After enduring several consecutive years of slow- or no-growth IT budgets, IT managers at manufacturing companies could perhaps be forgiven for believing that competition for limited IT resources is about as intense as it could get. But they're wrong. Pressure for a fresh, new wave of IT spending is growing, stimulated by a collection of forces ranging from regulatory compliance to globalization.
Not that IT budgets are being increased nearly enough to allow IT managers to meet all of those looming demands. Most manufacturing organizations continue to keep a tight lid on IT spending, a habit many acquired following the Y2K-inspired tech spending splurge of the late 1990s that was followed, painfully, by a manufacturing recession. While observers such as AMR Research Inc. (Boston) say IT budgets in 2005 are increasing by an average of 7.4%, many manufacturers are keeping the pressure on CIOs to suppress any budget increases.
SLUGGISH SPENDING
Managing Automation's latest IT spending survey, for example, shows 38% of manufacturing companies held IT spending flat this year, compared to 33% who said the same last year.
"Our IT spending has been flat to slightly down for the last seven to eight years," says Bill Lawson, CIO at diversified manufacturer Ametek Inc. (Paoli, PA). "We will always invest in IT ... but probably not at a rate that is significantly different than today."
With demand for new IT services poised to grow and the supply of IT resources continuing to increase moderately, if at all, you don't have to be Alan Greenspan to understand that something's got to give. IT managers at many manufacturing companies are concluding that, if they can't spend more on IT, they've got to spend smarter. Many are introducing new organizational structures and processes intended to help IT and line-of-business managers collaborate better, particularly when deciding where precious IT dollars are to be spent. Some are even turning to a new generation of software tools -- dubbed IT Resource Planning applications by some -- designed to help the IT organization better balance the supply of, and demand on, its resources. All are meant to better align where IT spends its dollars with the ever-changing priorities of the business.
"The battle for IT resources is intensifying," says Bill Swanton, vice president at AMR. "Sixty to 80% of most IT budgets are spent just keeping what's installed running; for all other possible expenditures, IT is competing with plants, equipment and other potential projects. As applications continue to touch more people in the company who want more functionality turned on, IT has to get a lot better at understanding and prioritizing all the demands it is facing."
BIG DEMAND
So what's driving increasing demands on IT resources? One major factor is globalization. As manufacturing companies continue to disperse production and supply networks more broadly around the world, many are beginning to realize they need consistent and consolidated processes and systems if they are to avoid global chaos. And that's leading many manufacturers to consider upgrading existing, and often aging, business and plant floor systems.
Take Dana Corp. (Toledo, OH), for example. The $9.1 billion maker of automotive parts now has 240 major facilities in 28 countries. Until recently, however, IT was run in a highly decentralized fashion. Each of the company's major divisions had its own CIO, and there was little if any standardization in terms of systems or business processes. But that changed last year when Dana brought in a new CIO from Pepsico Inc., Bruce Carver, who decided that, in the interest of improving efficiency, it was best to centralize management of the IT function, roll out consistent project management processes and standardize where possible on core enterprise applications. The company won't be able to standardize quickly on a single ERP system, for example, since it runs some very large plants and some that are quite small, says Sean Forrester, who has been installed in the newly created post of director of IT planning and governance. Still, says Forrester, the standardization effort will require a major investment.
"We're getting into some major projects because we're really involved in some significant transformation," says Forrester. "In the old days, we let plants continue running what they wanted. That often let technology age too much. The projects we're looking at now will cost money, but they are the right thing to do to get the technology back to where it belongs."
Also ratcheting up pressure on technology budgets is the need by manufacturing companies to comply with a growing list of government regulations. The Sarbanes-Oxley financial reporting regulations affecting publicly traded companies in the United States is the most well-known, and it is having a large impact on manufacturers. But many vertical manufacturing sectors -- from high tech to consumer packaged goods -- also are facing significant new regulations. And many of them will require upgrades of existing financial and other systems or even deployment of new systems for analytics and risk management. A recent survey of IT and business executives by AMR Research showed that compliance with government regulations will be the second-most important factor driving IT spending over the next 12 months. Only customer-driven issues ranked higher. And IDC (Framingham, MA) recently predicted that the market for financial compliance software will grow by 17% annually between now and 2009 to exceed $2 billion.
Even trends in the quickly-consolidating enterprise software market are putting pressure on manufacturing companies to accelerate their spending on software, specifically software upgrades. Vendors such as SAP AG (Walldorf, Germany) and Epicor Software Corp. (Irvine, CA) have begun encouraging manufacturing customers to upgrade to major new versions of their enterprise applications built around service-oriented architectures. At the same time, vendors such as Oracle Corp. (Redwood Shores, CA), SSA Global (Chicago) and Microsoft Corp. (Redmond, WA) have bought up competitors and initiated campaigns to merge acquired product lines and convince manufacturing customers to prepare to upgrade to their latest enterprise software releases.
As many manufacturers have discovered through hard-won experience, however, such major enterprise software upgrades can be extremely expensive and often deliver dubious value to the business. According to a recent AMR report, the average cost of a major enterprise software upgrade works out to $2,096 per user and takes, on average, 8.4 months. Labor, not software or hardware spending, accounts for the bulk of upgrade costs. On typical large projects, in fact, expenses related to professional services, internal staff time and training account for 58% of the total upgrade costs.
WORTH THE EFFORT?
It's not surprising, then, that manufacturers are increasingly looking for ways to defer upgrades, agreeing to move to new releases only when benefits become compellingly clear. Of the companies deferring upgrades, the AMR study found that 76% said they were doing so because they simply could not find business value in upgrading their enterprise applications. According to the Managing Automation IT spending survey, the largest group of manufacturing companies -- 48% -- say they upgrade applications only opportunistically, in order to support major business initiatives. Another 16% say they upgrade only to avoid vendors ending support of their applications.
Ametek's Bill Lawson is one of those IT executives who has decided to go slow on enterprise application upgrades, preferring to invest his company's limited technology budget on projects that deliver specific, demonstrable business value. Ametek has grown rapidly, mainly through acquisitions, having bought 14 companies over the past three years. Usually, when Ametek acquires a company, it will migrate the business to the latest release of its enterprise software standard, Oracle's E-Business Suite. After the initial migration, however, Ametek typically doesn't continue to upgrade those businesses to the latest release of the Oracle applications. As a result, its units are running a number of different Oracle releases in addition to several other legacy applications.
Why? If it's not broken, don't fix it, says Lawson. "We'll usually remain on a given release unless the business can show a need for newer technology or an instability in the package," says Lawson. "Usually, they can't show either." The typical exception, he said, is when a business needs to upgrade for new software functionality demanded by new regulations.
Many manufacturers are now looking for lower-cost software maintenance options including offerings from third-party maintenance services providers such as TomorrowNow Inc. (Bryan, TX), now owned by SAP.
THE PEOPLE HAVE SPOKEN
As that "stay put" philosophy spreads among budget-constrained manufacturers, some vendors have been forced to adjust how they market upgrades to reluctant customers. Microsoft, SSA Global and Oracle have all been forced to extend the period for which they'll support the current enterprise applications that they have recently acquired. In the wake of its takeover of PeopleSoft/JD Edwards in January, for example, users of the JDE OneWorld XE ERP package successfully campaigned for Oracle to extend support for the product for two years rather than halting support as planned. Similarly, SSA Global recently promised that it would never sunset support on existing products as long as customers were willing to pay maintenance charges, which, SSA said, may rise as products age.
"For more of our customers, an upgrade has to be justified with the same financial rigor of other investments, and that's dubious if you're trying to justify an upgrade just because a vendor is threatening to end support. So our direction has been more carrot and less stick," said Cory Eaves, chief of technology, SSA Global.
But, for some manufacturers, getting smart about IT spending isn't just about stubbornly holding the line on questionable purchases such as enterprise software upgrades. More companies are also putting into place processes, organizational structures and tools that, they believe, will bring more rigor, transparency and accountability to the IT budgeting process.
"I'm one of the biggest spenders of discretionary capital in the company, but, when it comes to justifying that spending to business folks, I and many of my peers have historically talked in ... technology talk that had no relationship to the business," says Dean Drougas, until recently CIO at computer manufacturer Silicon Graphics Inc. (Mountain View, CA). "We've got to speak the language of business in order to make sure that what IT is doing is really the right thing for the business."
As more manufacturers treat IT as a centralized, shared service, their customers -- business unit managers -- are demanding better, up-to-date information on where limited IT resources are being spent and to what end. And IT groups are demanding that business units present clear requirements and goals for IT projects before they're approved, something that hasn't been done at many companies.
TIGHTENING UP THE PROCESS
"In the past, we didn't have the level of control we needed," says Dana's Forrester. "If the plant manager asked for something, you did it. Now we're driving toward a formal structure with decision criteria that are signed off on by both IT and the business, where both sides know who has the right to make what decisions. That way we can get to a place where we will be able to say, 'No, we're not going to do that project, and here's why.' And it will have teeth."
Under Forrester, Dana is defining a set of common project and program management processes that will be applied to all existing and proposed IT projects, from support services, such as e-mail, to major application upgrade efforts. A new program management office will catalogue and track all existing IT projects and keep track of the resources, such as labor, going into each project. That, says Forrester, will not only help business unit managers to understand the IT resources that their projects are soaking up, it will also allow the company to build cost allocation models that can be used to analyze and charge business units for expenditures. And, with a consolidated view of existing and proposed projects, IT and the business units at Dana will get a clear picture of both the anticipated upcoming demand on IT resources as well as the supply.
Dana is also introducing a common project management methodology. In addition to providing consistent guidelines for organizing an IT project, it will give the company consistent processes for approving or rejecting proposed projects based on criteria such as the required investment level, return on investment and strategic fit.
In addition, Dana is introducing more business analysts into the organization who will act as intermediaries between IT and business units. The analysts -- many of who are former plant IT managers -- will gather business requirements and help translate those requirements into IT projects.
The result, says Forrester, will be more rigor applied to IT investment and, ultimately, smarter spending. "It's going to be a big cultural change for the organization because, in the past, it was, 'I need this tomorrow. Go and do it.' Now the business will have to be more articulate about their requirements. We're not going to accept iterative development cycles anymore."
Smaller manufacturers like Ametek have also tightened up project evaluation and approval with an eye toward bringing more rigor to the process and making sure IT and the business are better aligned. While Ametek doesn't need all of the program and project management organizational structure required at a larger company like Dana, the company's IT group has evolved a standard, repeatable set of steps for deciding whether or not to go ahead with a proposed IT project, says CIO Lawson.
The first step for the business unit proposing the project is to write up a business plan complete with an explanation of the competitive factors that make it necessary, the market opportunity, the potential savings and the opportunities for integration with existing applications. The IT team then evaluates it and develops a set of alternative technologies that could be used to execute the plan, along with a cost assessment for each. It also reports which technology alternative it recommends.
If the business unit and IT agree that the project still makes sense, together they come up with a preliminary design that includes specific cost estimates. From those estimates, Ametek's finance group assembles a set of reports that include estimates of the project's net present value, internal rate of return and risk.
Before taking the proposed project to Ametek's top management for approval, the company's readiness to execute is assessed. "We ask, 'do we have the capacity to do this' and 'have we done this kind of work before?'" says Lawson. "We typically only augment resources if there is a very strong business case."
Ametek also looks hard at the readiness of the business unit involved to not just take on, but embrace, the project. "We sit down with them and have a candid conversation about how much energy goes into something like a major ERP upgrade," says Lawson. "Not only do they have to have a business case that makes sense, but we need to make sure that the executives involved are ready for the challenge, that they have the sponsorship and the passion, and that they have the people and the skills on hand."
That kind of common sense and repeatable process for evaluating proposed IT projects can go a long way toward ensuring that a manufacturer is spending its limited IT resource chips on the things that matter. In some cases, however, it may not be enough. That's because, often, the processes used to evaluate and monitor IT projects lack transparency. Business unit managers often don't have visibility into exactly what IT is spending its resources on, nor do they have a clear idea of what value the business is getting out of those investments.
"Typically, we hear, from the board of directors down, 'We are spending 3% of revenues on IT, but we're not getting enough out of it,'" says Forrester. "The only way to answer that is to connect IT closer with the business."
Some manufacturing CIOs think one way to help do that is to deploy a relatively new class of enterprise application software that promises to automate the task of tracking resources and outcomes associated with IT applications and projects and report that information in terms that both business managers and IT managers can understand. AMR Research calls this emerging class of applications IT Resource Planning. Forrester Research has dubbed it Integrated IT Management. Whatever you call it, think of it as ERP for the IT function.
"There's a real rationale for this type of application," says AMR's Swanton. "The care and feeding of a large ERP system or other IT resource involves a lot of complex processes around change control and finding resources to meet demand. It makes sense to have a system to help you decide which projects to prioritize, how to budget for them, how to create schedules and then verify when things get done."
HAPPY TO GOVERN IT
Software vendors have enthusiastically jumped onto the IT Resource Planning idea. Established vendors of IT infrastructure performance monitoring and management tools, such as Mercury Interactive Corp. and Computer Associates (CA), have recently entered the space (Mercury with its IT Governance Center RPM product suite, and CA through a deal to resell a project portfolio management product from startup Niku Corp.). According to Mercury Chief Marketing Officer Christopher Lochhead, the IT governance products are the fastest-growing part of the company's business.
Enterprise application vendors, including SAP and Oracle, have rolled out application portfolio management products of their own. And a host of startups have germinated, purporting to solve a handful of different IT Resource Planning problems.
BREAKING UP THE SPACE
The IT Resource Planning space can be broken down into four areas of functionality, according to a recent Forrester Research report:
- IT Portfolio Management (ITPM). These applications help IT organizations catalog, analyze and plan a wide range of projects. ITPM suites from vendors such as ITM Software (Mountain View, CA), for example, pull together information such as financial planning and staffing data that can be used to compile valid total cost of ownership information. These tools also are used to prioritize existing projects and applications in much the same way that financial advisors use software tools to plan out investments according to their client's priorities.
- Project Portfolio Management. This set of applications is used to plan future IT projects, calculating both the required resources and those available from IT and business units; those include both financial and skill sets. IT program managers can combine this information with information from ITPM applications to help prioritize future projects.
- Application Portfolio Management. These applications help IT organizations understand the value of existing applications by digging into details on how much a given module within an enterprise application is being used and by which business units. It can also compile information about how much it costs to keep applications running. That can help IT organizations and their clients understand which software modules are delivering value to whom and who should be paying for their care.
- Enterprise Infrastructure Management. EIM tools perform many of the same tasks as APM tools, but here the focus is on hardware and software infrastructure: networks, servers, databases, etc. This is the type of data gathered by traditional system management tools from vendors such as Computer Associates and Hewlett-Packard. It can be combined with information from APM tools to give a clear picture of all IT asset utilization and costs.
GREATER ACCESS TO INFORMATION
Using these tools, IT managers and their business unit customers can get up-to-date information on what IT resources are being devoted to which projects and why. And both sides can track the results of those investments in the financial terms that business managers can understand. That can improve the business visibility into what IT is doing, and it can make allocating IT resources more of a collaborative effort driven by business priorities.
Understanding its complete IT portfolio, utilization and costs can also help a manufacturing company decide which new projects or ongoing applications it may not make sense to support. "Having a consolidated view of the project pipeline allows companies to realize savings of 20 - 45% by eliminating redundant projects, taking corrective action on those running off course and selecting projects that provide the strongest paybacks," says a recent Forrester Research report by Margo Visitacion.
"Now I can say to a particular business manager, 'You are getting 10% of my resources right now, and it's unlikely you're going to get more than that. So you need to sit down and tell me what are the two most important projects to you over the next year,'" says Silicon Graphics' Drougas, who has deployed IT Portfolio Management tools from ITM.
Dana's Forrester also is hoping to use IT Portfolio Management to provide business managers with better visibility into where IT resources are being invested. Ultimately, he says, that should enable IT and the business to collaborate more effectively when it comes to deciding what technology investments are needed to support the business.
"IT has not delivered on its promise," says Forrester. Part of that is because IT and the business don't fully understand what the other does. "A big part of the decision to use technology is business related, but, in many cases, the business didn't become IT savvy enough to understand why technology could help a given business function," says Forrester. "And IT folks did not become business savvy enough to understand why technology existed in the business. We're trying to solve that."
Dana is deploying the Niku applications in three phases. The first will track the expenditure of IT resources, including labor. That will help Dana build up-to-date cost allocation models. Phase two will involve the introduction of a common project management methodology. Niku will be used as the underlying workflow software. In phase three, Niku will be used by Dana's program management office to manage supply of, and demand for, IT resources and to evaluate proposed new projects.
Using such tools won't, by itself, guarantee that IT spending at your company is at the right level and in lock-step alignment with business priorities. Having financially-based data about IT costs and value that business unit managers and IT managers alike understand and believe will, however, go a long way toward helping your company spend smarter, says Peter Martin, vice president and general manager of performance management at Invensys Process Systems.
"If more manufacturing companies had this information, they would look at technology investment as other than a necessary evil," says Martin, who is putting together financial models to help manufacturing companies assess the true costs and returns they receive from investments in automation equipment as well as software. "Everything will change once they see technology in terms of something that is value generating. Right now, the reality is they have the tools, they just don't have the measures."