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CBI Plan - Value Focused Reengineering - VFR News
You could soon be earmarking almost a quarter of your company's revenues for IT. So you better start treating technology like the strategic investment it is.
But Eastman Chemical—and other low-margin commodity-based industries—are heading toward the same technology spending binge that transformed telecom and financial services from sleepy, bureaucratic order-takers into diversified, technology-based service companies. The Kingsport, Tenn., chemical company has created a venture capital fund to invest in software businesses and is taking major positions in two companies that will use the same technologies—supply chains and Web-based customer services—that are important to both financial services and telecom. Through these two efforts, Eastman is simply looking for the same payback from technology that financial services and telecom now enjoy. But before that happens, mainstream industries like chemicals are going to have to endure the massive structural changes and corporate upheaval that have become a way of life in leading businesses during the past 10 years. As these bellwether industries discovered, spending big on technology triggers big changes in business models. Bringing the turnaround time for a stock trade down from days to seconds has meant rebuilding the old brokerage houses and their ways of operating from scratch. Radically changing the percentage of money allocated to IS in mainstream companies will spark a similarly exponential change in the way those companies are organized and how they do business, says Howard Rubin, executive vice president of Meta Group in Stamford, Conn. "This is going to require massive cultural change," he says. Sound scary? It is. Such an upheaval will push brick-and-mortar companies to their limits. Indeed, many Fortune 500 companies already feel the effects. Only recently have CEOs begun to appreciate the impact of technology on their businesses. They have resisted spending money on IT for years because it was a tool that typically cost—but rarely made—lots of money. Instead, IT was viewed as a way to help the accounting departments keep better records or work faster, but the business could survive without it. The Internet is the first technology to change that perception. If you sell on the Internet, you are completely dependent on technology. No Internet, no servers, no business. Technology has never held that kind of sway before, and the opinion numbers show it. In 1998, only 55 percent of CEOs said that "technology decisions were an integral part of the decision making process." Today that number is 97 percent, according to a worldwide survey by the Chicago-based consultancy A.T. Kearney of more than 250 CEOs last year. Clearly, CEOs have made an attitude adjustment. But their spending habits have not yet caught up. Companies today spend an average of only 5 percent of their revenues on technology, according to Gartner Group in Stamford, Conn. And even technology bulls have failed to keep up with the dotcom startups, which pour 30 percent to 40 percent of revenues into technology after the second year of existence. Though dotcoms may not seem like blueprints for anything but disaster right now, the problem has never been with their levels of technology spending. Indeed, the dotcoms' focus on cheap, efficient technology led Wall Street to value them highly in the first place. Gartner predicts that by 2005, technology spending across all industries in North America will rise to an average of 10 percent of revenues, with industry leaders spending significantly more than that. Clearly, technology can no longer be viewed simply as a cost to be controlled. CEOs will have to relearn everything they know about technology budgeting and turn their pockets inside out to bring technology outlays up to the same level as spending on new products, new businesses and new markets. Doing so will require a methodical campaign of education to sweep away the perception that IT is a cost center. Everyone, not just the CEO, needs to be convinced that technology is a critical component of business success. The IS department must also radically transform itself to fit this elevated role (see "Death-Defying Leap," January 2001). Otherwise, the company will drag its feet on necessary technology investments. Bottom line: Technology spending could become a bet-the-business proposition for many companies. Here are some practical steps that you can take to make sure your company's spending spree won't be a crippling one. COMPARE I.T. SPENDING with an industry you'll look like in the future. Executives at Eastman Chemical are pushing for a transition. They want to take the company from a pure manufacturing company to a service organization. To help make that happen, they need to look outside their own industry for cues on technology strategies and spending levels. Making these cross-industry analogies is how Gartner Group analyst Kurt Potter helps his clients get comfortable with big shifts in technology strategy. "To predict what you will spend on IT, figure out what industry you will look like in the future," says Potter, who is research director for Gartner's Management Strategies & Directions Service. One model for Eastman to consider is The Vanguard Group, the Valley Forge, Penn.-based mutual fund company. In 1986, Vanguard spent 12 percent of its operating budget on IT. In 2000, it will spend 42 percent, says Vanguard CIO Bob DiStefano. In those 14 years, Vanguard has gone from the ninth- to the second-largest mutual fund in terms of assets managed. Along the way, DiStefano's company has endured a transformation that he sees coming for many other industries. The first change is in access. Vanguard's customers have demanded 24-hour phone access to accounts across an increasing number of different channels—online, phone and e-mail. The second change has been breadth of services. Says DiStefano, "The question we've been asking ourselves since 1986 is, 'Do we want our product sold through other companies, or do we want to try to own the entire customer relationship ourselves?'" To grow in the mutual fund business, you have to choose the latter, he says. So Vanguard has pulled together an entire range of financial products, all of them technology based. Why? Such products as brokerage services, 401(k) programs, increased financial advisory services and aggregated financial record keeping are all cheaper to provide online, he says. "After 14 years, we wouldn't be spending 42 percent of our operating budget on technology if the business and customers didn't like what they were getting. Technology has proven to be the most cost-effective way to expand our services and give customers better access to their accounts." THINK OF THE I.T DEPARTMENT as an investment, not a cost center. Companies that plan and budget technology spending with a traditional view toward controlling costs will not be able to keep up with competitors that are willing to spend more creatively, says Rubin. Think diversification, he says, using the metaphor of a personal financial portfolio to describe how companies should begin budgeting their IT money. "Fear of spending comes from the traditional view of IT as a cost center. If you begin to think of IT as an investment rather than a cost, it doesn't feel wrong to spend more. By doing so, you focus on the benefits rather than the cost drain." It's important, however, to create a balanced portfolio of safe investments that have low risk and steady return (an efficient, Internet-based network, for example) and riskier assets (such as an electronic commerce website) that have a higher potential for disaster but also offer potential new revenue for the company. Understanding the costs, risks and rewards of a customer relationship management—or CRM—software project, for example, clarifies the budget decision for the business. Doing so allows IT to put the costs for that project where they belong: in the specific profit and loss statements of the business units that will use the software. Too often, projects created and funded by IS fail to get busy business executives' attention and commitment. They see the project as IS's responsibility, not theirs. As a result, they don't provide the necessary staff and input needed to make sure the software fits their business needs. Unfortunately, when the software project stumbles—and it will—the responsibility for that lies with IS too. If the business has no good reason to get involved at the beginning, it certainly won't want to get involved when the project is a potential career ender. But if the CIO can pull project components—hardware, software, consulting, staff time, maintenance and support—out of the overall IT budget and assign them to the P&Ls of individual business units that will benefit from the project, the business executives will be forced to pay attention. GET BUSINESS EXECUTIVES to lead technology projects. "Someone on the business side needs to own technology," says Gartner Group's Potter. "Companies need to do continuous cost/benefit analysis on IT projects, and businesspeople are the ones best suited to do that. They are the ones responsible for profit and loss." They will also be more likely to pressure IS to make the project successful. At Vanguard, business units don't just pay for their software, they must also provide a senior executive to help lead the project full time. "You have to demand passionate sponsorship from the business," says Vanguard's DiStefano. "You can't leave it to the techies because they may not be connected well enough to the business to know what they should be providing. If the business units pull a senior person off the line to do the project, we know they are serious about it." REORGANIZE THE I.T. DEPARTMENT into a technology services department. If business units begin to take more responsibility for the fate of technology projects, they will need good advice. Trouble is, "IT organizations are spending so much time supporting the day-to-day systems and end users that it sucks up their resources," says Christine Gattenio, director of sales at research company Hackett Benchmarking & Research in Hudson, Ohio. IT departments must broaden their reach beyond simply maintaining the status quo. They need to act a little bit like an outsourcer and a little like a consultant. The way Avery Cloud sees it, in-house IT departments have many advantages over consultancies. "I don't have marketing costs," says the CIO at Integris Health in Oklahoma City, "I don't need a sales force, and I sit in on all the business strategy meetings," he says. "I should be able to offer services more effectively and more cheaply than outside companies." Cloud thinks his best hope of providing effective services to internal customers—ranging from hospitals to hospices—is to make his corporate IT group look and act like a Big Five consultancy. He spent a year researching what it cost him to provide strategic consulting, project management services and system maintenance. His staff bills an hourly rate for everything they do that requires more than four hours. Then Cloud sends the vice presidents of the business units a monthly report that shows the time and charges for each of their projects. He also charges each business unit separately for overhead costs (software and infrastructure support), PCs and direct charges (installing a T1 Internet line, for example). To soften the blow to the business units, Cloud's bills for the past six months have been for show only. He won't begin charging anyone until this June. "I'm already getting resistance," he says, "but it's a harmless fight right now, because no one's paying. I'm working through those fights without having economic angst feed into them. By the time we turn it on, we should have worked through all the kinks." And Integris's line business executives will have an exact idea of what IT contributes to the business. THE CIO SHOULD REPORT directly to the CEO. The quickest, easiest way to begin the shift to strategic IT spending is to create a direct line from IT to the CEO. That's what happened at Eastman Chemical last year when CIO Roger Mowen—whose background at the company is in sales and marketing—assumed the role of directing the company's e-commerce efforts. He eventually became CIO, reporting to the CEO. "We're an asset-intensive industry, and we've traditionally looked at technology as a cost," he says. "My proposition is that technology is an integral part of business today and should be represented at the table when deciding strategy, products and services to customers." TURN I.S. INTO AN OUTSOURCING watchdog. Gartner Group's figures show that the average support cost for a typical business consumer of IT resources has gone up nearly $2,000 per person since last year, mostly because of the surge in e-business and an increase in the number of employees who use computers. Staffing up to cover this dramatic increase in demand will be tough, given the chronic shortage of good IT staff. That means outsourcing. As one of the business executives at Partners HealthCare System in Boston who helps form technology strategy, Jay Pieper, vice president for corporate development and treasury affairs, always asks a couple of questions about outsourcing when IT staffers suggest a new project. "When we have an IT budget meeting, what's walked into the room are the additions," says Pieper. "But if you are going to raise the budget, part of the issue is what you are not going to spend money on. If IT wants money for PCs on everyone's desk, is there a rational way you will get rid of some mainframes or minis on the way from here to there?" If, for example, a new software implementation project will render an old system obsolete in two or three years, Pieper asks whether IT plans to outsource the legacy system right then, rather than waiting until the new project is completed. "Besides reducing the workload for your own staff, it makes the scheduling easier for bringing the new system up and the old one down," he says. Despite its potential for freeing up IT staff, outsourcing tends to focus on getting rid of existing systems rather than adding new ones. E-commerce, on the other hand, is a race to make smart investments in new technology. Any productivity gains from outsourcing support for old systems will be quickly sucked up by new Internet projects. Rather than becoming a bottleneck for the business's technology aspirations, the IS function needs to push the buying capability and responsibility out into the individual business units that will actually use the stuff. But for a peaceful handoff of power to occur, businesspeople can't be left with the responsibility for figuring out what will be required to support new technology—how many routers and servers will be needed, for example. And IT can't be stuck with providing all the resources to support the new applications. More and more, companies will approach the technology buying decision with the assumption that applications, infrastructure, and maintenance and support will be outsourced right from the start. Businesspeople will shop for services—customer support or supplier management, for example—and IT will be a watchdog for making sure the services have adequate technology support behind them. The application service provider (ASP) market is the first incarnation of this kind of co-op buying decision involving business and IT (see "When a Stranger Calls," June/July 2000). In return for a monthly fee, ASPs provide the necessary applications, infrastructure and software maintenance to support a business service, such as customer service or HR benefits management, for example. ASPs sell directly to businesspeople, with IT acting in an advisory role on issues such as technology scalability and security. The ASP market is nascent and unstable, but the application rental concept is here to stay. Joint ownership of technology spending by IT and businesspeople shouldn't be painful. After all, owning IT can't be much worse than owning any other asset these days, says Eastman Chemical's Mowen. "We have $6.5 billion in assets and $3.5 billion in market cap so there's some indication that the market doesn't value what we've built up over the last 30 years," he says. Shedding hard assets like warehouses and manufacturing plants for a network of contract manufacturing has enabled San Jose, Calif.-based Cisco Systems to achieve world-beating productivity levels. In 1999, Cisco brought in nearly $713,000 per employee, compared with the Fortune 500 average of about $192,000, according to AMR Research, a Boston-based research company. Because 90 percent of its orders come through its website and 50 percent of those orders never touch the hands of a Cisco employee, Cisco claims it has reduced the administrative overhead for processing each order from $100 to between $5 and $6. The question for the rest of the Fortune 500 is not whether they should spend significantly more on technology but rather how to ramp up technology spending quickly and wisely. Those that can use technology to transform their business practices and supply chains like the way Cisco did will become industry leaders. To do so, IT staff and businesspeople will need to forge a new partnership that alters the way they budget their IT dollars. If non-IT executives become more responsible for technology spending—and IT executives are elevated to a peer adviser role rather than a subservient service function—companies will have the basic decision-making structure they need to transform themselves quickly and effectively. --by Christopher Koch Executive Editor Christopher Koch can't imagine spending 30 percent of his own revenue on IT. But if you can, he'd love to hear from you. Contact him at ckoch@darwinmag.com. |
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