Spending To Save

By ADAM COHEN

Bollinger Shipyards of Louisiana, a major marine-construction and repair company with a global clientele, was mired in the steamboat era when it came to information management. Each of Bollinger's nine facilities was buying its own materials and generating a hefty paper trail. For every part they ordered, employees had to fill out an eight-section purchase order. Those orders added up fast. Each patrol boat Bollinger built for the U.S. Coast Guard contained about 4,000 parts.

Then Bollinger decided to leap into the information age. It paid $3 million to Oracle, based in Redwood Shores, Calif., for a suite of e-business software that promised to impose order on almost all its operations, including inventory, purchasing, project accounting and payroll. Most companies that buy an office suite start slowly, first installing the financial piece and then gradually adding new software. But Bollinger took what it calls the "big-bang" approach. It had nine shipyards working on old-fashioned systems on a Thursday and had them switched over in every area by the following Tuesday.

The impact on Bollinger's bottom line was almost as dramatic. After two years of using the software, the company says its purchasing system--which aggregates orders for all the shipyards and buys in bulk--has saved $5.9 million. The payroll system has saved $700,000 more in staffing expenses. And Bollinger has identified an additional $450,000 in savings throughout the company attributable to the new software. Total savings: $7.05 million. Not bad for a $3 million investment. Bollinger spent the money during flush times, but CFO Michael Ellis says he would do the same thing today. And plenty of other companies are following his lead.

The rallying cry of the old economy was "Spend it while you have it." In good times, companies rushed to build plants and invest in R. and D. Then when the economy cooled, they froze their budgets and tried to slog through. But the New Economy has rewritten the rules. Even in the midst of the current slump, companies are showing that carefully targeted spending on new technology--from business software to computer-storage hardware--can boost the bottom line, often within just a few quarters, by increasing efficiency and lowering costs. In today's economy, there's a new rallying cry: "Spend to save."

It's a management strategy that General Electric CEO Jack Welch is applying. "You won't see one ounce of slowdown in tech spending from us," he declared in a TV interview this year. "We are driving the hell out of IT spending."

To be sure, what Welch and other savvy CEOs are defending is not just any old information-technology spending. Nobody believes anymore, for example, in unlimited demand for fiber-optic cable and switches and bandwidth. And even among makers of efficiency-enhancing software, spending is slowing. Oracle, for example, was predicting 30% growth in earnings this year but revised that to announce that first-quarter growth would be less than 10%. Says Katrina Roche, chief of marketing for i2 Technologies, an e-business software maker based in Dallas: "Nobody is willing to blindly invest in technology the way they were 12 months ago."

But companies are still opening their wallets whenever they are confident that they will see a return on their investment within a year or two. A Merrill Lynch survey of 70 chief information officers this year found that they expected their IT budgets to grow 9%. That's less than when the economy was soaring, but it's more than most companies will be hiking expenditures in other areas.

Among the strongest sellers today are products that help companies store and use data more efficiently, manage supply chains and inventory better, meet the needs of their best customers and find new customers on auction sites. The leader in customer-relationship-management software, Siebel Systems, of San Mateo, Calif., for example, is helping Farmers Insurance claims officers access information about a customer's policy and claim from the field. Software firm Blue Martini, also based in San Mateo, allows Saks Fifth Avenue to identify and better serve its most profitable customers and prospects. Companies as large as Sun Microsystems and as small as antique-jewelry shops are finding that eBay and other auction sites provide a ready-made distribution channel. And an array of online auction-management companies, like GoTo.com and AuctionWatch, report rising demand.

Every vendor company has client success stories. i2 contends that its 9,000 implementations of e-business software around the world have produced some $16 billion in growth and cost savings to its clients. But more disinterested observers have also weighed in. IDC, a firm in Framingham, Mass., that analyzes IT trends, has found, for example, that the Enterprise Storage Network, pioneered by storage giant EMC, typically reduces costs 40% below those of conventional decentralized data storage. In the old setup, a single IT manager can handle no more than 200 gigabytes of data, IDC found. With Enterprise Storage, the same manager can handle 750 gigabytes. That leads to greater efficiency for each employee and substantial savings in salaries.

International Paper, with nearly 200,000 employees in 50 countries, today stores on computers some 25 terabytes of data--about factory operations, customers, suppliers, you name it. If printed, those data would fill 2,500 pickup trucks. Not long ago, International Paper's 191 IT technicians were spending nearly half their time manually backing up data.

Then, in 1999, International Paper decided to invest in instant backup systems provided by EMC, based in Hopkinton, Mass. The systems have significantly cut labor costs. "We've been able to reduce some of our daily backup routines to 15 minutes, from 10 hours before," says Stephen Schaefgen, director of information at International Paper's Memphis, Tenn., operations center. "Critical customer and product information is available for decision making more often," says Schaefgen.

Such investments are not just for big companies. Tropian, a 90-employee wireless communications company based in Cupertino, Calif., used to handle its purchase orders through what it called "SneakerNet." "You typed out the purchase order and you printed it, then you ran around the building looking for your boss or your boss's boss," says vice president of operations Marshall Wilder.

Last fall Tropian spent $200,000 on Oracle financial and purchasing software. Purchase orders are now handled over the Internet, eliminating rubber soles from the process and slashing the processing cost from $176 per purchase order to $87. Tropian says the investment has already saved it $530,000--and that number is growing daily. "For a start-up company," says director of materials and logistics Cindy Pence, "that's big bucks."

TaylorMade-Adidas Golf, a leading golf-equipment company based in Carlsbad, Calif., found that when its traveling sales reps showed up at local pro shops, they spent an inordinate amount of time on their visit just checking on inventory and handling paperwork. The main reason TaylorMade wanted them in the field, though, was to talk to the pros and sell new merchandise.

That's why TaylorMade has signed on with i2 and developed a 10-stage e-business plan that will be phased in over the next few years. For a company with worldwide sales of just $500 million a year, the $10 million investment is sizable. But TaylorMade is convinced that it will pay for itself by wringing new efficiencies out of every part of the company. The sales reps will be able to use a Palm handheld device with an attached scanner to assess the inventory quickly and then use the i2 database to place and track orders.

A new website will help TaylorMade better serve its large Asian market. Vendors will be able to operate online without being hampered by time-zone differences. There will be no faxes waiting to be read, e-mails waiting to be opened or phone calls waiting to be returned. TaylorMade expects that the software will allow a product to move from factory to market in 18 months or less, instead of two years. That's important in a business in which market share is closely tied to a company's ability to be first to market with hot new products.

Hiram Walker, the Canadian distiller of Canadian Club and other liquors, just bought Manhattan Associates' new warehouse-management system. The company is convinced that the new system, which will cost about $650,000 over six months, will quickly pay for itself by improving the speed and accuracy with which orders move from the production line to shipping. Vice president for operations Dan DeMarco says, "You can't stop investing every time the economy looks like it's going to take a little downturn."

For technology companies, the giddy build-it-and-they-will-come days may be over. But even amid today's economic slump, smart managers know that it can be just as much of a mistake to spend too little as too much.

--Reported by William Dowell/New York, Hilary Hylton/Austin, Linda Kim and Daniel Terdiman/San Francisco and Collette McKenna Parker/Atlanta

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With reporting by William Dowell/New York, Hilary Hylton/Austin, Linda Kim and Daniel Terdiman/San Francisco and Collette McKenna Parker/Atlanta