Saturday, August 4, 2001

Dot Com Culture is Dying

'Dotcom culture' is dying, and being replaced by a more traditional approach to business, according to a new study tracking the mindsets and attitudes of Europe's dotcom CEOs.

Evidence of this major shift in attitudes is revealed in the second annual PricewaterhouseCoopers European Dotcom study - "Focusing on fundamentals - dotcoms mean business" - which revisited 400 European CEOs of 'pure-play' Internet businesses to establish their key issues and challenges.

The 2000 report demonstrated that the priorities of CEOs were focused firmly on the issues of recruitment, brand-building and pan-European expansion, rather than profitability and customer service. In addition, when questioned, the CEOs placed a heavier emphasis on creativity and flexibility as desired traits for managers rather than a proven track record in business.

The 2001 report, however, marks a fundamental shift in attitudes, as CEOs take stock of their businesses and face the realities of an increasingly tough operating environment. Key insights from the CEOs questioned for the 2001 study include:

In 2000 one in three dotcom managers highlighted finding the right staff as a key challenge facing their company. In 2001 this figure dropped to just one in 20 CEOs, with emphasis shifting instead to winning business and keeping the costs down;

A clear focus on profitability and cash-flow is cited by CEOs in 2001 as one of the main challenges facing their business. Interestingly, tactics for increasing profitability vary from country to country. For example, the UK and Germany are concentrating on reducing costs and overheads (identified by, respectively 24 and 32 per cent of respondents in these two countries). In France, dotcoms are looking for better product quality (22 per cent) and the Dutch see more focus on marketing (34 per cent) as a solution to boosting their business;

A clear shift in emphasis towards experience and broad management skills. Management experience has moved from being one of the least valued traits to the most valued. (Ironically, though, it is now much harder for companies to hire experienced managers).

Nick Drewett, director at PricewaterhouseCoopers says:

"There used to be a tendency among some dotcoms to see themselves as a breed apart and subject to a different set of business rules.

"What is interesting about this new study is that we have seen a fundamental change in the attitudes of the CEOs running European dotcoms as they are now prioritising areas such as cost-cutting, profitability and acquiring and retaining customers, above creativity and risk-taking."

According to PricewaterhouseCoopers, the challenge for many European dotcoms now is to make the transition from venture start-ups to established businesses without losing the best elements of start-up culture, including a sense of fun and commitment to creativity and innovation.

Interestingly, PwC found that 72% of CEOs claimed still to be having fun, suggesting they remain committed to their venture, enthused and motivated.

It has put forward a 2001 survival checklist for European dotcoms including:

- Be realistic about future financing prospects and work within the funds available
- Focus on affordable growth
- Develop contingency plans in case original fundraising plans are unsuccessful
- Conduct a strategic review - re-appraise whether the venture will succeed
- Protect key assets and put in place robust internal controls
- Build realistic forecasts based on the real understanding of customers and costs
- Remember the fundamentals - your business model, cash-flow forecasts and management accounts are all vital ingredients
- Remain focused on the goal

The shift in business thinking highlighted in the 2001 study will not entirely stem the tide of dotcom business failure. PricewaterhouseCoopers warns that neither raw talent nor the adoption of sound business thinking will matter if firms are pursuing a fatally flawed business model. Surprisingly, few companies surveyed have conducted any type of formal strategic review of their business.

Furthermore, UK firms appear less profitable than their European counterparts because they rely more heavily on indirect sources of revenue such as advertising. As a result, they are significantly less profitable than other European dotcoms whose pursuit of profitability is strongly linked to sales of products. The result is only 24% of UK dotcoms surveyed are making a profit, compared to 66% of German, 61% of Dutch and 49% of French.

Nick Drewett adds:

"The report shows that many European dotcoms CEOs have changed and are continuing to change in terms of adopting sound financial management and business practices. The reality, however, is that some dotcoms will fail because they are handicapped by the fact they may be pursuing a flawed business model.

"I would not be surprised to see an increase in the number of firms taking the voluntary decision to wind up and return remaining assets to shareholders, if a strategic review of the business reveals no prospect of future profitability."