Spend Your IT Dollar Smartly

Even in today’s tough business climate, we still see companies making investments in IT systems, especially in the e-commerce area. In many direct businesses, more than 50% of sales are e-commerce based, though those sales may have been spurred by receipt of a catalog.

Long before the current economic slowdown, many companies had become more conservative with their IT spending because of the amount of capital needed for those investments. In the past two years, we have seen management require an 18 to 24 month return on investment (ROI). However, we also see companies with aging order management legacy technology replacing an order management system if they find it inhibits their ability to adapt new technologies, for new back office and Web applications. The bottom line is, no management team wants to go out and spend money on technology without getting both short and long term benefits.

Our purpose in this article is to identify what direct companies are typically spending on IT systems, and give you a blueprint for applications with the highest return on investment. The data presented here comes from F. Curtis Barry & Company’s IT consulting experience with our clients.

What Do Direct Companies Spend?

In our experience, companies that are simply maintaining the status quo and supporting their users spend less than 1.25% of net sales. We believe that companies that are investing in new systems are spending in the range of 2.5% to 3.0% of net sales, when you take into account call center and order management systems, telephone systems and e-commerce IT hardware. Not included in these amounts are the expenses for e-commerce marketing personnel. As e-commerce becomes more prominent, we expect that IT expenses will grow to support new applications and the “server farms” that support those functions.

This 2.5% to 3% figure represents a blend of businesses. Companies with a higher average order, or a high-end retailer, might be spending a lower percentage of net sales. (A higher amount per order means a lower percent of net sales because you’re spreading it over a larger sales base.) The flip side of this is that smaller companies, because they have a smaller sales base, may have to spend a higher percent of net sales. A number of companies that are making rapid changes to their systems may spend more than 3 percent.

What we have found complicates matters is that many companies don’t clearly identify IT costs as they are accounted for as part of general and administrative expenses. There is a tendency for management not to have that number right on the tips of their tongues.  The numbers are used in budgeting but they don’t have the visibility of gross margin percent or marketing expenses.  This is especially true when attempting to identify e-commerce IT expenses. In other words, there’s a tendency to say e-commerce is cheap, but management doesn’t even know what the expenses really are. Nonetheless, one thing we know is that it’s growing. Internet retailers keep adding functionality, servers to handle traffic and building “million Web sites”; some companies that had been putting off a total replacement of their Web sites from the late 90s and early part of this century are now investing in upgrades.

Here are a couple examples of what companies are spending.  In a large multi-brand retailer with a direct division, this company’s merchandise line consists of apparel and accessories, with a direct return rate above 25% and sales of over $2 billion. They operate a specialty store chain with more than 1,000 stores and a multi-brand direct print catalog operation. E-commerce accounts for more than 50% of direct sales. The centralized IT operation incorporates all IT expenses, including e-commerce and telephone systems. Their IT includes a mix of both internally developed systems for direct, and commercial retail packages. There are a number of major projects going on to replace aging systems and maintain competitiveness. IT expenses here are 4% of net sales, reflecting a high return rate for merchandise.

Another client, a direct business-to-business retailer of business (hard good) gifts, has sales of under $100 million. E-commerce accounts for more than 20% of their direct sales. Their IT expenses are mostly for in-house systems, with limited commercial systems. Included are e-commerce, telephone systems, and graphics systems for special orders, which are 10% of volume. This company’s total IT expenses are 3.2% of net sales, with 40% of expenses supporting special orders.

When comparing expenses, CFO’s often use percent to net sales as a metric.  Trying to compare a hard goods company to an apparel company is an “apples to oranges” comparison.  In the two examples above, the apparel company appears to have a higher expense for IT.  But when you consider it, their 25% return rate is what creates the incomparability.  If you looked at the two companies on a gross sales basis the apparel company would be spending 3% of gross sales – just about the same as the other company which handles hard goods predominantly.   

How Are You Spending Your Money?

Here is a review of the categories of IT expenses, showing roughly how we see the money being spent. Note that more than half of the expenses are still for labor— including management, help desks, operations and programming.

No matter what you’re spending, we think it’s important to ask whether you’re spending it wisely—not to invest in technology or systems for technology’s sake. Here are key questions to answer:

• Are you meeting or exceeding management’s IT expectations? How can IT facilitate change as a higher percentage of sales moves to e-commerce?
• Where can IT investment improve the synergy between channels?
• What investment is required to stay competitive in the e-commerce channel?
• Where can you make an IT investment that reduces costs and improves productivity?
• What systems improvements will manage inventory—the largest balance sheet asset—more profitably and provide higher customer service? 
• What are your company’s requirements in terms of flexibility and scalability of applications?
• As your business changes rapidly, how does IT need to help facilitate the change?

Largest ROI Applications

Build versus buy. One of the key variables that determines your IT cost as a percent of net sales, is whether you develop your own systems or use commercial systems. But the perennial build-versus-buy debate over in-house development of applications versus purchasing commercial systems has become a hybrid of both. One of our $3 billion direct clients is taking on commercial systems for call center, warehouse management and POS, yet they have over 150 IT personnel on staff. We believe more than 50% of direct businesses are internally developing and/or maintaining order management systems to some degree; it’s a changing paradigm. Most accounting applications are commercial systems. E-commerce solutions are a split between commercial systems and in-house development.

Even companies implementing commercial systems have added a person or two with an IT background. They write specialized functions in a user-controlled library in conjunction with the commercial system. They also write reports, train users, and maximize the use of the system.

Licensed in-house versus Software as a Service (SaaS). SaaS is becoming more commonplace for e-commerce, order management, warehouse management and specialized systems options. One of the attractive benefits is that the SaaS vendor becomes the IT department and most revenue models rise and fall with the transactions or dollar revenue processed, so it becomes a variable expense.

One thing you give up with this model is immediate control to make changes; you are at the mercy of the vendor. Depending on the vendor you may be waiting for the next release of the software for your enhancements.

Replace order management systems (OMS). Replace aging OMS with commercial systems on more up-to-date platform technologies (e.g., dot.net, C++, Java, etc.). Other companies are looking for open source software with the intent to develop further to their specific requirements. Service Oriented Architecture (SOA) is becoming more commonplace to share functionality and data between software applications and multi-vendor commercial systems.

Marketing/Creative.  As e-commerce becomes more predominant in direct companies, planning campaigns and products across channels becomes more crucial. Here are some of the key marketing system functions companies are developing:

1. Synergy between channels
2. E-mail campaign planning and control
3. Event tracking
4. Marketing and promotion calendar systems across channels
5. E-mail marketing and affiliate marketing
6. Content management (digital assets)
7. Data mining
8. In-house list processing

Internet. Direct businesses today average more than 50% of their demand coming from the e-commerce channel. Much of this is a transfer of sales from phone orders. Some areas worth investing in when it comes to e-commerce include:

1. Loyalty clubs (to purchase and redeem) across channels
2. Mobile/electronic coupons and gift certificates across channels
3. In store pick up
4. Web order to business systems integration
5. Predictive selling
6. Real time store inventory
7. Drop ship vendor inventory availability
8. Self-service on the Web functions comparable to call center customer service
9. Improved search engine optimization (SEO)
10. Web based systems
11. Improved Web-based visibility across channels
12. Vendor drop ship order control system

Customer Contact Center. No matter how the customer contacts you, your mission should be to take care of the customer and, when apropos, to use that opportunity to increase the average order. Many companies that have high customer service standards are putting more emphasis on the customer experience rather than the length of time for an order. Here are key functions clients are adding:

1. Predictive selling software in the call center
2. Up-sell and cross-sell to increase average order size
3. Click to call
4. CTI
5. Browser-based call center functions
6. CRM
7. Live chat
8. E-mail management systems
9. Skill-based routing
10. Address verification

Supply Chain and Fulfillment. Many companies are working to optimize the supply chain in terms of cost reduction as well as providing visibility end-to-end, from the vendor through the entire fulfillment process. Here are some system functions and trends to consider:

1. Warehouse management system (WMS) to increase accuracy of inventory and reduce labor
2. Warehouse control systems (WCS)—emerging as WMS alternative
3. Emergence of tier 2 and tier 3 WMS software providers
4. SaaS alternatives to licensed, in-house products
5. Voice picking
6. Pick to light
7. Web-based drop shipping
8. Inbound transportation management systems
9. Foreign quality assurance and freight consolidation
10. Best way, carrier rate shopping, new manifesting systems
11. PDA or Tablet PCs in QA and receiving
12. Vendor source marking eliminating ticketing in your DC
13. Bar code processes in receiving, marking; stock put away, picking, packing   confirmations, shipping and returns
14. Robotic systems for large scale automated warehouses
15. Any systems changes that reduce outbound shipping costs
16. Labor management systems

Merchandising/Inventory Management. In this business climate companies are conservative with their purchasing. Yet at the same time, in many companies imported product is well above 50% of the products being sold. Lead time and increasing prices in Asia are putting more pressure on merchandising to update systems across channels:

1. Developing planning and forecasting systems and disciplines for e-commerce
2. Coordinating those product requirements between channels for purchasing
3. Improvement in multichannel inventory systems

Finance. The latest analytical processing tools can provide your catalog’s executive management with the most up-to-date information about key performance metrics, and detailed drill down across the enterprise.

1. Develop management dashboards and key performance indicators (KPIs)
2. More integration of financial systems with other systems
3. OLAP tools

Summary
Even in this tough business climate, innovative companies are making investments in key information systems—many to gain a competitive advantage. But with management demanding that the new systems achieve an 18 to 24 month ROI, you need to look carefully at how you’re spending your IT dollars, and try to determine what percent of sales your IT spending really represents.

Curt Barry is president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking. Learn more online at: http://www.fcbco.com