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  1. 1. Stanford Global Supply Chain SGSCMF-002-2000 Management Forum May 12, 2000 Intuit Inc. From Products to Services in the Information Age Leo Redmond was appointed as a Process Engineering Manager of Intuit’s Financial Supplies Group (FSG) in May 1995. Redmond arrived at FSG to discover that the order fulfillment process at FSG was, in his words, “horribly broken” — customers were dissatisfied with how long it took to receive their orders, operating costs were high, and morale at FSG was low. Redmond was given the task to turn around the operation, and he pondered where he ought to begin. Intuit and FSG Background In 1983, Scott Cook and Tom Proulx founded Intuit with the goal of providing software solutions to ease and simplify the way individuals and small businesses manage their finances. Today, Intuit develops and markets the world's best-selling personal, small business, and tax preparation software, as well as a set of web-based financial tools. Exhibit A shows Intuit’s financial statement and balance sheet in 1998 and 1999. 1 In 1984, Intuit introduced its first product, Quicken, a personal finance software package. Quicken's success fueled the creation of Intuit's other businesses, beginning with QuickBooks, a small business accounting software, in 1992, and continuing with TurboTax personal tax software (through acquisition of ChipSoft in 1993). To enhance the value of these products, Intuit created FSG to sell paper checks, forms and envelopes to its large installed base of software customers. FSG was started in 1990, and by 1995 its annual revenue had grown to $52.8 million. Across its divisions, Intuit has focused on the core competency of developing and marketing financial software solutions to small businesses and consumers. This focus had paid off in granting the company large market share, but the resulting business model required extensive outsourcing of its operations to third parties (as one executive stated, This case was written by Terry Taylor, under the supervision of Professor Hau Lee of Stanford University. It is intended as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2000 by the Board of Trustees of the Leland Stanford Junior University. 1
  2. 2. Intuit Inc. SGSCMF-002-2000 “we’re a software company, not a manufacturing company”) and challenges in operational execution. Order Fulfillment at Financial Services Group Order Fulfillment Difficulties Like other divisions, FSG contracted out manufacturing to third parties. Intuit was responsible for order taking from customers, order processing and preparation, and addressing problems related to customer service. Redmond observed that orders moved through Intuit’s internal processes “Charles Dickens style”, from department to department. Roughly 15 “touches” by various individuals in various organizations were required in order to process a single order for a check. “Everything was paper-based and extraordinarily manual,” commented Ginny Lee, Operations Manager. Redmond led a team, consisting of Lee and four others, that was responsible for improving the way FSG fulfilled orders. The team’s first actions were to map out the current processes and develop metrics that would capture the effectiveness of the total process. The mapping out of processes revealed a convoluted system with “lots of handoffs and redundancies.” A high-level summary of the result of the process map is provided in Exhibit B. In 1995, the primary source of orders (90-95%) was mail. The remaining orders came by fax, which had been introduced one year before. Problem Diagnosis In exploring the difficulties faced by FSG, the operations team made several discoveries. The customer service team responsible for entering and processing orders felt they were under an unreasonably heavy load. The sales agents had 15 fields from which they had to transcribe customer handwriting into Intuit's order processing system. This led to many errors. The heavily manual nature resulted in a time-consuming process with high operating costs. Customer satisfaction was hampered by what were hoped to be innovations in how Intuit took orders. Faxes were harder to read than mailed forms, with roughly one-quarter of faxes requiring some type of follow up by Intuit. At the same time, customers expected a faster and higher quality of service with fax. In 1993, a new way to place orders was embedded into the QuickBooks software. “In Product Marketplace” forms were pre- filled in QuickBooks software. Users could dial in via modem to Intuit with their order, and the expectation for improved service was even greater because of this automated process. But there were severe operational problems. Intuit’s servers were unreliable, and Intuit’s internal processes were again manual—FSG’s internal process consisted of 2
  3. 3. Intuit Inc. SGSCMF-002-2000 printing out the customer orders and then manually entering them into the system, at times introducing errors that customers found surprising. The development of metrics captured how poorly the current system was performing. Total turnaround time from receipt of order to the time it left the production facility averaged 12 days. To support Intuit’s goal of providing superior customer service, the company established the policy that, if a customer felt that his or her order was printed incorrectly, Intuit would reprint the order. In 1995, more than 7% of the total print orders were “reruns” due to errors. These reruns created substantial extra costs and lengthened lead times during peak periods. The demand for FSG’s products was seasonal, with a large bulk of the sales coinciding with the end and start of a calendar year. Although sales were concentrated in late December and early January, Redmond confided, “Our turn-around time on order processing was so bad that it messed up our financials — making February look like the big month.” In early 1996, managers at FSG decided to open up another sales channel for orders, telephone. In the first 12 months the Intuit “call center” was primarily an “apology center,” said Lee. Roughly 60% of the calls into Intuit’s call center were “status calls” — customers calling to inquire about what had happened to and when they might expect their orders. Intuit was not always able to give customers timely, accurate responses. This was driven by two issues: First, all customer and order data resided outside of Intuit — at the manufacturers to which Intuit had outsourced production. Second, Intuit did not have in place a way to track orders and their status. “Checks are a sensitive issue, and as a result people are sensitive about them,” said Redmond. “We should know if and when an order has been received by a customer.” But in 1995, Intuit was not able to do so and did not actively follow up with customers to ensure that completed orders had been received satisfactorily. Integration with Vendors Thus, a critical need that Redmond’s team identified was to “close the loop” by tracking order status. The idea was to attach an Intuit order number to each order and attach time/date stamps to the order as it moved through various stages of the order fulfillment process. “Then we could track the order downstream through the printing process to find where the order was if it is stuck,” said Redmond. The desire of Redmond’s team to implement order tracking was complicated by the fact that Intuit outsourced production to two different vendors: Dataprint, which had its printing facility in Seattle, and Harland, with its plant in Atlanta. The operations team’s initial idea was to interconnect the systems across the three companies. However, the two manufacturers had substantially different information systems and processes, and it appeared that the investments and efforts required to integrated across three companies would be prohibitive. 3
  4. 4. Intuit Inc. SGSCMF-002-2000 Intuit’s solution was to negotiate a long-term contract in which the larger firm, Harland, agreed to buy the smaller company, Dataprint. This way, the two companies might eventually migrate to a single information system with a common production process. Such a merger did take place. However, despite the acquisition, for some time it was a “one company concept, but Harland’s two plants still acted like two different companies,” said Lee. For example, three years after the merger, Intuit was still trying to get Harland and Dataprint to use the same fonts. Despite the post-merger integration difficulties, in reflecting back on the experience the Intuit team agreed that this was a key decision that accelerated the process of integrating Intuit with its outside manufacturing operation. “If we had tried to do this with two companies, it really would have been a nightmare,” said Redmond. COSMOS Information System From 1995 to 1997, the operations team’s main initiatives were to implement metrics, clean up the order form to make it less susceptible to errors, and improve telephone order- taking service. In addition, the team mapped out a reengineered process that eliminated redundancies and simplified flows. During that time “we had a $60 to $70 million business running on a netware PC,” said Redmond. Through 1997, FSG continued to build on its home-grown transactional system, On-Line Product Ordering System (OLPOS). OLPOS was ported to Oracle. Originally, OLPOS was a database to track exception orders, and it was not designed to support a business as large as FSG’s. As a result, the software had 80,000 lines of “spaghetti” code, and essentially no documentation. The FSG team deemed that this way of operating was “pretty risky.” In December of 1997, Intuit initiated a process to develop a proprietary system called COSMOS (Customer Oriented Sales Marketing and Operations System). As the acronym suggests, the intended scope of the system was to span across Intuit’s functions and organization. Redmond describes that Intuit’s system went from a “transaction-based” order processing to a “value-focused” customer-oriented system. COSMOS automated the reengineered process that had been developed. Exhibit C describes the new process and COSMOS’s role within it. COSMOS was completed in August 1998. Prior to COSMOS, 90% of orders required a sequence of human “touches”; after COSMOS, 91% of FSG’s order volume goes “direct to plate,” meaning that after the order is initially entered at the point of customer contact and the production process is automatically initiated without human involvement. The remaining 9% of orders are handled as exceptions, the bulk of which require only minor manual intervention to make adjustments or modifications to the orders. 4
  5. 5. Intuit Inc. SGSCMF-002-2000 Benefits of COSMOS A defining characteristic of COSMOS is that it is organized by customer. This has several benefits. First, it is much easier for Intuit to determine who are its most profitable customers and more generally to identify drivers of profitability. “We always thought we knew what the drivers were, but we never had the data to back it up,” said Redmond. The COSMOS system tracked and reported for each customer: spending on Intuit products, order frequency, and the time of the most recent order. This improved Intuit’s understanding of its specific customers, which was critical in supporting FSG’s direct to the customer business, said Lee. Second, sales agents are better informed when working with customers because they see all of the information in the customer file on screen. For example, decisions about how to handle exceptions (e.g., special requests from customers) can be supported by having the information about the value of the customer and the history of customer’s past transactions (e.g., which in some cases might show a pattern of opportunistic behavior). Third, COSMOS draws on existing customer files to automate data entry. Because 65% of customers reorder, this has significant benefits in decreasing call length and reducing errors. Because COSMOS is organized by customer, it made sense for FSG to further integrate Intuit’s call center computer and phone system. In October 1999, Intuit integrated a new technology into COSMOS so that when a customer dials in, caller identification identifies the customer and brings up his or her record as the call is connected. Further, this system enables FSG to direct high value customers to special sales agents with greater skill and experience who are dedicated to providing premiere customer service. The reengineering and systems development efforts yielded substantial improvements for FSG, from both customer service and financial standpoints. Between 1995 and 1999, volume doubled to 1.2 million orders annually. The total elapsed time from receipt to ship shrunk by more than 70% to less than 3.5 days. The rerun rate dropped more than half to less than 3.5%, and the portion of calls that inquired about order status dropped by 85% to roughly 9% of all completed orders. FSG estimated that every 1% reduction in the rerun rate translated to a $450,000 contribution annually and every 10% increase in direct-to-plate translated to $250,000 in contribution. Web Ordering In September 1998, FSG initiated web ordering for FSG products, a project that took nine months to complete. The push to web ordering was driven by two objectives: reducing errors and reducing handoffs. These objectives translate into reductions in cost and response times. Immediately, web ordering was five times more accurate than other ways of taking orders. Further, virtually all (over 99%) of web orders go direct to plate. Part of this success is driven by the narrowed down product selection and customization that 5
  6. 6. Intuit Inc. SGSCMF-002-2000 FSG has allowed on the web. It is also facilitated by the direct system connectivity between Intuit’s web channel,, and COSMOS. Intuit’s approach is to push users to the web by direct mail, not by sales agents. Intuit’s channel segmentation objective is to push lower value, simple requirement users to the web for low-cost self-service and to channel high-value, high-volume customers to high- service phone sales agents. Within 18 months of it launch, represented 20% of FSG’s orders and 16% of its revenue. Lessons Learned In the process of gaining control of the order fulfillment process, Redmond mentioned two main lessons. The first is the need to focus early on data issues. Cleaning and reformatting data required substantially more effort than the team anticipated. While it took three months to design and build the front end of COSMOS, it required twice as long — a full six months — to design the data structure, and to clean and convert the data into the new format. Lee emphasized the importance of having clean data in a web-based environment. “The internet is a ‘one-way’ communication channel which is database-driven, whereas a call center is a ‘two-way’ communication channel between the customer and the sales associate. The tolerance for bad data is much lower for an internet site than for a call center.” The second lesson Redmond identified was the importance of focusing on total elapsed cycle time as the key metric. That focus helped drive change in the organization. “The only way to get cycle time down is to reduce the number of steps, and that reduces cost,” said Redmond. Order Fulfillment at Tax Table Service At the same time as Redmond, Lee, and others were pursuing changes at FSG, Pam Seitz, Group Service Manager, Tax Table Service (TTS) and Jennifer Martin, Product Manager, TTS were examining the order fulfillment process in the Employer Services Group (ESG). Tax Table Service Description TTS is part of the ESG’s service offerings associated with QuickBooks. “One third of small businesses pay a payroll tax penalty,” said Seitz, and TTS’ objective is to provide small businesses with tools to avoid such penalties. TTS was launched in 1993, and from the beginning it followed a different model than Intuit’s standard shrink-wrap product. Customers purchased TTS on a subscription basis. Thus, TTS represented for Intuit an 6
  7. 7. Intuit Inc. SGSCMF-002-2000 early form of a service type offering. Roughly half of QuickBooks customers use payroll. TTS was an add-on service targeted at the installed QuickBooks base. Federal and state tax rates usually change at least once a year, normally at the beginning of the year. In addition, many states have mid-year changes. TTS offers federal and state tax table updates to ensure that automated earnings and deductions calculations in QuickBooks are based on current tax rates. Customers subscribe for 12 months, and are guaranteed the latest tax information during that period. Information in QuickBooks “flows into” tax forms using the data from the tax tables. In 1993 orders were taken by phone, mail, and fax; updates were distributed by disk. Tax table update disks were shipped throughout the year as changes were announced in the federal and state tax codes. Electronic Distribution and Ordering As with the supplies product, TTS demand was particularly concentrated at the end of the calendar year (in this case because of the timing of many tax table changes). During this time Intuit’s call center experienced a very heavy load. Handling that demand was costly to Intuit (high capacity was required) and led to customer dissatisfaction (with long hold periods and the difficulty of getting through). In one 2-week period at the end of December and early January, 30% of calls “busied out.” Tax tables were in a relatively small file (less than 100K), and hence seemed to Seitz to be a good candidate for electronic rather than physical distribution. Intuit’s primary objective in moving to download distribution was to eliminate calls and provide better service. A secondary goal was the desire to reduce the cost of goods sold. In the summer of 1997, the TTS team initiated parallel distribution modes. ESG still shipped disks throughout the year, but also offered customers the ability to access tax tables via a website with a Personal Identification Number (PIN). Customers had to call in to Intuit’s call center to get their PINs. When the PIN was provided together with the customer number, a user could download the tables. The purpose of the parallel distribution mode was to build and test Intuit’s capabilities and to decrease the level of phone calls during the peak period. Further, the option could be valuable to customers that had problems with their disks. An annual subscription was priced at $59.95 per year. ESG initiated a development project and by September 1998 had established a website which no longer required the cumbersome PIN process. The customer simply entered her or his identification number, phone, and address to gain download access. The web version was priced at $59.95 and the disk version at $69.95. Under the web option, no disks were sent to the customer. Rather, the customer was notified via email and postcard when relevant new tax tables were available. In 1999, 30% of Intuit’s customers chose the web option, which was in line with the target of the TTS team. Seitz explained the 7
  8. 8. Intuit Inc. SGSCMF-002-2000 reason for the relatively limited migration: “Many small business are not comfortable with the internet. Some perceive a risk in going with the web because then they no longer have a backup disk.” In the fall of 1999, to supplement web distribution, Intuit launched web ordering, providing an additional channel to allow more people to “get through” to order during peak times. The move to electronic ordering and distribution has several benefits. First, the level of phone calls has been reduced, resulting in better customer service to those who call and lower fulfillment costs. Second, web distribution has decreased the cost of good sold, as material and shipping costs are eliminated. Third, the customer gets the tax tables immediately, as updates take less than one minute to download. Lessons Learned Seitz described two lessons learned during the shift to electronic ordering and distribution. First, it is difficult to anticipate the nature of demand and its ramifications in a new, digital channel of distribution. As a result of the very high initial demand for web download in December 1998, ESG had to react quickly — Seitz’s team had to double its server capacity in one 12-hour period. In addition, ESG did not anticipate how demand would be concentrated over the week. While consumer business is distributed across seven days a week and 24 hours a day, small business demand is very concentrated during Monday through Friday 8 a.m. to 5 p.m., with Monday being the peak demand day. Finally, Seitz’s team did not anticipate the demand placed on call centers due to download problems. Customer service agents were “having to handle technical support calls when they could have instead been taking orders,” said Seitz. Second, similar to the FSG’s team’s experience, database issues consume substantial and unanticipated amounts of effort. ESG had outsourced customer service since 1993. Intuit wanted to run its website in-house, and hence had to duplicate its third party’s database. This mirroring process substantially slowed down ESG’s migration to the web. It took twice as long as anticipated — 14 months rather than seven. The Physical Distribution Channel Distribution of Shrink-Wrapped Products While FSG and ESG have grown to be important and profitable business units, the bulk of Intuit’s revenue continues to come from the sales of shrink-wrapped products. A 8
  9. 9. Intuit Inc. SGSCMF-002-2000 portion of Intuit’s physical product sales are direct (through direct mail or internet), but the vast majority are still through Intuit’s retail channel. Intuit’s current physical distribution models are dominated by the distributors. In general, Intuit’s retailers and distributors determine the timing and size of their orders, a practice referred to as retailer managed inventory. Intuit responds by delivering the product to the ordering facility’s distribution center. In 1999 roughly two-thirds of Intuit’s retail channel revenue went through distributors before hitting the retailer’s shelves. However, there has been substantial consolidation in the retail software industry as big box warehouse clubs and computer superstores have captured market share from small boutique players (e.g., Egghead). Intuit has built direct relationships with large retailers (such as Office Depot and Wal Mart), which constitute one-third of Intuit’s total sales volume. At select retailers, such as Sam’s Club and Costco, Intuit bypasses distribution centers and instead delivers “direct to storefront.” In 1999 Intuit served 769 of a potential 5,571 storefronts directly. Challenges and the Future A major operational challenge in delivering physical products in response to retailer orders is the difficulty in accurately forecasting demand. Forecast error is expensive to Intuit. Under-forecasting is costly as relatively wide margins make lost sales translate into significant foregone profit. As is typical in the software industry, Intuit accepts returns of excess product from its retailers and distributors. As a result, over-forecasting is costly as well. “The variability in forecasting is very high,” said Dave Foster, Director of Supply Chain Management at Intuit. “Forecasting isn’t about being accurate. It’s about having a process in place to manage upside and downside.” Intuit is embarking on several initiatives to reduce supply chain inefficiencies and the associated costs of returns, lost sales, and excessive shipping costs. A future vision for Intuit is to have a rapid replenishment model facilitated by more direct relationships with its retailers. This direct-dominated model is characterized by direct-to-storefront delivery and vendor- or co-managed inventory (VMI /CMI), in which Intuit would play a collaborative role in determining the timing and size of replenishments. Intuit has explored VMI with Sam’s Club and CMI with Wal-Mart. Moving to direct-to-storefront delivery has a secondary benefit of meeting retailer’s demands for rapid, direct replenishment. Consolidation in the software retail industry has led to the emergence of progressive retailers who are more demanding with their suppliers in their ability to supply products. The pressure to rapid and direct replenishment has been mounting. At the same time “traditional distributors are becoming dinosaurs,” said Brian Fitzgerald, Vice-President of Operations at Intuit. 9
  10. 10. Intuit Inc. SGSCMF-002-2000 In spring 1999, Microsoft announced that it would enter the tax preparation software business, and in December 1999 it launched its TaxSaver product. In the past, TurboTax had faced competitors. For example, a competing product, TaxCut, had been around since the mid-1980s (in 1994 TaxCut was acquired by H&R Block). Nonetheless, Intuit maintained a 70% share of the market. Microsoft, however, represented a potentially significant threat. Fitzgerald described Microsoft’s typical business model as using a “scorched earth” policy. Fitzgerald anticipated that Microsoft would “throw a bunch of money at the channel … ship a ton of product, take 50% returns, and drop the price to try to take market share.” For the 1999 tax season Intuit cut its price of its basic TurboTax product $10 to $9.95 after a rebate. In the period up to March 5, 2000, Microsoft’s TaxSaver captured just 4% of the market while Intuit held its market share at 70%, according to PC Data. In late March, Microsoft announced it was dropping its tax preparation software line, and it signed a three-year software partnership with H&R Block. Fitzgerald anticipates that while the portion of Intuit’s electronic order fulfillment (via downloads or web-based applications) will increase rapidly, the physical portion will continue to be important. Thus, improvements in Intuit’s physical supply chain are still important and their success may help fund Intuit’s “digital future.” Migration to Services and Downloads From Products to Services Intuit began as a physical product company, with its shrink-wrapped Quicken, sold through distributors and retailers. In the most recent years, the company has started to shift to incorporate services in its offerings. The changes in order fulfillment and the products and services offered by FSG and ESG illustrate the migration at Intuit from physical product to digital product, and the more recent migration from products to services. Small Business Services Redmond, now Vice President, Internet Small Business Group (ISBG), sees the economics of a service-oriented business model as potentially very attractive to Intuit. Consumers make repeat purchases, and the potential for revenue is higher. “Someone buys a product once, and while we’d like people to upgrade as upgrades are released we can’t force that,” said Redmond. He went on to describe repeat service by saying, 10
  11. 11. Intuit Inc. SGSCMF-002-2000 It’s like cable TV. Once they are hooked up, they’re devoted and stay forever. If it’s too complicated to sign up, then it’s over. On the small business side, in addition to TTS, ESG offers an online Deluxe Payroll Service (DPS). Launched in the fall of 1998, DPS manages the responsibilities of tracking, preparing, filing, and depositing federal and state payroll taxes for customers. Intuit promises to file forms and payments accurately and on time, and provides a “No Penalties” guarantee — Intuit promises to pay any payroll tax penalties. In 1999, TTS had 400,000 customers, and while DPS’s base is smaller, it is growing rapidly. In October 1999, Intuit announced the QuickBooks Internet Gateway and commitments of several business-to-business e-services firms that could enable Intuit to deliver services through QuickBooks. Among the services provided are Site Solutions, which provides tools for businesses to create a web site which Intuit hosts; Merchant Account Service allows businesses to accept credit card payments in QuickBooks; through the US Postage Service businesses can purchase and print electronic postage from QuickBooks; and Direct Mail Service allows customers to produce and distribute direct mail from the web. Each service is provided through a partner company. Exhibit D provides detail about these partner companies. These contracts position Intuit to receive $68.5 million in committed payments over the next three years. The contracts for these alliances and services include placement fees and/or revenue sharing. In the future, Intuit plans to build and host its own services as well as expand the set of services offered by partner firms. Redmond describes ISBG’s objective as attaching recurring revenue services to the web and bringing buyers and sellers to the same place. “We have two million users using QuickBooks 10 to 20 hours a week, and that makes this a big portal that marketers would like to access,” said Redmond. As of 1998, all of Intuit’s primary products were available for purchase over the web. However, QuickBooks is too large to be downloaded given the current technological and bandwidth limitations. One possible approach Intuit is considering is to slice off the memory intensive video portion of QuickBooks, slim down the product to a downloadable core, and then release services through the year. This would involve a move from a traditional annual launch to a big release plus three or four smaller launches achieved through Marimba’s Castanet application distribution and management software. Castanet enables background download of new features and updates and is used in QuickBooks 2000. Consumer Services and Downloads On the consumer side, in 1995, the company added online banking and bill payment to Quicken. As of 1999, Intuit provided customer connectivity to more than 900 financial institutions and had nearly a quarter of all online banking users in the United States. 11
  12. 12. Intuit Inc. SGSCMF-002-2000 In 1994, Intuit introduced electronic filing as an integrated part of Turbo Tax, allowing users to file tax returns electronically. In 1999, more than 1.6 million TurboTax users filed electronically, representing 75% of all electronically filed returns received by the IRS. In 1997, Intuit introduced TurboTax for the Web, an online service for tax preparation and filing. A quarter of a million taxpayers prepared their tax return with TurboTax for the Web in 1999. In December 1999, Intuit offered TurboTax via download — the first time that a major Intuit product was offered electronically. In 1999, Intuit launched, a website designed for customers to find one-stop shopping for insurance and mortgages, as well as information and services to better invest and prepare taxes. In November 1999, Intuit launched My Accounts which allows consumers to personalize a web page so as to view and pay bills, manage multiple investment portfolios, and view credit card and bank account balances as well as transaction details. In the same month, Intuit announced a five-year agreement with America On Line (AOL) in which Intuit would be the exclusive integrated provider for bill tracking and payment services to AOL subscribers. Challenges in Moving to Services and the Internet While the challenges faced in the digital channel differ, there are similarities to those in the physical channel. Foster said: People think that once you go to downloading you don’t have to forecast. But it’s just a different kind of forecasting. Instead of forecasting physical units, you have to forecast systems capacity. Last year we processed three times as many electronically filed tax returns as the year before, and there were times when our systems ground to a halt. With its history of being a product-focus company, creating new services will be a big shift for Intuit. Shifting applications from the desktop to the web will require changes in customer behavior for Intuit’s existing customer base. Historically, Intuit had distinguished itself by providing free, lifetime technical support for its products. Given this past practice of suppressing the price of services, Intuit faces the question of how to ramp prices in a way that makes the economics of service provision attractive. Intuit offers services such as electronic tax filing for purchasers of TurboTax without additional charge. Intuit charges for services such as web site hosting at $9.95 per month after an initial free first six months. Quicken has a more than 70% share in the personal finance software market. Intuit has eliminated free phone support for the product for most calls and charges up to $3.90 per minute. Microsoft offers free phone support for its competitor product, Money. 12
  13. 13. Intuit Inc. SGSCMF-002-2000 With respect to the internet, Redmond points to two major challenges. The first challenge is internal: changing the Intuit mindset from being infrequent, product launch driven to being “broadly end-to-end.” Redmond elaborates: After launch you’re not done with service. There is a time element that’s introduced. There’s a degradation of service with lots of users and usage itself is dynamic. For most of our employees the mentality is “ship something and go have a party.” Now we have to watch 24/7 and that can be very tiring. The second challenge is external: competition. Since Intuit has dominated the markets in which it operates, there is the risk of taking eyes off competitors. Intuit’s history of being very customer-focused has meant that it at times has the potential to be less competitor- focused. With respect to the small business internet market, Redmond comments, “While we don’t have serious desktop competitors, if a new player comes along and provides the right mix of accounting, payroll, and other services, they can eat our lunch.” It is Redmond’s job to ensure that doesn’t happen. Intuit executives are confronting the question of how to protect and expand the company’s position in its transition from products to service and its move towards the web. Specifically, what more digitization can Intuit do for products? What more services can Intuit offer via the web? Should Intuit develop products and services in-house or serve as broker connecting service providers with customers? How would such developments benefit Intuit and its customers? What new alliances should the company form in expanding its service offerings? How would these developments affect the rest of the stakeholders (e.g., Intuit’s distribution channel, tax accountants, financial planners)? At the same time that Intuit moves toward embracing the internet, physical distribution continues to be an important part of its business. To what extent should Intuit devote resources to push improvements in its existing physical channel? How should Intuit manage its physical and digital distribution channels simultaneously and avoid the pitfalls associated with the classic channel conflict? 13
  14. 14. Intuit Inc. SGSCMF-002-2000 Exhibit A(i): Financial Statement INTUIT INC. GAAP CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (Unaudited) Twelve Months. Ended July 31, 1998 1999 Net revenue $592,736 $847,568 Costs and expenses: Cost of goods sold: Product 120,538 201,368 Amortization of purchased software and other 2,905 7,775 Customer service & technical support 117,714 130,759 Selling & marketing 164,834 191,628 Research & development 108,604 143,437 General & administrative 36,719 59,798 Charge for purchased research and development 53,800 -- Other acquisition costs, including amortization of 24,204 92,917 goodwill and purchased intangibles Total costs & expenses 629,318 827,682 Income (loss) from operations (36,582) 19,886 Interest and other income and expense, net 12,438 18,252 Realized gain/loss from marketable securities -- 579,211 Gain on disposal of business 4,321 -- Income (loss) before income taxes (19,823) 617,349 Income tax provision (benefit) (7,666) 240,800 Net income (loss) $(12,157) $376,549 14
  15. 15. Intuit Inc. SGSCMF-002-2000 Exhibit A(ii): Balance Sheet INTUIT INC. CONDENSED CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) July 31, July 31, 1998 1999 ASSETS: Current assets: Cash, cash equivalents and short-term investments $ 382,832 $ 823,430 Payroll tax deposits -- 131,148 Marketable securities 499,285 431,319 Accounts receivable, net 59,417 63,045 Deferred income taxes -- 64,925 Inventories 3,695 4,931 Prepaid expenses and other current assets 34,896 66,982 Total current assets 980,125 1,585,780 Property and equipment, net 69,413 108,851 Intangibles, net 85,797 98,004 Goodwill, net 285,793 382,888 Other assets 10,937 7,549 Investments 17,009 45,473 Restricted investments 28,516 36,028 Long-term deferred income taxes 21,006 63,675 Total assets $1,498,596 $2,328,248 LIABILITIES AND STOCKHOLDERS EQUITY: Current liabilities: Accounts payable $ 44,035 $ 63,003 Accrued compensation and related liabilities 23,728 37,414 Payroll tax obligations -- 131,148 Deferred revenue 58,560 65,994 Income taxes payable 3,044 146,847 Deferred income taxes 120,482 136,694 Other accrued liabilities 124,820 200,030 Total current liabilities 374,669 781,130 Long-term obligations 35,566 36,308 Stockholders’ equity 1,088,361 1,510,810 Total liabilities and stockholders’ equity $1,498,596 $2,328,248 15
  16. 16. Intuit Inc. SGSCMF-002-2000 Exhibit B: FSG’s Manual and Paper-based Order Fulfillment Process in 1995 1 FSG DATABASE Sales agent enters Printouts order data via phone Paper Copy of the Order prints out at Dataprint 3 Yes Produce@ DATAPRINT Dataprint? DATABASE Dataprint Dataprint Dataprint enters Plate Making 2 edits and separates Production order into enters orders via their entire zip code system order No HARLAND 4 5 DATABASE Harland Dataprint enters order Plate Making federal Harland Production edits enter into their expresses box of system orders daily to entire Harland order 16
  17. 17. Intuit Inc. SGSCMF-002-2000 Exhibit C: Simplified and Automated Order Fulfillment Process in 1999 BILLING Sales DATABASE Happy customers agent Bill customers enters order into COSMOS Direct to plate (Mail, (91% of volume) Fax, Phone) Electronic media COSMOS Plate Making FRONT COSMOS HARLAND N Production o END DATABASE SYSTEM (9% on-dire fv c olu t-to me -pl ) at e Rejects Paper Copy of Intuit- the Order Harland prints has to do out at some Harland minor edits Harland re- enters order 17
  18. 18. Intuit Inc. SGSCMF-002-2000 Exhibit D: QuickBooks Internet Gateway Partner Company Descriptions1 ELetter, Inc. ELetter is a market-leading, Internet-based postal mailing solution for direct mail and corporate communication. ELetter manages all aspects of a business mailing—from production to distribution—from the desktop, in a fraction of the time and effort it takes for companies to do it manually. QuickBooks users will simply upload addresses and mail content, and ELetter's fully automated system will quickly and efficiently produce and mail their letters, postcards and booklets worldwide. E-Stamp Corp. E-Stamp Corporation, the first company to sell postage commercially over the Internet, provides an easy and convenient way for small businesses to buy, download and print postage directly from their desktop. One of E- Stamp's key strengths is its strong integration with popular applications such as QuickBooks. The E-Stamp solution enables users to quickly and easily print stamps directly onto envelops, labels or documents using standard laser or inkjet printers, 24 hours a day, seven days a week—without being connected to the Internet. First Sierra First Sierra is an Internet leader in business-to-business e-finance lending, Financial, Inc. having funded more than $2 billion in loans through its electronic fulfillment platform. Development of this leading end-to-end business loan automation process has allowed First Sierra to reduce approval times to as little as two minutes and disperse funds in as little as 24 hours. Through this alliance, Intuit will offer First Sierra's LeasingOnline product and Working Capital Financing product, providing millions of qualifying small business customers with online access to lease financing for specific equipment purchases and working capital loans for general business purposes. Intelisys Intelisys is a leading provider of Internet-based business-to-business e- Electronic commerce solutions for companies of all sizes. Through Intelisys Commerce, QuickBooks users will have unprecedented buying power and will be able to L.L.C. enjoy online purchasing benefits including discount pricing, online comparison shopping, and administrative control of the purchasing process. StorageTek Safeguard Interactive Backup services, powered by StorageTek, provide enhanced data security with QuickBooks data file backup via the Internet. Customers can backup their QuickBooks data file or entire computer files to a remote, secure data storage center using the Safeguard Interactive Backup software. All data transmissions are compressed and encrypted. Signio, Inc. Signio provides a robust e-commerce payment service for online merchants, merchant aggregators, auctions sites and e-business buyer and seller communities. Signio's platform offers integrated payment services for real 1 Company summaries excerpted from October 20, 1999 Intuit Press Release. 18
  19. 19. Intuit Inc. SGSCMF-002-2000 time credit card authorization, debit card, purchase cards, and Internet checking for a flat monthly fee. Automated Clearinghouse (ACH) transactions are also available through the Signio platform. Connected to a broad range of payment processors, the Signio service has been pre- integrated with most e-commerce applications solutions, making it easy to deploy. Unlike other HTTP based payment solutions, Signio's TCP/IP based service provides fast response time and guarantees the completion of payments. This alliance enables QuickBooks users to accept credit card payments through participating merchant banks. is the first online service to provide small businesses with the essential sales tools to help small businesses manage customers, prospects and sales teams more effectively and efficiently. The company has turned the concept of ASP (Application Service Provider) into a unique "App-on- Tap" by making the service simple, instantly available, and free for the first 10 users. The hosted, secure service enables small companies to manage their sales process, all in one browser-based solution: contact management, time and customer management, built-in communications, forecasting, and web monitoring for breaking news. Wells Fargo An alliance between Wells Fargo Bank and First Data Merchant Services Merchant Corporation, Wells Fargo Merchant Services provides access to the Services technology that enables QuickBooks small business users to complete a paperless, one-click online application for a merchant account so that a small business can begin to accept credit card transactions almost immediately. Wells Fargo The nation's leading Internet bank, Wells Fargo & Company is an innovator & Company in small business e-commerce enablement. Beginning in February 1995, Wells Fargo was one of the first banks in the U.S. to make secured online credit card payment available to merchants, and currently processes payments for over 100,000 merchants across the U.S. First Data Corp. First Data Merchant Services Corp. is a wholly-owned subsidiary of First Data Corp. (NYSE: FDC). As the leader in electronic commerce and payment services, Atlanta-based First Data serves more than two million merchant locations, 1,400 card issuers and millions of consumers, making it easier, faster and more secure for people and businesses to buy goods and services. 19