Innovation Interruptus

FRAMINGHAM (09/26/2003) - You can't just throw money at innovation. And savvy chief information officers (CIOs) know that it's not a question of how much you invest in IT but how wisely you do so.

But after several years of IT budget-cutting throughout corporate America, many observers say that innovation has indeed suffered, though it hasn't been snuffed out entirely. In a Computerworld online, survey of 106 IT professionals that was conducted last month, 70 percent of the respondents said their IT departments have dropped or delayed, especially innovative projects, in the past two years. The No. 1 reason given was budget cuts.

Looked at a different way, only 24 percent of the IT professionals said they're working on strategic IT projects that will revolutionize the way business is done in their industries.

But observers say other forms of IT innovation have surfaced during these lean years. If you have read Darwin, "you know the species has to innovate to survive, and if you don't innovate, you die," says Paul A. Strassmann, former CIO at the U.S. Department of Defense and a Computerworld columnist. He says the current IT budget hardships are a "driving force" that will favor innovation.

"People have to be very innovative to support a corporation while the funds are shrinking," says Strassmann. He points to experimentation with offshore outsourcing, Web services and "anything that's going to save your ability to support" business activities.

But there's a difference between creative spending during tough times and investing in IT to achieve competitive advantage. Companies such as Wal-Mart Stores Inc., United Parcel Service Inc. and RadioShack Corp. have continued to increase their annual investments in IT, albeit in low, single-digit increments, to help them maintain or achieve leadership positions in their markets.

"Those who historically have known how to invest in technology for competitive advantage have continued to do so, probably at a slightly slower pace due to the general economic slowdown. But those who had no clue still have no clue," says John Parkinson, chief technology officer for the Americas region at Cap Gemini Ernst & Young in Chicago.

Wal-Mart is a prime example of a company that continues to invest heavily in IT to retain its top ranking in the retail market, says Parkinson. In June, the Bentonville, Arkansas-based retailer announced that it's requiring its top 100 suppliers to begin tracking their shipping pallets using radio frequency identification tags by early 2005.

Bold IT projects such as that can help a company like Wal-Mart squeeze another half point or point of profit margin from its revenue, which is a big deal in the retail industry, where 1 percent to 3 percent profit margins are the norm, Parkinson adds.

Still, Wal-Mart is an exception in the current IT spending climate. For example, midtier automotive and aerospace manufacturers that have seen 30 percent to 40 percent of their revenue base evaporate in the past three years as a result of the economic slowdown have made Draconian cuts to IT spending, Parkinson says.

However, some bigger manufacturers, such as DaimlerChrysler AG, are still making big bets on IT. Last November, the world's third-largest automaker announced that it was in the early stages of a huge investment in automating the design of its manufacturing plants. The project, called Digital Factory, is aimed at reducing the company's new-vehicle production cycles by up to 30 percent.

"As the economy has gotten tougher for all companies, we've been forced to focus on all aspects of costs, and you start doing a much better job of aligning business priorities with IT priorities," says Susan Unger, CIO at DaimlerChrysler.

Change Agent

Many companies that invested heavily in IT during the late 1990s are now de-emphasizing new IT investments and instead focusing on making existing technologies more effective. In the Computerworld survey, 51 percent of the respondents said theyíre using this period of tight IT budgets to re-engineer business processes.

Fort Worth, Texas-based RadioShack just completed the first year of a multiyear effort to further optimize its supply chain, including assortment planning, inventory management, distribution and logistics, and store operations.

Last year, RadioShack finished installing a supply chain management system from Rockville, Maryland-based Manugistics Group Inc. Now the consumer electronics retailer is working with Celerant Consulting Holdings Ltd., a multinational consulting firm in London, to address organizational and behavioral changes needed to make its operations more effective, says Mike Kowal, senior vice president of operational effectiveness at the US$4 billion company.

One reform has been to align corporate strategies with how workers and managers are actually compensated, something that's out of alignment at many companies. For instance, inventory managers typically want to minimize product inventories to hold down costs, but merchandising managers want to ensure the greatest selection of goods at each store. Now both sets of RadioShack executives have bonus incentives to keep store inventories as lean as possible.

The results? As of June 30, RadioShack was carrying 18.1 weeks of supply (the amount of time it would take it to deplete its inventory). Thatís a six-week improvement over its year-end 2002 supplies. Inventory management and other process improvements, such as reducing its new-product development cycles from nine months to seven months, have helped RadioShack cut $40 million in costs, says Kowal.

Grounded in Technology

In the Computerworld survey, 52 percent of the respondents said they're working on IT projects that will provide their companies with a major competitive advantage.

That's certainly the case at fierce industry rivals such as UPS and FedEx Corp., both of which have been investing heavily in IT since the 1980s in their respective bids to become the world's most efficient package-delivery company.

Donald Broughton, a transportation analyst at A.G. Edwards & Sons Inc. in St. Louis, says UPS ìis the gorilla in ground transportation and has been for decades. But UPS has yielded some of its market share to FedEx over the past decade, since "shippers like to have more than one supplier."

Broughton says the decision by UPS and FedEx to invest in technology is grounded upon a single acid test: "Will it improve my ability to operate?"

Like other leading companies, UPS has scaled back its IT spending over the past few years, having gone from 12 percent to 14 percent IT budget increases in 2000 and 2001 to 1 percent to 3 percent annual increases since then, says CIO Ken Lacy.

But that doesn't mean UPS has frozen innovative IT spending. For the past six years, UPS has invested roughly $1 billion on a "smart-label" project that will make it easier for customers to track the whereabouts of their packages.

As part of the effort, UPS plans to invest $127 million over the next five years to deploy a new handheld terminal called the DIAD IV to 70,000 drivers. The DIAD IV, which features built-in cellular, wireless LAN and Bluetooth short-range wireless systems, enables drivers to download routing instructions for the day. Previously, UPS drivers had to manually input a customer's address and other information and scan the bar code on a package.

Now, says Lacy, the information "is in stop-by-stop order, and the driver doesn't have to key in the information anymore." In addition, Global Positioning System technology automatically alerts the closest driver to a package pickup.

"Anything you can do to be more efficient in transporting and delivering packages on a global basis" will help maintain or achieve competitive advantage, says Lacy.

Productivity Slippage

The dip in corporate IT innovation may produce a dip in U.S. economic statistics, too. "We're going to pay the price for this down the road, three to five years from now, when productivity growth is lower than it should be," says Erik Brynjolfsson, the Schussel Professor of Management at MIT's Sloan School of Management.

"Right now, we're harvesting the productivity investments" from the late 1990s, Brynjolfsson says, referring to the massive investments that companies made in IT during the dot-com boom. "But if the pendulum swings too far, we risk cutting short the benefits."

In 2002, U.S. productivity grew at a 4.8 percent annual rate, a staggering figure, considering the weak economy. Brynjolfsson expects U.S. productivity to grow at an annual rate of 2 percent for the next few years, much like it did in the 1990s. But if companies continue to trim their IT investments, says Brynjolfsson, "I may trim that [forecast] back a bit."

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