Does Your Work in Information Technology Matter to Wall Street?

The truth is that IT matters a lot when systems and networks go horribly and publicly wrong. And IT that is run very well is difficult for Wall Street analysts to notice.

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O'Hara reported that in the third quarter, Level 3 "incurred approximately $20 million of integration expenses for a total of $80 million year to date," and the company still expects to incur approximately $100 million in integration expenses for the full year.

Market researchers at Current Analysis attributed Level 3's integration challenges, "mainly involving the transition to a single set of back office systems for its acquired carriers, as the reason for difficulties in converting high order levels to revenues and a subsequent reduction in the growth of its core communications revenues during the second and third quarters of 2007."

And while the company's revenues have increased from $1.7 billion in 2005 to $3.4 billion in 2006, it is still not profitable, losing $744 million in 2006. Since its Oct. 23 earnings announcement, its stock price slid from $4.50 to $2.50 a share.

What's the Value of Good Technology?

Nordstrom is a company with a great brand name and an upscale customer base that many retailers would love to have.

But since its founding in 1901 right up to the turn of the century, Nordstrom wasn't a big believer in IT and retailing systems. Nordstrom had "systems so antiquated that they were taking physical inventory twice a quarter, writing it down with a pencil or pen," says retail analyst Edwards. "They were so far behind the eight ball."

But after 2000, Nordstrom embarked on a technology overhaul, taking advantage of new point-of-sale (POS), inventory, price-optimization and buying systems, says Edwards. The company has also been able to link its Internet and in-store inventory management systems, allowing for more innovative, customer-friendly and flexible delivery options. "They are a shining example of how technology can help," Edwards says.

In Nordstrom's 2006 annual report, company executives acknowledge technology's impact. "Our investments in new technology and systems over the last five years have laid the foundation for more accurate decision making. Improved operating disciplines and cost controls have led to a higher return on investment," it states. "Our new systems and merchandising disciplines have helped us begin to tap into that business by enhancing our ability to keep inventories fresh and turn them more rapidly." (Nordstrom executives declined to be interviewed.)

Wall Street has reacted warmly to the technology-induced changes. In 2000, the retailer's stock price hovered around $15; by January 2007, it nearly topped $60. The week of Jan. 22, 2008, Nordstrom was trading in the $30s. But Edwards notes a clear long-term trend: "You can absolutely see that the technology has helped them over the last seven years," Edwards says.

The technology sword can cut both ways. In the 2006 annual report, Nordstrom detailed some of the challenges it experienced in creating a "seamless experience for our customers between our stores, catalogs and Web site, linking the Full-Line stores and Direct merchandise organization."

While executives believed their strategies would improve operating performance, "we also found that the technology changes will be more challenging than we initially anticipated," they wrote, adding: "Executing this strategy may cost more and take longer than expected, which could impact our future operating performance."

Despite the challenges, Nordstrom executives plan to spend $170 million each year on IT operations and systems development to sustain its competitive position and grow the business. "We must monitor and choose the right investments and implement them at the right pace. Targeting the wrong opportunities, failing to make the best investment, or making an investment commitment significantly above or below the requirements of the business opportunity may result in the loss of our competitive position," the report stated. "In addition, an inadequate investment in maintaining our current systems may result in a loss of system functionality and increased future costs to bring our systems up to date."

At Credit Suisse, CIO Sanzone and his team have taken advantage of virtualization technologies to save millions and become fast, flexible partners to their business counterparts. The IT team has reduced the time it takes to allocate server space for application-hungry lines of business from weeks or months to a day or two. This allows "quicker time to market for the products that they need, competitive advantage and driving revenue growth," he says.

But do the financial analysts who follow Credit Suisse care about this? "I don't think the analysts are interested in a virtualization conversation," Sanzone concedes. "But what they would be interested in is if we were doing things from a technology perspective that were going to significantly reduce expenses or improve efficiencies in the coming months that were meaningful to earnings or to the bottom line." His CEO or CFO just probably wouldn't mention the specifics of Sanzone's virtualization program.

Sanzone says his CEO has mentioned Credit Suisse's Centers of Excellence (COE) program, which Sanzone heads, that focuses on gaining efficiencies and savings through offshoring. "Our CEO has talked to the analysts on multiple occasions about our COE program and the size, scope and impact of that program," Sanzone says.

Like most CIOs, Sanzone himself has yet to present at one of Credit Suisse's quarterly earnings calls—which is not unusual. Securities analyst Chan says it's not often that she'll hear a CIO on an analyst call. "The only times when we see them is if the company is embarking on a major initiative, and the investor community will demand to know the ins and outs of the program," she says.

Sanzone doesn't seem bothered. "Being a part of the executive board, I'm there at a number of them," he says. "But I haven't presented to this point."

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Copyright © 2008 IDG Communications, Inc.

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