Eying IT expenditures

Aug 01, 2008 9:30 PM  By

Long before the current economic slowdown, many companies had become more conservative with their IT spending. The latest technology can take a huge amount of capital, and more merchants are demanding a faster return on investment

That’s not to say that merchants aren’t investing in IT. Many are — especially in the e-commerce area. And the companies with aging order management legacy technology will certainly replace a system if they need to. But no one wants to spend money on technology without getting both short and long term benefits.

Should you be investing more in IT? And if so, how much? To answer these questions, it helps to know what other direct merchants typically spend on IT systems, as well as what applications have the highest ROI.

What they spend

We’ve found that the companies simply maintaining the status quo and supporting their users will spend less than 1.25% of net sales on IT. Marketers investing in new systems are spending in the range of 2.5% to 3.0% of net sales, when you take into account call center and order management systems, telephone systems and e-commerce IT hardware (not including expenses for e-commerce marketing personnel).

This 2.5% to 3% figure represents a blend of businesses. Companies with a higher average order might be spending a lower percentage of net sales. A higher amount per order means a lower percentage of net sales because you’re spreading it over a larger sales base.

The flip side of this is that smaller companies, because they don’t have as large a sales base, may have to spend a higher percent of net sales. A number of businesses making rapid changes to their systems may spend more than 3%.

Complicating matters is that many companies don’t clearly identify IT costs, as they are accounted for as part of general and administrative expenses. Management uses these numbers in budgeting, but they don’t have the visibility of gross margin percent or marketing expenses.

What are companies spending on IT? Here’s an example of a large multibrand retailer with a direct division. The company, which sells apparel and accessories, has sales of more than $2 billion. The business includes a specialty retail chain with more than 1,000 stores and a print catalog; e-commerce accounts for more than 50% of direct sales. Due to its product line, it has a return rate exceeding 25%.

The retailer’s centralized IT operation incorporates all IT expenses, including e-commerce and telephone systems. Its IT includes a mix of both internally developed systems for direct, and commercial retail packages. The merchant has a number of major projects going on to replace aging systems and maintain competitiveness. IT expenses here are 4% of net sales, reflecting its high merchandise return rate.

Another client is a business-to-business direct retailer of corporate gifts (hard-goods items) with sales of less than $100 million. E-commerce accounts for more than 20% of its direct sales.

The company’s IT expenses are mostly for inhouse technology, with limited commercial systems. Expenses include e-commerce, telephone systems and graphics systems for special orders, which are 10% of volume. This merchant’s total IT expenses are 3.2% of net sales, with 40% of expenses supporting special orders.

Looking at these examples, it would appear that the apparel company has a higher expense for IT. But its 25% return rate is what creates the incomparability. If you reviewed the two companies on a gross sales basis, the apparel merchant would be spending 3% of gross sales — just about the same as the hard-goods business marketer.

The chart “IT cost breakdown by category” (page 46) shows roughly how we see the money being spent. Note that more than half of the expenses (51%) are for labor — including management, help desks, operations and programming. How does your company stack up?

If you’re pondering an investment in technology, first consider these questions:

  • Are you meeting or exceeding management’s IT expectations? How can IT facilitate change as a higher percentage of sales moves to e-commerce?
  • Where can IT improve the synergy between channels?
  • What investment is required to stay competitive in the e-commerce channel?
  • Where can you make an IT investment that reduces costs and improves productivity?
  • What systems improvements will manage inventory more profitably and provide higher customer service?
  • What are your company’s requirements in terms of flexibility and scalability of applications?
  • As your business changes rapidly, how does IT need to help facilitate the change?

Keep in mind that some applications have higher ROI than others. Here are a few more things to think about.

Build vs. buy

One of the key variables that determines your IT cost as a percent of net sales is whether you develop your own systems or use commercial software. Many merchants today take a hybrid approach to build-vs.-buy.

For example, one of our $3 billion direct clients is taking on commercial systems for call center, warehouse management and POS, yet the company has more than 150 IT personnel on staff.

We believe more than 50% of direct businesses are internally developing and/or maintaining order management systems to some degree, but this is changing. Most accounting applications are commercial systems, while e-commerce solutions are a split between commercial systems and inhouse development.

Even companies with commercial systems have added a person or two with an IT background, often to write specialized functions in a user-controlled library in conjunction with the commercial system. These staffers also write reports, train users and maximize the use of the system.

Licensed inhouse vs. Software as a Service


SaaS is becoming more common for e-commerce, order and warehouse management, and specialized systems options. One benefit: the SaaS vendor becomes the IT department. As most revenue models rise and fall with the transactions or dollar revenue processed, it becomes a variable expense.

One thing you give up with this model is immediate control to make changes; you are at the mercy of the vendor. Depending on the service supplier, you may be waiting for the next release of the software for your enhancements.

Replacing order management systems (OMS)


Some merchants have to replace aging OMS with commercial systems on more up-to-date platform technologies (e.g., dot.net, C++, Java, etc.). Other companies are looking for open source software with the intent to develop further to their specific requirements. With service oriented architecture (SOA) it is now quite commonplace to share functionality and data between software applications and multivendor commercial systems.

Marketing/creative


As e-commerce becomes more predominant in direct companies, planning campaigns and products across channels is crucial. Some of the key marketing system functions companies are developing include synergy between channels; event tracking; marketing and promotion calendar systems across channels; e-mail and affiliate marketing; content management (digital assets); data mining; and inhouse list processing.

Internet


Direct businesses now average more than 50% of their demand coming from the e-commerce channel. Much of this is a transfer of sales from phone orders. Some areas worth investing in for e-commerce include loyalty clubs across channels; mobile/electronic coupons and gift certificates across channels; in-store pick up; real-time store inventory; and drop-ship vendor inventory availability.

Customer contact center


Many companies that have high customer service standards are putting more emphasis on the customer experience rather than the length of time for an order. Key functions clients are adding include upsell and cross-sell capabilities; click-to-call; CTI; live chat; skill-based routing; and address verification.

Supply chain and fulfillment


More merchants are working to optimize the supply chain in terms of cost reduction as well as providing visibility end-to-end, from the vendor through the entire fulfillment process. Some of the technology to consider here: voice picking; Web-based drop-shipping; foreign quality assurance and freight consolidation; robotics systems; barcode processing; and labor management systems.

Merchandising/inventory management


For many merchants, imported goods account for well over 50% of the products sold. And lead time and increasing prices in Asia are putting more pressure on merchandising to update systems across channels.

Technology can help in at least three areas here:

  1. Developing planning and forecasting systems and disciplines for e-commerce
  2. Coordinating those product requirements between channels for purchasing
  3. Improving multichannel inventory systems

Especially in a business climate like the present, you need to look carefully at how you’re spending your IT dollars, and try to determine what percent of sales your IT spending really represents. But innovative companies are making investments in key information systems — many in hopes of gaining a competitive advantage. And we can all use one of those today.

Curt Barry is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consultancy.

IT cost breakdown by category


Labor (includes benefits) 51%
- programming (29%)
- ops/tech support (17%)
- other (5%)
Hardware 13%
Software 10%
Services 5%
Telecom 4%
Facilities 3%
Supplies 3%
Training 1%
Other costs 10%
Total 100%