Quelle: CIO, USA
You used to pity Lloyd Taylor. Like other CIOs who work for companiesin low-margin industries, he was the guy with the shoestring budgetwho had to watch every penny, every day.
Well, guess what? Taylor, the CIO at Cargill, a global manufacturerand distributor of agricultural and food products, is now a role modelin these tighter budget times. Cargill may be a $49 billion company interms of revenues, but it cleared a profit margin of seven-tenths of 1percent, less than one penny on the dollar, in 2000. So while you'verecently recalibrated your expectations about IT spending to fit arecession, Taylor has had to master the ability to do more withless - regardless of the economic cycle.
"There's only so much money to go around, and you have to make sureevery dollar is well spent," Taylor says.
Taylor uses his words like he uses his company's money: He prefers notto talk at length about frugal spending tactics. But keep hisstatement - and the remarks by other CIOs you will find in thisstory - in your pocket. They're coins that carry lessonsabout value.
As you read the tips culled from conversations with eight CIOs fromvarious industries, it's useful to remember that one industry'stypical profit is different from another. In bread-and-butterindustries, such as agriculture, trucking, contract manufacturing andconstruction, where stiff market competition and price pressures meanslim profits, CIOs are used to making sure every dollar is well spent.They have a lot of practice running IT with locks on their wallet andboth eyes focused on their company's bottom line. These CIOs say ROIis the barometer by which projects get approved. Fast payback is amust. Anything considered long term can take a backseat. And answer noto new purchase pitches without regret. In general, single-digitreturns are what you'll find here.
The following six tips are for CIOs from the penny-pinchingall-pros.
1 "Almost New" Is Better Than You Think
When it came time to update his infrastructure hardware, Byron Goodwinfaced a tough situation. As much as he would have liked to buy somespanking new servers and routers, Goodwin, CIO of the wholesalegroceries distributor Associated Food Stores (2000 profit margin: 9percent), knew his annual $8 million IT budget just couldn't take thehit.
So when he needed new hardware, he didn't pick up the phone to callDell or Compaq. Instead, he called a couple of resellers.
"We don't buy new equipment," Goodwin says.
With dotcom failures plentiful and other companies seeking savingsthrough consolidated operations, there is a lot of almost-newequipment that's available for used prices, he says. Last fall,Goodwin purchased storage systems for his data warehouses through areseller and paid 50 cents on the dollar. Instead of shelling out$100,000 for the hardware, he paid $50,000.
Like most companies in the grocery industry, the Salt Lake City-basedcompany faces a crowded competitive landscape growing more intensewith new challenges coming from chains such as Wal-Mart and Target,which now carry food items. Overall, the industry's average annual netprofit (revenues less expenses) is about 8 percent.
Buying used or secondhand hardware can be a plausible approach tocost-cutting, says Sunil Subbakrishna, a vice president in the ITstrategy practice at Mercer Management Consulting in New York City.CIOs need to consider whether the equipment will meet users' needs,and whether maintenance costs of such hardware are higher than on newgear.
2 Software Upgrade? Fuhgeddaboutit.
For many CIOs, the cost of updating and maintaining hardware doesn'teven come close to the numerous costs associated with software.There's licensing fees, patches and service packs, maintenance,customization and frequent upgrades that hit the market faster thansome companies can roll out the previous version.
There's an answer. Don't upgrade. And look to negotiate abetter deal.
Ted Barnicoat, CIO of Trimac (2001 profit margin: about 3 percent) iswell versed in the art of unearthing cost savings from softwarecontracts. His talent is a necessity - Trimac, a bulk carrier andtransportation company based in Calgary, Alberta, has an IT budget of$5.5 million to support 5,500 employees and 130 branch locationsacross North America.
Barnicoat's knack for minimizing costs has been honed by years in thetrucking industry, a notoriously low-margin business, particularly forbulk carriers that haul loads such as chemicals and paint. Bulkcarriers require special trailers, some that can be pressurized orheated, and have very strict delivery deadlines.
Every year, Barnicoat takes a look at software contracts about to comeup for renewal and renegotiates with his vendors. "Software is a majorcost to us, and we do this because the vendors tend to be flexibleabout renewal," he explains.
Barnicoat often finds that his organization doesn't need to upgrade tothe latest version of a program, and then he decides whether to deferor refuse the upgrade. Recently, he decided to forgo an upgrade toWindows XP.
"We won't do it," he says. "Right now we're paying 25 percent a yearfor maintenance, and they want 29 percent if we upgrade. We can'tafford it, and we don't need it. So my position is we'll wait untilour current licenses run out over the next four years."
Mark Settle, CIO of Arrow Electronics in Melville, N.Y. (2000 profitmargin: 2.8 percent), says he will also delay a move to Windows XP.Settle anticipates saving between $2 million and $4 million byupgrading from Windows 98 to XP in a year, rather than doing so now."We're just moving the cost out, but when we spend the money we willbe spending it more effectively," he says.
Another reason Settle thinks it's more valuable to delay the upgrade:The longer he waits, the more time other early users will have todiscover and fix the inevitable bugs in the system. If the bugs havebeen patched by the time he upgrades, that's a more effective use ofhis money, he says.
Subbakrishna of Mercer Management says upgrade delays can saveshort-term dollars, but they come with a caveat: the need to considerwhat will happen if the vendor stops supporting an older version of asoftware product.
3 Let the Other Guys Build It
When there's no avoiding spending money on software, it makes fiscalsense to stay away from software development, says Michael Radcliff,CIO of Ingersoll Rand, the industrial manufacturing company (2001profit margin: about 4.5 percent).
Radcliff says he lets vendors deal with software development. Insteadof customizing software in-house or allocating staff to developprograms, he gets his vendors to do the development and customizationwork on applications as often as possible. That way, the cost ofdevelopment is not borne by him, and there's an immediate ROI,Radcliff says. "It keeps the capital investment on the vendor'sbalance sheet. And if we're not spending money on development, we canput those funds toward deployment."
Radcliff is rolling out a new finance initiative that will add optionsfor customers who want to lease, rent or buy items such as golf carts,air compressors or construction equipment from Ingersoll Rand businessunits. When he bought the software from a vendor (he declines to saywhich one), he gave its representatives a list of customizationrequirements and let them do the development. "We don't have a lot ofdiscretionary spending, so we have to be very, very careful where ourmoney goes," Radcliff says.
4 Hunt Down Waste and Kill It
Some of the hidden costs of IT are not exactly IT-related. But thatdoesn't mean you can't find savings there.
Cargill's Taylor discovered that IT employees were calling 411 sooften that it was costing the department hundreds of thousands ofdollars in phone charges. Given his company's slim profit margins,Taylor describes himself as a stringent penny-pincher. Everyorganization has a surprising amount of waste, he says; you have tolook in all the nooks and crannies, and train your staff to do thesame. "If you create a culture where your employees watch for thelittle things that cost a lot, you can run a lean organization withoutsacrificing the important things," Taylor says.
Taylor put a stop to the costly calls by blocking the 411 function inthe department's phone system. He then posted a link for nationwideyellow pages on the corporate intranet. Without the calls toinformation, Taylor saved about $250,000.
Most CIOs can say where they spend money in their department, but theydon't have a handle on their actual costs, says Eileen Birge, vicepresident of the Concours Group, a Houston-based ITconsultancy.
"They don't know where the money really goes," Birge says. "You mayspend $10 million in a year, but how does that break down in terms ofprojects, maintenance, salaries, development and operations? A goodunderstanding of actual costs and their drivers is a very importantfactor and can save you a lot of money."
CIOs should do an in-depth analysis to find which major groups oractivities cost the most, and then find areas to cut in those places,she says. For example, if data storage is eating up a lot of funds,e-mail is often the culprit. By getting employees to clean out theire-mail boxes more often, CIOs could save 15 percent to 20 percent oftheir actual costs, Birge says.
After examining his spending, Robert Tolbert, vice president and CIOof Lyondell Chemical (2000 profit margin: 10.8 percent) saw thathardware and software were the major cost centers for his IT budget.Tolbert, who holds the same titles at Equistar Chemicals, a jointventure between Lyondell and Millennium Chemicals, says he is in theprocess of standardizing the desktop computers and software at each ofLyondell's and Equistar's 33 locations worldwide. Prior tostandardizing, Tolbert had to juggle more than 1,700 differentsoftware tools and four different operating systems. Upon completionof the project, he will oversee 400 applications and two operatingsystems. The project will enable him to slash maintenance costs onmultiple platforms and consolidate his resources into one centralizeddata center. This data center holds the resources to manageapproximately 8,000 desktop and laptop PCs all over theglobe.
"In tight times, you invest in projects that have a swift payback,"Tolbert says. "I wanted the desktops and software to be as similar aspossible so it was cheaper and there were fewer variables tosupport."
Budget constraints aside, CIOs know that it makes sense to spend moneyin IT and cut costs elsewhere in a business. Arrow Electronics' Settlerecently rolled out a new set of services on the company's websitethat lets customers view product availability and see how othercustomers are utilizing Arrow's products. The project ate a chunk ofhis budget but saved millions of dollars in call center and help deskcosts for the company.
Keeping all projects in line with business goals is essential forevery CIO, but it's particularly necessary when one's IT budget istightly constrained, says Tom Mangan, a partner in the technologyintegration services practice at Andersen, a management consultancy inAtlanta. "Every project must be business-focused, with the strongestbusiness case and a clear ROI so that every executive knows where eachIT dollar is going, and knows it's a business investment," Mangansays.
5 Bill the Customers
Getting someone else to pay for the cost of your IT projects is apopular tactic used by low-margin CIOs as a way to extend the reach ofa limited budget. All it takes is imagination and businesssense.
Phil Go, CIO of Barton Malow, a Southfield, Mich.-based constructioncompany (2001 profit margin: less than 1 percent), says he needed away to differentiate his company from others in the highly competitiveconstruction field without draining his $5 million budget. He mappedout a strategy for using IT to speed up construction projects, a planthat could put his company ahead of rivals. But his budget would onlygo so far. So he decided to deal with the cost of technology the sameway his company managed the cost of concrete or labor crews: He billedthe client.
"We are a professional services firm," Go says. "When IT projectsrelate to a client's construction contract, we pass the cost on tothem."
Go began using an ASP (though he declined to say which one) to handleall aspects of project management, a move that few other constructioncompanies have made. The result: Buildings are completed on scheduleabout 50 percent more often than they used to be. He also set up a WANat each construction site that maximized efficiency by linking theconstruction sites to Barton Malow's headquarters.
The monthly cost of both the ASP and the WAN are written into thecontract and billed to the client site as part of the job cost, Gosays. (If it's not written into a client's contract, differentoperating groups at Barton Malow absorb the costs.) This way, Go isable to help the business and fund projects without dipping into hisown budget.
"These are investments we must make in order for the job site to bemore efficient and for projects to be completed on time," Go says."Not many companies do that because they don't see an immediatereturn, but we're getting very positive feedback from ourclients."
6 Hang a Shingle
Steve Hassell, CIO of the Northrop Grumman Newport News Shipyard (2000profit margin: 4.5 percent), took a different route than Go to reach asimilar advantageous spot.
In early 2001, in concert with business leaders at the Newport News,Va.-based company, Hassell made his IT department a wholly ownedsubsidiary of the Shipyard. As president of the new entity calledNaptheon, Hassell (who retains his CIO title) signed a five-yearservice-level agreement with the parent company, Newport NewsShipyard, and now the IT department operates like a paid consultant.Hassell bills Newport News for all costs related to the department andits services. "Before, we used to have emotional yearly debates aboutthe cost of IT," Hassell says. "This step took all the emotion out ofit. Now we have cost and quality numbers based on standalone research,and we can do an objective business case for any project just like anyother service provider."
The move helped Hassell get his arms around the total cost of IT, frommaintenance and projects to how much it cost his employees to parktheir cars. It also gave him a definitive way to ensure hisdepartment's service levels are up to par. His department benchmarksitself against other IT service providers to ensure good cost benefit.Another benefit: The IT and business sides are collaborating more thanever. Each business unit vice president is assigned an IT partner,whose job is to understand how IT can help the unit. When theShipyard's engineering division needed to implement a CAD package,creating a project team comprising engineering and IT resources was apiece of cake, Hassell says.
"We didn't have a turf war over who was in charge or who would controlresources," he says. "They trusted each other and had been integratedfor long enough that they were used to working together as a team.Even the engineering vice president had no problem letting thedivisional CIO take leadership of the project."
7 You Didn't Invent a Budget Squeeze
Managing with tighter budget controls may be new to you, but CIOs inlow-margin industries have been doing it for years. Budget constraintswill force you to be creative and resourceful, but working on ashoestring shouldn't paralyze you, Cargill CIO Taylor says.
"Just because we operate in a tight sector doesn't mean we can't donew or exciting things, like the proprietary plant optimization systemwe just built," he says. "You just have to watch the pennies."