Where should you put your technology dollars during an economic downturn?
There’s no doubt these are tough times. With all the economic uncertainly, companies are looking for opportunities to reduce expenses across the enterprise. Awhile back we discussed the direction many direct companies are taking with their IT investments (“Eyeing IT Expenditures”) focusing on those applications with the highest return on investment (ROI). Indeed, you must take a hard look at ROI; over the past few years, we’ve seen management requiring almost every project to achieve ROI in a 12- to 18-month period. And while there are always intangible and soft savings possible, gaining hard savings through expense reductions or increased sales is nearly mandatory.
Most companies have more IT projects and enhancements than can be done in a couple of years so everyone must prioritize their technical spending. We’ll look at some tips based on the major steps our multichannel clients are taking to prioritize their tech spend.
Think long-term productivity, not short-term savings
IT often has very little flexibility to lower its expenses even though management may initially dictate across-the-board expense cuts. Having gone through a number of these business slumps and necessary expense cuts in 35+ years, I can attest that it’s often better for management to look at which IT projects, if initiated and completed, can positively affect departmental productivity and lead to savings in other areas. Indeed, when management makes IT accountable for understanding the business and helping other departments achieve productivity and sales gains (while pushing to develop business analysis in operations, marketing, merchandising, finance, inventory control and finance), the results are of real value to the company.
Management must balance a company’s short-term needs against long-term information systems strategy; this requires both creativity and an objective look at options to avoid disabling long-term goals. It goes without saying that many companies need to gain as much in savings as they can from all aspects of their operations. However, as you look at all the possibilities, it’s important to take a minute and determine which actions will result only in short-term savings—and may, if taken, actually hurt long-term planning and execution. You need to be conscious of the fact that what you do in the short term may set back the long-term gains of your business once the economy rebounds. For example, stopping the implementation of an order management system will essentially scrap the project. When the project does resume, your implementation team and the vendor’s personnel may have some serious restart issues—such specifications and programming for modifications and conversions, initial training, etc—depending on the length of the delay. Some of the work may still be usable, but many times a serious delay in implementation results in team members having to mentally reinvent some of the solutions they had been considering. Also, the vendor’s team may be reassigned to another project.
Another consideration is that a high portion of project costs are generally paid early in the implementation. Somewhere between 50% and 75% of the total investment in a commercial system—including the initial deposit, progress payments, training, hardware and software assets—is made early in the process. So once committed, it doesn’t really save you much money to stop. Better to get the system installed and gain the benefits.
Focus on features/functions to increase sales
Your top priority should be any projects that generate an increase in sales. The most likely candidates are in e-commerce, marketing, merchandising or e-mail marketing. I’ve seen clients giving the highest priority to marketing and merchandising, in terms of additional analysis tools and programming of special requests to assist in analysis. Several of our clients are increasing their traditional promotional post-mortem analysis. Two of our multichannel retail clients are implementing analysis of net contribution to profit, to identify (at the classification level) how to expand or contract the number of items in each category. This analysis fully loads fulfillment and overhead costs rather than stopping at square-inch profitability. Another multichannel client with 35 stores has been collecting customer purchase by category and address information, and they are now in a position to mail circulars to retail customers. Many retailers still lack the ability to better promote in-store sales and events through such customer marketing.
Manage your biggest asset
Any IT spending that improves management of inventory—the largest balance sheet asset in most companies—is bound to pay off. Mistakes made here have a direct affect on customer sales and satisfaction, with increased cost of back orders, lost sales and the liquidation of overstocks sharply reducing profitability. To determine what changes and systems could help to improve inventory performance, do an assessment of your inventory strategies including planning, forecasting, purchasing, end of season analysis and liquidation. A stand alone internal inventory system and exception reporting can increase merchandise turnover, reduce back orders, improve initial customer order fill rates and allow you to take action on overstock more quickly. This type system may have a 12 to 18 month ROI.
Use WMS to tame complex operations
In most moderate to large fulfillment businesses, the issue isn’t so much warehouse size as it is the complexity of multichannel operations, where picking, packing and shipping processes have to be efficient for both small orders in e-commerce/catalog and larger store replenishment and wholesale orders. The chief thing you can do to become efficient is to implement a full function warehouse management system (WMS), which provides benefits in labor productivity, space utilization and inbound and outbound transportation. Proper inventory slotting and full bar coding of the total inventory process is key. Additionally, multi-level bill of materials and kitting of products are handled more completely in WMS than many order management systems.
Schedule personnel efficiently
Scheduling software is most prevalent in the call center. Our experience is that there may be as much as 10% to 15% savings in call center labor with more sophisticated scheduling software. The major benefits are improving schedule adherence and occupancy, and adding flexibility to the scheduling process.
Use business intelligence (BI) tools intelligently
Many companies are implementing executive dashboards and OLAP (online analytical processing) analysis across the enterprise. Senior management rarely gets more than 10% of their critical data from any one system; they rely on spreadsheets and analysis of others to get their information. BI tools are now available that have templates for the direct industry and can incorporate data from any and all systems, including fulfillment, call center and telephony systems, merchandising, marketing, inventory control, finance and spreadsheets. These BI tools also allow importing plans, history and other KPIs (key performance indicators) that have not been available in transactional systems. Businesses are spending more to train users of these products. Some products have a longer start-up time than others so they may not be of short-term benefit.
Keep software support contracts
Considering the sizable cost of most software support contracts, eliminating them may be a tempting way to cut expenses. Be very careful. Openly ask your vendors what their policy is; some may charge you a high fee to restart the support, and also to upgrade. If you find yourself behind several release levels of annual maintenance, you may have to pay for those anyway, and go through the conversions to get to current release levels again. In other words, canceling software contracts will probably be more expensive in the long run.
Re-negotiate contracts
And while we’re talking about contracts, where you can, attempt to re-negotiate every major contract. You may not be able to negotiate with larger vendors but what about smaller suppliers? We all want strong vendor relationships, but these are tough times. There may be savings to be gained by competitively bidding contracts out. If you don’t try, you’ll never know.
Pay cut versus layoff?
I hate to bring this up, but some companies are asking senior professional personnel to take a temporary pay cut rather than having to lay people off. One company asked managers to take two additional weeks off without pay. Rather than cutting critical personnel, should you reduce salaries temporarily?
Outsource when practical
Where can you outsource and/or delay expenditures? Look at outsourcing in general to see what opportunities exist to change a fixed expense into a variable expense. Several of our clients have outsourced IT systems, call center and fulfillment rather than invest in new order management software. Some clients have successfully implemented Software as a Service (SaaS), but it needs to be right for your business. The concept of turning your IT operations over to a third party isn’t right for everyone. In my opinion, SaaS hasn’t yet been proven in this industry for large companies that have many integrations and complex conversions. On the other hand, it may make sense to outsource e-mail marketing, modeling, customer mailing file maintenance and other applications.
Offshore systems development
While not new, offshoring large IT development projects (e.g., rewrite of call center and order entry applications) to India continues to bring a huge reduction in project costs for developing large scale applications.
Virtualization and going “green” in IT
Something very common in the 1970s and 80s was to partition large mainframes with multiple applications. This concept fell by the wayside with the advent of low cost PCs. Now companies have invested, in some cases, in hundreds or thousands of servers, most likely underutilized and running single applications. Companies looking to reduce their infrastructure should consider virtualization of servers through software like VMware and Parallels. This can reduce dependency on the large number of servers, the cost to maintain them, the energy to run them, and their physical footprint.
One of our large retail clients has successfully moved nine cabinets of processors off the data center floor by outsourcing, with the data available online. This not only has reduced the storage space required but it is reducing power and cooling costs by 70%. Just as there is a movement to go “green” in other parts of the industry, the time has arrived for IT to implement sustainability best practices that help your company save money and protect the environment.
Get more out of what you have
Doing more with less is truly the mantra of these times, whether referring to new systems, new technology or major process changes. Yet there’s generally much more functionality designed into applications than companies utilize; in some companies we have found utilization of commercial applications to be less than 50% of their functionality. Do a post-implementation audit of your application set to see what possibilities exist; also, identify what additional training would benefit the user departments. Find out if there is functionality in the application that will bring you additional benefits, productivity or savings.
Summary
There’s no doubt that, with some creativity, IT can come up with many different possibilities for prioritizing and redirecting your company’s IT spend. The key lies in being objective, looking at everything from a fresh perspective, and having the ability to recognize potential. These qualities will allow IT to put together an action plan that meets the company’s current needs, but doesn’t maim the long-term strategy and benefits IT has been tasked to bring.
