Small companies waste untold dollars on technology that doesn't begin to solve their problems. Here's how to analyze your business and develop a focused technology plan.
Why guess what hardware and software you'll need when a technology plan can tell you for sure?
Back in the duck-and-cover days of the Cuban missile crisis, Robert Smith, a chemical engineer and director of new products for Mead Johnson, in Evansville, Ind., invented what he thought was an antidote for atomic fallout. Smith designed his milky-looking cleanser to remove radioactive particles from the skin and stored gallons of it in a 3,000-square-foot underground bomb shelter. To protect his family from starvation in the event of a siege, Smith also stockpiled gallons of another of his inventions--a diet drink called Metrecal, popular with Donna Reed wanna-bes. "We were secure in the knowledge that we'd be the cleanest, slimmest family to survive an atomic attack," recalls Smith's son, Steve.
Fast-forward to 1998. Steve Smith now runs Tec Laboratories Inc., in Albany, Oreg., a 21-year-old company that his father founded after leaving Mead Johnson. Tec Labs' cash cow is Tecnu, a popular over-the-counter prevention and treatment for poison-oak and poison-ivy rashes that is a variant of the fallout remover. Sold at large drugstore chains like Rite Aid and Walgreen, Tecnu last year pulled in $2 million in sales for the 20-employee company.
Tec Labs is doing very well these days. In addition to Tecnu, it manufactures seven other products--including anti-itch gels and insect repellents--whose sales have grown by 85% in five years. Last April the company signed a major sales agreement with Wal-Mart Stores Inc. And CEO Smith, who carefully tracks these things, says Tec Labs has enjoyed a 52% jump in productivity since 1994. (That increase may be a sign of employee contentment. Recently, Oregon Business magazine named Tec Labs one of the state's best places to work.)
Smith credits his company's success, in part, to a detailed technology plan that supports Tec Labs' grand strategies while ensuring that employees have everything they need to do their jobs well. The plan is a constant work in progress both for Tec Labs' information-systems director, who reviews existing computer use and sets standards, and for Smith himself, who has devised an elaborate formula for measuring the return on investment (ROI) from potential technology purchases. Under Smith's scheme every PC, every software package, and every modem and network wire is assigned a monetary value based on its expected contribution to the business.
"When we look at any technology improvement, we look at the people who are using it," says Smith. "You can spend millions on new computers, but if you don't think first about how they are going to improve your employees' work and your customers' lives, then they're just a bunch of boat anchors."
Formal technology plans like the one at Tec Labs are common in large companies but far less so in small operations. That may be the reason small companies often sink thousands--even millions--of dollars into technology that doesn't even begin to solve their problems. "Small companies don't pay attention to what they really need from their systems until it's too late," says Anita Cassidy, CEO of Minneapolis-based Strategic Computing Directions Inc. and author of A Practical Guide to Information Systems Strategic Planning (St. Lucie Press, 1998). "One day they wake up and find out that their technology can't support their business."
Technology plans are, in fact, "a lot like business plans," says Cassidy. They begin with a business destination and then lay out a map for getting there, examining both major and minor thoroughfares as well as roads not taken. For example, if a company's goal is to boost sales, then its technology mission might be to automate the sales force. If automating the sales force means putting in a new network, the technology plan will exhaustively evaluate that project as well. "A technology plan needs to look at all the company's pieces and processes and offer careful recommendations," says Cassidy.
Such plans force companies to ask important questions--How do we work with our customers now? How do we want to work with them in the future? What are our competitors doing? Where is our industry going?--and then to consider both the technical and the nontechnical implications of the answers. In some cases plans also impose much-needed discipline. "A lot of people want to play with the newest technology, even if there's no strategic reason to buy it," Cassidy notes. Technology plans counter those impulses by providing a structured approach to procurement.
Not surprisingly, a technology plan's shape and scope will vary with the company. Three- or five-year plans are fine "if you're dealing with a fixed product and you already have a certain set of known quantities in place," says Bruce Gray, vice-president of business-systems planning and measurement at insurance and financial-services giant Prudential Corp. "But if you're selling candy bars this week and ice cream the next, that changes everything."
For companies in fast-changing industries--high technology comes to mind--plans should be built around six-month or one-year cycles, according to Cheryl Currid, a technology analyst. "Basically, business and technology plans should become living documents that work together to drive the company forward, mapping vision to reality, theories to processes, goals to techniques," she says. "Ideally, the contents of the plans change over time and could look like a corporate diary."
The best plans are also collaborative, drawing input from the group (internal or external) that will implement the systems and the employees who will use them. "Bring clients and customers into the game by asking them what would make life easier for them to do business with you," Cassidy suggests.
Like many entrepreneurs, the Smiths for years were too preoccupied with such immediate concerns as making payroll to pay much attention to their computer infrastructure. Tec Labs installed its first PCs in 1983, adding new ones as the company grew but giving little thought to upgrading old models. As late as 1993, many employees still worked with DOS-based 286s that lacked the memory to run Windows. One poor soul spent three to four hours a week dashing up and down stairs to retrieve paper from a central printer.
Steve Smith describes the company's technology base as a crazy quilt of custom-built software and old computers sewn together by a parade of consultants. "It was like having multiple tailors making you a suit," he says. "One arm looked good, but when we put the suit together, we were just barely clothed. We were strangling ourselves on labor, on duplication of effort--spending all our money having three and four people doing different portions of a process."
Ironically, when it came to manufacturing technology, Tec Labs was a paragon of precision. The company practices "constraint management," an exacting procedure in which employees log how long it takes each bottle of Tecnu to pass through each step in the manufacturing process. The goal is to identify sticking points, measure their cost in production time, and then translate that into labor and revenue costs. Consequently, if a labeling machine begins to stick, Smith knows just when it is economically smart to replace it.
Tec Labs' manufacturing operations supported the company's business goals: to continually improve processes and boost employee productivity. Its information systems didn't provide the same kind of support. Then one day in 1996, "I realized that we could take the same processes we use in manufacturing and apply them to our computers," Smith recalls. That meant compiling extensive metrics on how technology was serving employees and where it was failing them. With the idea of mimicking the manufacturing process, technology director Kathlene Cowan asked staff members to begin logging the time they spent on computer-related tasks and then extrapolated those hours out to a year.
The results were eye-opening. Companywide, employees were spending 105 hours annually running to printers, 52 hours converting files from one operating system to another, and 75 hours in unnecessary document management. By Smith's calculations, the company was wasting $40,000 in labor every year.
With a clear view of Tec Labs' goals, a meticulous accounting of its weaknesses, and an eye toward what was already running at the company, Cowan began evaluating technologies. As she did so, she quantified for Smith the impact of each potential expenditure on Tec Labs' bottom line.
Ultimately, Cowan persuaded the CEO that a Microsoft Windows NT network would solve most of the productivity problems while also creating some new opportunities--allowing salespeople dial-in access from the road, for example. She calculated the cost at $20,000--half of what Tec Labs had been squandering on inefficiencies. "The ROI estimate made it easy to sell the idea to the board," says Smith.
Today the network is in place, and so is an ongoing planning process. Whenever a department or a group wants to add or upgrade something, it submits to management a formal wish list that includes a detailed breakdown of costs and estimated returns. With that information "the board can use money like a scalpel, rather than a bulldozer," says Smith. "They can look at all the multiple, complex projects we're considering--say, a new advertising campaign versus a new piece of machinery--and make good decisions as to which ones should come first."
Unlike Tec Labs, Minneapolis-based Rosemount Office Systems Inc. wasn't about to let the lack of a plan slow its technology spending. Two years ago the 175-employee builder of customized office furniture discovered that its enterprise resource planning (ERP) system--software products that link functions in manufacturers--was vulnerable to the millennium bug. "We were convinced we should fix our Y2K issue as soon as possible and basically thought that it would be easy," says vice-president and chief financial officer Mary Rolf.
Six months, $80,000, and "a lot of blood, sweat, and tears" later, the old system could handle the Year 2000--but not the company's operations. "After the fix was all done, we found out that the system we'd fixed no longer met our business requirements," says Rolf. In Rosemount's case those requirements were chiefly dictated by a new business plan that stressed customer service, especially the speedy turnaround of orders. Unwilling to leap again before taking a serious look, Rolf hired Cassidy of Strategic Computing Directions to help create a technology blueprint that would both mirror and extend the business plan.
Cassidy's recipe is fairly simple but demands unflinching rigor. The first step is to translate every business goal into a corresponding technology goal. For example, Rosemount's mission statement includes "customer delight" among its business objectives. In tech-plan-speak, achieving "customer delight" means "designing systems so that customers can access information easily and directly."
With goals defined, Rolf and Cassidy set about scrutinizing Rosemount's processes in order to assess its information needs. Everything went on the table: financials (monthly sales, order backlog, gross margin, operating margin), human resources (salaries, benefits, turnover rates, sick days), manufacturing (scrap levels, reworked items, material expenditures, total yield), and marketing (pricing, discounts, regional sales, special offers). "The combined data told us how we were doing now, compared to where we wanted to be in providing quicker, cheaper, and higher-quality products and information," explains Rolf. "It also helped us figure out how we stacked up to the rest of the industry. If we compared favorably, we asked ourselves, 'Is this good enough?' And if we didn't, we asked, 'Why can't we be better?"
Until that point, specific technology tools hadn't even entered the conversation. But armed with quantifiable objectives, Rolf and Cassidy asked such questions as "How do we stay in business with our current systems?" and "What do we need to be technologically competitive?"
To find the answers, the two turned their attention to how work was being done, concentrating on the manual workarounds employees used to circumvent problems with the old ERP system. "We measured anything that took time and effort," says Rolf.
Once the metrics were laid out, Cassidy and Rolf had a good idea of where to spend Rosemount's technology dollars. The company would benefit most, they determined, from Y2K-compliant ERP software with a knowledge-based "configurator" that would greatly simplify both ordering and fulfillment. After a four-month search, they chose a vendor, Friedman Corp., and a product, the AS/400-based Frontier. Using Rosemount's extranet, customers could connect with the system to request a price estimate, place an order, and check delivery dates and order status from the comfort of their PCs. (The result: customer delight.) Back at Rosemount the same software would dynamically handle material and routing, schedule production, process purchase orders, and track shipments. (The result: shorter turnaround cycles.)
The total cost--including ERP software, a local area network, bar-coding technology, new PCs and printers, consulting, and training--came to a whopping $1 million. But $1 million well spent is preferable to $80,000 blown, and Rosemount expects a 20% return in the first three years, thanks to reductions in labor, inventory, and lead times. "The biggest benefit we are getting from uniting our business and technology plans is that information flows from the front door to the back door, dynamically," says Rolf. "All the departments have what they need, when they need it."
Clearly, measurement is crucial to technology planning, but it's tough to measure something that won't hold still. Empire Graphics Inc., a $7-million printing company in New York City (#460 on this year's Inc. 500 list) serves an increasingly sophisticated market whose needs are constantly advancing. Unlike Tec Labs and Rosemount, which fit their technology plans to their business models, Empire adapts its business model to changes in technology. "We make technology decisions partly in reaction to what our competitors do, but also because the way we're working with clients has changed drastically," says vice-president Stuart Leventhal.
Empire produces brochures, catalogs, and in-house magazines for its customers, which range from mom-and-pop shops to Fortune 500 corporations. In the past the company would scan artwork and set type, producing a paper proof for the customer to correct and often going through several rounds of corrections before final approval. Today many companies have their own scanners and powerful laser printers and "can print good-looking stuff that's more 'finished' looking than they had in the past," says Leventhal.
In addition, the printing industry as a whole has been powerfully affected by persistent technological obsolescence. In the early 1990s, for example, most printing companies used 44MB or 88MB SyQuest disks when producing graphics files. When SyQuest Technology Inc. began selling 200MB disk drives, those companies had to pay more for the new products. Then in 1995 "this new kid on the block called Iomega shows up with Zip drives and disks," says Leventhal. Fujitsu, Seagate, and other competitors followed, and "consumers were quickly offered new alternatives, like optical disks and CD-RWs," says Leventhal, referring to rewritable CD-ROMs. "Was there a way to plan on that? Absolutely not."
Empire's technology plan, then, is to make hay out of the very things it can't plan for, "to learn to shoot accurately at a moving target," as Leventhal puts it. The staff members do everything they can to stay painfully up-to-date on technology: reading computer and trade magazines, and attending conferences and trade shows. The idea is to position themselves as technology gurus, offering new products and services that exploit whatever is currently out there and wonderful. But the company's ever-more-sophisticated offerings are worthless if customers don't understand their advantages, so Empire is also emphasizing more interactive, education-oriented customer relationships. "We've altered our business plan to make sure that we're in constant contact with our clients about media," says Leventhal. "There has to be a lot more cross-fertilization."
Keeping current on emerging printing technology informs Empire's own buying decisions, but it also familiarizes the company with the machines being purchased by some customers. From that understanding has sprung a whole new line of business--helping customers get the most out of their shiny new equipment. "By default we've become technology consultants, so we're beginning to bill for some of that," says Leventhal. "We think this will increase our bottom line by 25% a year."
Empire's consulting gigs also give management a pretty clear picture of the threat posed by customers' increasingly sophisticated in-house systems. As a result, the company can buy technology that allows it to do things for customers that customers can't do for themselves. In those instances, more- traditional ROI analysis--how many jobs the company expects to get with the technology, whether it improves productivity, and how long it is likely to last--kicks in. Depending on the results, Leventhal may decide to buy or lease--or simply contract out the work.
But chances are, if the printer or computer or software product in question helps Empire give its customers something they didn't know they needed, the company will find some way to use it. "If there's anything we bring to the table, it's that we see customers' level of technology," says Leventhal, "and it's much, much less than what we have."
Bronwyn Fryer writes about business and technology. She is based in Santa Cruz, Calif.
SAVINGS ACCOUNT: A page from Tec Labs' cost analysis
|Task||Time saved: Year (hours)||$ saved: year|
|Quick, easy printing from any station to any printer||105||1,050|
|Faster server/computers = faster printing, saving, file finding, etc.||52||520|
|Direct faxing capabilities||150||1,500|
|All documents are filed neatly on the network instead of indiv. diskettes, and lost directories||75||750|
|E-mail letters, documents, databases, photos, etc. prevents "phone tag"||100||1,000|
|Internet access reduces research time and ordering time||52||520|
|Remote networking--Larry can type letters, salesperson spreadsheets & other docs||200||2,000|
|Less training time: all stations would be the same||75||750|
|Everyone could log in to network--Kathlene wouldn't have to manage connections||90||900|
|Windows 95 allows multitasking||52||520|
|Maximizer for Windows = faster, more organized graphical user interface||52||520|
HAPPY RETURNS: A portion of Rosemount's ROI analysis (actual figures removed)
In total, we are estimating benefits of $XX/year at $XX/year sales. This estimate will be further refined once a specific vendor is chosen. Looking more specifically at the quantifiable benefits, the following are categories for improvement.
Resource improvements: Labor savings will come in all areas of the business. We anticipate saving six heads a year at an average fringed labor rate of $XX/year. The new system will also allow the company to continue to leverage head-count additions in future years, estimated to be XX% of sales.
Quality improvements: Quality issues are projected to cost $XX/year at $XX/year in sales. A conservative estimate that the new system and reengineered processes will save only 50% of these quality costs per year would result in savings of $XX/year at $XX sales.
Asset management: We anticipate a conservative reduction of 10% of our total of $XX inventory, or $XX/year. Improvements made in the front end of the order-entry process will yield corresponding improvement in days sales outstanding (DSO). We anticipate savings of one day, or $XX/year, in DSO.
Sales impact: The new system will allow us to more accurately process orders, handle customized product, and provide more timely information on order status. We will improve service and quality and reduce lead times and time to market for new products and options. We utilized a conservative sales impact of 1%, or $XX per year.
Measures For Measures
A technology plan may be a big strategic document, but what's at its heart? Metrics, metrics, and more metrics, says Anita Cassidy, author of A Practical Guide to Information Systems Strategic Planning. Inc. Technology asked her to expand on that idea:
"As the saying goes, 'You can't improve what you can't measure.' Gathering metrics challenges you to improve and progress, and gives you external and internal standards against which to assess your company.
"Be careful what metrics you use: one set does not fit all companies. Your metrics must reflect--and align with--your business and technology strategies. They should reflect how your company goes to market, delivers value, or obtains a competitive edge: whether through innovation, speed, quality, service, or cost. Your technology metrics should be consistent with your company's mission, values, objectives, and strategic direction. What does the company expect from technology? To generate revenues (improve time to market, improve customer service, open new distribution channels), transform the business (streamline operations, provide business information), or reduce costs?
"You should have metrics that measure both the efficiency and the effectiveness of technology. Effectiveness metrics, such as user-satisfaction surveys, identify the value technology is bringing to the business.
"Metrics are the foundation of a continuous improvement process. Tracking them is an ongoing journey, and the practice must reflect a change in management philosophy. Metrics are only as good as the leadership behind them."