MFMN: In your estimation, what is the state of e-commerce in the fund industry today vs. what people three or even four years ago expected it to be?
McCalley: That's a good question. When I think back to when e-commerce really started to evolve in the mid-nineties there was a lot of discussion as to Is this a new distribution channel? Is it a new business unit?' All of the conversation tended to cycle in and around e-commerce being a separate business. And I think, clearly, we're at the point now where electronic commerce is part and parcel of the business. I mean, to think that you can have an e-business strategy and a business strategy is really not appropriate. You have a business strategy, which has elements of an e-business strategy. That's part of the fabric of what we're doing.
So, I think that's the key shift. I think early on people thought, I can own a customer in the electronic channel.' But at that point, which is obvious to us today, it wasn't clear that people were going to be multichannel. When I talk about channel, I'm talking about content channel. People are sometimes going to call us on the phone, sometimes they will e-mail, sometimes they will use the interactive voice response, other times they are going to walk into one of our investment centers. To think that you can own a customer in a particular channel or set up a separate business for them like a dot-com, although it seemed feasible at the time, seems very ridiculous today... The key shift, again, has been that e-commerce has really become everybody's business.
And if e-business is everybody's business I think what a lot of organizations are struggling with is where to put this organization within their business: Is it a separate unit or is it fully integrated into the fabric of the company?
MFMN: Within American Century, how did that transformation take place?
McCalley: From an organizational perspective e-commerce was a global, centralized group within the organization. But then as e-commerce became a more valuable component of each one of the distribution channels' strategy, to have that in a centralized organization that maybe didn't fully understand their business needs didn't make sense.
So you saw a lot of vacillation in the late nineties... It went back and forth. Now we're in the decentralized mode throughout the organization so that each distribution channel has the opportunity to drive the strategy.
Maybe another way to state it is this: If you were responsible for a particular business channel five or six years ago, this was not a big part of your business strategy. Now I think it has shifted to become a key component.
That creates tension between a decentralized or centralized organization. Yet at the same time it's important from a global perspective to gain efficiencies that you need to have across the business by having centralized services, because you don't want to build three separate Web platforms.
MFMN: Since American Century began charging clients with accounts smaller than $10,000 a maintenance fee unless they agree to conduct business online, how many of those investors have switched over to that format?
McCalley: It's been along the lines of what we were projecting.
MFMN: And what were your projections?
McCalley: I knew you would want to know that. I'm not sure I'm really at liberty to go there now, but we're tracking along what we had hoped we would do.
MFMN: Have you recovered your costs of setting up an online customer service and e-delivery platform?
McCalley: Not yet because we are really very new into the program. But we are charting those and we are on our trend line for where we want to be as far as recouping our costs on the investment.
MFMN: Can you tell me about some online initiatives you have in the pipeline?
McCalley: Where we're really going next is to continue to integrate the ability for customers to do our straight-through processing for us. It's something that has been out there for a long time and has been a goal of ours, but we're getting more aggressive on moving toward that next year. What that allows us to do is create a more efficient back office.
MFMN: When you say more aggressive,' what does that entail? Will it include some sort of marketing program to sell the service to your clients?
McCalley: That's what our online account management program has been all about: To provide the carrot-and-stick approach. You pay the fee or you can get out of it by doing business with us online. So that's really where that comes from. We've had internal marketing campaigns and have tried to drive our traffic, and have been pretty successful. Close to 50% of our shareholder base actually has a user name and password, which we feel is pretty significant.
But what I meant about aggressive is we are going to that next level of leveraging e-commerce to gain operational efficiencies. Now we're coming back to really analyze from beginning to end the process of how some of these transactions move through our systems. And we're looking to leverage e-commerce in a way to make that process more efficient.
MFMN: How do you determine what projects to undertake and those that you'll hold off on?
McCalley: We have a couple ways to gather information as we try to assess where we are headed. One is through a service team we call Interactive Delivery. They provide technical support to people using our Web site. That team every month submits a top 10 list based on the interaction they have with our customers. The list highlights the top 10 things that would provide the most value in interacting with the customers. So that's a very customer-centric perspective.
We also have an online survey and those online surveys pop up for every nth customer and they fill out those online surveys and we ask questions there. So on a regular basis we receive a statistically significant sample, it's usually around 10,000 per quarter.
We also have an online Web tool called "Personified" which is a Web analytics tool. It does something called click stream analysis. What that does is it actually shows the path that an investor takes on the site and the software takes all of these millions of different paths that investors take and it then begins to group them in clusters and provide common behaviors. Then we start to study those behaviors.
MFMN: Based on that, what are your shareholders asking for and what will you be adding to address their demands?
McCalley: One item that we'll be working a lot more on is our fund facts. To date, we have information, like a lot of others, that is just static information on our top 10 holdings, the fund objective, really just standard stuff. We've found that people are really looking for richer information on funds. So we're looking to develop ways for people to screen and analyze and select our funds and understand how they fit into their portfolios. It's a more interactive way to work with what has traditionally been static information.
We have a whole list of account management functionality issues that we're hearing about from our customers. We are hearing from them, We want to margin manage our accounts online,' and We want more wrap product information,' and those are really the two key drivers that we are hearing.
MFMN: In today's market environment firms are looking to cut corners and are watching the bottom line more carefully. How has that affected American Century's e-commerce initiatives?
McCalley: I think the main impact has been the way we approach project initiation. When I think back over the last five, six or seven years, early on there really wasn't a lot of effort to do a return on investment analysis or a net present value of a particular project. And we have now set up a process where every single project goes through a net present value calculation to help us determine months to pay back and whether this is something we can do in-house and how it stacks up. So, it is possible that you have something that shows up as maybe a competitive gap but if it doesn't meet some return on investment requirements, it may not actually happen.
MFMN: How much time do you generally give your projects to recoup their costs?
McCalley: There is no hard and fast rule, but I will say that we have set up our models so that if it doesn't meet a three-year return on investment, then it probably isn't up for consideration. The only caveat I'd like to put around that is occasionally you're going to have an outlier with great potential and that's not a hard cutoff.
But on most of the projects we're initiating today, our breakeven point is in the six-to 18-month range. And part of the thinking around that is that things are changing so fast in this space that you really need to have that shorter time period.
If you're looking for something that will give you a return on investment in five years, gosh, I can barely tell you what my environment is going to be like two years out, let alone five. So, if something is going to be that long, it has to have a pretty solid business case and, quite frankly, we really haven't done anything along those lines.
David McCalley is the VP of electronic commerce for American Century. McCalley started with the Kansas City-based firm in 1992, working in the customer service unit answering phones. A self-described early adopter of new technology, McCalley's interest in electronic commerce propelled him through the company, eventually putting him in charge of the firm's e-commerce strategy in 1996.
Mutual Fund Market News discussed American Century's online initiatives with McCalley as well as the state of electronic commerce in today's fund industry. An edited version of his conversation with Andrew Greene follows.