See How They Spend It

For a direct-marketing powerhouse, Hooked on Phonics knew its Web site was inadequate. “The Web site we had was really a homegrown product,” explains Mike Manning, director of e-commerce for the 15-year-old San Francisco company that sells products geared to teaching kids to read. Although the company generated 20% of sales in 2000 from the Web, Manning felt it should do better.

“We are a direct-response company and the Internet is made for direct response,” he says. “Also we already had a brand so we did not have to build a brand and a business at the same time.”

As a manufacturer, the company operates on a more favorable margin structure than most e-tailers, and knew it could realize even greater efficiency by increasing its sales on the Web. All told, HOP paid Web developer Tristream $80,000 and spent $400,000 upgrading its technology.

The result: a 43% increase in Web sales. Manning expects the site to generate $18 million in 2002, or 30% of sales. The investment was a no-brainer.

In the current economic squeeze, companies and IT departments don’t have to dream up creative ways of spending the green. In 2002, many CIOs and IT execs who work under them will be focusing on a new strategy for IT spending: Identifying spots in their companies where investments in technology will yield quick and clear dividends.

Today’s mantra: “Return on Investment”

“Fuzzy ROI is gone,” says Larry Prager, founder and CEO of Entology, a project-based consulting firm located in Bedminster, N.J. Even among Entology’s primary clientele -Fortune 500 firms- companies are more interested in achieving short-term returns than embarking on long-term investments.

“Companies are still interested in supply-chain management and ERP but they are putting huge wholesale applications on hold and looking for ways to achieve efficiencies out-of-the-box or with existing technology,” Prager says.

CIOs’ 2002 Priorities

Morgan Stanley polled CIOs in November to determine spending priorities for 2002. Here are the top 10 areas for spending and the percentage of CIOs surveyed who said it was a priority:

1. E-commerce initiatives: 37%
2. Security software: 34%
3. Application integration: 33%
4. Storage hardware: 28%
5. ERP software/upgrade: 26%
6. Windows 2000/XP upgrade (desktop): 25%
7. CRM software: 24%
8. Web site enhancements: 24%
9. Content management software for Web site: 23%
10. Windows 2000/XP upgrade (server): 20%

Source: Morgan Stanley CIO Survey, Nov. 2001

Indeed, according to a survey of CIOs conducted in early December by Morgan Stanley Dean Witter, 67% of CIOs were planning to spend less in 2002, with 71% reporting a moderate or significant backlog in pending or potential projects due to spending constraints. The top three spending priorities for 2002: e-commerce initiatives, security software and application integration.

In the current environment, companies are focused on increasing productivity from within, relying on IT execs to help accomplish the task. Among Prager’s own clients, for example, he has seen increased spending on content management systems that allow non-technical employees to update information that belongs on the Web. These systems save money by taking information where it is generated -say, HR or marketing- and pushing it out to the Web. Prager has seen excellent returns on content management systems, but warns CIOs of some of the challenges involved. “With more companies concerned about being multi-cultural and multi-lingual, you may have several different versions of a Web site. You may have legal concerns or complex permissioning routes where data has to go through multiple approvals.”

Prager has seen increased spending on enterprise directories that set up permissions, personalization and authentications for anyone -employees, customers, suppliers- who might be accessing corporate networks. He has also seen spending on enterprise portals take off.

“Clients are setting up ways for their employees to access disparate material from across the enterprise,” he says. “For one, effective knowledge sharing reduces time and increases productivity. In addition, a common platform eliminates duplication and lowers the overall cost of developing applications.”

Smart Choices Free Up Dollars
HOP is a case in point. In the past, says Manning, almost 100% of his IT budget went to developing e-commerce initiatives. Last year he significantly reduced development costs by streamlining his technology platform and coding base -thanks in part to a switch from ColdFusion to ATG’s Dynamo platform- making his network easier to maintain. The new platform has freed up two-thirds of his budget to invest in new projects.

New projects in 2002

Morgan Stanley polled CIOs asking whether they will spend more on new projects in 2002 than in 2001. Here’s what they said:
Yes: 28%
No: 44%
Maybe: 16%
Would like to, but it depends on the economy: 12%

Source: Morgan Stanley CIO Survey Nov. 2001

The savings has allowed him to ramp up other applications without squeezing his budget. In 2002, he plans to upgrade the company’s call center and accounting systems. “Our budget is holding steady but is being asked to do more,” Manning says.

Smart companies seek to drive down core costs even as they look for investments that support growth or expand support for new business, says Howard Rubin, Ph.D., executive vice president and research fellow at Stamford-based Meta Group. By Rubin’s reckoning, few companies -only about one in eight- manage technology as an investment, with the vast majority operating in a reactive mode.

To manage technology as an investment, companies may have to change their approach to budgeting, says Rubin.

“In the old days, you planned from May to October and implemented in January,” he says. “These days you may have to track your big projects once or twice monthly and do deep quarterly reviews. You have to have five to six quarters of visibility ahead of you and be willing to adjust based on circumstances.” Rubin acknowledges that the companies most successful at managing IT as an investment are small outfits (under $300 million in revenues) and that it is very difficult to make a $10 billion company dance.