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A year after 9/11, are businesses prepared for any contingency?; outsourcing update; and more.
Scott Leibs, CFO Magazine
September 1, 2002
Best-laid plans abound, but will they be enough to ensure that operations always run smoothly?
As the one-year anniversary of the attacks on the World Trade Center approaches, reevaluations of policy will be as conspicuous as NYFD baseball caps. Less celebrated but no less important will be the ongoing efforts of businesses to make sure that a future disaster of that magnitude, whatever the cause, proves far less disruptive to operations.
Most companies have overhauled their contingency plans, albeit not with the sense of urgency one might expect. It remains unclear whether companies are willing to spend more money to ensure that their operations can be restarted elsewhere should some form of interruption occur. That raises the question, if 9/11 hasn't prompted companies to take business continuity seriously, what will?
Certainly it is being taken very seriously in the financial services world. At the Board of Trade Clearing Corp. (BOTCC) in Chicago, which acts as a guarantor of futures and options traded on the Chicago Board of Trade and the MidAmerica Commodity Exchange, the heightened interest in business continuity has taken several forms. Foremost among them, and relevant to every company, is its ideas about just what constitutes a "disaster." Brett Paulson, senior vice president and CIO at the BOTCC, says that prior to 9/11 his organization tested its disaster-response capabilities about eight times a year. It still maintains that schedule, but now it tests for a much greater range of scenarios. "In the past, we limited ourselves mostly to problems at our own site," he says, "but now we'll test for things like a disaster striking metropolitan Chicago, to see how we'd respond to telecom outages, disruptions in transportation--all the things that go beyond simply protecting the data in the data center."
The need to address a range of issues beyond the data center is why "business continuity" has replaced "disaster recovery" as the preferred term for post-crisis response: it's no longer enough to "recover" data at a backup site or via some other means. Businesses now understand that to weather any sort of storm successfully they must address manpower availability and productivity, financial issues such as lines of credit, public/private sector cooperation, and much more besides.
That may be why companies have so far spent more time and money concocting plans than arranging for traditional methods of disaster recovery, such as subscribing to third-party backup sites. Cynthia Doyle, an analyst at IDC, in Framingham, Mass., says that "spending has indeed picked up on the consultative side of the business, but in a down economy [many] are not willing to pay for outsourced business-continuity services."
That's not good news for companies like SunGard Availability Services, which would have seemed a good bet to see business boom following last year's attacks. But revenue for its most recent quarter is up only 9 percent once its acquisition of Comdisco Inc.'s business-continuity services is excluded, and the previous quarter's revenues were up 11 percent. "Awareness of the issue has increased since last September," says SunGard Availability Services CEO Jim Simmons, "particularly the idea that companies must orchestrate recovery for every point along the continuum." But in the current economic climate, there has been no stampede toward backup services such as remote data centers.
SunGard and its competitors, however, believe that such services will be a priority once the economy improves. SchlumbergerSema, a leader in business-continuity services in Europe, has doubled its U.S. capacity since 9/11 and has expanded again by 50 percent this summer. In addition to its 150,000 square feet of data center space in the New York metropolitan area, SchlumbergerSema offers services such as Web-based backup of the contents of laptop computers, an acknowledgement that the loss or theft of a sales representative's machine can be just as disastrous as a flooded data center. SunGard has also expanded its services to offer more human expertise and intervention, versus a focus on facilities alone.
And customers that have signed on for those facilities are looking at ways to use them more effectively. The BOTCC, for example, now relies on its SunGard site not only for backup in the event of a catastrophe, but as a second, primary data center that mirrors all transactions and absorbs spikes in traffic or other anomalies.
Cost-conscious companies are taking other measures as well. The Philadelphia Stock Exchange is talking to other financial services firms to see if partnerships can defray the costs of responding to disasters. In the wake of 9/11, it provided space to the American Stock Exchange's options floor, which required it to handle triple its normal transaction volume. "We're a small operation, but we have large infrastructure requirements," says William H. Morgan, the Philadelphia Exchange's executive vice president and CIO. "So we have to put competitive considerations aside and look for ways to leverage partnerships, mobile technologies, whatever we can do."
Having helped Amex in its hour of need, the Philadelphia Exchange was no doubt motivated to get its own plan in shape as soon as possible. "We're in the middle of our review right now," says Morgan.
The Year in Review
Key steps taken or under way to address business continuity:
Planned within three months
|Reviewing disaster-planning documents|
|Reviewing insurance policies for adequate coverage|
|Reviewing business travel policies|
|Increasing use of videoconferencing|
|Checking backgrounds on contract personnel|
|Checking employee backgrounds more thoroughly|
|Reviewing guidelines for no. of staff on any single flight|
|Contracting for emergency alternative office space|
|Increasing use of private or corporate planes|
|Lowering own public profile|
Making a Statement
Many software products have been touted as user-friendly, yet live up to that claim only if the "user" happens to be a crack code-writer in the IT department. That can be particularly frustrating for finance staffers, who face increasing pressure to produce financial statements and other reports more quickly than ever.
A new application from Cetova Corp. may help. Dubbed "C-FAR," the software reaches into enterprise resource planning (ERP) systems and plucks numbers directly from the database, rather than relying on a data warehouse or similar middle layer. Perhaps more important, it uses an Excel-like interface and drag-and-drop functionality that allows a user to create reports without needing to learn a query language or endure a multistep "iterative" process that so often prompts users to abandon their attempts at self-sufficiency.
At LVMH Fashion Group Americas, which comprises Louis Vuitton, Givenchy, Fendi, and other high-end designer brands, a joint search by the company's CIO, Carol Knouse, and corporate controller Michael Helmstetter led to Cetova. "We needed a way to pull data from our J.D. Edwards ERP system," says Knouse, "and we were attracted to Cetova because of its fast implementation and true user-friendliness." The report-writing capabilities inherent in the ERP system were tough to use, Knouse says, and while makers of business-intelligence software provided options, they were expensive and not very flexible.
A pilot project showed that users needed only two days of training to get up to speed. The pilot itself was implemented in less than a month, including some consulting help from Cetova to establish the hierarchical structure against which reports are run.
Brian O'Kelley, executive vice president at Cetova, says that a reduction in manual labor and the errors that can creep in as a result are also selling points. "Many people re-key data from ERP systems into Excel spreadsheets," he says, "then play with the numbers before passing them up the food chain. At each level, mistakes can be made."
Cetova is a new company and faces plenty of competition, notably from FRx Software Corp., now a division of Microsoft, and from business intelligence and budgeting-software firms like Cognos Inc., Hyperion Solutions Corp., and others. To date, C-FAR integrates seamlessly with J.D. Edwards & Co.'s ERP systems, and will do so with other major brands of ERP by the end of the year. In fact, LVMH expects to work closely with Cetova to help shape the budgeting software.
Price varies, but software analyst Tom Cook of Hurwitz Group Inc. estimates that a typical enterprise will spend about $100,000. --S.L.
Where's the Big Deal?
Outsourcing, so often presented as a cure-all for companies that sign on for it, may not be so healthy for companies that offer it. In July, Electronic Data Systems Corp. (EDS) announced that it was withdrawing from consideration for a massive outsourcing contract being dangled by The Procter & Gamble Co. EDS said that the risk and accounting issues associated with long-term contracts were its main concerns, and that its simultaneous plan to lay off 2,000 workers was not a factor.
The company stated further that those layoffs were part of the normal course of business, and were not connected with the bankruptcy of WorldCom, which is both a major EDS client and a supplier of telecom services to the company. EDS took a $101 million hit in its most recent quarter for write-downs and the creation of reserves due to WorldCom's bankruptcy.
All of that might have made you glad to be an executive at, say, IBM Global Services, except that even as EDS endured its nightmare July, IBM CFO John R. Joyce was backing off earlier projections that its outsourcing business would see double-digit growth in the second half of the year. John Bothwell, vice president of global strategic outsourcing for IBM Global Services, maintains that these are boom times for outsourcing because it tends to be countercyclical, but admits that deals are taking longer to sign.
At the same time, their duration is shrinking. Traditional IT outsourcing has long been a business marked by headline-grabbing deals ranging from 5 to 10 years in length and hundreds of millions if not billions of dollars in value. That hasn't completely changed--the P&G contract is said to be worth up to $8 billion over 10 years--but Bothwell and others say that customers are now more interested in jobbing out discrete pieces for shorter time frames. Increasingly, they don't want to parcel it out at all, but prefer someone else to come in-house and run it as a "managed service."
Outsourcers have been quick to respond. IBM, for example, launched its "Manage It for Me" program in June. Aimed at midsize businesses, the portfolio of services and financing arrangements addresses everything from computer security to Web-site hosting, payable on the installment plan. Blue-Star Solutions, a small outsourcer that specializes in managing customers' SAP environments, offered new, shorter terms as brief as three months. EDS confirmed the growing market for E-business infrastructure management by paying $63.5 million in June to acquire Loudcloud Inc. And in a major move to expand its systems integration and consulting opportunities, in July IBM announced plans to buy PricewaterhouseCoopers Consulting for $3.5 billion in cash and stock.
Those are just some of the changes marking an industry that, despite recent turbulence, is about to metamorphose from ugly duckling to swan. That's the view, anyway, of Dana Stiffler, an analyst at AMR Research Inc. in Boston. She points to strong revenue growth within the outsourcing divisions of Accenture, Computer Sciences, IBM, and even EDS, which saw first-quarter outsourcing revenues up 18 percent compared with a year ago.
"Outsourcing is now an established and well-understood way to cut costs," says IBM's Bothwell, "which is why we now have twice the number of potential deals that we had two years ago." One big industry change, however, is that services such as "E-business on demand," in which customers buy only the computing functionality they need, have more momentum than traditional deals.
The shrinking of those long-term contracts may not be so bad for outsourcers: as WorldCom shows, big deals can vanish. Certainly, the once-burgeoning ranks of application service providers (ASPs) learned that when their dot-com client base vanished. And on the plus side for outsourcers is the virtual disappearance of the per-user, per-month pricing system that was once the chief selling point of ASPs. Today outsourcers may be doing less for clients, but they do get paid.
And with outsourcers eager to satisfy clients' desire for more flexibility, companies clearly have more leverage than before. Still and all, an outsourcer could be forgiven for glancing at the pending P&G deal and getting a little misty-eyed for the good old days. -- S.L.