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Prodigal Sums

Prodigal Sums

IT regularly gets rapped on the knuckles for overspending, over-promising and under-delivering. Expensive projects, hyped as huge productivity boosters, cost trimmers or revenue generators, never see the light of day and garner media headlines. But is IT business's only wayward child? How do CEOs rank the risks and rewards of IT investment in relation to other business disciplines?

Finance, human relations, research and development, operations, information tech-nology, plant and equipment, property: all are building blocks of modern commerce. As such they invite the constant attention of, and investment by, the chief executive officer. The day to day oversight of these business elements can be devolved to other C-level managers: the CFO, the COO, the chief research officer, the human resources director and the CIO. Yet each area has the capacity to keep the CEO awake at night - and some more so than others.

Barry Fitzpatrick, the group managing director of Adelaide Bank Group, believes that IT is one of the more obvious contributors to the bank's competitiveness and overall performance. "There are no other areas within the bank that promise such significant cost savings as IT. There is no other area of the bank's operations that has the same level of potential to deliver additional revenue to the bank as IT," he says.

But there's always a but.

"To date," Fitzpatrick continues, "the risks associated with the development of IT have not proved significant, but it is fair to say that IT is an area that can expose an organisation to great risks if not planned, executed and delivered successfully."

Adelaide Bank is not a big spender by banking sector standards on information technology; its annual budget runs to around $10 million. The bank spends a lot more on human resources, which account for just under 50 per cent of total operating costs. "Many areas of investment are crucial to competitiveness and overall performance. IT is one of those areas and is more obvious than some others. Some of the other areas - like human resources - have the same potential ability to expose organisations, but the manner and level of that exposure may not be as visible," Fitzpatrick says.

According to John Brand, the program director for electronic business strategies at the research and consulting firm Meta Group, juggling the risks of IT are like juggling the risks of any investment. "Investment in IT is no different to investing in any other area. You should manage that investment in the same way you manage a portfolio of property, equities and direct business investments. The technology portfolio must include the IT people, their skills, the systems used and the suppliers," Brand says. "When you manage investments you're inherently managing risks. Few organisations today can accurately measure their risk exposure over more than a few projects. It is rare to see an organisation that knows - and can articulate - what its 'risk reserve' is across the board.

"The trouble with technology is that it is not 'black and white' for most people. They understand property: you either have some or you don't. Its value will go up and down with the market, but that's relatively easy to measure. In many cases people do a better job of managing their risks in R&D projects than they do with IT, and R&D is a much higher risk area. Technology can be as simple or as complex as you like and still add the same amount of business benefit. The trick is to know when enough is just enough to gain the rewards without getting caught in the market hype."

When Clive Hooke joined National Foods in 1996 as CFO he quickly recognised that not only did the company have not enough IT, it didn't have any real infrastructure in place. (It is Hooke rather than National's CEO Max Ould who engages with the IT function.) Over the last 18 months the company has installed a base management information system, a chart of accounts that operates throughout the business, and common product numbers - all fundamentals of a basic company-wide information system, which until recently National Foods did not have.

Turn that around and it means that until 18 months ago National Foods survived pretty well without any effective IT. Today the company has a $35 million IT plan that spans the next three to five years and significant IT-related ambitions.

Take the IT away now, and National Foods - which numbers Pura and Yoplait among its best known brands, and at the time of writing was pursuing a take-over of the King Island brand - would miss it.

But Hooke says technology is far from the most important issue the company has to tackle, the one that keeps National's top managers on their toes. That honour goes to the issue of quality and food safety. "Our number one priority is ensuring product safety," he says. "Our capital spending has to ensure that our manufacturing processes are robust and our security systems are robust and that we have appropriate recall and audit processes."

Hooke is not an IT atheist, but he is an IT agnostic. "One of the most common myths about IT is that it will increase revenues," he says. "IT is an enabler to change the business process. Where most projects go wrong is that there is a group in IT which makes decisions in isolation - that B2B is a good idea, that e-commerce is a good idea."

But surely that sentiment is the equivalent of an urban myth. In today's enlightened world, isn't the isolationist CIO as extinct as the Tasmanian Tiger?

"Oh yes?" snorts Hooke derisively. He does, though, apportion the blame equally between IT and business. Business, he says, has too often turned to IT and said: "Go away and do it for us." Hooke says at National Foods no IT project is begun until a business user commits to be the sponsor, justifies the investment and commits the time.

An unlikely-seeming ally for Hooke's hard line is Peter Kazakos, managing director of Kaz Computer Services. Kazakos' business is selling IT, yet he always asks his IT department: "What's the impact of doing nothing?" because that option, he says, may be less expensive. As an example Kazakos cites the recent rush to achieve compliance with the Privacy Act as the clock ticked down to December 21. He suggests that some businesses might have delayed the significant spend required to revamp their information systems until a dispute arose, and then tackled the problem. (That said Kaz Computer Services took a more conservative approach and got the consultants in.)Kazakos admits to his scepticism about IT spending, and believes that over-investment can overexpose a company to risks, just as much as under-investment. He thinks this is an increasingly prevailing attitude. "The public and boards in general are more IT literate than ever. The mystique has gone away. The level of questioning is much deeper and therefore IT executives are faced more than ever with proving their case, especially as the cost of [software] packages has gone up and the cost of implementing them has gone up. That can be a big drain on an organisation."

He's expecting a bit of a lull in terms of innovation in IT, which may slow spending cycles. "People are talking about adding incremental improvements and for a cost that can be quite high. Especially in the current economic climate this can be seen as discretionary spending."

Pinning Down ROI

Increasingly dependent on technology for its competitive edge is transport company DHL, which nominates IT spending as its third biggest cost area after people and transport. "It's money that you have to spend to run the business," says John Pearson, the area director for Oceania. He believes good IT is critical to DHL's success and that "a bad IT investment would have a huge effect on our business and our customers".

Pearson admits that assessing IT's return on investment can be elusive. There are many instances, he says, where it is difficult to for a CEO to gauge the ROI of IT. Nevertheless, he is "satisfied in the sense that the changes in IT are for the better of the customer or the business [and have] a sensible rate of return".

Meta's Brand disagrees. He argues that "a CEO should feel satisfied with the investment even before they've seen any payback. If he/she can't see the benefit, then they have not done the appropriate due diligence in estimating their risk reserve and mitigation strategies. They're probably not ready to make the decision.

"Technology is not an option, it's a must have. How you apply it is the crucial piece of the puzzle. As with any investment, knowing what not to do is just as important, if not more important, than knowing what to do. A good investment in IT should deliver you benefits that you can use to reinvest and get even further ahead: increasing revenue, decreasing costs, maximising working capital, building reusable infrastructure and so on.

"Some organisations need to get out of the "follow the screamer" mentality, where the latest IT flavour of the month is followed regardless of whether it's any good or not. As with any decision, though, there's the right answer, and the one you can afford," Brand says.

Pearson does not fall into the "screamer" trap, but he is convinced that IT has the potential to deliver the business with unparalleled cost savings compared with other operational areas such as property, plant and human capital. "There are areas where you could identify other cost savings; but not areas where you can achieve the scale of savings from reorganising the IT infrastructure and then the structure of the business. There are very significant opportunities and that is what we are realising now," he says.

A clear convert to the church of the CIO, and evidently a man who enjoys a decent relationship with his CIO Tim Allan, who sat in on the interview, Pearson says his relationship with Allan is founded on "a clearly charted way forward in terms of expectations and strategy", which is the case for all his C-level executives.

A CIO for all Seasons

More than other executives, CIOs today have to be renaissance figures when it comes to making a difference in their business. CEOs want their CIOs to contribute to the organisation beyond the domain of IS - to think in cross-functional terms, to see the big picture, and to help problem-solve across the organisation. They want their CIOs to be great communicators, with a strong consultative approach and an aggressive customer service and delivery orientation. They expect their CIOs to behave like consultants - out there working with their customers and aggressively leading major projects through successful implementations"The CEO usually relies on the CIO to deliver accurate and timely information to enable the board to make a whole range of investment decisions for the company. The problem today is that business is becoming so complex - the increasing number, size and complexity of mergers and acquisitions, for example - that the relationship between these two must be incredibly strong," Meta's Brand says.

"We see many organisations where the ability to roll up accurate information about the company - even historical information, let alone a current position - is severely limited, so the investment decisions being made are often done so without being fully informed. We see many examples today of organisations who get themselves into trouble, not because they do not manage their risks badly, but because they were working from information that was unreliable, untimely or just plain incorrect," Brand says. "It has to be remembered that great technology does not always deliver great results. The good application of 'average' technology can achieve even better results. It's just another example of working smarter rather than harder. I see so many organisations that keep trying to push through the IT pain barrier without stepping back and thinking about smarter ways to get this done."

Kazakos agrees wholeheartedly. He wants IT solutions that are smarter rather than flashier. He also wants to be fully convinced of the benefits before signing off on the budget. "For example, we're looking at a new call management system. Well, will it differentiate us? Our early videoconferencing experience wasn't good. I was sold on the terms of saving on airfares; I'm not seeing it and the quality is inconsistent,"This cautionary attitude regarding new investments doesn't necessarily equate to leaner IT budgets. It certainly hasn't at the Adelaide Bank Group or at DHL.

"Adelaide Bank has been prudent in the development of our IT and has not spent at the same level as many other similar organisations. At the same time we have been able to reap significant benefits, today having a loan processing system that is the envy of most other financial institutions and an online banking system that has few peers. As a result, I envisage that spending in this area will remain constant as we continue to develop systems and solutions that keep us at the cutting edge of financial sector technology," Fitzpatrick says.

DHL has allocated around $12 million for its IT budget in 2002 (although there is additional spending at the regional and global level that supports the local operations). Over the last few years the company's spending has remained relatively consistent says Pearson, and he expects this to continue. "The IT budget would only be reduced if we found ourselves particularly inefficient or if, as a region, we reorganised the way we operated our IT and its tentacles. There are always elements of centralisation on the horizon. Otherwise we would maintain our IT spend as a percentage of revenue as much as spending on anything else."

To ensure that the IT operations are efficient, DHL is embarking on a program to benchmark its IT operations against those of other IT units in the DHL network, and against those in other industry sectors.

Another organisation that operates its information technology with both a global and local focus is law firm Andersen Legal. Managing partner of the Australian practice Adrian Ahern says that over the past two years law firms have increased their use of IT and not just to support their lawyers. Firms also have to meet the rising expectations of clients, who want online access to work in progress and online compliance tools to help them with issues such as trade practices and environmental reviews. "Twelve months ago I would have said that this delivered us a competitive advantage. Now I just see it as where the bar has been raised a little," Ahern says.

Although IT systems are needed to run the business, for a law firm investment in human capital is far and away the most important issue. A rogue lawyer can do a lot more damage generally than a rogue computer system. Still, technology has an important role to play when it comes to supporting and training that human capital. "IT allows people to operate 24x7," says Ahern. "People can take the laptop home and plug in all the precedents. Our people like that."

It's an important reminder that information systems are about providing information, not about providing computers. While the importance of computers to a business is occasionally hard to fathom for a CEO, the importance of information is crystal clear.

"At the end of the day organisations should recognise that moving information is more important now than moving goods," says Meta's Brand. "You can make the best paint in the world; but without providing information about that paint throughout the supply chain efficiently, you could just as easily find yourself out of business. It's not the paint that sells, it's the information about the paint that sells the paint.

"Most organisations are still focused on the physical product and although that's important, it's worth nothing without the ability to move information more efficiently. IT has traditionally focused on automating simple tasks: databases for managing large volumes of data, spreadsheets and applications for calculations and reporting. Only now are we starting to see that IT systems are becoming focused on automating long-running, complex processes like negotiating contracts with suppliers, collaborative product design and so on.

"It's still early days for many of these technologies," Brand says. "It's really no wonder that companies are making some expensive mistakes." Maybe, but as far as a CEO is concerned an expensive mistake, however explainable is unforgivable.

Andersen's Ahern says he would not embark on a major IT project without having some level of client involvement. "Two years ago the client would have said: 'Yes, do it.' Now they are more IT savvy and more frank," Ahern says, stressing that the firm can't just "thrust" a new application onto a client, it needs to secure the client's buy-in. In the medium term he expects this focused approach will help keep his firm's IT budget under control. "I expect the IT budget to grow as the size of the practice grows, but not to the extent that it did over the last few years. I think that the growth will be a bit slower."

In contrast National Foods is about to embark on a range of new IT initiatives now that it has its base infrastructure largely in place. "We have and will generate considerable savings and efficiencies," says Hooke. The improved management information system has already stripped 30 accountants out of the company and he predicts that as more business goes online a further 50 positions will be cut from the payroll.

Hooke reserves most of his excitement though for the new milkflow management system which is due to be commissioned in early this year, which reinforces Brand's point about the fundamental importance of recognising computer systems as information systems. At $350 million a year, purchasing milk is National's biggest single expense outside of people. "If we can manage the componentries better - the fat content, the volume, the milk swaps - we can get considerable savings," says Hooke, predicting annual savings of up to $5 million a year.

So surely Hooke is satisfied with the investment and the projected payback? "You're never satisfied," he says. "This is not a destination, it's a journey." VIT Takes Two to TangoPeter Kazakos, managing director of Kaz Computer Services, is cautious about IT spending and believes smart spending should take precedence over excessive spending on when it comes to technology. His uncompromising stance makes for an interesting relationship with his CIO and indeed all his employees (CIO goes one-on-one with Kaz Computer Services' CIO, Stephen Pearson in "Standard Issue", page 108). "I'm tough because I'm in the industry and [my] staff are all little CIOs and think they know better. I say to customers: 'You should be using this technology', and they say: 'Well why are you not using it?' It is a balance," he says.

Kazakos says that life for his CIO is "much more difficult" than might be the case for him elsewhere. It's exacerbated by the fact that Kaz maintains a status as a relatively independent supplier, which puts pressure on the CIO to also run a pretty open IT shop.

National Foods CFO Clive Hooke has a more give-and-take relationship with his CIO . "I have a very collaborative approach," he says. "You get the best person you can find and then paint a picture of the strategic vision that dovetails with the direction in which the organisation goes. Then you set tasks to deliver on that strategic intent."

At the Adelaide Bank Group, group managing director Barry Fitzpatrick, says that the process of getting information technology right at the bank "has brought myself and the CIO closer together in terms of decision making and developing a mutual understanding of each other's issues and in the identification of opportunities. This has especially been the case in the development of IT systems and solutions for the bank's wholesale operations as this part of our business is very much dependent on technology."

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