Sticking fast to plan

A year-end surge in technology spending? Forget it. Ditto for the launch of big, competitive game-changing IT projects.

The reality is that as companies move into the second half of a year marked by depressed revenues, shrinking profit margins and massive layoffs, CIOs are sticking close to the strategic plan. And above all else, the plan calls for cutting costs - then going back and cutting them again.

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For IT, the top budget priorities are projects aimed at creating common systems and cookie-cutter business processes that will shrink ongoing labor, maintenance and support costs. Better integration of existing systems, automating administrative tasks, such as expense reporting, and inserting self-service capabilities wherever possible are also key spending themes for the second half of this year. So are outsourcing and adopting common systems.

Conspicuously absent from second-half IT budgets are any and all surprises.

In a May survey of 369 CIOs conducted by Stamford, Conn.-based Gartner Inc. and New York-based The Goldman Sachs Group Inc., 89% of respondents said they anticipate a modest economic recovery by year's end. Yet they also remain obstinate about spending according to previously set plans: Regardless of month-to-month dips or upticks in the economy, 78% of the CIOs said they won't change how they intend to spend their budgets this year.

Cutting Costs Carefully

"The economy has caused us to do a lot of things in IT to manage costs better," says Jerry Hale, CIO at Eastman Chemical Co. in Kingsport, Tenn. "We'll spend as much as 10% less this year [compared with 2001], but hopefully, it will be without losing much capability at all."

Eastman plans to save money by first slashing labor costs. On average, salaries make up 42% of corporate IT budgets, with costs growing by 3% to 4% this year, according to a March poll of 75 CIOs by New York-based Merrill Lynch & Co. IT salaries are also frequently higher than other non-IT salaries, although the gap is narrowing, according to Meta Group Inc. in Stamford, Conn.

Last year, 68% of 250 companies surveyed by Meta reported IT salaries that were 11% to 20% higher than other staff salaries. This year, the percentage of companies paying that much more to IT staffers dropped to 46%. However, the percentage of companies paying IT salaries that are 6% to 10% higher than other salaries increased from 14% in 2001 to 35% this year.

"We're trying to select the lowest-cost skill set that can meet our needs," Hale says. "Consequently, we're using an offshore [labor] model more extensively" for e-commerce, application development and programming related to Eastman's SAP R/3 enterprise software. He estimates that 40% of Eastman's IT workforce is made up of contractors this year.

During the next six months, Eastman will focus on standardizing its e-commerce capabilities in Brazil, Germany and China. Thanks to centralized management of the company's business-to-business commerce portal, customers in those countries will be able to tap into the same product catalog and ordering system as all customers worldwide. Maintaining a single system keeps a lid on development and support costs, according to Hale.

During the third quarter, Eastman also plans to integrate two of six recently acquired companies into its R/3 system. The other four have already been assimilated. "Improving our cost structure and margins are why we're doing all of this," Hale says.

Gaylord Entertainment Co., which operates a chain of hotels catering to the convention industry, went through a "painful" downsizing of its IT staff in October, says CIO Kent Fourman. In the next six months, the Nashville-based company is looking to squeeze operational costs by consolidating and replacing scattered sales and catering applications with a single system. This will give executives a common lens to view all Gaylord properties and get one financial picture of the entire corporation.

This summer, Gaylord will also build and launch a single customer and marketing information database that can be leveraged by all of its hotels. The common database and processes will enable the company to more effectively market its properties to convention groups, which Gaylord hopes to rotate through its different hotel locations from year to year.

For example, if members of the Chicago-based American Medical Association met at Gaylord's Florida hotel this year, the company could market its Tennessee property to the group for next year. Two different hotels and locations for the conventioneers, but the business stays with Gaylord.

"The whole concept is to lock in customers by giving them a good and easy experience with a single hotelier. Common systems let us do that," Fourman says. "We've also done a lot of ROI [analysis] on it and found that if we can move the top line by one-half or 1%, the returns [in cost savings] are significant."

'Flight to Quality'

The Eastman and Gaylord cases illustrate what Meta analyst Howard Rubin characterizes as companies' "flight to quality" in tough economic times. That means providing better products and services by creating efficiencies within existing systems, rather than buying or building new ones.

"What we're seeing now is companies investing in things that help them run their businesses better. They're going back to process efficiency and optimization," Rubin says. "In sectors that look tight in terms of revenue, companies will stay very close to home in their investments, with the big emphasis on squeezing out costs."

At Limited Technology Services Inc. (LTS), the IT arm of Columbus, Ohio-based retailer Limited Brands Inc., whose brands include Bath & Body Works, Express and Victoria's Secret, the drive toward common systems and process optimization began more than a year ago. Despite the economic downturn, that remains LTS's top budget priority for the rest of this year.

"Implementing common systems across brands applies to hardware and software. It's important because it gets us to a point where economies of scale begin to pay off" with labor costs, says Jon Ricker, president and chief technology officer at LTS.

"Common systems allow us to become very expert on a much smaller subset of systems, which increases our bench strength in terms of head count," Ricker says. "If I've got 100 developers and 100 applications, I basically have one person per application. If I have 100 developers and 10 applications, I can have 10 people deep in each application."

The bottom line: "The fewer systems we have, the less complexity there is, so the more specialized we can be with services and support," Ricker says.

Simplifying Infrastructure

Whether or not a new system can be applied across different business units is the litmus test for any project getting the green light at Reliant Energy Inc., a $38 billion, Houston-based corporation whose regulated business includes three gas companies.

"Three different systems means more costs," says CIO Ianthe McCrea. In fact, the cost savings associated with common systems are so compelling that one of McCrea's second-half priorities is linking one last business unit into Reliant's enterprise SAP R/3 system.

"Until we get that last company on the system, we don't have one place to go to look for HR or financial information for the whole corporation. Short-term, the return [on that implementation] isn't great, but by getting them on the same system, we're not managing two different processes, which cuts costs," McCrea says. "It also positions us for acquisitions. If we go out and buy a new company, they'll come in onto one system."

Sysco Corp., a food distribution company in Houston, is also intent on cutting costs by integrating applications. But it's keeping a keen eye on the future as it continues into the second half of the year with a massive enterprise application integration (EAI) software project.

"Right now, we're a $24 billion company, but our goal is to be a $50 billion company by 2008," says Sysco CIO Kirk Drummond. The company plans to reach that level primarily by acquiring other companies, such as purveyors of specialty meats and produce. "And since we're not going to convert [their IT systems] to our [enterprise resource planning] system, we need EAI so we'll be able to properly integrate," he says.

"The economy has been a challenge for us," Drummond adds. "Our sales are growing, but not as rapidly as they have historically, so we have to be prudent with our IT investments. But we are still investing."

Low risk is another way to sum up the kind of modest IT investments that companies will make between now and the end of the year.

Throughout the economic downturn, "the IT audience has become a lot more risk-averse," says Tom Pohlmann, an analyst at Forrester Research Inc. in Cambridge, Mass. "They're not going to overreact or act quickly in shifting budget money from one category to another. They will be slow to respond in a positive or a negative way."

In other words, you can look forward to six more months of sticking to the plan.

Copyright © 2002 IDG Communications, Inc.

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