IT: Luxury Or Necessity?

Dec. 21, 2004
As manufacturers cut back on technology spending, strategic projects remain on track.

B.J. Scheihing has seen the boom times and the bad. It was only a couple of years ago that IT budgets were expanding faster than a waistline at a Las Vegas buffet. "Everyone was looking to implement as many projects as they could," says the senior vice president of worldwide operations for Arrow Electronics, a manufacturer and distributor of electronic components and computer products. Yet by the fall of 2000, when sales at the Melville, N.Y., firm began plummeting, Scheihing and other executives at Arrow began reevaluating. First, the company began tightening its collective belt. Then it realized that it had to lay off workers -- though simply cutting back on staff to match reductions in sales wouldn't solve the problem. So, Arrow slashed the 2001 information technology budget for North America from $145 million to $115 million. "We had to quickly refocus our IT strategy," Scheihing says. "It was essential to determine which projects were the most strategic." Arrow Electronics isn't the only company trying to salvage its IT strategy amid a faltering economy. Over the last 18 months, few organizations have emerged unscathed. And the events of Sept. 11 only worsened an already painful situation. While almost every business recognizes the importance of IT in realizing long-term goals and objectives, it's clear that projects that achieve the greatest return on investment or provide the biggest strategic advantage are the only things making the cut. Of course, every industry and company is different, and the drumbeat one company follows can be far different from the next. Even as some businesses are reducing spending on technology across the board, others are choosing instead to focus their investment in specific areas -- such as e-business. Still others are maintaining their IT budgets in an attempt to emerge from the current slump ahead of the pack as a result of business capabilities fostered by new technologies. As Scheihing puts it: "When the market turns up, it will be more important than ever to have a solid technology foundation in place." Arrow Electronics, for example, has delayed the purchase of new personal computers and some servers, and put a few significant projects -- such as an electronic data interchange (EDI) upgrade -- on hold. Nevertheless, the company has maintained full funding for an ambitious supply-chain-management initiative. The goal is to expand Arrow's ability to share forecasts and inventory information with suppliers and vendors, in a move calculated to boost efficiency and shed costs, Scheihing says. Arrow also is pushing forward with an engineering database and collaboration system and is expanding the use of Web collaboration tools that allow employees and business partners to communicate via the Web, using videoconferencing, instant messaging, chat and document-sharing tools. According to Scheihing, this technology has helped cut travel expenses and nudge employees toward more effective and efficient communication. Another company coping with the downturn by trimming IT spending is La-Z-Boy Inc., the leading U.S. manufacturer of upholstered furniture ($2.26 billion in sales in fiscal 2001). A downturn in sales has forced the Monroe, Mich., company to enforce strict cost-cutting measures. La-Z-Boy has delayed several projects centering on information security and general business systems and has reduced the use of consultants. So far, it has been able to get by using its own IS staff, says Gary Clark, director of corporate IT services. Even so, La-Z-Boy is keeping key technology initiatives on track. One of the projects at the top of the list is the implementation of a new payroll and human resources system from Lawson Software. The company is expecting the new software will significantly lower costs for the entire organization, particularly as La-Z-Boy builds a company-wide shared services system, Clark says. Like many IT executives, Clark is looking at return on investment (ROI) more closely than ever before. And the criteria for judging what's essential and what's unnecessary have changed. "Previously, we would look primarily at high-level issues. Now, we're not only examining the details of a project but also the underlying assumptions and the business case. It's all about cost and results." To be sure, walking the tightrope between technology costs and benefits requires a subtle balancing act even in the best of times. Complex IT systems with a price tag in the millions of dollars do not offer any guarantee of results. When profits are flowing, it's far easier to gloss over mistakes, miscalculations and failures. Before the economy hit the skids, SanDisk Corp., a manufacturer of storage chips and flash memory, was already concentrating on becoming the industry's low-cost provider. Gene Fleischer, vice president of information technology, views the current downturn as an opportunity to achieve additional strategic advances, despite a 10% reduction in IT costs. The company continues to pump IT dollars into improving and automating manufacturing processes, establishing better demand-planning and forecasting techniques, and refining business intelligence systems. It also is adding advanced EDI capabilities to its intranet in order to provide 24x7 order and shipment status for customers. The Sunnyvale, Calif.-based high-tech manufacturer has focused on trimming IT expenses for network support on its internal helpdesk. And, like other companies, it has deferred purchases for PCs, servers and software upgrades. "Ultimately, it all comes down to making the appropriate tradeoffs," Fleischer says. "Our goal is to reduce production costs to the lowest possible level while developing a customer relationship that gives us a distinct competitive advantage." Learning to operate with a slimmer IT budget is also a reality for United Technologies Corp. Based in Hartford, Conn., the $26.2 billion (2000 sales) conglomerate, which manufactures products ranging from elevators to jet engines to air conditioning and environmental systems, has had to reevaluate and reorder projects over the last 18 months. However, according to John Doucette, vice president for e-business and CIO, that hasn't prevented the company from continuing some 40 IT projects, whose aggregate savings, once fully operational, is estimated at $500 million annually. "IT is the key driver in introducing e-business activities that will boost productivity and deliver quality earnings," Doucette says. In order to reduce costs, United Technologies has outsourced some IT operations to India. The company also is consolidating and renegotiating contracts for mobile assets, personal computers, Web hosting and other technology outsourcing initiatives. Finally, United Technologies is also working to remove inefficiencies built into everyday processes, largely by eliminating wasteful or unnecessary work. For example, the company is now prompting employees to use the Internet to look up a phone number rather than dial directory assistance at about $1 per call. The proof of United Technologies' success lies in the numbers. When the company released third quarter earnings in October, it posted a 7% rise in revenues and a 14% increase in profit compared with results for the same period a year ago. Yet, for every United Technologies, perhaps a dozen other companies are struggling, and for these firms, it's no secret that IT often becomes the first casualty. A recent survey by the IT research firm Meta Group found that U.S. businesses plan to cut total spending on IT by 2% to 5% in 2002, compared with an estimated increase in IT budgets of 8% this year. Some companies have halted or delayed major CRM and ERP projects, laid off IT staff and eschewed key software upgrades. And the research firm Forrester Research predicts that IT spending won't pick up significantly until 2003. A concern for many organizations is just how much to cut during the downturn. After years of struggling to find talent, some CIOs are finding it painful to lay off IT workers. They're also grappling with difficult decisions about which projects to delay or scrap. "When the economy turns around and business picks up, you don't want customers and prospective customers to view your organization as inefficient, and you don't want to find yourself scrambling for the same IT talent you let go several months before," says Arrow Electronics' Scheihing. As a result, some companies, such as La-Z-Boy, are relying almost entirely on internal IT expertise -- even if it means a delay in completing a project. An added benefit of this approach is that it can keep staff engaged and feeling challenged. Similarly, the IT slowdown can serve as an opportunity to tackle projects that aren't possible during boom times. For instance, the Belden Brick Co., a maker of brick products and building materials, is looking to get bargain prices when it goes to upgrade PCs and other IT systems across the company. With a stable IT budget over the last few years, Belden has invested in an extranet for customers, an ERP system from Computer Associates and a largely homegrown CRM system. "In some respects, such as computer prices and salaries, the downturn has proven beneficial," says Jeff Adams, director of IT at the Canton, Ohio, manufacturer. "It's a good time to take advantage of the situation and act strategically." Coping with the downturn hasn't been particularly easy for Carpenter Technology Corp., a Reading, Pa., manufacturer of stainless steel, titanium and other metal products. The company, which posted $1.32 billion in sales for fiscal year 2001, has found itself forced to delay several projects, including ERP and CRM. The company is currently focusing on IT investments that will streamline operations and reduce costs. Carl Marks, vice president of information services, says that while the current environment is far from ideal, it does provide an opportunity to slow down, reevaluate things and, ultimately, make more informed decisions. "Now the key question is: Which projects provide a company with the greatest benefit and ROI? Accountability is once again part of the picture."

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