| Answering the Question, How much should we spend on Technology? |
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Given the uncertain returns on technology spending, many managers wonder whether they are spending too much—or perhaps even too little. If we can just get the dollar amount right, the thinking goes, the other technology issues will take care of themselves. So they look to industry benchmarks as a way of determining appropriate spending levels. The main problem is that there are limited if no benchmarks for most small to medium sized organizations. Previously successful organizations tend to approach the question of technology spending very differently. First they determine the strategic role that technology will play in the organization, and only then do they establish a company-wide funding level that will enable technology to fulfill that objective. Setting Goals Technology goals as they relate to business or marketing goals vary considerably across organizations. They may be relatively modest: for example, eliminating inaccuracies and inefficiencies in administrative processes. Or they may be central to an organization’s overall strategy: for example, supporting a seamless order processing system, flawless customer service, or leading-edge research and development. Clearly, these different objectives require different levels of spending. And if you have determined that technology should play a central strategic role, the nature of that role will affect the required level of spending. Case Study Take arch rivals United Parcel Service and FedEx. Both companies report spending around $1 billion on technology each year, but FedEx, which has annual revenues of about $20 billion, is just two-thirds the size of UPS. Does that mean technology plays a more important role at FedEx? No, simply a different one. UPS's technology strategy, which evolved from its industrial engineering roots, has focused on introducing efficiencies to a business that demands consistency and reliability. The company's centralized, standardized technology environment allows for dependable customer service at a relatively low cost. FedEx, on the other hand, has focused on achieving flexibility to meet the needs of its various customer segments. The higher costs of this decentralized approach to technology management are offset by the benefits of localized innovation and a heightened ability to respond to customers' needs. Of course, UPS also uses technology to meet the needs of individual customers, and FedEx uses technology to provide consistent service to different customer segments. But the goals of the two companies' technology and business strategies are different. Both are successful because they have matched their spending levels to those strategies—not to industry benchmarks. Defining Technology’s Role In most companies, management has not yet clearly defined technology's role in how it relates to the overall organization. In effect abdicating that responsibility. In those organizations, the technology may deliver on short term projects but not on long-term ones. Without building a "strategic platform," one that not only responds to immediate needs but also provides escalating benefits over the long term those organizations will experience delays, stalled projects, and cost over runs. A high price for any organization. UPS's experience illustrates the benefits of a broad strategic platform. The company began investing heavily in technology in the late 1980s, at a time when FedEx was touting its package-tracking capability. But instead of simply creating a tracking system, UPS's senior management decided to build a comprehensive package database that had the potential to become a platform for numerous applications. To gather information for the database, UPS developed the "Delivery Information Acquisition Device", a handheld computer used by drivers to collect customers' signatures and other information electronically. The device saved drivers thirty minutes a day by reducing the manual input of delivery information. But these electronic tracking capabilities were only an initial benefit. What came shortly after: electronic data provided a more accurate record of deliveries, enabling UPS to collect hundreds of millions of dollars in revenues that had been lost when customers self-reported deliveries, which UPS couldn't easily verify. the database allowed UPS to introduce new products, such as guaranteed delivery, and new processes, including online package tracking by customers. other recent enhancements will optimize the scheduling of routes and help UPS's business customers get paid faster once their goods are delivered. Happy Surprise Benefits Those benefits grew out of UPS's decision to make significant and consistent investments in a system that, before long, outgrew its original purpose. UPS's CEO, Mike Eskew, calls the new applications, each of which furthers the strategy of providing consistent and reliable customer service, "happy surprises." Such unforeseen benefits lead to a total return on technology investment that exceeds the sum of the ROI’s of individual projects—a return far greater than many companies can imagine. Technology spending can be designed to meet immediate needs and allow for an multiple future benefits ONLY if technology and business goals are clearly defined. Some management teams offer only a vague vision—for example, "providing information to anyone, anytime, anywhere." Technology initiatives can only respond to such ill-defined goals by trying to build platforms capable of responding to any business need. Not surprisingly, the typical outcome of such large, undirected projects is thousands to millions of dollars spent chasing elusive benefits. nxtConcepts.com Need help implementing a new sales or marketing program? 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