Profiting from IT

With the ever-increasing focus on investment return combined with market pressure to adopt the so-called universal technologies of email and the Internet, many middle-market companies are struggling to get to grips with exactly how technology can benefit their organisation.

Accountancy Age publishers VNU recently staged an industry forum to debate whether awareness and adoption of new technology impacts directly on company profitability. Underpinning the debate was a Coopers & Lybrand survey of the middle market, Globalisation in the New Millennium: Success Strategies for High-Tech Companies. The middle market was defined as those organisations with a turnover between #5m and #200m which account for around 30% of UK employment and GDP.

According to the survey, this sector has outperformed the whole of the rest of the economy over the last year. For example, the real value of orders for middle-market companies rose by around 9% over the past 12 months, compared with real UK GDP growth of around only 2%. Nevertheless, almost a third of middle-market chief executives agreed that the UK lags behind its international counterparts in the adoption of new technologies.

Coopers partner Joe Ryan said: ‘IT has become so much a part of our culture that we no longer recognise it as something new. I don’t have a single client who does not have a computerised accounting system. Five years ago, I probably had two. It’s such a dramatic change, and one which is just taken for granted now.’

Beyond short-termism

So has technology been devalued as a subject, one that is interesting only when it goes wrong? According to IBM’s UK marketing and strategy manager for SMEs, Garry Veale, some elements of technology are little more than part of the furniture. While that may certainly be the case within larger organisations, are SMEs actively assessing new technology?

And if so, are they so focused on justifying cost that they neglect potentially valuable technological developments because they can’t see any obvious short-term benefits?

Rashpal Gill, operations director at Bay Trading Company, cites email as an example. Having undertaken a feasibility study on external email, he could not justify spending the required u1,600. He added: ‘We have over 300 suppliers and only four of them are on email – and those are all IT suppliers. It’s a pittance in terms of spending – we have spent u500,000 on IT in the last 18 months – but I just can’t justify spending any more for email.’

There is a danger, however, of limiting potential new technology adoption by taking this cut-and-dried approach. Tony Fawl, innovations executive at Lancashire Enterprises, one of Europe’s specialists in economic development – which includes providing assistance in the implementation of new technology – spoke on innovation and technology management within small and medium-sized enterprises. He said: ‘It is important to look at new technologies as an opportunity, as something which you must learn about.’ And, to Bay Trading’s Gill, he responded: ‘He was wrong to have considered the options and then dismissed them. What he should have done is recognise the potential advantages which were on offer.’

But Gill was adamant: ‘I work for a medium-sized company where the primary factor is cashflow control.’ Previously he worked at Marks & Spencer and maintained: ‘If I were still working for M&S, I would think nothing of spending u5m on a technology-led development, embracing everything new, going down the data warehousing route, the Internet and so on. This was feasible because M&S had the margins and stability to sustain that kind of investment in technology and skills.’

SMEs, he insisted, cannot afford that luxury: ‘I don’t have that level of security. In a medium-sized company, you have got to watch your cashflow and you have got to make your money work for you. If you are in a big company, it is less of a concern – you can afford to take a risk.’

Could the computer industry itself take the plunge and ease that risk burden for SMEs? As Tony Lewis, executive director of the Computer Software & Services Association (CSSA), said: ‘I have always thought the software and services industry is particularly unimaginative in the way technology is sold. How would organisations react if, instead of a salesman saying “here is the solution”, the IT supplier was to offer to implement a solution, without charge, based on an expected 5% increase in turnover – with payment to the IT supplier based on a percentage of that increase?’

He added: ‘In other words, they’ll say: “here is the system, you use it and it will improve your business”. Would that make you more amenable to considering it, given that you are not making the investment in the first place?’

Bay Trading’s Gill replied: ‘It is not a straightforward “yes”. If it saves a large investment, and it was the right thing to do, I would bite on it.’ However, senior management time is a concern. ‘Do you really have the time to devote to such a process? If it went wrong, it’s you and not the vendor who has to incur the penalty for making that decision.’

Getting closer to customers

The level of closeness between supplier and customer emerged as one of the greatest areas of concern in the forum. Partnership and risk sharing must underpin the relationship, asserted Michael Hunt, associate chief financial officer at Chiltern District Council. ‘When we are looking at tender processes for software, we are looking to get into a partnership.

But, hopefully, it is a partnership based on equals. We would anticipate working with that organisation for three to five years to develop the technologies, develop the processes and experience the benefits of the added value they can supply us with.’

And as a result, he maintained, when he went through the process of looking for new financial systems, ‘I was more interested in who I was getting into partnership with than how the technology itself worked. As far as I was concerned, the functions were secondary.’

For IT suppliers, however, particularly systems integrators such as Foundation Systems, the SME market makes it hard to provide profit-related contracts with customers. Len Palmer, Software Director of Foundation Systems, explained: ‘We are not normally given the opportunity to get close enough to our customers to know where they would derive that benefit from and how they would expect to achieve it.’

Fawl suggested responsibility for developing the relationship between vendor and supplier lay at the door of the vendor. ‘People in the market have got to make us more aware, not only of our own individual expertise, but also the resources which are linked to this expertise, to enable users to benefit from the technology.’

This point is extended towards user perception of technology in general which, all agreed, has been significantly manipulated by the industry since its inception. One of the most significant figures arising from Coopers’ survey was that 50% of middle-market companies believed themselves to be self-sufficient in technology implementation.

Coopers’ Ryan added: ‘I wish only about 10% thought themselves self-sufficient because I have a few clients who have really cocked up on new IT initiatives.

They came nowhere near Coopers – or anybody – for advice.’ As he says to such people: ‘”Would you service your own BMW?” And the answer is always “no”. By the same logic, you don’t know how to implement an IT system or go and select them either.’

Palmer agreed: ‘Some users underestimate how complicated implementing a system really is.’ He cited a recent invitation to tender that listed all the key ingredients of the system the user wanted, which included RDBMS back end, Windows client, ISDN Wans and Lans. ‘The next page said the system must be easy to install and maintain – the two just do not go hand-in-hand.’

Veale added: ‘People spend a great deal of energy on selecting a system.

They don’t realise that this is the start of the process. SMEs are bombing out because they don’t realise that implementation is really the hard part.’

Not having the expertise

There is a further problem: IT suppliers may lament the lack of predefined business drivers and performance measurements but, as Palmer said, many middle-market companies simply do not have the level of IT expertise or appreciation of the benefits IT can deliver to their companies. ‘That itself is a constraining factor, inhibiting businesses from making an investment. On the one hand, it is perception and knowledge of what can be achieved and, on the other, it is what the business can actually afford,’ said Palmer.

And, while larger organisations demand IT sales people with an intimate understanding of their business needs, Lewis said that within the middle-market sector: ‘You cannot afford to employ that level of expertise, so you are going to get the salesman who bombards you with detail and rams it down your throat.’

Gill agreed: ‘Certainly, I felt that IT suppliers would come in, put on a nice face, pretending to understand, and then, regardless of what you told them, they still sold you the same box. At the end of the day, they are paid to sell. They are not paid to care about your business.’