Penny-Pinching All-Stars

For CIOs at companies with historically small profit margins, a recession means little change. Read how they make every IT dollar count

You used to pity Lloyd Taylor. Like other CIOs who work for companies in low-margin industries, he was the guy with the shoestring budget who had to watch every penny, every day.

Well, guess what? Taylor, the CIO at Cargill, a global manufacturer and distributor of agricultural and food products, is now a role model in these tighter budget times. Cargill may be a $US49 billion company in terms of revenues, but it cleared a profit margin of seven-tenths of 1 per cent, less than one cent on the dollar, in 2000. So while you've recently recalibrated your expectations about IT spending to fit a recession, Taylor has had to master the ability to do more with less - regardless of the economic cycle.

"There's only so much money to go around, and you have to make sure every dollar is well spent,"Taylor says.

Taylor uses his words like he uses his company's money: he prefers not to talk at length about frugal spending tactics. But keep his statement - and the remarks by other CIOs you will find in this story - in your pocket. They're coins that carry lessons about value.

As you read the tips culled from conversations with eight CIOs from various industries, it's useful to remember that one industry's typical profit is different from another. In bread-and-butter industries, such as agriculture, trucking, contract manufacturing and construction, where stiff market competition and price pressures mean slim profits, CIOs are used to making sure every dollar is well spent. They have a lot of practice running IT with locks on their wallet and both eyes focused on their company's bottom line. These CIOs say ROI is the barometer by which projects get approved. Fast payback is a must. Anything considered long term can take a backseat. And answer no to new purchase pitches without regret. In general, single-digit returns are what you'll find here.

The following six tips are for CIOs from the penny-pinching all-pros.

Almost New Is Better Than You Think

When it came time to update his infrastructure hardware, Byron Goodwin faced a tough situation. As much as he would have liked to buy some spanking new servers and routers, Goodwin, CIO of the wholesale groceries distributor Associated Food Stores (2000 profit margin: 9 per cent), knew his annual $US8 million IT budget just couldn't take the hit.

So when he needed new hardware, he didn't pick up the phone to call Dell or Compaq. Instead, he called a couple of resellers.

"We don't buy new equipment,"Goodwin says.

With dotcom failures plentiful and other companies seeking savings through consolidated operations, there is a lot of almost-new equipment that's available for used prices, he says. Last northern autumn, Goodwin purchased storage systems for his data warehouses through a reseller and paid 50 cents on the dollar. Instead of shelling out $US100,000 for the hardware, he paid $US50,000.

Like most companies in the grocery industry, the Salt Lake City-based company faces a crowded competitive landscape growing more intense with new challenges coming from chains such as Wal-Mart and Target, which now carry food items. Overall, the industry's average annual net profit (revenues less expenses) is about 8 per cent.

Buying used or second-hand hardware can be a plausible approach to cost-cutting, says Sunil Subbakrishna, a vice president in the IT strategy practice at Mercer Management Consulting in New York City. CIOs need to consider whether the equipment will meet users' needs, and whether maintenance costs of such hardware are higher than on new gear.

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Software Upgrade - Fuhgeddaboutit

For many CIOs, the cost of updating and maintaining hardware doesn't even come close to the numerous costs associated with software. There's licensing fees, patches and service packs, maintenance, customisation and frequent upgrades that hit the market faster than some companies can roll out the previous version.

There's an answer. Don't upgrade. And look to negotiate a better deal.

Ted Barnicoat, CIO of Trimac (2001 profit margin: about 3 per cent) is well versed in the art of unearthing cost savings from software contracts. His talent is a necessity - Trimac, a bulk carrier and transportation company based in Calgary, Alberta, has an IT budget of $US5.5 million to support 5500 employees and 130 branch locations across North America.

Barnicoat's knack for minimising costs has been honed by years in the trucking industry, a notoriously low-margin business, particularly for bulk carriers that haul loads such as chemicals and paint. Bulk carriers require special trailers, some that can be pressurised or heated, and have very strict delivery deadlines.

Every year, Barnicoat takes a look at software contracts about to come up for renewal and renegotiates with his vendors. "Software is a major cost to us, and we do this because the vendors tend to be flexible about renewal,"he explains.

Barnicoat often finds that his organisation doesn't need to upgrade to the latest version of a program, and then he decides whether to defer or refuse the upgrade. Recently, he decided to forgo an upgrade to Windows XP.

"We won't do it,"he says. "Right now we're paying 25 per cent a year for maintenance, and they want 29 per cent if we upgrade. We can't afford it, and we don't need it. So my position is we'll wait until our current licences run out over the next four years."(Barnicoat's position is not unusual. See "The Meter Is Running", March CIO.)Mark Settle, CIO of New York-based Arrow Electronics in Melville, (2000 profit margin: 2.8 per cent), says he will also delay a move to Windows XP. Settle anticipates saving between $US2 million and $US4 million by upgrading from Windows 98 to XP in a year, rather than doing so now. "We're just moving the cost out, but when we spend the money we will be spending it more effectively,"he says.

Another reason Settle thinks it's more valuable to delay the upgrade: the longer he waits, the more time other early users will have to discover and fix the inevitable bugs in the system. If the bugs have been patched by the time he upgrades, that's a more effective use of his money, he says.

Subbakrishna of Mercer Management says upgrade delays can save short-term dollars, but they come with a caveat: the need to consider what will happen if the vendor stops supporting an older version of a software product.

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Let the Other Guys Build It

When there's no avoiding spending money on software, it makes fiscal sense to stay away from software development, says Michael Radcliff, CIO of Ingersoll Rand, the industrial manufacturing company (2001 profit margin: about 4.5 per cent).

Radcliff says he lets vendors deal with software development. Instead of customising software in-house or allocating staff to develop programs, he gets his vendors to do the development and customisation work on applications as often as possible. That way, the cost of development is not borne by him, and there's an immediate ROI, Radcliff says. "It keeps the capital investment on the vendor's balance sheet. And if we're not spending money on development, we can put those funds toward deployment."

Radcliff is rolling out a new finance initiative that will add options for customers who want to lease, rent or buy items such as golf carts, air compressors or construction equipment from Ingersoll Rand business units. When he bought the software from a vendor (he declines to say which one), he gave its representatives a list of customisation requirements and let them do the development. "We don't have a lot of discretionary spending, so we have to be very, very careful where our money goes,"Radcliff says.

Hunt Down Waste and Kill It

Some of the hidden costs of IT are not exactly IT-related. But that doesn't mean you can't find savings there.

Cargill's Taylor discovered that IT employees were calling 411 (directory assistance calls) so often that it was costing the department hundreds of thousands of dollars in phone charges. Given his company's slim profit margins, Taylor describes himself as a stringent penny-pincher. Every organisation has a surprising amount of waste, he says; you have to look in all the nooks and crannies, and train your staff to do the same. "If you create a culture where your employees watch for the little things that cost a lot, you can run a lean organisation without sacrificing the important things,"Taylor says.

Taylor put a stop to the costly calls by blocking the 411 function in the department's phone system. He then posted a link for nationwide yellow pages on the corporate intranet. Without the calls to information, Taylor saved about $US250,000.

Most CIOs can say where they spend money in their department, but they don't have a handle on their actual costs, says Eileen Birge, vice president of the Concours Group, a Houston-based IT consultancy.

"They don't know where the money really goes,"Birge says. "You may spend $10 million in a year, but how does that break down in terms of projects, maintenance, salaries, development and operations? A good understanding of actual costs and their drivers is a very important factor and can save you a lot of money."

CIOs should do an in-depth analysis to find which major groups or activities cost the most, and then find areas to cut in those places, she says. For example, if data storage is eating up a lot of funds, e-mail is often the culprit. By getting employees to clean out their e-mail boxes more often, CIOs could save 15 per cent to 20 per cent of their actual costs, Birge says.

After examining his spending, Robert Tolbert, vice president and CIO of Lyondell Chemical (2000 profit margin: 10.8 per cent) saw that hardware and software were the major cost centres for his IT budget. Tolbert, who holds the same titles at Equistar Chemicals, a joint venture between Lyondell and Millennium Chemicals, says he is in the process of standardising the desktop computers and software at each of Lyondell's and Equistar's 33 locations worldwide. Prior to standardising, Tolbert had to juggle more than 1700 different software tools and four different operating systems. Upon completion of the project, he will oversee 400 applications and two operating systems. The project will enable him to slash maintenance costs on multiple platforms and consolidate his resources into one centralised data centre. This data centre holds the resources to manage approximately 8000 desktop and laptop PCs all over the globe.

"In tight times, you invest in projects that have a swift payback,"Tolbert says. "I wanted the desktops and software to be as similar as possible so it was cheaper and there were fewer variables to support."

Budget constraints aside, CIOs know that it makes sense to spend money in IT and cut costs elsewhere in a business. Arrow Electronics' Settle recently rolled out a new set of services on the company's Web site that lets customers view product availability and see how other customers are utilising Arrow's products. The project ate a chunk of his budget but saved millions of dollars in call centre and help desk costs for the company.

Keeping all projects in line with business goals is essential for every CIO, but it's particularly necessary when one's IT budget is tightly constrained, says Tom Mangan, a partner in the technology integration services practice at Andersen, a management consultancy in Atlanta. "Every project must be business-focused, with the strongest business case and a clear ROI so that every executive knows where each IT dollar is going, and knows it's a business investment,"Mangan says.

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Bill the Customers

Getting someone else to pay for the cost of your IT projects is a popular tactic used by low-margin CIOs as a way to extend the reach of a limited budget. All it takes is imagination and business sense.

Phil Go, CIO of Barton Malow, a Michigan-based construction company (2001 profit margin: less than 1 per cent), says he needed a way to differentiate his company from others in the highly competitive construction field without draining his $US5 million budget. He mapped out a strategy for using IT to speed up construction projects, a plan that could put his company ahead of rivals. But his budget would only go so far. So he decided to deal with the cost of technology the same way his company managed the cost of concrete or labour crews: he billed the client.

"We are a professional services firm,"Go says. "When IT projects relate to a client's construction contract, we pass the cost on to them."

Go began using an ASP (though he declined to say which one) to handle all aspects of project management, a move that few other construction companies have made. The result: buildings are completed on schedule about 50 per cent more often than they used to be. He also set up a WAN at each construction site that maximised efficiency by linking the construction sites to Barton Malow's headquarters.

The monthly cost of both the ASP and the WAN are written into the contract and billed to the client site as part of the job cost, Go says. (If it's not written into a client's contract, different operating groups at Barton Malow absorb the costs.) This way, Go is able to help the business and fund projects without dipping into his own budget.

"These are investments we must make in order for the job site to be more efficient and for projects to be completed on time,"Go says. "Not many companies do that because they don't see an immediate return, but we're getting very positive feedback from our clients."

Hang a Shingle

Steve Hassell, CIO of the Northrop Grumman Newport News Shipyard (2000 profit margin: 4.5 per cent), took a different route than Go to reach a similar advantageous spot.

In early 2001, in concert with business leaders at the Virginia-based company, Hassell made his IT department a wholly owned subsidiary of the Shipyard. As president of the new entity called Naptheon, Hassell (who retains his CIO title) signed a five-year service-level agreement with the parent company, Newport News Shipyard, and now the IT department operates like a paid consultant. Hassell bills Newport News for all costs related to the department and its services. "Before, we used to have emotional yearly debates about the cost of IT,"Hassell says. "This step took all the emotion out of it. Now we have cost and quality numbers based on standalone research, and we can do an objective business case for any project just like any other service provider."

The move helped Hassell get his arms around the total cost of IT, from maintenance and projects to how much it cost his employees to park their cars. It also gave him a definitive way to ensure his department's service levels are up to par. His department benchmarks itself against other IT service providers to ensure good cost benefit. Another benefit: the IT and business sides are collaborating more than ever. Each business unit vice president is assigned an IT partner, whose job is to understand how IT can help the unit. When the Shipyard's engineering division needed to implement a CAD package, creating a project team comprising engineering and IT resources was a piece of cake, Hassell says.

"We didn't have a turf war over who was in charge or who would control resources,"he says. "They trusted each other and had been integrated for long enough that they were used to working together as a team. Even the engineering vice president had no problem letting the divisional CIO take leadership of the project."

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* You Didn't Invent a Budget Squeeze

Managing with tighter budget controls may be new to you, but CIOs in low-margin industries have been doing it for years. Budget constraints will force you to be creative and resourceful, but working on a shoestring shouldn't paralyse you, Cargill CIO Taylor says.

"Just because we operate in a tight sector doesn't mean we can't do new or exciting things, like the proprietary plant optimisation system we just built,"he says. "You just have to watch the pennies."

Do you have pointers on how to manage budgets during tough times?E-mail them to the editor

SIDEBAR: Tips from Low-Margin CIOs

How to get the most from every IT budget dollar.

- Invest only in projects that are linked to business goals and will show ROI within three to six months.

- Survey your administrative and infrastructure costs for unnecessary spending that can be cut.

- Decide whether you can forgo in-house software development in favour of keeping development with the vendors.

- Get more for your money by renegotiating licensing contracts with software vendors and service providers on a regular basis.

- Standardise desktops, servers and major software packages to save in maintenance and operations.

- Take a close look at your expenses to be sure you aren't paying for software or hardware that you don't use.

- Look to charge your IT organisation's customers for the systems and services they use.

- If the chance is there, take your IT department independent and charge your parent company for IT services as a consultant.