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Value for e-biz spending the new mantra

The free-wheeling days of the 1990s are over. Now companies want to know how investments in technology will pay off

Special to The Globe and Mail

When Canada's oldest retailer went on a technology shopping spree, it was determined to get full value for its $275-million e-business spending splurge.

The economy was cooling down and Hudson's Bay Co. was keenly aware of the need to be cost-conscious in a highly competitive market with razor-thin profit margins. But the company also knew it needed to invest heavily to integrate "a bunch of disparate technologies" acquired during two decades of expansion and take advantage "of all manner of opportunities to improve our efficiency and effectiveness," says Gary Davenport, HBC's vice-president and chief information officer.

So HBC shopped around carefully, forming an alliance with major technology vendors to get good deals and a co-ordinated approach to building an integrated e-business platform. The company figured out what it needed to implement its strategies and focused its spending on projects that promised a good return on investment.

A rigorous process was put in place to analyze the cost and expected return on each project. Then, when projects were completed, post mortems were held to assess whether budgets were met and goals realized, he says.

He says tech spending has always been closely linked to business strategies, such as bringing credit cards and loyalty programs together, linking customer accounts and information or integrating logistics to handle all merchandise in one location.

The alliance with vendors such as International Business Machines Corp., Microsoft Corp., Oracle Corp., Cisco Systems Inc. and Symbol Technologies Inc. not only makes it possible to negotiate deals based on business volume but also eliminates bureaucratic processes, streamlines the evaluation process and ensures all technologies can be implemented in an integrated fashion, Mr. Davenport says.

The $275-million invested over the past five years has, he says, resulted in a major payback. It has reduced inventory by more than $160-million annually and made for a continuing cut in expenses.

This rigorous approach to investment may seem normal for most businesses, but it represents a new trend in e-business spending, where unbridled budgets and massive cost overruns were the norm during the 1990s dot-com boom, says Joanne Moretti, Canadian general manager of Computer Associates International Inc.

"In the past, people didn't look at the price tags very much on IT. We didn't have to put business cases together. We didn't have to put together return on investment justifications," Ms. Moretti says.

"But that's all over now," adds Ms. Moretti, whose company has reorganized its own accounting system to be able to offer customers a flexible licensing program that will let them pay for software products as they use them rather than in large, up-front lump sums.

Technology managers have experienced "a crash back to reality" during the past few years, as their budgets were cut back and their operations called upon to justify expenditures, says Chuck Tatham, vice-president of marketing and business development at Changepoint Corp., a Richmond Hill, Ont.-based company that specializes in helping technology organizations become more efficient.

Mr. Tatham says corporate technology departments that used to have a "finger in the air, loosey goosey approach" to cost estimates are now putting mechanisms in place to track every cent they spend and run their operations along business lines.

Even though there are signs technology spending is starting to rebound from a three-year slump, industry analysts say there is no chance of a return to the free-spending days of the 1990s. Framingham, Mass.-based International Data Corp. reports North American firms are recording their first gradual increases in tech spending since 2000, but growth is "inhibited by a persistent atmosphere of caution and hesitancy."

Cost-cutting is still the major focus of most companies and less than one-third of technology departments expect to receive the necessary funding to complete critical and strategic objectives during the next 12 months, according to a recent IDC survey. But companies are facing a dilemma because they also realize an urgent need to upgrade their technology infrastructures, notes Stephen Minton, director of worldwide IT markets at IDC.

"It's a Catch-22," says Danny Chazonoff, chief technology officer at Terra Payments Inc., a Montreal-based company that specializes in processing on-line payments. In order to cut costs, Terra has invested in technology to automate as many of its processes as possible, he says. "You've got to spend money to save money."

Mr. Chazonoff says he is happy to take advantage of special arrangements with vendors, such as CA's flexible licensing program, which helps him manage his cash flow. "My chief financial officer will have a larger smile when I come to him and say the investment is $30,000 a month, as opposed to a million dollars right now."

Companies are also finding ways of cutting costs by integrating the technology better and eliminating duplication, says Rick Zytaruk, partner in technology strategy at IBM business consulting services. In boom times, he says, companies tend to do things in a rush to gain competitive advantage and the result is often a system with lots of overlaps, "like a city without well-planned architecture."

In today's environment, organizations are spending money on consolidating servers and creating links that will, for example, provide financial institutions with a single mortgage system, where they had several overlapping systems. Companies can then make the most of the investments they have already made in their existing systems and the cost of new technology can quickly be recouped through the savings gained through consolidation, he says.

Mr. Zytaruk compares this piecemeal approach to technology investment to "rebuilding a house as you're living in it."

Carefully focused spending on technology to improve efficiency and take advantage of new market opportunities will likely fuel a moderate recovery in the technology sector in the next few years, according to Michael Fleisher, chairman and chief executive officer of research firm Gartner Inc.

He says forward-thinking companies are already focusing their IT budgets on core business strategies, applying principles such as outsourcing functions that are not strategic to their business, standardizing many elements of their core technology infrastructure, reducing the number of vendors and separate technologies for a more efficient IT portfolio management, and continuing to maintain control of strategic planning, regardless of the scale and scope of their outsourcing programs.

"IT organizations must be ready to support two distinct functions going forward," Mr. Fleisher told a recent international gathering of senior technology executives. "A continued vigilance around tightly managing costs and driving efficiency and support for your CEO's emerging No. 1 priority: innovation to drive growth."

© The Globe and Mail

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