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Recipes for IT success from three companies that go well beyond mere numbers-crunching.
Chuck Lenatti, CFO IT
June 16, 2003
As the economy resists any sustained bout of good news, most discussions of information technology continue to center on how to get the biggest return for the least investment. As a result, the ROI business is booming, with consultants continuing to hawk various forms of guidance, from simple formulas to high-priced hand-holding, while purveyors of hardware, software, and associated gear tout ROI seals of approval from everyone this side of Consumer Reports.
Meanwhile, in the real world, companies are finding that one size does not fit all and that smart IT decisions require continual reevaluation and plenty of input from a range of executives and departments.
Not long ago, it seemed that every company would march in lockstep toward some rigorous and formulaic analysis of technology investment. But ROI has proved not so much an iron fist as a guiding hand. While it informs the decisions of the companies featured on the following pages, sometimes strongly, it's clear that ROI is just one facet of a new and more sophisticated discipline taking hold.
These companies may operate in industries far different from yours, but the problems they face — shrinking margins, pressures wrought by globalization, and fear of falling behind technologically — give their challenges and solutions broad relevance. Their approaches to ROI and IT management run from detailed scorecards to inventive reporting structures, but all avoid simplistic solutions. The CFO as penny-pinching autocrat? Don't try to force that stereotype on these companies. In each case, IT and finance have managed to find the sweet spot on the risk/reward continuum.
The past few years haven't been smooth sailing for the global shipping industry. Anticipating an increase in consumer demand, shipping companies added capacity, which drove down rates. When the economy went sour, so did demand forecasts.
Among the hardest hit was global giant Neptune Orient Lines (NOL) and its subsidiary, American President Lines (APL). Even though its volume rose by 6 percent, the lower rates meant revenue fell by 5 percent. As a result, the company reported a $330 million loss for 2002 — on the heels of a $56 million loss the year before — and its debt rose to $2.8 billion.
Early this year, NOL/APL's CEO stepped down and the company announced that it would cut 1,100 jobs over time. The company has made cost-cutting a priority, outsourcing some financial functions to Accenture and selling its profitable crude-oil transportation business, American Eagle Tankers.
One result, says NOL's CFO, Lim How Teck, is that the company is now "trying to change to a more asset-light business model." But at the same time, it's becoming more reliant on what's arguably the most IT-intensive facet of its business, APL Logistics, which contributed 18 percent of NOL's $4.6 billion in revenue in 2002.
Even before its push into logistics, APL had earned a reputation for technology innovation prior to being acquired by NOL in 1997. About 30 percent of APL's transactions are conducted online, more than any other shipping firm, the company says. The question is whether it can maintain that reputation as it moves from what Glynis Bryan, CFO of APL Logistics, describes as a focus on the top line two years ago to "more-focused growth with the emphasis on profitability — not just revenue for the sake of revenue — and with less emphasis on acquisitions."
Cindy Stoddard, who became Group CIO for NOL last year, takes an approach that seems tailor-made for the new reality. "We keep asking, 'What business problem are we trying to solve?'" she says. Sometimes, says Stoddard, expensive technology is not the answer. "We now question the level of automation that a particular problem needs," she says. "We've been scaling back because we don't need the bells and whistles that people thought were needed."
Navigating Via Scorecard
The company now charts its IT course by two stars: an insistence on short-term payback and a balanced-scorecard approach to project approval that brings an almost fanatical level of rigor to IT investment.
"Longer-term strategic projects are not even being considered," says Josh Smith, who as IT controller reports to both Stoddard and to NOL's CFO. "Historically, we've had a few long-term projects under way. Now we're focused on only one, an automated pricing system intended to alleviate a very manual process."
The company's scorecard covers a lot of ground. For example, a recent project to automate the entry of data pertaining to shipments transferred through the company's Singapore hub looked at a wide range of potential benefits, including employee and customer satisfaction, two facets of IT projects that are notoriously difficult to assess. The scorecard assigned a weighted average to those and a range of other benefits and costs. But ultimately, the fact that the three components of its ROI analysis — internal rate of return, net present value, and payback — all scored 10 made the project a winner.
The scorecard requires weighted averages to be assigned to a long list of items, including strategic alignment, costs, benefits to the company and its customers, risks, and more. The assigning of those numbers, from -2 to 2, is handled by the project's IT champion and business champion working together. Once they've established the weighted-average scores, the project moves to IT controller Smith and Mark Miner, the project-governance head, for approval. It then goes to the governance committee, where the final decision is made.
APL's balanced scorecard is based in part on the control objectives for information and related technology principles first developed in 1996 by the Information Systems Audit and Control Association, an IT membership organization. APL modified the scorecard to be heavily weighted toward ROI, payback, and net present value, while also considering a range of soft benefits.
Business leaders who propose a project are teamed with a representative from IT, such as Smith, who helps articulate the plan and develops the appropriate scorecard weightings. If a business leader claims that a project will yield hard-dollar returns, Smith requires him or her to identify which cost center and account the benefits will accrue to. If a business chief tells him a project could yield a savings of $1 million in labor — the equivalent of, say, 10 full-time employees — Smith wants the scorecard to specify which cost center will eliminate those jobs and which of the company's accounts will turn red ink into black. Unless the business leader can convince Smith that there are hard dollars to be saved, the figures do not enter the all-important ROI category and are not quantified.
The aim is to draw a distinction between the soft benefit of increased efficiency versus the hard-dollar savings that stem from reduced head count. "When I dig into it, what it often means is that the project will save 5 percent of 100 people's time," says Smith. But the "equivalent" of eliminating 10 full-time workers, for example, doesn't necessarily mean that any real workers will actually be let go. "Unless you tell me where the savings will come from, it's a soft benefit and is scored accordingly," he says. APL's no-nonsense approach means that "requests that were touted as the greatest benefit of all time start shriveling up pretty quickly," says Smith.
If the project passes muster in his meeting with the business leader, Smith validates the projections with the controllers of the affected businesses to make sure the opportunities are really there. "It's a very good reality check for a lot of these projects," he says.
A project that looks promising on paper must meet other requirements to win approval. Smith looks at whether the business leader has a detailed plan for accomplishing the project's goals. "As simple as that sounds," he says, "it sometimes gets lost in the excitement." Strong business ownership and commitment are also essential. "A lot of times a business unit gets excited about an idea, and the next day they get excited about a new idea," he says.
Smith also wants to see specific details regarding what the project will require from the IT department. A business might come up with an idea to solve a problem without truly understanding what the problem is, mistaking a patch for a true solution, for example. Finally, he looks for a quick turnaround. "If the project extends beyond 12 to 18 months, the chances for failure significantly increase," he says.
After the business leader and technology sponsor complete the scorecard and it is reviewed and validated by Smith, it is then reviewed by a project-governance committee, which meets at least once a month to discuss the company's top 25 projects. The committee, which includes representatives from all of the company's business units, approves or denies the project, or asks for more information. Projects that cost more than $100,000 require sign-off by both the CIO and the CFO.
As the project progresses, it's reviewed every month, and if it's one of the top 25 projects, it's assessed by both the IT management team and the governance committee. During the review process, it is assigned a red, yellow, or green light. A yellow light indicates that the project has a problem but can get back on track with some modifications. A red light means that there are significant issues that will demand management escalation. "The biggest challenge is saying, 'Stop the project.' Once a project has gotten wheels and is moving along, it is very difficult to stop," says Smith.
But APL tries. The project-governance committee reviews comments from the IT project group, and if a project is more than 10 percent over schedule or over budget, the committee will reevaluate it, says CIO Stoddard. However, the committee may determine that the benefits of the project are so great that a 10 percent overrun is inconsequential.
After the project is completed, the committee conducts a postmortem to see whether it was completed on time and on budget, and if it delivered the benefits promised. APL also plans to review projects six months after they are completed, says Smith.
Stoddard says that by focusing on quantifiable benefits, APL can maintain its technology edge within the constraints of a tight budget. "The balanced-scorecard approach strengthens IT innovation because it makes the company more aligned with the business strategy," she says.
Stoddard thinks the balanced scorecard could work for other companies, too, but she says that it is partial to companies in which business processes favor hard ROI. Otherwise, she warns, "you can achieve some successful technology implementations that ultimately fail because the business isn't ready to make the most of them." Even at APL, some projects have been put on hold not because the ROI wasn't there, but because the business side wasn't ready to commit. She says the reverse can also be true: the business is ready but the technology isn't.
Smith adds that this more formal embrace of IT governance has required plenty of finance education. Business units that once had direct access to the IT group have been schooled in IRR, NPV, and other concepts so that all requests are not framed in a financial context. Having put the scorecard at the center of its IT efforts, APL doesn't plan to change course, even if the economy should boom. "We are doing fewer things better, as opposed to doing a lot of things but not doing them well," says Smith. "This back-to-basics approach is the future. I don't think this lesson will be forgotten for a long time."
Dow: A Focus On Vision
Dow Chemical Co.'s formula for global success is all about homogeneity. From Casablanca to the Louisiana bayous, the company's worldwide manufacturing empire relies mainly on the same software and hardware infrastructure, an approach that doesn't come cheap.
Paul Janicki, Dow's global finance director for information systems and E-business, says IT's job is to provide top-quartile performance at the best price so that the company can achieve its strategic objectives. "If it is in the company's strategic interest to install an IT service or application, it is our role to optimize it," he says. The cost of a standardized global infrastructure pays off in the way it facilitates the integration of newly acquired companies, he adds.
Quantifying a specific return for an IT project is a challenge, says Janicki, because many costs occur up front, while the benefits, in terms of strategic advantages, don't show up until later. "When we integrated Union Carbide, we got all the synergies the company envisioned, but the first people on the ground to make that possible were IT staffers. Without the systems and connections, nothing else happens," he says.
In that situation, Janicki says, it makes little sense to demand a specific ROI, although the company does conduct a formal analysis for all projects. But, if a deal is deemed worth doing, then the IT costs have to be absorbed as an inevitable part of the deal, even if the ROI is not positive.
To keep costs in line and projects on track, Dow works closely with a few key vendors. It signed a major outsourcing deal with EDS, for example, to create a global network dubbed DowNet. Dow meets with its vendors at least annually to review their performance and discuss technology and business strategy for the future. "The idea is to refine our IT strategy, as well as understand when things may be feasible," says Janicki. "Part of this is to see if we can't line up our longer-term strategy with theirs."
Janicki has a word of caution for companies seeking to outsource parts of their business. "One of the bigger mistakes companies make is to say, 'I don't understand something, so let me outsource it so I won't have to deal with it anymore,'" he says. "You never outsource something you don't understand. You make a bigger mistake because you don't know what you sent out the door."
The DowNet project with EDS has high-level milestones — for example, when the implementation is due to be completed in country no. 79 — as well as tactical milestones, such as whether the necessary servers have been installed on time. By using milestones and tracking projects closely, Dow can judge where EDS is relative to the goals of the project; in essence, it manages the manager.
Bucking the trend toward shorter-term paybacks, Dow's IT strategy will ultimately be measured by its long-term impact on the bottom line. For that reason, it's less important that projects pay off individually than that the overall IT plan supports the business efficiently. For Janicki, much of that comes down to risk management. "There is no absolute line to quantifying [IT project] risk. It comes down to how you mitigate or manage those risks," he says. "A riskier project with a good mitigation plan may be a better bet than a low-risk project that offers no alternative if it fails."
Dow's approach may be a luxury few other companies can afford, but some may find the company's long-term view refreshing. EDS certainly must.
IBT: Teamwork Triumphs
While it's difficult to deny the value of diligent ROI analysis, some companies are finding success not so much in how they run the numbers as in who runs the numbers.
At Boston-based Investors Bank & Trust (IBT), the finance and IT departments are working more closely than ever, thanks to a double dose of diligence. The IT department has a finance team embedded within its ranks, while CFO John Spinney relies on a former CPA with substantial IT awareness helping to analyze the company's IT investment strategy. This system of careful controls highlights how critical IT is to the bottom line at IBT (a subsidiary of Investors Financial Services Corp.), which provides global custody and multicurrency accounting services to people such as mutual fund managers.
While American President Lines (APL) has reined in IT spending, IBT is continuing to devote a hefty 20 percent of revenue to IT even as its overall revenues climb. The reason: as the company has grown, partly through the acquisition of the custody units of other large banks, information processing has served as the cornerstone of its services. The accuracy and security of its data is paramount, and Spinney says that IBT's competitive advantage hinges on its deployment of IT. Nonetheless, he adds, "if you don't control the tech budget from the financial perspective and let it get out of control, you are not going to meet your earnings estimates for the Street."
Spinney says IBT does not have the luxury of investing only in technologies that boost efficiency, but must also provide certain capabilities that customers demand. "Our IT budget is driven by several needs: to enhance our technology, deliver better customer service, minimize risk, and provide better functionality," he says.
Therefore, several projects — including an internally developed custodial service and the purchase of an Oracle application suite — weren't made in the name of cost savings, but to improve the quality of the information the finance department uses while also enabling the CFO and line managers to make better decisions. Those benefits, Spinney acknowledges, "are hard to quantify."
To keep spending on track, IBT puts major technology projects through an ROI analysis, one built around conservative assumptions but no set payback period. Once the company sets its IT budget for the year and an executive team (including the president and CEO) approves priorities, finance director Ed Sargavakian, the finance department's designated IT analyst (who reports to Spinney), and Dave Mueller, director of IT finance (who reports to CIO Ted Maroney), develop a detailed work plan.
The plan is then reviewed by the company's decision-makers — the CEO, CFO, CIO, president, and managing director of operations — and implemented by the IT department. From their vantage points in finance and IT, respectively, Sargavakian and Mueller monitor the progress of IT projects. Mueller handles operational issues, while Sargavakian keeps tabs on the budget and forecasts for the year.
At the project level, IBT takes a tack similar to APL's, identifying what problem the company is trying to fix and which solution provides the most benefit. Working from a preliminary project evaluation form, the company's IT development team first decides if it even needs to fund a project or whether the problem can be solved with a manual workaround. "The IT development team works closely with the business unit," says Sargavakian. "The business unit identifies a problem, then the IT group goes through the specs to define the problem and come up with a solution, identifying the deliverables to meet that solution."
The close working relationship between IT and finance acquired an additional dimension earlier this year when finance became responsible for IT procurement. The goal was to leverage finance's expertise in negotiating volume discounts and other deals, but Spinney also recognized that the technologists know best what software and hardware they need to accomplish the company's IT goals.
So for the first month after unifying procurement under finance, finance discussed purchasing priorities with IT. "We don't want our new approach to procurement to result in finance dictating to IT what it should be buying," says Spinney. "We want the technology people saying, 'We need to buy x type of server or x type of software. This is how I need the server configured. Go out and get it for me.'"
The strategy paid off when IBT made a major investment in Oracle software. The company's human-resources, finance, and IT departments pooled their requests and requirements to the procurement office, which Spinney says enabled IBT to gain substantial leverage.
Consolidation helps drive better deals, but so does the current climate. Sargavakian says that in the past 18 months, most vendors have become more amenable to making concessions. He has found, for instance, that they will accept contracts that include clauses that limit the degree to which recurring costs will increase in subsequent years to between 3 percent and 5 percent. He's also been able to get "price holds," which lock in discounts throughout the length of a contract, not just in the first year. "You can get those discounts whether you are spending $1 million or $100,000," says Sargavakian. "At first you get the old 'We can't do that,' then the next thing you know, it's, 'We'll do that and more.'"