Does Your Work in Information Technology Matter to Wall Street?

Before one stock traded on Wall Street on Jan. 22, the world had telegraphed its view of the slumping U.S. economy.

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The Hong Kong market followed up Monday’s 5.49 percent dive with a 7.22 percent decline on Tuesday. The Nikkei in Tokyo slumped to a low point not seen since September 2005. Mumbai’s Sensex Index plunge of 7.4 percent on Monday was the second-worst ever. And the Frankfurt Stock Exchange nosedive was its worst since Sept. 11, 2001.

Then the Federal Reserve slashed interest rates with an unheard of “emergency U.S. rate cut.” It wasn’t enough: The Dow Jones Industrial Average took an early-morning nosedive. President Bush continued to talk up an “economic stimulus plan.” And the weak U.S. dollar fell sharply against the Euro.

All was not well.

Certainly few could pinpoint blame on IT departments for causing all the turmoil or count on IT chiefs for quick fixes to the credit crunch, subprime mortgage crises, housing slowdown and jobless rate climb.

But the recent turn of events and sour forecasts for 2008 raise intriguing questions of exactly what IT’s role is at publicly traded companies, how much a CIO and his IT operations can influence Wall Street, and what CIOs should do to keep their companies in the good graces of its shareholders.

CEOs and CFOs can all talk a pretty good game about how mission-critical IT systems are these days, but just how much does IT actually matter to those who work on Wall Street?

The answer, it turns out, is both simple and difficult. The simple version is that IT matters a lot when systems and networks go horribly and publicly wrong, as these things sometimes do. The bigger-picture view is that IT run very well can make internal operations more efficient for bottom-line results.

But the fight to get credit for that work on Wall Street is like the mechanic who gets little credit for a well-cared-for and dependable car, say CIOs and financial analysts. A car should run along smoothly, shouldn’t cost too much to maintain and should take good care of its passengers. Surprises ought to be rare.

“If everything is going swimmingly with a company and its stock, then IT doesn’t matter [to Wall Street],” says Patricia Edwards, a portfolio manager and managing director at Wentworth, Hauser and Violich who focuses on retail. But if systems are ignored and IT investment is continually chopped, then, to borrow the car maintenance analogy, “companies won’t notice it at 7,000 or 8,000 miles, but they will notice it at 15,000 miles,” Edwards says. “Sometimes it doesn’t matter until it matters.” Like when the muffler falls off when you’re heading down the interstate at 75 mph.

One of the most notorious examples of IT directly influencing Wall Street was Nike’s supply chain disaster in 2000. A software “glitch” in Nike’s i2 system rollout depressed its stock price by 20 percent, cost Nike more than $100 million in lost sales, triggered a flurry of class-action lawsuits, and caused its chairman, president and CEO, Phil Knight, to lament famously, “This is what you get for $400 million, huh?”

The Goal: Making IT So Good It’s Invisible

As the CIO role has evolved during the last 10 years, with its elevated status and “seat at the table,” those executives in charge of core IT operations in publicly traded companies have received a crash course in the push and pull of keeping The Street happy. The pressure to satisfy shareholders and financial analysts (with lean IT operations, decreasing annual technology investments and lots of short-term successes) does not always make for great IT.

“There is a balance,” says Frank Modruson, CIO of Accenture. “Your goal is to operate so cleanly that IT becomes invisible and that it fades into the background. But at the same time, you want to drive that IT ability to get better and better because it can take friction out of the business and reduce the cost of doing individual transactions.”

A recent Accenture survey of CIOs found that IT innovation has suffered because executives’ technology priorities and investments were more aligned with Wall Street’s needs rather than focusing on customers of IT inside and outside a company.

“Executive and technology leadership—under pressure from investment analysts and other Wall Street observers—are undertaking superficial improvements in their IT systems rather than making fundamental changes to meet the growing demands of users,” stated the survey, which polled CIOs at nearly 300 global Fortune 1000 companies.

The problem is that IT shops have been paying too much attention to cutting costs and maintaining legacy systems, and not enough attention to developing online customer service initiatives, and innovative Web 2.0 and social networking projects, the survey found.

But just how do those new technology applications translate to company financials that will appease financial analysts and shareholders—if they do at all?

Credit Suisse CIO Tom Sanzone, who’s a member of Credit Suisse’s executive board, says the reality is that IT doesn’t get mentioned when earnings are good and the business is performing well. In many of Credit Suisse’s technology-centric business units, he says, IT systems are critical and can provide a competitive differentiator.

“For example, in a business where you’re doing electronic trading or algorithmic trading, the majority of business flows through our technology infrastructure,” he says. “If that business is performing well, clearly IT has a big part to play. But when we report externally, we don’t say that the IT platform or our IT execution systems performed well. We say, ‘Equity did well.’ You talk about results from the business perspective.”

Of course, the flip side is that if a significant systems failure placed a hit on quarterly earnings, the company “would highlight that as a reason and why the results were affected,” he says. “In that case, [IT] gets specifically called out.”

Execute Well, Impress Financial Analysts Like Bonnie Chan

To Modruson, his responsibility to Wall Street is clear: “I try to make operations as efficient as possible while freeing up money to invest and continue to make IT better,” he says. “I’m always looking for opportunities to make IT more efficient, and constantly looking at what’s the next thing over the horizon, and also having the money available to invest when something new comes along that will benefit the company.”

To that end, he stresses the importance of offering a track record of IT successes—with hard-dollar returns on IT projects and metrics that bolster IT’s contribution to both operational savings and increased productivity.

That track record is key to financial analysts like Bonnie Chan, a securities analyst who covers financial services at Dreman Value Management, a $22 billion money management company. Because she and many of her fellow financial analysts aren’t IT experts, she looks for a strategy from IT that either saves money or enhances productivity.

“I don’t need to know the nitty-gritty details about what exactly this IT platform entails,” Chan says. “Execution is key: Who is doing it and what’s their track record?”

While Chan doesn’t follow Accenture specifically, the consulting giant tries to impress analysts like her by demonstrating how its IT operations execute.

As an example of his contributions, Modruson cites a scheduling system for Accenture employees that IT rolled out a couple of years ago.

Scheduling is critical for firms like Accenture, which must track billable hours spent by multiple consultants on multiple clients’ projects. But after doing some research, Modruson’s team discovered that the previous system was the third-most expensive application to run (in terms of total cost of ownership), was slow performing and had a poor user interface. “Not exactly a win-win app,” Modruson says.

Analysis on the application showed why: It was poorly architected and required a ton of extra hardware costs and staff attention to keep it running, Modruson says. Accenture eventually replaced it with a custom-built application that took a year to build, costs half as much to maintain as the previous application, and reduced, by 70 percent, the time it takes to staff employees for assignments. “We hit all three: better, faster, cheaper,” he says.

To Modruson, efficiencies gained from projects such as the scheduling system as well as a project to standardize Accenture’s global ERP systems on SAP have allowed him to reduce what IT spends per person by 60 percent, when compared with 2001 data, which is just before he arrived at Accenture. That has happened even as Accenture has continued to invest more in IT each year and the company’s headcount more than doubled in size—from 75,000 employees in 2001 to 175,000 today. Over the same period, Modruson points out, Accenture’s revenue has gone from about $11.4 billion in 2001 to $19.7 billion for the past fiscal year.

“We didn’t just cut the IT costs, we replaced [IT systems] with better technology that was more efficient to operate,” he says. “If you look at overall G&A spend [general and administrative expenses], it’s gone down substantially since 2001. A chunk of that is from IT because we’ve made IT more efficient.”

So while Modruson’s CEO probably hasn’t called out his IT projects by name during quarterly earnings meetings, chances are those IT achievements are residing on a line item somewhere on the quarterly report’s balance sheet.

The Dangers in Mergers and Acquisitions

With a hot mergers and acquisitions market, the pressure on IT to ensure smooth systems integration and careful consolidation has never been greater.

“One of the key factors of very big integrations is the ability of IT to consolidate and streamline the acquisition onto a single platform and gain significant cost savings,” says Sanzone of Credit Suisse, who has worked in the M&A space in the past. “As the head of IT, I know what would be expected of me, and that’s certainly a type of pressure I have felt.”

But have all of these deals necessarily been better for acquiring companies and their beleaguered IT shops, which are tasked with meshing together dissimilar systems that have to provide the expected efficiencies and savings?

According to an August 2007 Boston Consulting Group study of more than 4,000 completed mergers and acquisitions between 1992 and 2006, 58 percent of deals actually destroyed value for acquirers, with a net loss of 1.2 percent for all transactions.

“What happens in looking at these deals is that [the companies] don’t realize just how hard and expensive it is to consolidate onto one platform,” says Barry Jaruzelski, VP and lead marketing officer at Booz Allen Hamilton. He notes that the challenge is intensified when companies start looking at consolidating and changing all of the pre-existing business-to-business connections and terabytes of customer data that companies maintain.

“Companies are entangled with their customers, and customers don’t want you to move to [something different],” Jaruzelski says. “The transition costs of moving the data, translating it, and all the workarounds that have to happen can become huge when they get into the granular implementation.”

One company that has had troubles integrating its acquired companies is Level 3 Communications, a global communications company that provides IP, voice, voice-over-IP (VoIP) and broadband services.

In its 2007 third-quarter earnings report delivered on Oct. 23, 2007, Level 3 President and COO Kevin O’Hara detailed the ongoing integration challenges. Level 3 has acquired six network companies since 2005, each with its own provisioning processes and systems, he said. Level 3’s Project Unity integration plan was to have the new processes and systems deployed in increments in 2007 and into 2008.

“While the fundamental approach was sound, we made some implementation decisions that in retrospect made achieving our provisioning throughput targets more difficult,” O’Hara said. “In particular, we took certain processes which had been centralized and split them up among our customer facing groups, which made identifying and fixing throughput issues more difficult. As a result, we fell short this quarter in increasing our provisioning capabilities to the level we expected.”

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.”