     – Late 1990s Web businesses
           • Started by investors wanting to make fast money
     – Angel investors funded initial startup
           • Became stockholders hoping business grows rapidly
           • Sell interest to venture capitalist



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                 Managing Costs (cont’d.)
• Funding online business startups (cont’d.)
     – Venture capitalists
           • Very wealthy individuals, investment firms
           • Look for small companies about to grow rapidly
           • Hope for rapid growth and initial public offering
     – Initial public offering (IPO)
           • Selling stock to public
     – System of financing startup and initial growth of online
       businesses
           • Benefits: access to large amounts of capital early
           • Costs: investors, capitalists got most profits, pressure
             to grow rapidly
Electronic Commerce, Eighth Edition                                     27
                 Managing Costs (cont’d.)

• Funding online business startups (cont’d.)
     – Decreasing need for venture capitalists and angel
       investors
           • Relieving pressure to grow rapidly
           • Online entrepreneurs more creative, learn from
             mistakes
     – Trending toward more and smaller online ventures
           • Creating online business: costs falling




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             Comparing Benefits to Costs

• Capital projects (capital investments)
     – Major investments in equipment, personnel, other
       assets
     – Companies have procedures to evaluate
           • Range from simple calculations to complex computer
             simulation models
           • Always reduces to comparison of benefits and costs
     – Benefits exceed costs by comfortable margin
           • Company invests in project



Electronic Commerce, Eighth Edition                               29
  Comparing Benefits to Costs (cont’d.)

• Key part of creating electronic commerce initiatives
  business plan
     – Identifying potential benefits
     – Identifying costs required to generate benefits
     – Evaluating if benefits exceed costs




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              Return on Investment (ROI)

• Techniques measuring amount of income (return)
  provided by specific current expenditure
  (investment)
     – Payback method, net present value method, internal
       rate of return
• Provide quantitative expression of comfortable
  benefit-to-cost margin
• Mathematically adjust for future reduced value of
  benefits


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   Return on Investment (ROI) (cont’d.)

• Electronic commerce initiatives seen as absolutely
  necessary investments
     – Not subject to close examination, rigid requirements
     – Companies fear being left behind
• Great value in new market early positioning
     – Many companies invest large amounts of money
           • With few near-term profit prospects
     – Example: first wave of newspaper Web sites
           • Calculated opportunity costs not being on the Web
           • Greater than losses experienced from starting sites

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   Return on Investment (ROI) (cont’d.)
• Companies turning to ROI measurement tool for
  evaluating new electronic commerce projects
     – ROI used in the past
• ROI built-in biases
     – ROI requires all costs, benefits be stated in dollars
           • Gives undue weight to costs
     – ROI focuses on predicted benefits
           • Initiatives have returned benefits not foreseen
           • Cisco user forums assisted engineers (unexpected)
     – ROI tends to emphasize short-run benefits over long-
       run benefits
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   Return on Investment (ROI) (cont’d.)

• ROI built-in biases (cont’d.)
     – Short-term benefits easier to foresee
           • Get included in ROI calculations
     – Long-term benefits harder to imagine and quantify
           • Not always included in ROI calculation
     – ROI calculations weigh short-term costs/benefits
       more heavily than long-term costs/benefits
     – More information
           • CIO Budget, Computerworld ROI Knowledge Center
             Web pages

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    Strategies for Developing Electronic
           Commerce Web Sites
• Evolution of Web site functions
     – From static brochures (early days)
     – To transaction-processing tools
     – To today’s automated homes; all kinds of business
       processes
• Transformation occurred rapidly
     – Change in site management did not occur quickly
• Now companies are seeing Web sites as collections
  of software applications
     – To manage development and maintenance
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    Strategies for Developing Electronic
       Commerce Websites (cont’d.)
• The Internet has changed markets and marketing
  channels quickly
     – Creating difficulties in industry value chains
     – No luxury of time
     – Must explore alternatives to traditional systems
       development methods to succeed




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  Internal Development vs. Outsourcing
• Internal people leading projects ensures:
     – Company’s specific needs are addressed
     – Initiative congruent with organization goals, culture
• Outside consultants
     – Seldom able to learn enough about organization’s
       culture to accomplish objectives
• Key to success
     – Finding balance between outside and inside support
• Outsourcing
     – Hiring another company to provide outside support for
       all or part of project
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  Internal Development vs. Outsourcing
                 (cont’d.)
• The internal team
     – First step in outsourcing decision making
           • Create internal team
     – Team members
           • People knowledgeable about the Internet and its
             technologies
           • Creative thinkers
           • Distinguished within the company




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  Internal Development vs. Outsourcing
                 (cont’d.)
• The internal team (cont’d.)
     – Project lead
           • Mistake: technical wizard, not business knowledgeable,
             not well known
           • Better choice: person with business knowledge,
             creativity, respect of firm’s operating function
             managers, good sense of goals and culture
     – Measuring team achievement: important
           • Not necessarily monetarily
           • Express in terms appropriate to initiative objectives


Electronic Commerce, Eighth Edition                                  41
  Internal Development vs. Outsourcing
                 (cont’d.)
• The internal team (cont’d.)
     – Intellectual capital
           • Employees’ knowledge about the business and its
             processes
           • Ignored in the past
           • Value recognized today
     – Human capital measurement networking approach
           • Includes employee competencies
           • Includes value of customer loyalty and business
             partnerships


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  Internal Development vs. Outsourcing
                 (cont’d.)
• The internal team (cont’d.)
     – Holds responsibility for initiative from setting
       objectives to final implementation
           • Internal team decides project parts to outsource,
             outsourcer, consultants or partners needed




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  Internal Development vs. Outsourcing
                 (cont’d.)
• Early outsourcing
     – Company outsources initial site design and
       development to launch project quickly
     – Outsourcing team trains company’s information
       systems professionals before handing site operation
       to them
• Company’s own information systems people work
  closely with outsourcing team
     – Develop ideas for improvements as early as possible
       in project life

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  Internal Development vs. Outsourcing
                 (cont’d.)
• Late outsourcing
     – More traditional approach
     – Company’s information systems professionals
           • Perform initial design and development work,
             implement system, and operate system until stable part
             of business operation
     – Once competitive advantage gained
           • Electronic commerce system maintenance outsourced
           • Company’s information systems professionals turn
             attention and talents to developing new technologies,
             providing further competitive advantage

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  Internal Development vs. Outsourcing
                 (cont’d.)
• Partial outsourcing
     – Also called component outsourcing
     – Company identifies specific project portions
           • Can be completely designed, developed, implemented,
             and operated by another firm specializing in a particular
             function
     – Examples
           • Smaller Web sites outsource e-mail handling and
             response functions
           • Electronic payment system


Electronic Commerce, Eighth Edition                                 46
  Internal Development vs. Outsourcing
                 (cont’d.)
• Partial outsourcing (cont’d.)
     – Example: Web hosting activity
           • Service providers usually willing to accommodate
             requests for variety of service levels
           • Service provider has continuous staffing and expertise
           • 24/7 operation: running 24 hours a day, seven days a
             week
           • Service providers offer wide range of services
           • Some service providers specialize



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              Selecting a Hosting Service

• Internal team responsible for selecting ISP
• Smaller electronic commerce projects
     – Consult ISP directory (The List)
• Larger electronic commerce projects
     – Obtain advice of consultants, other firms rating
       service providers
           • HostCompare.com, Keynote Systems




Electronic Commerce, Eighth Edition                       48
    Selecting a Hosting Service (cont’d.)

• Important factors when selecting hosting service
     –   Functionality
     –   Reliability
     –   Bandwidth and server scalability
     –   Security
     –   Backup and disaster recovery
     –   Cost
• Vendor’s security policies, practices: very important
     – Business information placed in hands of service
       provider
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 New Methods for Implementing Partial
           Outsourcing
• New ways of implementing partial outsourcing
  strategy evolved specifically for Web businesses
• Incubators
     – Offer start-up companies physical location with
       offices, accounting and legal assistance, computers,
       Internet connections
           • Very low monthly cost
     – May offer seed money, management advice,
       marketing assistance
     – Receive ownership interest in company

Electronic Commerce, Eighth Edition                           50
 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Incubators (cont’d.)
     – Incubator sells all or part of its interest
           • Company grows to obtain venture capital financing,
             launch stock public offering
     – First Internet incubators: Idealab
           • Helped CarsDirect.com, Overture, Tickets.com
           • Today’s focus: own internally generated ideas




Electronic Commerce, Eighth Edition                               51
 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Incubators (cont’d.)
     – Company created internal incubators
           • Develop technologies for use in main business
             operations
           • 1980s programs: unsuccessful and shut down
     – Matsushita Electric’s U.S. Panasonic division
           • Started internal incubators to help launch new
             companies to become important strategic partners
           • Prospects appear much brighter



Electronic Commerce, Eighth Edition                             52
 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Fast venturing
     – Existing company wants to launch electronic
       commerce initiative
           • Joins external equity partners and operational partners
             offering experience, skills needed
     – Equity partners: usually banks, venture capitalists
           • Sometimes offer money
           • More likely to offer experience
     – Operational partners: firms
           • Systems integrators, consultants, Web portals
           • Experienced in moving projects along, scaling up
             prototypes
Electronic Commerce, Eighth Edition                                53
 New Methods for Implementing Partial
        Outsourcing (cont’d.)
• Fast venturing (cont’d.)
     – Venture sponsor
           • Existing company wanting to launch electronic
             commerce initiative
           • No experience in starting new businesses
     – Equity partners
           • Provided start-up money to new ventures in the past
           • Developed knowledge about operating new ventures
           • Provided venture sponsor advice
     – Operational partners
           • People and companies that previously built Web
             business sites
Electronic Commerce, Eighth Edition                                54
Electronic Commerce, Eighth Edition   55
         Managing Electronic Commerce
               Implementations
• Best way to manage complex electronic commerce
  implementation
     – Use formal management techniques
           •   Project management
           •   Project portfolio management
           •   Specific staffing
           •   Postimplementation audits




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                       Project Management

• Collection of formal techniques for planning and
  controlling activities undertaken to achieve specific
  goal
• Developed by U.S. military, defense contractors
• Project plan criteria
     – Cost, schedule, performance
     – Helps management make trade-off decisions
       involving three criteria



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            Project Management (cont’d.)
• Project management software
     – Specific application software
     – Helps manage projects
     – Example: Microsoft Project, Primavera P6
           • Provide built-in tools for managing resources,
             schedules
     – Generate charts and tables showing:
           • Critical parts of project for timely completion
           • Parts that can be rescheduled, delayed without
             changing the project completion date
           • Where additional resources might be most effective in
             speeding up project
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Electronic Commerce, Eighth Edition   59
            Project Management (cont’d.)
• Software management tasks
     – People and tasks of the internal team
     – Tasks assigned to consultants, technology partners,
       outsourced service providers
• Examining costs and completion times
     – Learn about project progression
     – Revise future estimated costs, completion times
• Risks of information systems’ development projects
     – Running out of control, ultimately failing
     – Causes: rapidly changing technologies, long
       development times, changing customer expectations
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            Project Portfolio Management

• Teams rely on project management software to help
  achieve project goals
• Electronic commerce uses rapidly changing
  technologies
     – Relatively short development times
           • Technology, user expectations have less time to
             change
           • Initiatives more successful (in general)
• More information
     – Project Management Institute

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        Staffing for Electronic Commerce

• Business manager
     – Member of internal team setting project objectives
     – Responsible for implementing business plan
       elements, reaching objectives set by internal team
• Project manager
     – Person with specific training, skills in tracking costs
       and accomplishment of specific project objectives
• Account manager
     – Keeps track of multiple Web sites in use or keeps
       track of projects combining into larger Web site

Electronic Commerce, Eighth Edition                              62
        Staffing for Electronic Commerce
                      (cont’d.)
• Applications specialists
     – Maintain accounting, human resources, logistics
       software
• Web programmers
     – Design and write underlying code for dynamic
       database-driven Web pages
• Web graphics designer
     – Trained in art, layout, composition
     – Understands how Web pages are constructed


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        Staffing for Electronic Commerce
                      (cont’d.)
• Customer service personnel
     – Design and implement customer relationship
       management activities in electronic commerce
       operation
• Call center
     – Company handling incoming customer telephone
       calls, e-mails for other companies
     – Makes sense for smaller companies
• Systems administrator
     – Responsible for system’s reliable, secure operation

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        Staffing for Electronic Commerce
                      (cont’d.)
• Database administration function
     – Support activities
           • Transaction processing, order entry, inquiry
             management, shipment logistics
     – Activities require:
           • An existing database into which site being integrated
           • Separate database established for electronic
             commerce initiative




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               Postimplementation Audits

• Formal review of project
     – After up and running
• Examine project items established in planning stage
     – Compare to what actually happened
           • Objectives, performance specifications, cost estimates,
             scheduled delivery dates
• Blame identification approach
     – Used more in the past
     – Focused on identifying individuals to blame for cost
       overruns, missed delivery dates

Electronic Commerce, Eighth Edition                                66
     Postimplementation Audits (cont’d.)
• Feedback on strategies
     – Used more today
     – Obtains valuable information
           • Useful in planning future projects
           • Gives participants meaningful learning experience
• Comprehensive audit report
     – Analyzes project’s overall performance
           • How well project administered
           • Appropriate project organizational structure in place
           • Specific project team(s) performance
     – Should compare actual results to objectives
Electronic Commerce, Eighth Edition                                  67
                                      Summary
• Key elements included in e-commerce business
  plans
• Setting objectives in measurable terms
     – Derived from initiative’s overall goals
     – Include planned benefits and planned costs
• ROI evaluation technique
     – Past, present, and future uses
• Outsourcing the electronic commerce project
• Project management overview and importance
• Postimplementation audit value
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