Juiced

By Julia King and Gary H. Anthes
(Nov. 20, 2000) Wall Street analysts and oil industry executives were thick 
among the legion of skeptics who thought Enron Corp. President and Chief 
Operating Officer Jeff Skilling was nuts to launch a Web site for the trading 
of natural gas and electricity over the Internet. 
That was last November, before EnronOnline locked up more than $120 billion 
in transactions in its first few months of operation, quickly establishing 
itself as the world's largest e-commerce company. As of Oct. 11, just prior 
to Enron's report of its third-quarter earnings, EnronOnline had executed 
more than 350,000 transactions, representing a gross value of $183 billion. 
Since then, the $40 billion Houston-based energy giant has elbowed its way 
into several new diversified markets. And it plans to continue its push into 
many more, ranging from railcar cargo space to broadband networking and 
data-storage capacity. 
In doing so, Enron is turbocharging its transformation from a stodgy, 
old-line fuel company to an entirely new kind of business-to-business market 
maker, with information technology and an all-out emphasis on 
entrepreneurship at the heart of its New Economy operations. Enron has been 
so successful in leveraging IT to pioneer new markets that others are trying 
to emulate its approach. 







First to Market 
"Enron often introduces a product before the competition even senses a market 
exists," the company says in its latest annual report. A prime example: 
online trading of data-network capacity. 
Indeed, "there's a low degree of awareness [among carriers] about the 
bandwidth-trading business," and Enron is ahead of the game, says Seth Libby, 
an analyst at The Yankee Group in Boston. 
At present, there are only a handful of network professionals who are aware 
of these capacity commoditization plans, says Libby. But not for long, 
asserts Enron President?? Jeff Skilling. "Within five years, the bandwidth 
market may be bigger than the gas and electric markets," he says. "So for us, 
it could be as big as the rest of our existing energy business." That's 
currently a $35 billion business. 
But critics say trading bandwidth is much more complicated than trading gas, 
especially for a company with little depth in telecommunications. And critics 
add that although carriers stand to benefit from the ability to buy and sell 
capacity, they might prefer to do it through some channel that's independent 
of the control of a single market maker like Enron. 
"Enron's argument is that its trading capabilities are the differentiator, 
and that it need not have deep telecom expertise," says Lisa Pierce, an 
analyst at Giga Information Group in Stamford, Conn. "But I'm not convinced 
it's that simple. Technology isn't a long-term competitive differentiator." 
Houston-based Enron Broadband Services Inc., formed last year, offers IP 
transport on its 15,000-mile fiber-optic network. Enron Broadband Services 
also trades - that is, makes a market by buying and selling - network 
capacity to and from other data carriers, conducting some of the transactions 
on EnronOnline. 
Enron Broadband Services also offers content-oriented services, such as a 
video-on-demand service it will market with Dallas-based Blockbuster Inc. to 
home viewers starting next month. 
"When we started the gas business, they told us we were nuts," Skilling says. 
"They said, 'You're going to sell gas but not own production? How does that 
work?' Then we did electricity and they said we were nuts again, and even 
louder than before. They said this stuff moves at the speed of light; you can 
never create a market. Then in telecommunications, they said we were nuts 
again." 
Despite its share of skeptics, some experts like Enron's prospects in this 
space. "I think aspects of this have the potential to be very big," says 
Libby. "The carriers like the idea of instantaneous provisioning. And I think 
it has a lot of potential [for] . . . selling it to businesses and giving 
them the ability to cut their costs significantly by buying it as they need 
it." 





"We aspire to that kind of model," says Fred Buehler, director of electronic 
business at Eastman Chemical Co. in Kingsport, Tenn. 
"In every sector, there will be one or two innovators who get out front and 
do things differently to create shareholder value," Buehler says. "We're 
trying to be one of them." 
Market Maker 
Stroll through the gas-trading section on the 32nd floor of Enron's 
glistening 50-story headquarters, and the company's technological 
sophistication is immediately evident. Traders like 26-year-old John Arnold, 
who personally executes about $1 billion per day in trades, have real-time 
access to virtually any information that might affect their split-second 
buy-and-sell decisions. 
That information might be a meteorologist's prediction of a 
colder-than-normal winter across the Plains states or a live news report of 
political instability in an oil-producing country in the Middle East. 
Behind the scenes, all of Arnold's trades are instantly analyzed and 
processed by a sophisticated, proprietary risk-management system and then 
updated across multiple back-end computer systems worldwide. Less than a year 
after launching the operation, 60% of the world's gas is traded on 
EnronOnline. 
"What we are doing, no one in the industry did 10 years ago. Eighty percent 
of our income this year is from businesses that didn't exist 10 years ago," 
says Skilling. 
For example, EnronOnline contributed heavily to its parent company's 
third-quarter earnings, which were up 31% to $292 million, compared with the 
same period last year. 
"The change is technology-driven," Skilling adds. "We couldn't do what we do 
without massive amounts of computing capability." In this regard, Enron joins 
a short list of companies that includes Wal-Mart Stores Inc., FedEx Corp. and 
American Airlines Inc., which famously pioneered various mission-critical IT 
techniques to leapfrog competitors and create a whole new class of IT-enabled 
industry leaders. 
Among Enron's boldest ideas is its use of a single, powerful software-based 
trading platform to insert itself as a principal buyer or seller in hundreds 
of different markets. Currently, Enron trades more than 1,000 different 
commodities, such as gold, natural gas and metals, on EnronOnline. 
"The core of our business is our business model, which is a centralized 
risk-management and market-making business model. It just so happens that the 
Internet is just perfect for improving the efficiency of that model," 
Skilling says. 
But as a market maker, EnronOnline stands alone. For starters, unlike most 
other Internet marketplaces, it's free. There are no transaction fees or 
catalog, inventory or subscription costs for users. 
"Enron has broken away from the pack in the last year, in terms of their 
capital growth," says Ian Wylie, vice president of e-business at BP Amoco PLC 
in London. "And e-business is responsible for a lot of this change." 
Even more unusual is Enron's role as a principal in each transaction. That 
means Enron is either the buyer or seller in every trade in which it's 
involved, unlike market makers that simply act as matchmakers between buyers 
and sellers. 
In fact, Skilling, as well as Mike McConnell, who heads EnronOnline's global 
expansion efforts as president and CEO of Enron Global Markets LLC, dismisses 
much of the current hyperactivity surrounding other fee-based 
business-to-business exchanges as a flash in the pan. 
"[Many of the] B2B guys think all you have to do is set up a bulletin board 
and people will start transacting, but it doesn't work that way," Skilling 
says. "You need to know you can deliver if push comes to shove." 
As either the seller or buyer in all of its trades, Enron, an established 
brand name with 32,000 miles of pipeline and deep financial pockets, 
guarantees delivery or payment on all trades that are executed on 
EnronOnline. 
"We're creating markets that were highly illiquid, so someone has to put 
their reputation on the line to say, 'We'll deliver,' " Skilling says. 
But guaranteeing delivery also requires having guaranteed access to physical 
assets such as network bandwidth and papermaking plants. Guaranteed access 
also ensures marketplace liquidity. For Enron, this is where the bricks and 
mortar come in. 
For example, to help drive its liquidity in the pulp and paper market, Enron 
paid $72 million in July for Garden State Paper Co., a recycled-newsprint 
mill in Garfield, N.J. 
Skilling's current market fancy is metals, and in May, Enron bought MG PLC, a 
London-based metals marketer. "You have to break the liquidity logjam, and to 
do that, you have to take a risk position," Skilling says. 
But once the logjam is cleared, Enron is just as likely to sell off the 
brick-and-mortar assets it acquired and use the cash to invest in new 
business. 
For example, to finance its new bandwidth-trading operation, Enron is selling 
Portland General Electric Co., a Portland, Ore.-based power producer that it 
bought in 1997, so it could bring liquidity to and guarantee trades in the 
online electricity market. 
Eventually, Enron may end up trading commodities that aren't even considered 
commodities - at least not at the moment - such as data storage capacity or 
empty railcar space. 
"Might we move into sauces or meats or grains? Potentially," says McConnell, 
who was Enron's de facto CIO before moving into his current role. 
"You have to be creative every day," McConnell says. "You have to be 
open-minded to trying new things." 
But what remains constant throughout all the upsizing and downsizing is 
Enron's core IT-enabled business model, which is what puts it in a class of 
its own, analysts say. 
"People have talked a lot about systems that they're about to roll out, but 
there is just not much out there for direct trading," says Mike Heim, an 
energy analyst at A.G. Edwards & Sons Inc. in St. Louis. "Enron rolled out 
its technology 10 months ago, and still there isn't much else out there. 
There hasn't been much competition [because] there isn't anybody in the same 
class." 
But just last month, Houston-based Dynegy Inc. launched Dynegydirect, an 
Internet-based, commission-free trading site for energy and communications 
commodities. 
Also last month, IntercontinentalExchange in Atlanta, whose partners include 
BP Amoco and The Hague-based Royal Dutch/Shell Group, added natural gas and 
power to its online trading system, which already included precious metals 
and crude oil. 
Skilling doesn't get called "nuts" much anymore. In fact, he's a darling on 
Wall Street, where Enron's stock has soared from around $40 per share last 
November to $81 as of this Nov. 2. As a result, Enron - by all accounts, an 
Old Economy gas pipeline company until 12 months ago - is widely regarded as 
a New Economy pioneer. 
Says Skilling, "We like to say we were B2B before there was B2B." 

Thriving On the Unconventional 
As head of two Enron pipeline subsidiaries, Mike McConnell knew a lot more 
about gas flows than he did about data flows last year when he got a surprise 
call from Enron President and Chief Operating Officer Jeff Skilling. 
Recalls McConnell, "Jeff went into this whole thought process about how the 
Internet is changing everything. He said, 'We need to make Enron an 
e-business, and I need a guy that can run this as a business. We need to 
change the way we view technology.' 
"I thought he was a little crazy and I said, 'Jeff, I'm not a technology 
person at all,' He said, 'No, seriously - this is going to be big.' So I took 
over as CEO of Enron Global Technology," and thus became the company's de 
facto CIO, McConnell explains. 
Appointing a person with no technology background to the top IT post is an 
unusual move. But Enron often defies convention and typically thrives as a 
result. Indeed, Enron boasts an entrepreneurial culture that's unusual in 
large, long-established companies, and in utilities firms in particular. 
McConnell relates the tale of how 29-year-old Louise Kitchen, Enron's head 
gas trader in Europe, spearheaded the creation of an online gas-trading 
system, recruiting IT people from elsewhere in the company to do the 
development work. Word of the Web-based platform, EnronOnline, which is 
literally remaking the company, didn't reach top management until a few weeks 
before it went live. 
Kitchen enlisted the support of Enron's initially skeptical top traders, and 
she scoured the company for software developers and other experts. Her small 
army of volunteers worked nights and weekends on the project while carrying 
on with their regular jobs. 
"It's an amazing story about not getting corporate approval and going through 
all the bureaucracy," McConnell says. "No one went to the board and said, 'We 
want to change the way we trade.' You just do it." 
Glowing Endorsement 
Soon after McConnell became the de facto CIO of the $40 billion energy 
company, he joined eight of Sun Microsystems Inc.'s top Houston customers at 
a breakfast hosted by Sun CEO Scott McNealy. 
"I was very nervous," recalls McConnell, 40. "I mean, McNealy is the guy, and 
here I know nothing about technology. I'd been on the job maybe two weeks." 
McNealy asked the attendees - all but McConnell were middle-aged CIOs with 
many years of IT experience - to introduce themselves in turn. 
"When Scott came to me, I said, 'I'm the CEO of Global Technology, and we 
want to be the leader in B2B commerce in the world.' He kind of sat back and 
said, 'How long have you been in the IT business?' " McConnell explains. " 
'About nine days,' I said, 'and we are going to take a little bit different 
approach to technology.' Scott chuckled and said, 'That sounds like Enron; it 
always looks at things differently.' He then stated that my CEO title and 
Enron's approach were very unusual but that it would be more commonplace 
soon, as this was the way of the future." 
McConnell says McNealy's endorsement had "a huge impact" on how he structured 
IT at Enron during the following year. 
"I realized that we weren't too late to change our approach and take a 
commercial view of technology," he says - a view of IT as an integral part of 
the business, not as something that supports business functions. "None of the 
other companies were thinking our new way at all." 
Taking a commercial view of IT has led to a blurring of the line that 
traditionally separates IT organizations from the business units they 
support. When McConnell became CEO of Global Technology, Enron had five CIOs 
who were predominantly operating independently inside the company's major 
lines of business. 
"Each CIO had his own agenda, his own thought process, his own goals, and 
they did not communicate at all," he says. 
McConnell established corporate standards for IT, created a management team 
that included the five CIOs and put all IT people under a new chief 
technology officer, Philippe Bibi. 
But IT is far from centralized at Enron. "We wanted to make people think 
about technology not as IT and support, but as an extension of your 
business," he explains. "So we seeded people out into the business units. 
[IT] directs the performance review process, but the business units have the 
greatest influence on where the person actually ranks and is rated." 
Firms like Enron that merge IT departments with the business units they serve 
will be the winners among fast-paced e-businesses, says IT organization 
expert Robert Zawacki, president of Zawacki and Associates in Colorado 
Springs and a professor emeritus at the University of Colorado, also in 
Colorado Springs. "We need more entrepreneurial leaders in IT, and 
[McConnell] is certainly one," he says. 
IT makes it easier to be entrepreneurial, says McConnell, who is now 
president and CEO of Enron Global Markets. "We really do like to try things 
and see what happens, and when you have an electronic platform like 
[EnronOnline] that we can model into different sectors, it's very inexpensive 
to try it. We are not afraid; if it's not working, we'll just stop." - Gary 
H. Anthes and Julia King