by Tom Davenport

Using IT for Long-Term Advantage with Short-Term Cost Cuts

Mar 15, 20026 mins

IT’S A DIFFICULT TIME for enterprise IT. Many companies are feeling the weight of cost reduction pressures. No one knows exactly how much chopping and hacking will ultimately be required, so companies go through round after round of relatively small cuts. It’s difficult to think about deriving long-term business advantage from technology with these frequent budgetary bee stings. Yet we know that things will eventually turn around, and the steps taken during difficult times to position the organization could really pay off when economic life gets better.

Most organizations need a bifocal strategy with respect to enterprise IT: short-term cost reduction and long-term competitive positioning. Of course, bifocals can initially be disorienting. What makes for cost reduction is minimal functionality, standards, commonality and low expenditure of labor. What makes for competitive advantage is differentiation, a close fit with the business model and human effort to match strategies to systems. However, I see some near-term approaches that aren’t compromising long-term goals. I’ll also describe some further-out actions that don’t require a lot of spending?at least not today.

The Closer View

Cutting short-term costs with enterprise IT is not a new idea, and we can rely on some time-honored techniques: consolidation, outsourcing, process improvement and so on. Consoli-dation is perhaps the most promising candidate. Most large companies have implemented major enterprise systems with multiple instances or implementations. It’s likely that no great competitive damage will be done by consolidating instances across the organization, and consolidating will save on modification, maintenance, support and software licensing costs.

The cry will go up that “our business is different,” but the same cries went up in many companies that put in only one or two instances from the beginning, and everything worked out. Some companies didn’t even consider the possibility early on that instances could be shared, so consolidation should be easy for them. One European company, for example, put in 400 different instances of SAP across its diverse businesses. I’m guessing that there might be enough meaningful variation in the company’s businesses to justify 10 or 20 different instances.

Even consolidating across single modules can save some bucks. A big U.S. bank, for example, let every major business unit decide on its own what systems it needed for human resources. Fortunately, every unit chose PeopleSoft software, but there are minor variations in implementations. Eliminating those variations and operating off one instance for the entire company could save a passel of money, and it’s highly unlikely that the company’s competitive advantage derives from its unique HR system implementations.

Process improvement can play a role in short-term cost reduction, but you’ve got to be looking at it through the right lens. The nearsighted view on process improvement doesn’t mean total quality management or Six Sigma or radical reengineering. It simply means reviewing key processes and chopping out non-value-adding activities.

Since most applications don’t provide much competitive advantage, it often makes sense to hand them over to people who specialize in implementing and running them. The trend seems to be to outsource not only the application but also the performance of the related process. If you’re having someone else run the general ledger system, why not have him take over your basic accounting processes as well?

The only glitch here is integration. If you ask one outsourcer to take over HR management, another to take over accounting processes and another to take over manufacturing, you might wonder how information and processes will flow in an integrated way across these functions. As a result of this valid concern I expect that we’ll begin to see outsourcers take on multiple functional pieces and be responsible for their integration.

The Farsighted Perspective

Now look through the top lens of the bifocals, and think of ways to improve long-term competitive positioning with enterprise IT?without spending a lot of dough in the short run. I believe the keys to this perspective involve using company and industry-specific applications, installing new package modules, continuing to connect the ERP dots, reengineering and taking the interorganizational perspective.

Enterprise IT has become?and perhaps was from the beginning?a commodity. Every business has it, it works roughly the same way, and the only way to extract a drop of competitive advantage from it is to install it for less or tailor it on the margins to fit your company. The only real way to get advantage is to develop your own stuff. For the parts of your business that are truly distinctive and core to your success, it makes sense to build your own and interface it with the rest of your enterprise systems. Intel did it with manufacturing and product design systems; Compaq with production forecasting and product configuration. Every business ought to be thinking about some killer app that it doesn’t want to share with the rest of the world.

If you think you can’t afford your own stuff, you can at least partner with a vendor or other companies in your industry to customize systems to your specific processes. That’s what Reebok International did with SAP to make the system work for selling apparel at retail. A group of oil companies worked together to create IS-Oil, a tailored version of SAP that now goes by the name MySAP Oil & Gas. There’s a version of PeopleSoft customized to work for state governments. And so on. The upside is that sharing the work with a vendor means you don’t have to pay for it all. The downside, of course, is that others get to use the system, but you can at least be first.

Contrary to how it was viewed in the early 1990s, business process reengineering (at least when done correctly) is a long-term solution, not a short-term palliative. But it’s still a good idea when radical IT-enabled change is necessary. Look beyond the old standby processes of order management and procurement, and focus on those that help to achieve more desirable products and services in the marketplace, such as marketing and product development.

Finally, there’s a lot of interest in transforming interorganizational relationships with enterprise IT. In case you were waiting for my endorsement of this activity, you have it?but with a strong caution. It’s a truly long-term initiative to develop seamless transactions with your customers and suppliers?maybe a decade or so if you haven’t started already. And try not to partner with the rest of your industry as you do this, or your distinctive products and services will end up as just another line on a crowded computer screen. That’s one purpose for which we don’t want bifocals to be employed.