See How They Spend It

By Eva Marer

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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.

Yet the events of September 11 showed just how fast companies may need to adjust their spending.

"Previously enterprises looked at spending on business continuity and disaster recovery as dead investments," says Atul Rege, Ph.D., a consultant in the IT Security Group of Mahindra-British Telecom in Mumbai (formerly Bombay), India. "Now multi-nationals are starting to store back-ups off-site and conducting regular drills for systems they have in place." Partnering with DRI International, the Indian telecoms giant has seen demand for security services take off, the more so after the December 13 terrorist attack on the Indian parliament. Despite the slowness of size, the lumbering giants have the most to lose from not thinking quickly on their feet.

Aligning IT Spending with Business Goals
Of course, technology leadership only comes with the support of the CEO, says John Hollier, vice president of IT for PDI Inc., a commercial partner to the pharmaceutical, biotechnology and medical devices and diagnostics industries located in Upper Saddle River, N.J. Hollier attributes his company's place among Fortune's 100 Fastest Growing Companies at least in part to "our CEO being the biggest tech advocate in the entire organization."

Yet that kind of leadership also comes at a price. For one thing, PDI will show heavy revenue losses due to cash outlays it made last year. Strategy-wise, the company is on track, says Hollier, but Wall Street may judge otherwise. "Our attitude is that now is not the time to change course, but to continue to execute against the goals we set for ourselves." In short, that means moving beyond selling drugs to doctors -a marketplace that is quickly becoming saturated- toward offering comprehensive sales and marketing solutions for products at any stage of their lifecycle.

In order to achieve PDI's business goals, Hollier's IT department must constantly innovate even as its budget remains flat. His first move since joining the company last year: tighten processes within his own IT organization. "We've matured over the last year from an IT organization that accepted what anybody said we needed to do, to an organization focused on major business initiatives." In order of priority, Hollier plans to focus in 2002 on: CRM and sales force automation; business intelligence; and reducing costs in finance and HR.

The focus on those three technologies comes after a period of rapid growth for the company. PDI had grown from 700 sales reps in 1998 to 3,700 this year, and had expanded its operations to include not only selling drugs to doctors but to offering comprehensive sales and marketing solutions for products at any stage of their lifecycle. The company already had a reputation among customers and competitors for being nimble: it could recruit, train, hire and put 500 sales reps in the field within nine weeks of signing a contract. Next year, it will roll out a Siebel sales automation platform and test it among 1,500 reps in the field.

Hollier does not reveal exact projections but expects the upgrade to have a payoff for every aspect of his business "from making better deals up front all the way to tweaking our marketing plans to improving market share." Hollier hopes the technology will buttress his company's ultimate business goal: to change the way pharmaceutical, biotechnology, and medical devices and diagnostics companies manage their portfolios by offering innovative, alternative solutions.

Links to organizations cited in this story
Hooked on Phonics


DRI International

Meta Group

PDI Inc.

The majority of CIOs polled by Morgan Stanley expect the economy to improve by the second quarter 2002. In the meantime, CIOs must prove their value in good times and bad. "The CIO must be seen as a driver of change," says Rubin. That may require smarter forecasting, deeper and more frequent analysis and doing more with less. Yet ultimately the CIO's mandate remains unchanged - improve operational efficiency while leveraging technology to drive business growth.

Eva Marer is a freelance business and technology reporter based in New York. She covers investments, personal finance and corporate technology issues for a variety of trade and consumer magazines. Contact her at egresspress@aol.com.