Some high-profile IT disasters have made boards of directors highly sensitive to risky IT rollouts. Jeanne-Vida Douglas looks at how IT affects the bottom line, and how CIOs can progress with IT projects while avoiding disastrous implementations.
In October 1997 Don Argus, then CEO of the National Australia Bank, announced a AU$1.7 billion cash offer for US-based mortgage servicing outfit HomeSide. This worked out to be about US$28 per share when just two months earlier the company had been trading at US$21 per share but Argus was prepared to pick it up at a 30 percent premium because it had something he wanted: mortgage-processing technology.
At the time local analysts were lukewarm about the deal; HomeSide had formed from a merger just 18 months earlier and the technology was not yet fully functional. However, mortgage servicing seemed to hedge the bank's exposure in the credit sector, and, riding over half a decade of a tech-led boom in the Australian banking sector, Argus seemed blind to the risk.
Given the climate it is almost understandable. According to a 2003 report compiled by the Federal Productivity Commission, the banking and finance sector in Australia spent the early nineties restructuring into an IT-intensive industry. By the time HomeSide's mortgage-processing technology had caught Argus' attention the sector had already replaced face-to-face transactions with electronic transfers, implemented financial and risk management products, and consistently grown its output given fewer inputs.
Argus was hoping for more of the same, but ended up with a AU$1.7 billion lemon. The HomeSide bomb didn't go off until 2001 by which time Argus had moved on, and Frank Cicutto saw most of his AU$5.3 billion gains sucked into a AU$4 billion black hole created by the HomeSide failure.
The ripple effect
While the numbers might not be as large or the risks as great, IT managers and CIOs are constantly faced with purchasing decisions that will directly effect the bottom line. Gone are the days when the tech department was a little black box from whence sprang new technology -- some high-profile implementation disasters put pay to that idea.
Moreover, Australian company board members are drawn from a fairly small circle of professionals. As IT has played an increasingly central role in business over the last two decades, it would be hard to find a board member who hasn't been burnt by at least one botched implementation, and one who isn't about to make the same mistake again.
This has bought CIOs and technology managers into a whole new realm of project management, where return on investment, total cost of ownership, and efficiency gains need to be demonstrated and tested throughout any implementation.
Counting the costs
John Roberts, chief of research at Gartner Asia-Pacific, is sympathetic with the position IT managers and CIO find themselves in when it comes to justifying expenditure, especially when dealing with boards that are understandably cynical of the spend-money-to-save-money argument.
"Within organisations IT departments are seen as cost centres, but they exist only to add value to the rest of the organisation," Roberts says. "The relationship between what IT does and what it costs is often intangible because the value of IT is based in the way we do business. In most cases companies simply couldn't operate without it."
Roberts points to the example of e-mails, where many companies still see e-mail systems as an additional cost rather than a replacement for surface mail.
"E-mails are at least two orders of magnitude cheaper than traditional mail, but that's still not made explicit when it comes to paying for the service," Roberts says.
The problem for CIOs is that while a bad choice of IT system will no doubt effect the bottom line, no choice is even worse. This leaves the IT department in the unenviable position of demonstrating potential future productivity gains which are necessary simply to keep companies operating in a competitive marketplace where everyone else is doing the same.
His observations are backed up by 2004 research carried out the Productivity Commission, which found a clear correlation between investment in IT infrastructure and productivity growth. The report found that many of the gains from IT investment do not come automatically, and that the purchase and installation of new hardware and software can be costly and time-consuming.
Roberts also offers a cheeky compromise for exasperated tech managers wanting to demonstrate the core nature of their services. "If you're repeatedly offered the proposition that you're spending too much money on essential IT infrastructure, you can always offer to switch off what isn't needed," Roberts says.
Switching on the wrong system can be just as disastrous, as James Elkington, managing director of French-based software vendor Esker discovered in 2001. With a presence in Australia since 1998, Esker was dependent on selling its document management solutions through channel partners until the 2001 launch of its DeliveryWare product. The company decided to sell DeliveryWare direct which put a lot more pressure on its internal Siebel customer relationship management (CRM) software.
"We were using a Siebel customer relationship management system when we were dealing with distributors. We realised that in going direct, the CRM system would become much more important," Elkington explains. "It wasn't a bad product, but it was a bad choice of product and it was rolled out badly. The decision to go with Siebel had been made by management, not by the people that were actually using the technology."
According to Elkington, as the DeliveryWare product was sold in Australia, staff simply were not entering sales data into the Siebel system, so the company had no idea how the new product was going. "You can't manage what you can't measure, and we had no sales data to go on," Elkington says. "Not only could we not move forward, this bad decision regarding software almost put us out of business."
Having already poured half a million US dollars into the Siebel system, Elkington says management was against large rollouts and not about to take any more risks. As the smallest Esker outpost, the company's Australian operations were chosen to trial an ASP version of a locally-developed CRM product called SalesForce.
With data entry integrated into the sales process, automated reporting and a minimal foot print, Elkington came out of a two-week evaluation period convinced he was on the right track. "Since we adopted SalesForce in 2003 our revenues have grown by 37 percent," Elkington says. "I know exactly how long sales cycles last, and I can set up dashboards to see how each of the teams are doing which saves me about six hours per week in meetings with team leaders. It also saves me at least a week a year which I used to spend getting data to generate reports."
On the other side of the table, vendors are also feeling increased pressure according to Geraldine McBride, CEO and managing director of ERP vendor SAP.
"We seldom do software sales these days, from 2000 onwards IT competes directly with other business projects for capital spend," explains McBride. "A lot more time is spent looking at financial returns, and there's far more accountability now expected from both the vendor and the CIO."
However, vendor ROI or TCO calculators aren't the only tools available to nervous IT project managers. Some in the IT sector are adopting decision-making processes designed to avoid bad decisions, and tie business considerations more closely to the technical infrastructure.
As CIO for Internet-based company Wotif.com, with 75 staff and double figure growth rates, Paul Young makes strategic decisions that effect the company's bottom line on a daily basis. "We need to be able to deliver a positive customer experience whenever a customer comes to the site, whether we have 10 or 10,000 [customers]. If we are unable to deliver that experience the customer is lost, as is the cost of acquiring the customer in the first place," says Young.
With IT clearly so central to Wotif.com's operations, Young has worked strategically to minimise any disconnection between IT and the company's business direction. Founded in 2000, Wotif.com doubled in size for the first three years of its operations. Under pressure to work fast, and accurately, Young has adopted a strategic approach to technology management and implementation.
Developed in the US, Extreme Programming is designed to enable IT departments to more closely align themselves with overall business outcomes, and thus create more flexible and innovative solutions.
"With traditional methods of communication between departments and IT procurement, you spend a lot of time tying requirements down tight, then get exactly what you asked for, not exactly what you wanted," Young says.
In order to implement the strategy, Young has severed the company's ties to proprietary software and it now runs on a J2EE platform and Linux operating systems. "The greatest inhibitor to growth for any company is to be limited by proprietry software," Young says. "We need systems to be very reliable and cost effective, because that's what effects our bottom line."
And although the adoption of open source technology might seem a risky approach to some, Young believes it has provideded Wotif.com with significant competitive advantage.
"The technology has given us the flexibility to stand out from our competitors -- we wouldn't be here without it," Young concludes.
This article was first published in C|Level magazine, a supplement of Technology & Business magazine. Click here for subscription information.