Power the Web

Enron Corp. launched its online energy marketplace in November 1999. Still, many long-time customers were wary of the change. “I had one guy that I was talking to for three to four months, and I couldn’t get him to trade online,” recalls Larry Gagliardi, director of marketing for the crude oil and refined products business. “Finally, I talked him through it: ‘Put the little arrow on the sale price, click and you’re done,'” Gagliardi says. “The next day he did five trades with us. The next week he did 20. The following week he did 40 in one day, and I had to call him and tell him to slow down.”

An extreme case of love at first site? Perhaps. But the simplicity and the lack of red tape and paperwork of EnronOnline has rocketed the company to success.

Since launching the site, Fittest 50 winner Enron has not only revolutionized the energy markets but pioneered the Web as a supremely easy place to buy and sell commodities. EnronOnline now encompasses 30 commodity markets, from forest products and plastics to broadband and weather futures, and currently averages a whopping US$3 billion in transactions per day. “EnronOnline is one of the leading examples of the right way to apply technology,” says Bruce D. Temkin, group director at Cambridge, Mass.-based Forrester Research Inc. “While other dot-coms tried to invent new business models, or made them up, Enron has done a great job of [using technology to] extend its business model.”

Formed in 1985 by a merger between Houston Natural Gas and InterNorth of Omaha, Neb., Enron started as a natural gas pipeline company. But when gas and electricity deregulation hit in the late ’80s, the company moved into the business of buying and selling those commodities by phone or fax. Traders took orders from buyers, such as independent power companies, then tracked down potential energy supplies. The gambit worked: Within a year of deregulation, Enron’s gas services group had captured 29 per cent of the electric power market. And as the traders looked for new and better ways to aggregate and analyse market information, they realized that an online marketplace may be the answer.

The site began as a skunk works project a popular practice at Enron. In this case, Louise Kitchen, who was the head of European gas trading in London at the time (and is now chief operating officer for Enron Americas, a division of Enron), spearheaded the campaign for a global electronic trading platform. Kitchen mounted a full-scale PR assault to get Enron traders on board, and searched out the technology that would support the new marketplace. It was only when those two goals had been achieved a process that involved 350 Enron employees, 25 law firms to work through the legal details and about US$15 million in development costs that Kitchen took the idea to the CEO, who gave it the green light.

One of the keys to EnronOnline’s success was that Kitchen and her team recognized that there was no value in creating another typical exchange, where buyers and sellers are matched up. Enron’s marketplace is principal-based, meaning that the company acts as the conduit between the buyer and seller in every transaction. Because Enron deals with players on both sides of the market every day, its traders know where the supply and demand lies. This positioning assures sellers that they can always find a home for their natural gas or power (Enron buys it at a posted price), and assures buyers that they can rely on Enron for dependable delivery. Buyers and sellers that deal with Enron also get predictable pricing because the company bundles a variety of financial risk management products futures contracts and options, for example with its commodities as a hedge against volatile market pricing.

Predictable pricing aside, customers love EnronOnline’s ease of use. Enron touts the uniqueness of its pricing system, which allows customers to transact immediately when they see the right price onscreen. Through an arrangement with Reuters, the site also lets customers access up-to-the-minute information about the markets they are trading in. The transaction process for the buyer and seller has also been automated so that each party no longer has to physically write out a contract for each transaction it makes with Enron.

Enron’s formula for marketplace success also lies in its canny choice of commodity markets that are significantly fragmented and that deal in a product that doesn’t vary much from player to player. For example, the company now trades weather derivatives, where businesses that are affected by changes in weather can mitigate the risk of financial losses.

EnronOnline has not only drummed up more business, it has created great efficiencies for the company. “We’re trying to use technology to accelerate what we already do,” says Greg Piper, president and CEO of Enron’s Net Works division, which houses EnronOnline. He says that each of Enron’s brokers buy and sell five to six times more than they did before, radically increasing productivity without increasing head count. By capturing each order electronically, the company also claims that its error rates have fallen to zero, and it has lowered the cost of each transaction by 75 per cent. EnronOnline has generated a huge uptick in transactions physical volumes increased by 60 per cent in 2000 (EnronOnline’s first full year up and running) compared with an average 30 per cent growth per year during the past 10 years.

Enron isn’t done growing yet. In April 2000 the company launched Enron Net Works for the express mission of extending Enron’s business model to new commodity markets through e-commerce. EnronOnline is one of the initiatives falling under that banner. Others include Clickpaper and Commoditylogic.com. Clickpaper is a Web-based transaction system for the paper, pulp and wood industries. Commoditylogic.com builds Web-based products that automate back-office operations for commodity buyers and sellers. Enron has already proven that its marketplace can handle a number of disparate commodities, so the real question for them is how much is too much? “We do a good job of asking ourselves how fast we can move horizontally,” Piper says. “Right now our plate is pretty full and the biggest hurdle is not the business model or the technology, it’s having enough good people to make a go of it.”

Despite the expansion of the past year and a half, Enron has also had its share of trouble. Its stock price has plummeted this year in response to several problems, including the poor performance of the company’s broadband trading operation, as well as investor uncertainty resulting from the ongoing turmoil in the electricity markets of the western United States. To top it all off, CEO Jeffrey Skilling resigned abruptly in August after only six months on the job, and a video-on-demand venture with Blockbuster was scuttled amid mutual recriminations.

Still, many analysts remain bullish on Enron’s future. “They are as Darwinistic as any company out there,” Forrester’s Temkin says. “They give their people a lot of rein to try new things, and they lock into the things that work and cut off the things that don’t.”