Rationale for Information Technology

Many companies have a great deal of difficulty validating the value derived from technology because the benefits of technology are not easily translated into financial terms. The increase in revenues from combining companies is much more visible than the impact of implementing sales force automation software. One of the clearly linked benefits of information technology is revenue enhancement.

Revenue Enhancement

As a company's technology is made available to customers, the use of technology can be directly linked to creating revenue. The purest example of revenue enhancement through the use of technology is e-commerce. Retail sales over the Internet are the fastest-growing retail channel. As consumers have grown accustomed to the conveniences of shopping online, Internet sales have grown dramatically. Another technology application that increases sales is the use of kiosks, where no human intervention is necessary to sell a product. This technology is being used to purchase anything from subway fares to airline tickets.

Competitive Intelligence

IT helps create competitive intelligence through the use of information about internal business processes and customer information. CRM (customer relations management) systems provide a competitive advantage by collecting information about customer behaviors. Retailers use these systems to connect its order information with customer profiles. This gives retailers an advantage over their competition because they get insights into purchasing patterns by customer, demographic profile, and geographic information.

Let's assume that a national furniture retailer discovers through its sales information system that brown leather couches are a hot seller on the East Coast. Armed with this information, the retailer can feature brown couches on its catalog covers and website in that specific geographic market. The retailer will sell more of these couches than competitors who do not have the benefits of this intelligence.

Another way of increasing sales of this product is to create call center processes that pitch brown couches when a customer inputs an East Coast zip code. The retailer can also improve its operations by stocking more brown couches for its East Coast Stores; this increases cash flow by getting the fast-selling products to the stores and keeping the slow-selling furniture off the store floor.

Let's look at an example of competitive intelligence on the other end of the supply chain. How can a company use information to cut its costs of purchasing goods and materials? IT systems can be used to collect buying information that helps firms negotiate better discounts with suppliers. Many large companies that operate numerous locations are often not able to track purchasing on a company-wide basis. Eprocurement systems can connect the purchasing activity in the various sites and pool the consumption patterns. Assume that National Corp. operates ten locations throughout the West Coast. Each location annually spends $200,000 with different vendors for office supplies. Among these vendors is Super Supplier with stores across the country—they presently service one location with revenue from National of $200,000. An e-procurement system can help National understand what is being purchased and by whom. Using e-procurement, National finds that it spends a total of $2,000,000 in office supplies— mostly on commodity items that are not location specific. National can take that information and negotiate volume discounts with an office supply company to provide services to the buyer on a national basis. As a result of having this information, the company can cut its costs on office supplies, National is able to negotiate a 10 percent discount on its purchase—saving the company $200,000. Super Supplier, the successful bidder for the National contract, benefits by increasing its sales from $200,000 to $1,800,000.

Efficiency Improvements

IT can improve cash flow through process automation. Many manual components of processes can be performed through automation that is faster and cheaper than the manual alternative. Many ERP software packages issue checks without any human intervention.

One example of using technology to improve efficiency is the company 1-800-FLOWERS. The strategic use of IT helped transform the company into a multimillion-dollar telephone and Web-based florist with a global reach. The company used to rely heavily on advertising because it could not retain its customers. It had a cumbersome manual order-taking process. Telephone representatives needed to write the order, get credit card approval, find the closest participating florist to the delivery location, choose the floral arrangement, and send the order to the florist. When the company automated the order-taking process, sales started to grow at a higher rate as a result of the improved service. The efficiency of the order-taking staff improved since the manual aspects of the process were eliminated. Consequently, labor costs were limited.

How does IT help reduce costs? One way information technology can cut labor costs is through staff reduction. Let's look at a concrete example of this: Ford Motor Company's implementation of an invoice free processing system that resulted in large reductions in labor costs. Ford needed more than 500 people in its North American accounts payable (A/P) department. A/P staff spent most of their time trying to resolve discrepancies between purchase orders, receiving documents, and invoices. Ford implemented an IT system that used the Web to have vendors enter purchase orders into an online database. Then the purchase orders were verified by the receiving department upon shipment arrival. If the shipment matched the purchase order, the system generated a check to the vendor. This processing system eliminated the need for vendors to send invoices. The technology reduced the head count in accounts payable significantly and improved the accuracy of financial information.

E-procurement systems can cut purchasing costs for goods and services as well by significantly reducing the amount of research required to find the best price for a product. The search engine within the e-procurement system can locate the top supplier for a specific product in a manner of seconds. This eliminates time-consuming searches for product suppliers. These systems also collect buying information that can be used to negotiate better discounts with suppliers. Often large companies that operate numerous locations are not able to track purchasing on a company-wide basis. E-procurement systems connect the purchasing activity in the various sites and pool the consumption patterns. The companies using the systems gain leverage over their suppliers since they can make the case for steeper discounts.

Information technology and business process reengineering (bpr) are close cousins. Most technology initiatives involve changes to the way work is done in a business. Things as simple as using e-mail can mean a drastic change in the way employees communicate internally and externally. The implications are significant. When technology is implemented there will be:

A change in the way employees do their jobs
A period where people will need to learn the technology
A negative impact to productivity

These factors are often ignored in the planning phase of a technological initiative. In many cases these questions have been avoided because the technology was used internally. As a company's technology is pushed out to customers (such as in the self-service example above), the impact can become much greater. This means that many of the risks of BPR initiatives that we will discuss later in this chapter can also be attributed to IT projects.

Rationale for Information Technology