IT doesn't have to be spend and hope.

Fearful of falling behind the technology curve, financial executives are struggling to manage their information-technology investments - and to quantify IT's real value.

In what business can you routinely deliver late and over budget, without paying the penalty of going out of business? If you answered "information technology," you're not alone.

IT is expensive and it's costing more each year. IT costs consume 2.2 percent of revenue - a hefty chunk of most companies' after-tax profit margins - according to a new benchmark study piloted by Financial Executives Institute and The Hackett Group.

And 60 percent of large IT projects are delivered late and over budget. Routine activities such as ordering and installing new PCs and delivering basic training on new applications take weeks, not hours.

But instead of objecting to high costs and below-par service, most of IT's captive customers are resigned to it. One symptom of this is that 85 percent of CFOs acknowledge they can't substantiate the real value of their IT investments, based on a 1993 survey by The Hackett Group. Bombarded by bits, bytes and intense user demand for instant Internet access and global e-mail, these CFOs often feel hoodwinked into greenlighting expensive projects.

However, a new perspective is emerging. Forward-thinking CFOs and CIOs know that IT costs are considerable, and they're willing to spend the money - if the value is there. But they also know it's impossible to measure, let alone unlock, the true value of IT if the IT organization itself is poorly managed. They understand a top-notch management process is a prerequisite to getting more value out of the IT equation. And they know it's the only way to provide a dependable framework for measuring - and ultimately enhancing - the value the IT organization can bring to the corporation as a whole.

YOUR TO-DO LIST

To get a handle on the true drivers of IT costs and to focus management on what's critical for success, some 40 companies have joined this benchmark study. The benchmarking effort can help management understand that IT costs are best viewed not as overhead, but as an investment in advancing the business. Also, benchmarking can help IT strengthen its focus on customer service - quality projects, delivered on time and on budget.

As with any complex problem, the first step is to carve it into manageable pieces. There are four key areas to successful leadership of the IT function. By targeting these imperatives, wise financial executives clear away the detritus so they can zero in on what IT needs to accomplish.

CHALLENGE #1:

Control excessive personalization 

The typical company in the FEI/THG study maintains six different operating systems and 28 different financial systems per billion dollars of revenue. What's more, most companies are wrestling with numerous different standards (an oxymoron?) on the desktop, for e-mail and other core productivity tools.

For many companies, this lack of standardized tools isn't the result of real business needs, but rather the consequence of the decentralized approach to IT purchasing, which governs how up to 70 percent of IT purchases are made at the typical company. Believing they're fundamentally unique - and consequently the drivers of cost are "inherent" and derive directly from their particular industry, geography or market requirements - business units have built their own huge hardware and software empires over the years. These empires are largely incompatible with each other and are characterized by redundancy and overlap of basic hardware and software choices.

Complexity and fragmentation have a price tag. As Shawn O'Keefe, CFO of DHL Systems (which provides central technology support to the international air express network), notes, "The degree of complexity we have, combined with the limited use of standards in the desktop environment, results in higher support costs. We're paying a premium for flexibility, and senior management needs to understand that so they can determine if it's justified."

For DHL and many other companies, the truth is that most of the perceived uniqueness in business requirements is just that - perception. In reality, the bulk of IT investments results from choices, not imperatives.

Those choices have to do with how IT organizations choose to do the work that must be done. For instance, it may be a business requirement that invoices are paid in a timely manner, but it's entirely a matter of choice (and of how the organization is structured) whether those invoices are paid by 10 different A/P systems or by a high-efficiency, shared-services center.

The trick is to separate the wheat from the chaff. As O'Keefe points out, "We'll be using the benchmark to identify choices that are driven by unique business requirements versus those that just evolved or developed over time and happen-stance."

An efficient IT organization will satisfy only those demands for personalization that demonstrably add value to product or service delivery capabilities, while disqualifying any that merely reflect the whims of the end user.

CHALLENGE #2:

Build a world-class project-management capability

Developing the best IT strategies in the world does no good if you can't implement them. As the FEI/THG study shows, there's a critical need in IT today to bring a higher level of project management and implementation expertise to the IT organization itself.

At the typical company, only 42 percent of large systems projects (i.e., those requiring more than 360 days' effort) come in on budget. Only 37 percent come in on schedule. This means that every time a company makes a major technology investment, it must do so knowing that two out of every three projects will be, according to most standards, a failure. That's quite a roll of the dice, particularly given the sheer magnitude (in terms of resources required and time spent) of large-scale systems integration projects, where the entry point typically starts at tens of millions of dollars.

Poor project management is perhaps the biggest credibility issue IT must overcome, particularly as it shifts its focus to integration and as IT costs continue to expand as a proportion of overall costs. In the new era, tolerance for "late" and "over budget" will be sorely tested.

In the future, IT organizations must become highly adaptive and service-oriented. As GTE Directories' Les Robertson states: "If we want to have a value-added role, we must improve our time to market." Robertson is the information management project manager for the $1.3-billion publisher of yellow pages.

As corporations everywhere begin to break down functional silos and move toward cross-functional ownership of processes, there'll be an even stronger drive for these crucial project management skills. "At GTE Directories," Robertson explains, "we expect that more discrete projects will emerge from the new process-owner organization and that IT will have to be more adaptive. Already, applications are being integrated across processes. Our internal customers will be the process owners - not the functional organizations."

CHALLENGE #3:

Change the focus from software development to integration

Companies today are undergoing a sea change. While the mainframe is still used to process most applications, IT development efforts are focused on other, more distributed platforms - notably client/server. This study highlights the large gap between the infrastructure that supports a corporation's operations today and that being built for tomorrow.

The implications of this transformation, in terms of resource allocation, skills and investment, are significant. Leading organizations are increasingly redirecting their resources - both capital investments and staff time and talent - to buying and integrating off-the-shelf solutions instead of developing their own custom applications. One particularly painful lesson is that the enormous investment in third-party integration services is simply too expensive to sustain on a long-term basis. That's why leading companies are targeting integration as a key skill set that internal IT organizations must develop to leverage both cost and value.

As GTE Directories' Robertson comments: "Last year, we had a 10-percent reduction in force. However, we made sure to keep our skills in two key areas: client/server technology and systems integration. We invested heavily in open systems and are now concentrating on buying packages, not developing them. We're integrating data into a distributed computing environment, so we need more people who can integrate the system at the hardware, software and data layers."

Robertson credits the benchmark with helping his firm "decide to focus our energies on systems integration. Instead of adding headcount, we took systems developers with client/server expertise and migrated them to a new systems integrator group. At the same time, we enabled them to do a better job through our new integration test facility, a sealed-off lab that replicates the actual production environment. Using a controlled environment like the ITF ensures a higher-quality production environment by reducing the introduction of production errors. Stress testing and performance testing increase our knowledge of how a newer solution will execute in the production environment" - and all that before rolling it out live to the company at large.

Bert Young, vice president of information systems at WMX Technologies, a $6-billion solid waste management services company, describes a similar imperative: "We'll probably not argue that our costs need to get bigger or that we need more resources. Instead, we'll be recommending a greater focus on integration. This will allow us to deploy our resources on the projects and initiatives that will make the biggest difference in the business."

For GTE Directories, the focus on integration is already creating "better relations with our internal customers," says Robertson. "With our ITF, we're better able to solve problems quickly, to keep abreast of emerging issues and to troubleshoot effectively."

CHALLENGE #4:

Manage multiple infrastructures

The FEI/THG study surfaces a vexing truth about why IT costs are growing: There's no visible evidence that the old mainframe infrastructure is going away. At the same time, there's abundant evidence that the appetite for new, integrated systems and client/server is immense and that the systems are more expensive to implement and maintain than initially projected. Combine that with the Internet, video conferencing and data warehousing, and the complexity becomes obvious. Chances are, the need to manage multiple infrastructures is a long-term reality - not a problem that will disappear overnight.

The effects of this can be seen in the average IT organization, which spends nearly 60 percent of staff time on infrastructure support processes like production support, network support and software maintenance, relegating such crucial activities as planning for the future use of technology to just half an hour a day.

At Johnson & Johnson, explains CIO Ed Parrish, "Most of our operating companies are spending their money on either infrastructure or transaction processing. They're doing it and redoing it and redoing it. It's a legacy from the era of clerical displacement as a source of technology investment."

While these investments have delivered genuine benefits, many companies recognize this isn't enough. "It's not the level of IT expenditure that's the problem," comments Parrish. "It's what we're spending the money on. Our intention in benchmarking was to focus line management - not just our information management organization, but companywide - on investigating and prioritizing expenditures by value-chain segment. The first step is to make everyone aware of how we're spending money today; the second step is to make them more aware of alternative ways to spend it.

"We see a major shift coming that will radically increase the information component of health care products and services," adds Parrish. "As one of the leading health care companies, J&J has to accommodate that shift. Consequently, I'd rather see major systems investments or IT expenditures being made in product or customer-related areas than in replacing redundant transaction processing systems."

In terms of complexity and fragmentation, the experience of Johnson & Johnson is typical of others in the benchmark, most of which are struggling to support, rationalize or replace a plethora of different operating systems and platforms.

Given these circumstances, many companies have turned to outsourcing as a solution. But they're missing the point. Outsourcing, in itself, is not a strategy; it's merely a purchasing decision, a choice of who does the work, not how. And if you outsource an inefficient process, the vendor will most certainly charge you for your inefficiency and still make a profit in the deal.

Moreover, those companies that mistakenly think of outsourcing as a silver bullet would do well to note that while outsourcing costs are significant - accounting for one in every four dollars paid to a third party - supplier management consumes just over one percent of IT staff time.

Still others are making a concerted effort to rationalize their infrastructures, as has Johnson Controls Inc./Controls Group. Jim Kerwin, Director of IT Operations for the worldwide supplier of facility services and control systems, explains: "For the past four years, we've been religiously transferring funds from mainframe to client/server systems development. There are no enhancements made and no discretionary projects developed on the mainframe. We spend money on mainframe systems only if they break."

So, while managing multiple infrastructures is a reality, it shouldn't drain such a high proportion of a company's resources. Eliminating redundancy and targeting investments are key to meeting this challenge.

KNOWING WHAT YOU NEED

The directive is clear: If IT is to play a higher-value role in your organization, you and the rest of top management must first focus on the basics and learn how to manage IT more effectively and efficiently. The road to transformation requires careful navigation, as the benchmark shows. Only by accepting the four challenges and following the steps described above can you make the informed decisions that will allow your company to tap the real potential of information technology.

On average, it costs a company 2.2 percent of its annual revenues to provide IT services. This cost includes operations, network support, software maintenance, service outsourcing and overhead. There are three components to the cost: fully loaded labor and outsourcing at 1.5 percent, systems at 0.4 percent and other (such as facilities, supplies and corporate allocations) at 0.3 percent. With corporate after-tax profit margins at 2.7 percent of revenue, according to the Fortune Global 500 list (August 1996), it's no wonder CEOs and CFOs are beginning to scrutinize the IT organization.

There's a wide range of costs among the benchmarked companies. To evaluate the gap between the best and the rest, it's helpful to examine how much it costs to provide basic IT services - from fielding help-desk calls to maintaining a company's infrastructure - to each end user in a company. Companies in the fourth quartile of the benchmark spend $17,776, while those in the first quartile have costs as low as $1,355 per end user.

At the typical billion-dollar company, IT supports 2,933 end users and a wide range of technology needs and levels of expertise. On average, total IT costs per end user are $7,518 annually.

For every 1,000 end users, the average IT organization fields up to 5,281 help-desk calls annually and supports 1,143 PCs. IT also maintains one data center, on average, for each 1,000 end users.

The typical company spends 8.4 times more on developing and maintaining software than on managing projects.

The average IT organization today may be juggling six or more operating systems on a comparable number of platforms and must be fluent in at least six program languages.

Many IT organizations rely on outsourcing to provide services ranging from integration expertise to routine maintenance, with outsourcing consuming 25 percent of process-related IT costs - with an ever-increasing proportion of the whole going to pricey third-party systems integrators. Yet supplier management consumes just 1.2 percent of IT staff time.

All benchmark statistics are courtesy of The Hackett Group Benchmark Study of Information Technology, 1996, all rights reserved.

ABOUT THE STUDY

To get a handle on the true drivers of IT costs and to understand the strategically valuable impact a world-class IT organization can have in advancing the business, some 40 companies have joined a benchmark study piloted by The Hackett Group and Financial Executives Institute. About 75 percent of the participating companies are in the manufacturing sector, while 25 percent are in services. Companies range in size from $120 million in annual revenues to nearly $44 billion.

The benchmark covers the entire spectrum of IT, with information gathered on 22 specifically defined processes, organized in four broad categories, as follows. Infrastructure support: production support/operations, network support/operations, technical support, end-user support, software maintenance, system procurement, data administration and general administration. Risk management: computer audit, quality control/assurance, computer risk management, training, vendor management, standards development and administration. Systems development: software development, project management and software development tools. Decision support: network planning, information architecture planning, technology strategy development, business strategy support and IT management.

The results reported here represent data analyzed during 1996.

Mr. Axson is vice president of The Hackett Group, based in Hudson, Ohio. You can reach him at 216-656-3110.