CIOs See Spending Ahead

Interesting times. That's what the men and women working inside America's largest enterprise organizations have been living in for the past three years. Think cutbacks, management shuffles, mergers and acquisitions. Those and other factors have made for interesting times, for sure. But now, the rebounding economy has lifted the spirits of large corporations, many of which are posting their biggest profits in years and moving ahead with ambitious capital spending plans.

Take Hilton Hotels, one of the world's largest hotel chains. This year, the hospitality giant plans on increasing its IT spending by 2.2 percent or about $3.1 million, though not accounting for the elimination of a legacy property-management system. Its overall IT budget this year will be roughly $147 million. In relative terms, the spending hike on IT is aggressive when compared to many other companies. But it's one way Hilton has stayed ahead of the competition in an industry hard hit by the lingering impacts of the Sept. 11 terrorist attacks, which had a ripple effect on the travel industry.

Hilton CIO Tim Harvey says his company has consistently increased spending throughout the downturn, calculating that increased investments will likely put the hospitality giant in a better position to compete once the hospitality sector rebounds.

Among other things, Hilton is well into the deployment of an integrated customer-relationship application, called OnQ, to leverage its $4 billion acquisition of Promus Hotel, the franchise operator of such chains as Conrad, Doubletree, Embassy Suites, Hampton and Homewood Suites. Fueling spending this year is an ambitious CRM initiative, utilizing OnQ, designed to help improve customer loyalty, and various measures that aim to cut overall costs while maximizing revenue, Harvey says.

That's welcome news to the suppliers of Hilton and other enterprise companies like it. "Things are definitely starting to get better," says Julian Sparkes, the partner at Accenture who works with Hilton, Marriott and other major players in the travel industry. The reason is simple: Big business is getting down to business, especially where IT is concerned. Take Office Depot, for example. The company, which runs one of the world's largest e-business Web sites and operates a leading chain of office-supply superstores, is replacing its legacy systems with a new computing architecture and applications. That means lots of new hardware, software and implementation services. The goal: to become more efficient and provide better customer service. The effort ultimately will improve the way Office Depot conducts business with its customers, suppliers and partners.That's not to say that Office Depot is spending more on IT than before. It isn't, says CIO Patty Morrison. Despite the rollout of new servers from Sun, a merchandising solution from Retek and a store-optimization solution from ACNielsen--all with consulting and implementation services from Accenture--IT spending will be flat, Morrison says. Call it new math, but the increased capital investments and implementation services Office Depot is making now in its business-transformation project will play a pivotal role in helping Morrison reduce her IT shop's overall cost structure.

"We have a pretty aggressive process of holding the IT organization accountable to efficiencies," she says.

One way she does that is by aligning her company with ISV partners such as Retek, which convinced Morrison that it could help meet those goals. "The common denominator is you have to be able to show return on investment," says Jerry Dolinsky, Retek's senior vice president of worldwide sales.

Though shipping and logistics giant FedEx is also looking to hold the line on its massive $1.4 billion IT budget, CIO Rob Carter isn't cutting back on his plan to transform FedEx's business using innovative technology solutions and practices. Carter has several major initiatives for FedEx, including Fusion, a messaging backbone that will allow for the sharing of customer and shipping information across its different lines of business. Another is the rollout of new handheld computers for FedEx drivers called PowerPads, which are based on Microsoft's PocketPC, and the rollout of the Web-based PeopleSoft 8 suite with help from BearingPoint.

No wonder things are looking up in IT. Major analysts, for one, are raising their forecasts. The U.S. Department of Commerce, for example, revised upward its numbers for earlier quarters in 2003, meaning IT spending was actually up 1 percent last year, rather than the half-percent decline. Likewise, market-watcher Forrester is also upping its view on overall IT spending. It now believes hikes will be more in the 5 percent range, up from 4 percent."We are hoping the continued economic growth and better GDP news going forward will acutely change the mindset [so] that the CIOs will actually start outspending their run-rates as opposed to just sitting on them," says Forrester analyst Tom Pohlmann.

Some large enterprises are already doing this. That includes Guardian. After cutting back IT spending 30 percent in total over the past three years, Guardian this year will increase its IT investments by 9 percent, says executive vice president and CIO Dennis Callahan. What's driving this year's increase? Not the improved economy, Callahan insists, but two key requirements: regulatory requirements and the rollout of new products."Our general approach has been to spend smart and get a lot of mileage out of our expenditures," Callahan says.

That said, there are still some companies that are decreasing their spending this year. Almost one in eight, or 14 percent, of enterprises expect to spend less this year on IT, according to VARBusiness' State of Enterprise Spending report. Perhaps no one exemplifies that more than Nasdaq, which runs one of the most sophisticated data centers in North America. Post-bubble life for Nasdaq, which is now a publicly traded company and has found itself in competition with electronic communications networks (ECNs), has posed significant new challenges.

"We are in a multiyear effort to reduce our costs dramatically," says Steve Randich, Nasdaq's CIO and executive vice president of operations. Just a few years ago, Nasdaq was focused on expanding globally and trying to increase capacity to keep up with the transaction volumes that doubled many times over. "Now we're consolidating and focusing on domestic, and it's all about becoming more efficient and reducing the operating costs of our infrastructure," Randich says.

Many customers find themselves in similar straits. In fact, many are finally opening the purse strings out of necessity rather than desire. They need to consolidate their servers or update aged PC fleets, for example.Making matters worse, CIOs have learned the art of putting the squeeze on solution providers, particularly the large systems integrators. "We've been able to get very serious players of very serious sizes and excellent track records to structure the kinds of deals we want to structure," Callahan says.

The two key business requirements that are driving new IT spending this year are improving customer service and reducing operational costs, according to our Enterprise Spending survey findings. Three out of four CIOs say improving customer service is a key priority, while two-thirds have a mandate of reducing operational costs.

Indeed, reducing operational costs came second only to improving customer service. "We have customer relationship management, campaign management and total account management. We're doing everything," Morrison says.

One thing is also clear: All IT investments now are being decided on collaboratively among the lines of business, finance and IT organizations. And that means solution providers targeting large enterprises have to be able to speak to the business impact of any IT solution, notes Bobby Soni, vice president of integration services at BearingPoint. Gone are the days where a customer simply wanted to integrate a Siebel or SAP solution. Rather, solution providers have to be prepared to address specific business goals, such as reducing the time it takes for a bank to process a loan. "We have to put on our line-of-business-friendly hats and show them how we can actually improve their set of business processes and create an environment that is more agile and allows the business to be more flexible and, therefore, respond to customer needs," Soni says.

Here is a look at what these five enterprise CIOs are up against this year and how they are working with their solution-provider partners to achieve their business and IT objectives.

Office Depot
Solution providers: Accenture, ACNielsen, IBM Global Services, Manhattan Associates, RetekKey projects: Automating merchandising and inventory management, migrating legacy systems to Sun Solaris and Windows

Before you call on Office Depot's Morrison, keep one thing in mind: She, like many CIOs, feels that the cost for IT services is still too expensive. And that's in spite of the fact that customers have managed to push service fees down in recent years. "I don't ever think I'm getting a good deal," Morrison says. "The whole industry is so inflated."

Morrison certainly has utilized the oversupply of services to her advantage during the past year. In a business with razor-thin margins and cutthroat competition, Office Depot last year began embarking on its business-transformation effort, reflecting on the fact that less than half of its revenue comes from its large superstores. Office Depot also relies on sales from its Web site and subsidiaries, including Tech Depot, as well as from ministores established on military bases and in small sections of supermarkets, such as Albertsons and Stop & Shop. In addition, Office Depot last year acquired Guilbert SA, an office-product supplier in Europe.

The goal is to provide an integrated supply-chain management and merchandising platform. Office Depot, like many retailers, relies on home-grown merchandising applications running on AS/400s. Looking to lower costs and increase flexibility, Office Depot is migrating its merchandise management to Retek, an ISV focused on the retail sector. Office Depot is rolling out the solution on Sun servers running Solaris, one of the largest recent wins for the troubled hardware vendor. The company is also rolling out a store- and space-planning system from ACNielsen.

"The objective is growing sales," Morrison says. "It's about making sure that we have the right assortments at the right price, in stock with the lowest supply chain costs as we possibly can."To deploy the Retek solution, Office Depot is using Accenture, whose experience with the solution and with other retailers was key in its selection. Also, Accenture has had a longstanding relationship with Office Depot. "We really liked the experience they bring," Morrison says. "They've pitched a terrific team, and they've made it price-competitive."

Hilton
Solution providers: Accenture, Avanade, CSC, Datanamics, Epsilon, Quilogy, STSN, V-Link

Key projects: Integrated CRM and property-management systems, network upgrades, including wireless hot spots

Building customer satisfaction and loyalty drives just about every IT investment at Hilton. The hospitality giant is well into the implementation of an applications backbone it calls OnQ. With help from Accenture, Epsilon and a variety of smaller contractors, Hilton is looking to leverage the relationships it has with customers across all of its brands. That means knowing the preference of a customer who shows up at a Hilton property for the first time, who may have previously stayed at its Doubletree or Hampton properties. "It's part of our culture that we take care of customers 24/7/365 and that every single customer matters," Harvey says.

Hilton provides the IT backbone for its owned and operated hotels as well as those owned by franchisees with the exception of point-of-sale terminals and PBXs. At the heart of the backbone is the new OnQ, which has six key components: the ability to take and deliver reservations, property operations, CRM, revenue and sales management, back office and ownership reporting.Hilton has a distinct advantage over its larger rivals in that it has a single property-management system, Accenture's Sparkes says. "The other hotel chains have four to six property-management systems and are trying to integrate them into one," Sparkes says.

Moving forward, Hilton is borrowing from a chapter of the airline industry by testing kiosks in hotel lobbies, hoping to facilitate the check-in process. With help from IBM, Hilton has begun rolling out kiosks at its largest hotels, with plans to have them all out at 25 key properties by year's end. At those locations where the kiosks have been rolled out so far, Hilton has seen an average 15 percent of all guests arriving using them to check in, Harvey says. "I expected we would only achieve 5 percent, so we're three times as high as we thought we were, and ultimately we believe that number will go higher," Harvey says.

Hilton works with numerous solution providers, but Accenture is probably its largest and has worked with Hilton for more than 10 years. In addition, Harvey's organization works with Avanade, the partnership of Accenture and Microsoft. "They know our systems, they know our people, and they know our philosophies," Harvey says of Accenture. "So, usually, when we have big items we go back to the people that know us best."

The company is also building out a Cisco backbone and putting wireless hot spots throughout its various hotels. While Hilton procured the technology direct from Cisco, it is using five partners to deploy the hot spots and the accompanying backbone. The partners all are specialists in the hospitality industry, Harvey says.

Guardian
Solution providers: IBM Global Services, InforteKey projects: PeopleSoft and Siebel rollouts

The insurance and securities firm is rolling out a sales-force automation package based on CRM software from Siebel with help from Siebel partner Inforte. Guardian is also piloting a workflow-automation system that automates the application and underwriting of a policy, and is putting together a proposal that would replace its legacy administrative systems in phases during the next few years.

One key component of that effort to modernize its administrative systems is currently under way: Guardian is now replacing a 25-year-old legacy financial system with a PeopleSoft financials application. "It is significant, and we're taking a very aggressive approach to it across the firm," Callahan says. He is considering utilizing a managed-hosting solution from IBM Global Services, "so we will be able to scale our activities very quickly," he says.

Does that mean IBM's e-Business On Demand? "If IBM really delivered the promise of on demand, [then it] would be available to guys like me to scale my operation up and down to pay by the drink, whether I was outsourcing or whether I was doing it here in my own environment," Callahan says. It took him several months to get that answer, but for now, he was told capacity on-demand is only available to those who buy outsourced data-center processing.

So what does Callahan look for from solution providers? "Price comes into play, the terms and conditions of the deal come into play, reputation, and control and exit strategy come into play," he says.Nasdaq
Solution providers: EDS, Forsythe

Key projects: Scaling down and consolidation

In the late 1990s and into 2000, Nasdaq couldn't add enough capacity. During the boom market, transaction volumes doubled almost yearly, testing the limits of computing and networking technology. Any hiccup in the system made headlines--and not just in technology publications.

Global expansion was high on the agenda of then-CEO Frank Zarb. These days, Nasdaq is scaling back its IT spending. It is still a key client of companies such as EDS and Forsythe, but their key role now is helping Nasdaq scale back. What happened? Besides a permanent market correction, the Nasdaq marketplace has become a separate entity from its former parent, the NASD. Also, Nasdaq has competition in the form of ECNs. We are in a unique position of having to be aggressive on the cost takeout than the others," Randich says.

Already, Randich has renegotiated Nasdaq's MCI contract, its Microsoft enterprise licensing agreement and its leases with Unisys. But he's not done. "I'm bringing Hewlett-Packard back to the table relative to our NonStop [systems] and looking at reducing our footprint by making use of more efficient technologies within that product that are going to allow me to reduce the amount of servers I need to do the same work," Randich says. Still to be determined is whether to migrate to the next version of NonStop, running on Itanium processors with an upgraded version of the operating system. Randich also is encouraged by Linux and looks forward to the day when he has the option of running any Unix application on an Itanium server with Linux. "I see the Unix software providers letting their systems run on an Itanium server across multiple vendors, and enjoying that price commoditization that we've seen in the Intel server space for years," Randich says.Also on the table is his outsourcing contract with EDS, which manages Nasdaq's Dell PCs. Randich says his IT partners have been quite accommodating. "Everything is negotiable. Everyone has something to gain if the deal is struck right to be a win-win," he says. "My discussions with the VARs and the vendors that we deal with is that this is standard operating procedure in the industry right now."

FedEx
Solution providers: BearingPoint, Cook Systems, Keane, Mphasis, Protech, SCB, Venturi Technology

Key projects: Bridging of systems across business lines, rollout of new computers to drivers, PeopleSoft upgrade

While spending will be flat for the coming year at FedEx, the company is still one of the most sought-after clients in the solution-provider community. The company is still known for its innovative use of technology and is the key founder of the FedEx Institute of Technology (FIT) announced back in November in concert with the University of Memphis. Looking to gain the same stature as MIT and Stanford, FIT is looking to work with vendors, VARs and students alike.

FedEx's key solution-provider partner is BearingPoint, which manages its PeopleSoft deployment. BearingPoint is helping FedEx bring together the various companies it has acquired up to the Web-enabled PeopleSoft 8.0 suite, CIO Carter says. "That's probably the most significant one we have," says Carter of FedEx's partnership with BearingPoint.With a sizable internal IT staff, FedEx's use of other solution providers is primarily for break-fix of legacy applications, Carter says. The company uses a handful of solution providers, primarily local ones as well as those that have offshore facilities, Carter says.

For offshore work, his key providers are Keane and Mphasis, Carter says. "Once our plate is full, if there's an ROI on additional work that the business chooses to pay for, we don't want to be the ones to say no," Carter says. "It's very cost-effective, but it's not outsourcing because we don't displace jobs."