It Investment and Efectiveness

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2006GMA Inormation Technology Investmentand Eectiveness Study

PREPARED BY IBM FOR THE GROCERY MANUFACTURERS ASSOCIATION


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Grocery Manuacturers Association

The Grocery Manuacturers Association (GMA) represents the worlds leading

branded ood, beverage and consumer products companies. Since 1908, GMA

has been an advocate or its members on public policy issues and has champi-

oned initiatives to increase industrywide productivity and growth. GMA member

companies employ more than 2.5 million workers in all 50 states and account or

more than US$680 billion in global annual sales. The association is led by a board

o member company chie executives. For more inormation, visit the GMA web

site at www.gmabrands.com

IBM Global Business Services

With consultants and proessional sta in more than 160 countries globally,

IBM Global Business Services is the worlds largest consulting services organiza-

tion. IBM Global Business Services provides clients with business transormation

and industry expertise, and the ability to translate that expertise into integrated,responsive, innovative business solutions and services that deliver bottom-line

business value. IBM Global Business Services provides leading transormation

consulting across a range o industries as well as in the ollowing key business

unction areas: Strategy and Change; Applied Technologies; Application Services;

Financial Management; Human Capital Management; Customer Relationship

Management; and Supply Chain and Procurement. For more inormation, visit

www.ibm.com/bcs


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2006 GMA Information Technology Investment and Effectiveness Study

TABLE OF CONTENTS

Executive summary

Introduction

Approach

Profleorespondents

Perspectives on IT

ImportanceoIT

Thereportingstructure

DierentconceptsotheroleoIT

Thebarrierstosuccess

The IT budget

Measurement o IT

The allocation o IT resources and personnel

The technological environment

Adoptiononewtechnologies

The eectiveness o the IT unction

Conclusion

Appendix 1

ComparisonotheresponsesoGMA-membercompanies

withthecurrentstateoCPcompaniesinEuropeandAsiaPacifc

Appendix 2

Thereportingstructureinarangeoindustries

Acknowledgments

Reerences

1

3

3

4

5

5

7

9

11

13

16

20

24

27

34

38

39

41

42

43


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The 2006 GMA Inormation Technology Investment and Eectiveness Study,conducted

by IBM on behal o the Grocery Manuacturers Association (GMA), shows that

business executives in consumer products (CP) companies give inormation tech-

nology (IT) more weight than they did a ew years ago. Yet neither the status o the IT

unction nor the allocation o IT investment dollars reects its increasingly important role.

The most senior IT executives in CP companies typically spend almost one-third o their

time working with people in other unctions, such as human resources and customer

services. They are thus becoming more involved in broad decision making. But, unlike

in other industries, ew top IT executives report directly to the chie executive ofcer

(CEO). The majority report to the chie fnancial ofcer (CFO), so they cannot inuence

the direction o the business as eectively.

Similarly, responding companies allocate more than two-thirds o their total IT budgets

to running the business and improving compliance. Only 21 percent goes toward

strategic issues, and an even smaller 10 percent is invested in initiatives to generate

greater revenues. Business executives continue to view IT primarily as a means obecoming more efcient and cutting costs, rather than as a tool or supporting growth.

Nevertheless, an increasing number o business executives in CP companies see IT

as an essential investment area. Total spending on IT grew 4.5 percent in 2005 and is

expected to rise by a similar amount in 2006, although the ratio o IT expenditure to net

sales revenues has remained constant at 2.1 percent or the past three years.

Most CP companies still rely on in-house personnel or the majority o their IT needs;

internal stafng costs account or 46 percent o their operating budgets more than

the next three largest areas o expenditure (external service providers, sotware and

hardware) combined. Responding companies also spend more than hal their total appli-

cations budgets on two unctions: the supply chain and sales and demand ulfllment.

Surprisingly, however, only 55 percent o the CP businesses participating in this years

survey use measures like return on investment (ROI) to evaluate the success o their IT

projects. Many companies still use non-quantifable criteria, despite the evidence that

companies which measure ROI typically have higher success rates than those which

do not.

EXECUTIVESUMMARY

EXECUTIVE SUMMARY


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2006 GMA Information Technology Investment and Effectiveness Study2

Moreover, even though the majority o IT executives now track the success o their

projects using non-fnancial criteria, a signifcant number o business executives are

unaware that such measures are used within their own frms. This may help to explain

why they are sometimes wary about investing in IT. The two most requent reasons

business executives cite or hesitating to make an IT investment are lack o clarity about

the returns they can expect and competing capital projects with a higher priority.

The technological landscape is continuing to change rapidly. Most CP companies

have made considerable progress in implementing various industry initiatives, including

Global Data Synchronization (GDS) and electronic data interchange (EDI), although

they have adopted a more conservative approach to the introduction o radio requency

identifcation (RFID) devices. Nearly hal report that they are currently piloting RFID

internally or in conjunction with a trading partner, but only 3 percent are actively leading

the way and aggressively implementing RFID.

One o the biggest IT-related obstacles responding companies ace is the complexity o

their IT inrastructure a act that IT executives recognize, since they list it among theirmain problems. Many CP frms still run a relatively large number o applications, and a

good third o the applications they use are custom-built. This has a direct bearing on

the speed and efciency with which they can implement industry initiatives. Companies

with predominantly custom-built applications have been markedly slower to introduce

Global Trade Identifcation Numbers (GTINs) and EDI, or example, than those with

predominantly packaged applications.

Despite such difculties, corporate perceptions o the IT unction are becoming increas-

ingly positive. Seventy-our percent o business executives believe their IT departments

are eective, or very eective, compared with just 43 percent two years ago. They rate

these IT departments highly or their ability to work with other parts o the organization

and the alignment o their activities with the companys business strategies.

However, business executives are more critical about the IT unctions ability to innovate

and communicate. Only 43 percent are satisfed, or very satisfed, with the provision

o inormation regarding new IT products and services. Even more telling, perhaps, is

the act that most business executives do not see IT as a means o supporting growth

initiatives, although it is the second most important priority or IT executives. Nor do

business executives appreciate the extent to which the complexity o the IT inrastruc-

ture can make it difcult or companies to achieve their business objectives. It is thus

essential that IT executives in CP companies assume a more proactive role, both in

driving the IT agenda and in exerting a much stronger inuence on broader business

decision making.

EXECUTIVE SUMMARY


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The 2006 GMA Inormation Technology Investment and Eectiveness Studywas

conducted by IBM on behal o GMA. It aims to provide a clear picture o the state o

IT within the CP industry; to analyze IT spending and investment trends; and to assess

how business executives view the eectiveness o the IT unction.

ApproachThis years study is the eighth such analysis to be completed. The fndings are based

on two separate surveys administered between November 2005 and February

2006: the IT Spending and Investment Survey; and the IT Eectiveness Survey. The

IT Spending and Investment Survey targeted senior IT executivesin GMA-member

companies and ocused on capturing inormation about IT spending and strategy.

The IT Eectiveness Survey targeted senior business executivesin GMA-member

companies and ocused on evaluating the eectiveness o IT.

Thirty-seven IT executives completed the IT Spending and Investment Survey, while 66

business executives completed the IT Eectiveness Survey. In all, 103 respondents rom

46 companies with revenues ranging rom US$160 million to US$14 billion participated inthe study. (The fgures in the remainder o the report are based on the number o respon-

dents who answered each question, since not all respondents answered every question.)

The overall response rate was higher than in earlier GMA IT investment and eective-

ness studies (and particularly strong or the IT Eectiveness Survey), illustrating both the

continued importance and relevance o IT to business and IT executives alike.

IBM presented the preliminary results o the latest study at the GMA Inormation

Systems/Logistics Distribution Conerence in April 2006. This report provides a more

detailed analysis o the data. It includes comparisons o the fndings with those o the

2004 GMA Inormation Technology Investment and Eectiveness Studyand similar

studies conducted by Forrester Research, where relevant. It also draws on IBMs

surveys, thought leadership and extensive experience rom client engagements.

Appendix 1 provides a brie discussion o the fndings in an international context, since

GMA is interested in extending the geographic range o uture surveys.

INTRODUCTION

INTRODUCTION


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Profle o respondentsThe IT executives who participated in the IT Spending and Investment Survey represent

a cross-section o CP companies. Thirty-three percent work or large companies (with

revenues o US$5 billion or more); 43 percent work or medium-sized companies (with

revenues o US$1-5 billion); and 24 percent work or small companies (with revenueso less than US$1 billion). These organizations generate more than our-fths o their

revenues in North America. Fity-six percent are global operations, 33 percent domestic

companies and 11 percent divisions o larger concerns.

The pool o senior business executives who provided eedback regarding the eec-

tiveness o IT is equally diverse. Twenty-three percent are CEOs or chie operating

ofcers (COOs); 72 percent are vice presidents or above; and 5 percent are directors

or managers. They represent a wide range o unctions, regardless o the position they

occupy within the organizational hierarchy (see Figure 1).

INTRODUCTION

0 5 10 15 20 25 30

Supplychain

Salesanddemandulfllment

Financeandaccounting

Marketing

Humanresources

Procurement

Legal

R&D/Newproducts

Percent

28

24

21

11

8

3

3

2

FIGURE 1:

Theunctionsrepresentedbybusinessexecutives

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study.Note: Survey responses or 66 business executives responding to the IT Eectiveness Survey.


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FIGURE 2:HowrespondingcompaniesuseIT

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.

0 10 20 30 40 50 0 10 20 30 40 50

2004study 2006study

Percent Percent

Cuttingedge

Essentialinvestmentarea

CurrentonIT

Conservativeapproach

26

29

27

33

46

36

21

33

46

33

26

33

25

31

Business

IT

The importance o ITBusiness executives in CP companies widely regard IT as a strategic asset in which

it is essential to invest. But neither the allocation o IT budgets nor the position o the

most senior IT executive within the corporate hierarchy reects the strategic role the IT

unction is increasingly being expected to play.

Business executives in CP companies attribute more importance to IT than they did

several years ago, but IT executives clearly think that they still ail to give it sufcient

weight. Respondents were asked which best describes their companies use o IT:

We compete at the cutting edge o innovation and use IT as a competitive weapon

We view IT as an essential investment area and invest in leading, but proven,

technologies

We stay current on technology without getting too ar ahead o the competition; or

We take a conservative approach, using proven, mature technologies.

Forty-six percent o business executives said that their companies see IT as anessential investment area, compared with just 29 percent o those who were surveyed

in 2004. And only 25 percent said that their companies take a conservative approach,

compared with 36 percent two years ago. However, IT executives are much more

divided in their views: 33 percent said that their companies see IT as an essential

investment area; 33 percent that their companies like to stay current; and 31 percent

that their companies take a conservative approach (see Figure 2). This dierence in

opinions shows that IT executives think their companies take IT less seriously than

colleagues in other unctions believe.

PERSPECTIVESON IT

PERSPECTIVES ON IT

We are ocused on enabling the business, not using IT asa strategic advantage on its own. Everything must be in thecontext o supporting business goals and objectives survey respondent


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Several other pieces o evidence suggest that business executives may indeed be

paying less attention to IT than they should. The majority o business executives in

CP companies still consider IT a strategic asset and a growing number regard it as a

return-producing investment (see Figure 3). Yet they invest relatively little in ITs revenue-

producing potential.

Sixty-nine percent o the total budget responding companies allocate or IT is spent

on running the business and improving compliance. Another 21 percent is spent on

strategic issues, and only 10 percent on initiatives to generate more revenue. This is

likely not enough to deliver real growth (see Figure 4).

FIGURE 3:HowbusinessexecutivesviewIT

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study; CSC,2004 Inormation Technology Investment and Eectiveness Study.

2004study

Non-value-addingcost

Necessarybusinessexpense

Return-producinginvestment

Strategicasset

0

20

40

60

80

100

2006study

61

21

16

2 2

15

28

55

Percent

PERSPECTIVES ON IT

0

20

40

60

80

100FIGURE 4:Howresponding

companiesallocatetheirITbudgets


2004study

Revenuegrowth-producing

Businessstrategy

Regulatorycompliance

Customercompliance

Costodoingbusiness

Reducingbusinesscosts2006study

27

24

13

12

8

16

Percent

26

25

12

10

6

21

Grow

Plan

Comply

Run

New products, R&D, marketing [we] ocus on providingsolutions that help grow the top line survey respondent


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We are ocused on business change. The key is leadership.IT can lead but, i IT leadership is tactical, the business willhave the lead

survey respondent

This is very dierent rom the situation in other industries. Indeed, research conducted

by IBM as part o the 2005 Global CFO Studyshows that the percentage o CIOs who

report to the CFO is higher in the CP sector than it is any other area except education

(see Figure 7).1 A study recently published by Forrester Research provides urther

evidence that the reporting structure in GMA-member companies diers dramatically

rom that in other industries, where between 65 percent and 76 percent o CIOs report

to the CEO or President (see Appendix 2).2

A CIO who reports to the CFO rather than the CEO is not in a position to inuence

the direction o the business as eectively. Correlation analysis o the survey results

shows, or example, that companies in which the CIO reports to the CEO typically invest

29 percent o their IT unds in areas that are related to business strategy, versus 22percent in companies where the CIO reports to the COO or CFO, and just 12 percent in

companies where the CIO reports to someone else.3

Source: IBM Global Business Services, The 2005 Global CFO Study.

FIGURE 7:

ThepercentageoCIOsreportingtotheCFOindierentindustries

Education

Consumerproducts/Wholesale

Proessionalservices

Mediaandentertainment

Industrialproducts

Automotive

Liesciences

Retail

Energyandutilities

Chemicalsandpetroleum

Healthcare

Travelandtransportation

Aerospaceanddeense

Electronics

Government

Telecommunications

Financialmarkets

Banking

Insurance

Percent

0 10 20 30 40 50 60

60

57

47

44

43

39

39

38

35

34

29

29

20

19

17

16

13

10

7

PERSPECTIVES ON IT


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Again, this is in line with Forrester Researchs fndings. In a report published in February

2006, the technology research frm concluded that when the CIO reports to the CFO,

the ocus is on fnancial controls and order visibility. When the CIO reports to the CEO,

the ocus is on processes and technologies that build brand relevance at the point o

purchase.4 In other words, a CIO who reports to a CFO is more likely to be engaged in

cutting costs than in growing the business.

The issue is, then, that the typical CP IT unction is increasingly expected to assume

a more signifcant role in shaping the uture o the business. Yet the IT unction is still

somewhat marginalized and handcued by virtue o its reporting structure.

Dierent concepts o the role o ITIT executives believe that one o their most important priorities is to support growth

initiatives. But even though business executives consider IT a strategic asset, they still

see it primarily as a means o creating greater efciency and cutting costs.

I there is a gap between the role the IT unction is expected to assume and the statusit is accorded, there is another gap between the priorities o IT and business execu-

tives. As Figure 8 shows, or IT executives the three most important priorities or the

next 12 months are aligning the IT strategy with the business strategy, securing top-line

growth and optimizing business processes.

AligningbusinessandITstrategies

Supportinggrowthinitiatives

Optimizingbusinessprocesses

Supportingcost-reducingprojects

Satisyingcustomerimperatives

Improvingbusinessagility

ImprovingITservicetobusinessusers

ReducingITbudgets

Percent

FIGURE 8:TheprioritiesoITexecutivesorthenext12months

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.Note: The sum o all percentages exceeds 100 percent because respondents were asked to select their top fve priorities.

2 1

7 2

1 3

3 4

5 4

9 6

12 7

8 8

Ranking

2004study

2006study

Majordiscrepanciesbetween2004and2006

73

57

54

41

41

35

32

22

0 10 20 30 40 50 60 70 80

PERSPECTIVES ON IT

Our near-term ocus areas are automation and ITaround capturing insights, enabling innovation, knowledgemanagement, data analytics and business intelligence survey respondent


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Two eatures are especially worth noting here. First, the act that IT executives are so

concerned about the alignment o the IT and business strategies suggests that they

believe there is more to be done in this respect. Second, there has been a major shit in

emphasis over the past two years. Supporting growth initiatives ranked only seventh on

the list o priorities or IT executives who participated in the previous study.

However, business executives continue to view IT primarily as a tool or improving the

efciency o the organization and cutting costs. When asked what they regard as the

most important reasons or investing in IT, 86 percent o business executives cited

increases in internal efciency or productivity; 70 percent better compliance with

customer and regulatory imperatives; and 56 percent greater efciency in interacting

with trading partners (see Figure 9).

Increasedinternalefciency/productivity

Customerimperatives/compliance

Increasedefciencyotradingpartnerinteractions

Costodoingbusiness


Security

Increasedtradecustomersales

Increasedconsumersales

Reducedprocurementcosts

Creationonewdemand/overallmarketgrowth

Increasedunderstandingoconsumers

MarketsharegrowthDeenseocurrentmarketshareposition

Consumerbrandbuilding

LackoopportunitycausingnoinvestmentinIT

Percent

FIGURE 9:ThemostimportantITinvestmentdriversor

businessexecutives

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.Note: The sum o all percentages exceeds 100 percent because respondents were asked to select their top fve priorities.

1 1

2 2

3 3

7 4

6 4

9 6

4 7

10 8

5 8

12 10

14 11

8 1211 12

13 14

- 15

Ranking

2004study

2006study

86

56

47

25

23

20

14

2

70

47

31

23

22

14

8

0 20 40 60 80 100

PERSPECTIVES ON IT


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Figure 10 illustrates the divergence between the priorities o business executives

and IT executives even more clearly. Business executives identiy 15 key drivers or

investing in IT, but only our are related to revenue growth. Moreover, they rank those

drivers only seventh (increasing trade sales), eighth (increasing consumer sales),

tenth (stimulating new demand or overall market growth) and twelth (increasing

market share) in order o priority.

The barriers to successIT executives say that the main barriers to making the IT unction more eective are

budgetary restrictions, lack o human resources and the complexity o the existing IT

inrastructure. But the biggest issue or business executives is uncertainty about returns

on investment in IT.

What, then, are the barriers to creating a more eective IT unction? The three biggest

obstacles IT executives say they ace are budgetary constraints, the complexity o the

inrastructure and applications that are already in place and lack o human resources

(see Figure 11).

FIGURE 10:ThedierencesintheagendasoITandbusinessexecutives

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study.

AligningbusinessandITstrategies

Supportinggrowthinitiatives

Optimizingbusinessprocesses

Supportingcost-reducingprojects

Satisyingcustomerimperatives

Improvingbusinessagility

ImprovingITservicetobusinessusers

ReducingITbudgets

GovernanceandmanagementoITorganization

GlobalDataSynchronization

ImprovingROIoITcapital

Improvingfnancialreporting

Security

Customercollaboration


Improvingtradecustomerservice

Retainingskilledsta

RFID/EPC

Maintainingpacewithtechnologychanges

Other

E-businessprojects

Ensuringdisasterrecovery/businesscontinuity

Increasedinternalefciency/productivity

Customerimperatives/compliance

Increasedefciencyotradingpartnerinteractions/transactions

Costodoingbusiness


Security

Increasedtradecustomersales

Increasedconsumersales

ReducedprocurementcostsCreationonewdemand/overallmarketgrowth

Increasedunderstandingoconsumersandconsumerneeds

Marketsharegrowth

Deenseocurrentmarketshareposition

Consumerbrandbuilding

LackoopportunitycausingnoinvestmentinIT

1

2

3

4

4

6

7

8

9

10

10

12

12

14

14

16

16

18

18

18

21

21

1

2

3

4

4

6

7

8

810

11

12

12

14

15

IT respondents view Business respondents view

PERSPECTIVES ON IT


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We are a zero overhead growth unction as measuredversus operating budget survey respondent

Conversely, the three most requent reasons why business executives hesitate to make

an IT investment are unclear returns on investment, competing capital projects with a

higher priority and technologies that are rapidly changing or evolving (see Figure 12).

In act, it is notoriously difcult to measure ROI in IT projects which take place in the

context o multiple unctional initiatives or span the entire enterprise. Nevertheless, the

survey results suggest that many CIOs need to argue the business case or their IT

projects more eectively.

The key issues IT and business executives identiy are thus budgets, human resources,

returns on investment and the complexity o the technological inrastructure. We shall

look at each o these issues more closely in the ollowing pages.

FIGURE 11:Theobstaclesthatreducetheeectivenessothe

ITunction

Budget/costconstraints

Complexityocurrentinrastructureandapplications

Lackohumanresources

LackoagilityinITorganization

LackoalignmentbetweenbusinessandITstrategyLackocorporatecommitmentto,orawarenesso,IT

Lackocustomerserviceorientation

Other

Inabilitytokeeppacewithrapidadvancesintechnology

Inabilitytopartnerwithexternalserviceproviders

Inabilitytomanageenterprisewideprojects/programs

Percent

69

39

39

31

2822

11

6

6

3

8

0 10 20 30 40 50 60 70 80

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study.Note: The sum o all percentages exceeds 100 percent because respondents were asked to select the top three actors.

FIGURE 12:ThereasonswhybusinessexecutiveshesitatetomakeanITinvestment

UnclearROI

Othercapitalprojectswithhigherpriority

Rapidlychanging/evolvingtechnology

Desiretowaitorprovenapplicationsinthisindustry

Lackobusinesssponsorship/leadership

Lackopeoplewithappropriateskills/abilities

Lackotopmanagementcommitment

Instabilityotechnology

Securityissues

Uncertaintyabouttheroleoindustryexchanges

Percent

82

68

55

52

51

49

49

46

15

11

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study.Note: The sum o all percentages exceeds 100 percent because respondents were asked to select the top three actors.

0 20 40 60 80 100

PERSPECTIVES ON IT


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The proportion o their revenues that CP companies invest in IT is relatively stable, but it

is less than companies in many other industries spend on IT.

Responding companies, on average, plan to spend US$98.1 million on IT in 2006:

US$18.6 million on capital projects and US$79.5 million on operating expenses. This is

4.7 percent more than the total budget they allocated or IT in 2005 and a marginally

greater uplit than the 4.5 percent increase in the budget between 2004 and 2005 (see

Figure 13).

I we had 10 percent additional budget, we would spend/invest in retail execution and business intelligence survey respondent

However, actual IT spending is not always the same as the amount that has beenbudgeted. In 2004, or example, the inormation provided by responding companies

shows that the ratio o projectedexpenditure on IT to revenues was 2.3 percent, but the

ratio o actualexpenditure on IT to revenues was just 2.1 percent; in monetary terms, this

was 10 percent less than originally envisaged (see Figure 14).

THE IT BUDGET

THE IT BUDGET

0

20

40

60

80

100FIGURE 13:TheaverageITbudgetorespondingcompanies

Capitalbudget

Operatingbudget

2004 2005 2006E

US$millions

76.0

17.6

73.1

16.5

79.5

18.6

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.E = Estimated.

+4.5% +4.7%

FIGURE 14:ThegapbetweenprojectedandactualexpenditureonIT

TotalITbudget

Capitalbudget

OperatingbudgetPercen

tofrevenue


0.0

0.5

1.0

1.5

2.0

2.5

2000 2001 2002 2003 2004 2005 2006E

0.44 0.42 0.41

0.82 0.86E

0.39 0.39 0.40

2.03

1.59

2.04

1.62

1.97

1.56

2.24

1.42

2.32E

2.09 2.102.10

1.71

1.46E

1.70 1.70

EstimatedversusrealizedITbudget


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43%39%

Yet CP companies already spend less on IT than companies in most other sectors. In

its latest survey o US IT spending patterns, Forrester Research reports that projected

expenditure on IT as a percentage o revenues is lower in the CP industry than in 11 o

the 15 other industries it analyzed (see Figure 15). Indeed, fnancial services companies

and public-sector organizations typically invest 6.8 percent and 5 percent o their

revenues respectively more than double the proportion CP companies invest.5

The breakdown between new initiatives and ongoing IT operations is orecast to stay

constant. Responding companies plan, on average, to spend US$35.5 million devel-

oping new capabilities and US$62.6 million maintaining their existing capabilities (seeFigure 16).

Source: US IT Spending Benchmarks or 2005, Forrester Research Inc., May 24, 2005.

FIGURE 15:ProjectedITexpenditureasapercentageorevenuesinvariousindustries

Financeandinsurance

Publicsector

Businessservices

Overall

Utilitiesandtelecommunications

Media,entertainmentandleisure

Manuacturing

High-tech products

Consumer products

Industrial products

Chemicals and petroleumPrimary production

Retailandwholesaletrade

Retail

Wholesale trade

Percent0 1 2 3 4 5 6 7 8

6.8

5.0

3.7

3.6

3.4

2.9

3.8

2.4

2.0

1.6

2.0

1.1

2.1

2.1

1.7

THE IT BUDGET

0

20

40

60

80

100FIGURE 16:ITexpenditureonnewandcurrentcapabilities

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.E = Estimated.

Capitalbudget(developingnewcapabilities)

Capitalbudget(maintainingcapabilities)

Operatingbudget(developing

newcapabilities)Operatingbudget(maintainingcapabilities)

2005 2006E

BudgetUS$millions

23.1

8

52.9

6.9

10.7

54.6

10.6

24.9

8.061%

30%

57%

31%

69%70%


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They intend to devote 31 percent o their operating budgets and 57 percent o their

capital budgets to new initiatives, which is directly in line with their expenditure on new

initiatives in 2005. However, everything else being equal, a company which spends a

smaller proportion o its total IT budget on maintenance, and a larger proportion on new

capabilities, than its peer group will likely have better business results.

Large companies spend 45.5 percent more than medium-sized companies, and 59.4

percent more than small companies, on IT per employee (see Figure 17). However, the

average IT budget per employee is now lower than at any time in the past three years.

The dierence is small; it ranges rom a high o US$7,904 to US$7,704 per employee,

and may be attributable to the act that many CP companies have now fnished imple-

menting ERP systems.

FIGURE 17:TheITbudgetperemployee,2005


7,704

US$

Overall

3,762

5,047

9,260

Smallcompanies

Mediumcompanies

Largecompanies

10,000

8,000

6,000

4,000

2,000

0

THE IT BUDGET


19/48


Most IT projects in CP companies are on time and within budget, and meet their

stated objectives. But a substantial number o responding companies still rely on non-

quantifable criteria rather than fnancial measures to evaluate the success o those

projects. Without hard measures o what prior projects have delivered such as ROI

they are unlikely to increase the amount they spend on IT.

The old adage that what gets measured gets managed is as true or IT as it is or any

other part o a business. So how does the typical IT unction in the CP sector score in

this regard? Not very well, it seems.

Ninety-two percent o IT executives report that they have a clearly defned mission

within the context o the overall business strategy. But only 43 percent say that they

have a ormal process or measuring the extent to which business users are satisfed

with the services they provide, although another 31 percent say that they are currently

designing or implementing such programs (see Figure 18). This reects the increasing

extent to which IT executives are ocusing on customer service in the management o

their operations.

Not surprisingly, large companies lead the way. Fity-nine percent o the IT unctions

in large companies already measure the extent to which users are satisfed with

the service they provide, while another 33 percent are currently implementing some

sort o eedback program. By contrast, only 37.5 percent o the IT unctions in small

companies and 33 percent o the IT unctions in medium-sized companies already

have such tools in place, and only 37.5 percent and 27 percent, respectively, are

currently implementing them.

However, this is by no means the only weakness CP companies display when it comes

to measuring IT. Eighty-two percent o IT executives and 83 percent o business execu-

tives report that the IT projects their frms undertake are completed on time and within

budget, and meet their stated objectives. But many companies still put more emphasis

MEASUREMENTOF IT

MEASUREMENT OF IT

FIGURE 18:MeasurementousersatisactionwithIT

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study.

26

Percent

Usersatisactionmeasurement

100

80

60

40

20

0

No

Currentlydesigning/implementing

Yes

31

43


20/48


on non-quantifable criteria than on quantifable criteria when they are deciding whether

or not to invest in a particular IT initiative. IT executives report that ROI or net present

value (NPV) is a lowly third on the list o determining actors, well behind the costs o

doing business and strategic imperatives as it was when the previous study was

completed in 2004 (see Figure 19).

Worse still, only 55 percent o responding companies currently measure their ROI in

IT projects although the situation is better than it was in 2004, when only 44 percent

o responding companies did so. Nearly hal the frms which were then designing or

implementing beneft-tracking tools are now using them (see Figure 20).

FIGURE 19:ThecriteriaorevaluatingITinvestments

Deemedessential/costodoingbusiness

Strategicreasons

ROI/NPV

Guteel

Other

Percent

6974

50

57

4752

3

3

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.Note: The sum o all percentages exceeds 100 percent because respondents were asked to select their two top criteria.

0 10 20 30 40 50 60 70 80

2

2

2006study

2004study

FIGURE 20:Theexistenceoatool

ormeasuringreturnsoninvestment

32

Percent

2004study

100

80

60

40

20

0

No

Currentlydesigning/implementing

Yes

24

44

32

13

55

2006study

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness Study; CSC,

2004 GMA Inormation Technology Investment and Eectiveness Study.

MEASUREMENT OF IT

Everything must have an ROI associated with it. Anythingover $500K must be approved by the senior leadershipteam ... [which uses] NPV analysis survey respondent


21/48


22/48


It is equally important or IT executives to publicize the act that they measure the

success o the projects they undertake, whatever criteria they use. Although 45 percent

o responding companies do not currently measure ROI, 68 percent o IT executives

say that they have some sort o measurement system in place. But only 52 percent o

business executives are aware that such programs exist within their own companies

(see Figure 22). This suggests that some IT executives have ailed to explain what they

do very eectively, and that they need to improve their communications with other areas

o the business.

Despite these shortcomings, more than two-thirds o respondents irrespective o

whether they are IT or business executives believe that their companies have either

already achieved a satisactory return on their existing IT investments or will do so within

a one-to-two year timerame. Twenty-nine percent o those surveyed report that their

companies have already achieved a satisactory ROI, while 41 percent note that theyexpect their companies to do so sometime within the next two years (see Figure 23).

FIGURE 22:ThepercentageoITexecutiveswhomeasuresuccessratesrelativetothepercentageobusinessexecutiveswhoareawareosuchmeasures

11

Percent

ITresponse

100

80

60

40

20

0

Dontknow

DontmeasureITprojectsuccess

MeasureITsuccess

21

68

37

11

52

Businessresponse


MEASUREMENT OF IT

FIGURE 23:ThepercentageorespondingcompaniesreportingasatisactoryreturnontheirexistingITinvestments

Alreadyachieved

Sixmonthsorless

Withinoneyear

Withinone-to-twoyears

Withintwo-to-fveyears

Dontknow

Percent

29

3

3

35

24

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and Eectiveness StudyNote: These statistics include all respondents, not just those who said they currently have an ROI measurement program in place.

0 5 10 15 20 25 30 35

6

41%


23/48


CP companies devote most o their IT resources to operational activities rather than

high-level issues such as risk management. They spend nearly hal their IT operating

budgets on personnel (and typically rely on employees rather than contract workers).

They spend 60 percent o their IT capital budgets on sotware and computing

equipment.

Responding companies typically spend 76 percent o their IT budgets on operational

activities and 24 percent on the management o their IT processes. They allocate their

human resources in a very similar ashion; 80 percent o the ull-time equivalents (FTEs)

working in the IT unction are engaged in operational activities, while 20 percent are

involved in managing processes. But only 2 percent o IT spending and 2 percent o

the workorce is used to manage business resilience and risk (see Figure 24). This is a

remarkably low proportion o resources to devote to such a key issue.

THE ALLOCATION OF IT RESOURCES AND PERSONNEL

THE ALLOCATION OFIT RESOURCES AND

PERSONNEL

FIGURE 24:TheallocationoIT

expenditureandFTEsbyprocesscategory


ITspending

ManageITknowledge

Managebusinessresiliencyandrisk

ManagethebusinessoIT

Manageenterpriseinormation

DevelopandmanageITcustomerrelationshipmanagement

DeployITsolutions

DevelopandmaintainITsolutions

DeliverandsupportITservices FTEsperormingITprocesses

76%

Percent

0

20

40

60

80

100

80%


24/48


On average, just over 2.4 percent o the FTEs employed by responding companies work

in IT, although the precise ratio varies depending on the size o the organization (see

Figure 25). The percentage o sta engaged in IT activities is highest in large companies,

which generally have a more complex IT inrastructure than smaller frms and are more

likely to be in the vanguard when it comes to implementing new technologies. It is lowest

in medium-sized companies, which usually enjoy greater economies o scale than small

frms but incur ewer IT expenses than large companies.

The percentage o FTEs perorming IT processes relative to the total workorce is

much lower in responding companies than it is in other industries such as fnance and

insurance, and utilities and telecommunications. However, it is in line with the overall

industry average, as Forrester Researchs latest analysis o US IT spending patterns

shows (see Figure 26).6

Source: US IT Spending Benchmarks or 2005, Forrester Research Inc., May 24, 2005.

FIGURE 26:ITFTEsasapercentageothetotalworkorceinvariousindustries

Financeandinsurance


Businessservices

Overall

Manuacturing

High-tech products

Industrial products

Consumer products

Chemicals and petroleum

Primary production


PublicsectorRetailandwholesaletrade

Wholesale trade

Retail

Percent

10.1

8.6

3.3

2.4

2.2

9.0

1.6

1.1

0.5

1.8

0.8

1.6

2.5

1.8

0.4

0 2 4 6 8 10 12

FIGURE 25:ITFTEsasapercentageothetotalworkorce


2.4

Percent

Overall

2.1

1.8

2.7

Smallcompanies Mediumcompanies Largecompanies0.0

0.5

1.0

1.5

2.0

2.5

3.0



25/48


26/48


Further analysis shows that 31 percent o these personnel costs were allocated to appli-

cations development, and 26 percent to technical support (see Figure 29). Another 30

percent was spent on external services and outsourcing.

Meanwhile, support and maintenance and sotware amortization accounted or the

bulk o responding companies operating expenditure on sotware, at 48 percent and

36 percent, respectively. Similarly, data and voice telephony jointly accounted or 88

percent o their operating expenditure on networks and telecommunications.

However, sotware and computing equipment accounted or a much larger share o

capital expenditure. In 2005, responding companies devoted 43 percent o their capital

budgets to sotware and 17 percent to computing equipment (see Figure 30). More

than hal the money they invested in computing equipment was spent on enterprise

computing (application servers, database servers, integration servers, brokers andso orth or use throughout the organization). Another 22 percent went toward client

computing (high-end workstations and personal computers), and 19 percent was

spent on enterprise storage (storage on application servers, database servers, Network

Attached Storage (NASs) and Storage Area Networks (SANs)).

FIGURE 29:BreakdownotheIToperatingbudget,2005


Internal/externalpersonnelcosts Sotwarecosts

46 14 13 10 9 6 2

Personnel

Externalserviceproviders

Sotware

Hardware

Othercosts

Networksandtelecoms

Facilities

FIGURE 30:BreakdownotheITcapitalbudget,2005


Equipmentcosts

1743 1414 6 6

Sotware

Computingequipment

Externalserviceproviders

Othercapitalbudgetitems

Storageequipment

Networksandtelecoms

3%-Clientstorage

3%-Othercomputingandstoragecosts19%-Enterprisestorage

22%-Clientcomputing


Percent o operating budget

Percent o capital budget

31%-Applicationsdevelopment

13%-Otherpersonnelcosts

26%-Hardware/sotwaretechnicalsupport

13%-Otherpersonnelcosts

1%-Subscriptionsandone-timeees

15%-Licensecharges

48%-Supportandmaintenanceees

36%-Sotwareamortization/depreciationorinrastructure

53%-Enterprise

computing


27/48


Many CP companies still have an unduly complex IT inrastructure. A substantial number

o the applications they use are also custom-built, which makes it more difcult or them

to integrate their systems with those o their partners and customers.

The complexity o the technological environment in which CP companies operate

remains a serious obstacle. As Figure 31 shows, most responding companies still run a

relatively large number o applications, and have been slow to reduce the number in

marked contrast with the trend toward simplifcation and integration in other industries.

The problem is especially notable in large frms; in acquiring or disposing o brands

and businesses to fne-tune their product portolios, many such organizations have

increased the complexity o their applications inrastructure.

Keep it simple ... standardize, standardize, standardize survey respondent

A ull third o the applications responding companies use are predominantly custom-

built rather than packaged products. This makes it much more difcult to integrate a

companys systems, both internally and with those o its partners and customers, so that

it can collaborate with them more eectively. There is, or example, a close correlation

between those responding companies that rely more heavily on packaged applications

and those that report higher rates o success with their IT projects.

FIGURE 31:Thenumberoapplicationsrespondingcompaniesrun

Numberofapplica

tions

Smallcompanies Mediumcompanies Largecompanies

2004study

2006study

0

100

200

300

400

500

600

33 33

125 127

593578

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study; CSC,2004 GMA Inormation Technology Investment and Eectiveness Study.

THE TECHNOLOGICAL ENVIRONMENT

THE TECHNOLOGICALENVIRONMENT


28/48


Again, the problem is particularly acute in large companies, where 39 percent o the

applications are predominantly custom-built. Conversely, small companies are more

inclined to use packaged applications, probably because they have more limited

budgets and ewer in-house resources on which to call (see Figure 32).

The same pattern holds true with servers. On average, large CP companies now have

738 servers apiece, even though servers are becoming increasingly powerul (see

Figure 33).

0

20

40

60

80

100FIGURE 32:Useopredominantlycustom-builtversuspredominantlypackagedapplications

Custom-built

Packaged

Percent

71

29


67

33

61

39

0

100

200

300

400

500

600

700

800

FIGURE 33:Thenumberoserversandserversperadministrator


Numberofservers

Smallcompanies

Mediumcompanies

Largecompanies

47

14

205

2373822


25

20

15

10

5

0

Numberofserversperadministrator

Smallcompanies

Mediumcompanies

Largecompanies

Smallcompanies

Mediumcompanies

Largecompanies

Servers Serversperadministrator


29/48


Large CP companies likewise have more database management systems and storage

platorms than small or medium-sized companies, although this is hardly surprising;

the volume o data they must enter, organize and store is necessarily much greater

than it is in small frms. Conversely, medium-sized CP companies have more operating

systems, and small CP companies more middleware technologies (see Figure 34).

0

5

10

15

20

25FIGURE 34:Thetechnologicalenvironment

Largecompanies

Mediumcompanies

Smallcompanies

3.5

5.5

Source: IBM Global Business Services, 2006 GMA Inormation Technology Investment and E ectiveness Study.Note: The data are based on the average number o middleware technologies, storage platorms, database management systemsand operating systems used by responding companies.

5.5

4.6

5.5

5.1

Middlewaretechnologies

Storageplatorms

Databasemanagementsystems

Operatingsystems

3.3

2.1

3.6

4.4

7.1 6.5


Averagenumber


30/48


Adoption o new technologiesCP companies have generally been conservative in their approach to industry initia-

tives like GDS, EDI and RFID. The complexity o the technological environment in

which they operate has also impeded the speed and efciency with which they adopt

such initiatives.

Responding companies plan to spend more than hal their applications budgets on two

unctions the supply chain and sales and demand ulfllment in 2006 (see Figure

35). This is very much in line with the allocation o IT spending in 2005, and reects the

importance o both unctions within the CP industry. As the pressure to produce more

and better products ever aster increases, so does the necessity or efcient, exible

supply chains and ulfllment processes.

Responding companies identifed lot recall/traceability as the industry mandate

receiving the greatest proportion o their IT budgets. They plan to invest 2 percent

o their total IT budgets or 2006 on track-and-trace technologies more than anyother area except compliance with the FDA Bioterrorism Act o 2002 (see Figure 36).

Again, this makes sense. Ater the events o September 11, 2001, the US government

elevated measures to counter bioterrorism in the ood and agricultural industries to

the top o the political agenda. The European Union has also introduced traceability

laws, and there is now a growing global consensus that ood supply chains should be

wholly accountable or the quality o the end products they deliver.

FIGURE 35:TheallocationotheITapplications

budget

Supplychain

Salesanddemandulfllment

Financeandaccounting

R&D,Newproducts

Marketing

Humanresources

Procurement

Corporatecommunications

Legal

Percent


2005

2006estimated

9

8

9

11

14

15

21

19

32

33

0 5 10 15 20 25 30 35

7

6

5

5

2

2

11



31/48


Lot recall/traceability %oITbudget 0.9 1.8 2.0

%ocompanies 38.0 38.0 31.0 55.0 59.0

FDA Bioterrorism Act %oITbudget 1.3 1.4 1.8

%ocompanies 12.0 26.0 28.0 41.0 41.0

Sarbanes-Oxley Act %oITbudget 2.9 1.5 1.3

%ocompanies 21.0 67.0 45.0 52.0 48.0

FDA electronic audit trail %oITbudget 0.9 1.1 1.2

(21 CFR Part 11) %ocompanies 19.0 21.0 24.0 28.0 21.0

Allergens tracking %oITbudget 0.6 0.9 1.0

%ocompanies 14.0 21.0 28.0 28.0 24.0

Trans at labeling %oITbudget 0.6 0.6 0.8

%ocompanies 19.0 21.0 21.0 21.0 17.0

GMO tracking %oITbudget 0.2 0.3 0.8

%ocompanies 5.0 10.0 7.0 10.0 14.0Country o origin labeling %oITbudget - 0.1 0.7

(COOL) %ocompanies 10.0 14.0 - 14.0 14.0

The rate the industry moves on major initiatives is sodisparate that it is difcult to build critical mass, eectivelyreducing the advantages o adoption survey respondent

However, the complexity o the technological environment in which CP companies

operate has a direct bearing on the speed and efciency with which they adopt many

industry initiatives. As Figure 37 shows, nearly three-quarters o responding companies

have either implemented, or are in the process o implementing, GDS.

FIGURE 36:TheproportionotheITbudgettobespentonspecifc

industrymandates

2002 2003 2004 2005 2006E


FIGURE 37:ImplementationoGDS



PercentageofITbudget

Nothingplanned

0

20

40

60

80

100

Plansagreedbutnotstarted

Pilottests Implementationrolloutstarted

Fullyimplemented

05.5

22.2

55.6

16.7

72.3percentinimplementation

Percent


32/48


Figure 38 illustrates more specifcally what they have already done. Most responding

companies have switched to external data pools and catalogs, or example, and rely

to a much smaller extent on internal data pools. In 2004, 17 percent used internal data

pools, but only 9 percent o those that participated in the most recent survey plan on

doing so.

Most responding companies have at least started to allocate GTINs, global location

numbers (GLNs) and serial shipping container codes (SSCCs), as Figure 39 shows.

FIGURE 38:Useointernalandexternaldatapools

17

Percent

2004study

100

80

60

40

20

0

Internaldatapool

Internalandexternaldatapool/catalog

Externaldatapool/catalog

40

43

9

38

53

2006study


FIGURE 39:Respondentswithactivityoncurrentindustryinitiatives

ConsumerunitsallocatedaGTIN

Cases/cartons/innersallocatedaGTIN

GTINscatalogedconsistentlywiththeGlobalProductClassifcation

Standards

ItemexceptionstoGTINallocationguidelines

Saleswithsynchronizedmasterdatabetweentradingpartnersvia

GS1-certifeddatapools

Pallets/UnitloadslabeledwithSSCCs

ShippingorreceivinglocationsallocatedaGLN

Percentorespondents

94


0 20 40 60 80 100

89

76

51

85

81

65



33/48


34/48


35/48


Only 20 percent o responding companies have adopted RFID devices or electronic

product codes (EPCs). Another 48.6 percent are conducting pilot studies, either alone

or in conjunction with their trading partners (see Figure 44). Again, however, the rate o

adoption is quite slow.

IT leads the business in RFID, obtaining data, building thebusiness case now the business has started to pick upthe initiative survey respondent

Sixty-one percent o responding companies report that in the next two years they plan

on doing only enough to satisy the key requirements o their customers; a mere 3

percent plan on actively leading the way. But this pattern is likely to shit over the next

three to fve years, when 47 percent o responding companies expect to become ast

ollowers (see Figure 45).

FIGURE 44:ImplementationoRFIDorEPCs


FIGURE 45:RateoadoptionoRFIDorEPCs


36/48


Most companies intend to ocus on implementing RFID at pallet- and case-level or

the next ew years. Use o RFID at item-level is not expected to start until 2009 and

20 percent o responding companies say that they do not expect to move to item-level

until 2015 (see Figure 46).

The relatively slow pace at which responding companies are adopting RFID is

probably due to the act that there are still technical problems with the readability

o the tags and that there is no clearly demonstrated business case under the

current conditions. In another survey recently conducted by IBM, 48 percent o CP

companies reported that that they could see little, or no, short-term value in adopting

RFID. They cited two key obstacles: problems with data quality and ailure to changethe relevant business processes.7

FIGURE 46:ProjectedimplementationoRFIDorEPCsatpallet-andcase-level

2004 2005 2006 2007 2008 2009 2010 2015


3

Percent

Pallet-levelAverageyearoimplementation=2005

Case-levelAverageyearoimplementation=2006

Item-levelAverageyearoimplementation=2009

4

34

29

10

37

41

10

3

10

37

10

20

3

1715

20

0

10

20

30

40

50

20

4


0 0 00


37/48


Business executives in CP companies are increasingly satisfed with the eectiveness

o the IT unction. Nearly three-quarters o those who participated in this years survey

believe that their IT departments are eective or very eective. They rate the IT unction

particularly highly or its ability to work with the rest o the organization and the success

with which it aligns the IT strategy with the business strategy.

Corporate perceptions o the IT unction are becoming increasingly positive. Seventy-

our percent o business executives believe that the IT departments in their companies

are eective or very eective. This is a marked improvement on the situation in 2004,

when only 43 percent o business respondents thought their IT departments were

eective or very eective (see Figure 47).

There is also a close correlation between those companies where business executivesreport that the IT unction is eective and those that report high levels o success with

their IT projects (see Figure 48). Clearly, thereore, running an efcient and eective IT

unction is something that the other unctions within the business notice and appreciate.

THE EFFECTIVENESS OF THE IT FUNCTION

THE EFFECTIVENESSOF THE IT FUNCTION

0

20

40

60

80

100FIGURE 47:TheeectivenessotheITunction

2006study2004study

Percent

36

2

51

12

NoteectiveSomewhateective

Acceptable

Eective

Veryeective

14

19

723

43%

74%

36

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study; CSC,2004 Inormation Technology Investment and Eectiveness Study.

FIGURE 48:ThecorrelationbetweenITeectivenessandprojectsuccessrates

Source: IBM Global Business Services, 2006 GMA In ormation Technology Investment and Eectiveness Study.

1response2responses3responses4responses

Veryeective

Eective

Acceptable

Somewhat

eective

Notatalleective

0 20 40 60 80 100

Percentprojectsuccess


38/48


37

Business executives rate the IT unction particularly highly in two respects. Eighty-seven

percent say that they are satisfed, or very satisfed, with their IT departments ability

to work with other parts o the company. And 79 percent say that they are satisfed,

or very satisfed, with the way in which their IT department aligns its activities with the

companys business strategies (see Figure 49).

In act, aligning the IT strategy with the business strategy is the IT unctions frst priority,

as Figure 8 showed. So it seems that IT executives are either perorming better than

they realize in this regard or that, even though the majority o business executives are

satisfed with the perormance o their IT departments, IT executives still eel discon-

nected rom the rest o the business. There is, or example, a clear correlation between

responding companies in which business executives agree, or strongly agree, that IT

does a good job in meeting its customers requirements and those that score highly

on innovation.


FIGURE 49:LevelsosatisactionwithkeyattributesotheITunction8

ITandbusinessworktogether

ITactivitiesalignwithbusinessstrategies

Leveloexperienceandexpertise

Systemsandservicescontributetobusinesssuccess

Understandbusinessgoalsandstrategies

ImpactIThasonbusinessorganization

ReliabilityoITsystemsand

servicesIdentiyimprovement

opportunities

Cost-eectiveITsystemandservicedelivery

Provideeectivebusinessapplications

Problemidentifcationandresolution

ITdemonstratesleadership

Provideeectivedecisionsupportsystemsandtools

Applicationoinnovativesolutions

ProvidenewITproductandserviceinormation

Percent

Verydissatisfed

Dissatisfed

Neutral/Noopinion

Satisfed

Verysatisfed

5

3

3

3

3

3

2

3

2

3

1

3

2

5

14

9

11

11

11

8

9

8

8

8

6

5

43

27

20

18

19

23

21

18

17

15

8

20

11

13

3

32

42

54

45

42

43

50

47

66

61

53

47

53

51

17

12

23

25

28

25

21

25

14

20

23

31

26

11

36

3

3

THE EFFECTIVENESS OF THE IT FUNCTION

0 20 40 60 80 100

9


39/48


40/48


41/48


In short, most CP companies perceive IT as a strategic asset, but do not position it as

such. They also ocus their IT spending on cost reductions and improvements in ef-

ciency rather than using it to support their growth-oriented business strategies. There is

thus a major opportunity or the CIOs o CP companies to close the gap in perceptions

o the part IT can play.

It is equally important or CIOs working in the sector to remove some o the impedi-

ments to the perormance o the IT unction. The absence o proper tools with which

to measure ROI is one such barrier to the elevation o the IT unction. The cost and

complexity o the IT inrastructure is a second problem, since it diverts senior IT

management rom more strategic activities and ties up scarce resources; when 80

percent o IT employees work on operational issues, or example, relatively ew are ree

to work on more strategic concerns.

The complexity o the technological environment also makes it more difcult to

implement key industry initiatives like GDS and RFID. Here, however, one o the biggest

obstacles lies outside the control o the CIO; disagreements between retailers andCP companies as to how the benefts should be shared are a major barrier to greater

collaboration, and are likely to remain so or some years to come.

In the meantime, though, there is much that CP companies can do. They can treat IT as

a strategic resource and change their reporting structures accordingly. They can also

exploit the potential or reducing costs and increasing their unctionality via outsourcing

and o-the-shel applications. And, they can adopt fnancial measures to quantiy the

returns they earn rom their IT expenditure a discipline that is likely both to ensure

better returns and to give top management the reassurance it needs to invest in IT.

CONCLUSION

CONCLUSION


42/48


Comparison o the responses o GMA-member companies withthe current state o CP companies in Europe and Asia PacifcThe 2006 IT Investment and Eectiveness Study was set up with a North American

perspective; however, we have drawn on IBMs experience rom client engagements

to include a brie comparison o the responses o GMA-member companies with thesituation o CP companies based in Europe and Asia Pacifc.

CIO reporting structure

As in North America, the CIO o a typical European CP company reports to the CFO

rather than the CEO or President. The same is true in most Asian CP companies and in

the Asian operations o multinationals.

Budgets

The IT budgets o European CP companies are under pressure possibly even greater

pressure than those o North American CP companies, because the market as a whole

is growing more slowly.Competitive pressures and the introduction o the euro have

also spawned numerous change initiatives, with the result that many European CP

companies currently have a limited appetite or urther such initiatives.

Meanwhile, most o the Asian subsidiaries o multinationals (including those based in

China) are moving toward global templates originating in other parts o the world. Some

companies are also switching rom bespoke to packaged applications to reduce costs.

This is especially true o CP companies headquartered in Japan, which have tradition-

ally maintained large internal IT departments to develop bespoke sotware solutions.

Some o these companies are now purchasing packaged sotware, starting with basic

accounting and Material Requirements Planning (MRP) applications.

Growth and innovation

Many European CP companies report that their core goals include growth and/or

innovation. However, anecdotal evidence suggests that they lag behind their North

American counterparts in achieving these aims. The situation in Asia is much more

varied. In China and India, the main goal is at-out growth, oten driven by innovations

tailored to local market conditions. Conversely, in Japan, continuous product innovation

is essential merely or survival. In mature markets, the ocus is largely on maintaining

proftability.

Returns on investment in IT

Many European CP companies develop upront business cases or the majority o their

IT investments. But, like North American CP companies, they are much less consistent

about tracking their progress during IT projects to ensure that they realize the benefts.

The same is true in Asia. Many o the IT investments currently being made by CP

companies located in Asia are based on global roll outs. The business case or such

investments typically rests on a combination o local benefts and the advantages o

global consistency, including lower maintenance costs. But the emphasis is generally

on completing IT projects within budget rather than tracking the benefts they deliver.

APPENDIX

APPENDIX 1


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Outsourcing

Some European CP companies are actively outsourcing non-core business processes.

Nestl has outsourced its fnance unction, or example, while Unilever has outsourced

its North American procurement unction, European IT unction, global HR unction and

certain fnance and accounting processes.

A number o the larger, global CP companies have also outsourced various non-core

operations in Asia Pacifc, and some CP companies with their headquarters in Japan

have started to outsource certain back-ofce unctions to China. However, since Asia is

requently the location where the outsourcing is carried out, the case or outsourcing in

many parts o the region is not as strong as it is in other areas o the world.

Cost and complexity

The cost and complexity o the IT inrastructure and applications supporting European

CP companies is generally even greater than it is in North American CP companies.

Structural barriers in the European labor market (such as dierences in language, culture

and legal regimes) have also produced signifcant cross-border variations in terms o ITlabor costs and capabilities, as well as creating dierent outsourcing challenges.

The IT inrastructure o many CP companies operating in Asia is likewise very compli-

cated, since Asia is a highly diverse region with markets at very dierent levels o

maturity. Most companies have thereore managed their IT on a country-by-country

basis, but that is now changing and a growing number o frms are rolling out global

or regional platorms. However, this process is still incomplete and in the interim CP

companies must manage their legacy systems alongside their new systems.

Industry initiatives

Implementation o technologies such as GDS, EDI and RFID is generally less advanced

in both Europe and Asia than it is in North America.EDI has been widely adopted inWestern Europe but is still relatively unusual elsewhere in the region. Many global CP

companies are also piloting and implementing RFID in North America prior to investing

in such initiatives in Europe. One reason or this relative lack o progress is the absence

o a dominant retailer compliance mandate. However, Tesco, Carreour and several other

big retailers are now beginning to take up the mantle.

Asia lags still urther. EDI is widely used or simple orders. Several Asian countries have

also built national GDS data pools, and the leading CP manuacturers have uploaded

their data. But there is no active synchronization o data between manuacturers and

retailers. The picture is similar with RFID. A number o large US importers have now

started experimenting with RFID on deliveries rom a ew o their Asian suppliers, but we

are not aware o any large grocery retailers in Asia using RFID or asking their suppliers

to use RFID tags on cases or pallets.

APPENDIX


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The reporting structure in a range o industriesIn The CIO Profle, Forrester Research examines the reporting structure in a range

o industries. As Figure 52 shows, the percentage o CIOs reporting to the CEO or

president is 76 percent in the retail and wholesale trade sector; 67 percent in the

fnance and insurance sector; and 66 percent in the manuacturing sector. This is verydierent rom the situation in GMA-member companies, where more than hal o all

CIOs report to the CFO.

Source: The CIO Profle, Forrester Research Inc., October 7, 2005.

FIGURE 52:TheCIOreportingstructureindierentindustries



Businessservices

Publicsector

Manuacturing

Retailandwholesaletrade

Financeandinsurance

CEO

President

COO

CFO

Businessunithead

Other

Percent

31 2134 7

33 25 10 17 12

36 26 21 10 5

39 21 13 9 11

41 25 11 16 6

44 32 12 12

48 19 17 8 6

7

4

3

8

1

2

APPENDIX 2

APPENDIX 2

0 20 40 60 80 100


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We would like to thank GMA or selecting IBM Global Business Services to conduct

this study. Special thanks are due to the members o the GMA Inormation Systems

Committee who contributed their time and expertise to the project.

GMA Inormation Systems Committee

Aaron Alsaker, The Schwan Food Company

Paul Amorello, Pepperidge Farm, Incorporated

Kevin Barnes, E. & J. Gallo Winery

Randy Benz, Energizer Holdings, Inc.

Donna Braunschweig, Campbell Soup Company

Neal Bronzo, The Pepsi Bottling Group

Marc Brown, Del Monte Foods Company

George Chappelle, Sara Lee Corporation

Paul Cunningham, The Dial Corporation

Clay Curtis, CROSSMARK

George Davis, The Hershey Company

Robin Evitts, The Clorox CompanyRon Gilson, Johnsonville Sausage, LLC

Thomas Greene, Colgate-Palmolive Company

Havalyn Hensley, Coca-Cola Enterprises

Stephen Hrpcek, S.C. Johnson & Son, Inc.

Diane Kandis, The Procter & Gamble Company

Paul Klein, Rich Products Corporation

Je Malat, McCormick & Company

Nick Moore, Wm. Wrigley Jr. Company

Mark Nichta, Nestl USA, Inc.

George Rembold, H.J. Heinz Company

Janis Ross, The Procter & Gamble Company

Todd Schnobrich, Cargill, IncorporatedJohn Schoeberlein, ACH Food Companies

Suzanne Simonett, General Mills, Inc.

James Wicker, The J.M. Smucker Company

Bill Wilkinson, Hallmark Cards, Inc.

Michael Ziltzer, Unilever

We would also like to thank the 103 respondents rom GMA-member companies who

made this study possible, by sparing time rom busy schedules to share their insights

and observations.

Lastly, we would like to thank the IBM Global Business Services team responsible or

collecting and analyzing the data over the last six months, and the various IBM subject

matter experts who provided support. In particular, the project would not have been

possible without the eorts and dedication o Maureen Stancik Boyce(IBM Institute

or Business Value distribution sector leader), Richard Henderson (project leader), Bill

Gilmour (program sponsor and IBM global consumer products industry leader) and

John Winstead (Americas consumer products industry partner).

ACKNOWLEDGMENTS

ACKNOWLEDGMENTS


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Project members

Guy Blissett, Consumer Products Leader, IBM Institute or Business Value

Maureen Stancik Boyce, Distribution Team Leader, IBM Institute or Business Value

Carola Kratzer, Business Analyst, IBM Global Business Services

Isabelle Pontille, Distribution Team Member, IBM Institute or Business Value

Bonnie Ray, Research Relationship Manager, Consumer Products, IBM Research

Lori Simonson, Learning and Knowledge Delivery Manager, Benchmarking, IBM Global

Business Services

Chris Thompson, Enterprise IT Architect, IBM Global Business Services

Project advisers

Bill Gilmour, Consumer Products Industry Leader, IBM Global Business Services

John Winstead, Americas Consumer Products and Systems Integration Leader, IBM

Global Business Services

Richard Henderson, Associate Partner, IBM Global Business Services

1 IBM Global Business Services. The agile CFO: Acting on business insight.

December 2005. Available at www.ibm.com/bcs/cosurvey

2 Forrester Research Inc. The CIO Profle: Are CIOs Too Tech-Oriented To

Communicate Well With The Business? October 7, 2005.

3 Correlation analysis shows the strength and direction o a linear relationship

between two random variables. The correlation is 1 in the case o an increasing

linear relationship, -1 in the case o a decreasing linear relationship, and some value

in between in all other cases, indicating the degree o linear dependence between

the variables. The closer the coefcient is to either -1 or 1, the stronger the correlationbetween the variables. All the correlations included in this report are statistically

signifcant to at least 0.05 (2-tailed).

4 Forrester Research Inc. How IT Leadership Shapes Manuacturer And Retailer

Collaboration. February 28, 2006.

5 Forrester Research Inc. U.S. IT Spending Benchmarks or 2005. May 24, 2005.

Forrester Research ound that CP companies planned to spend 2.4 percent

revenues on IT in 2005. This is marginally more than the 2.3 percent that GMA-

member companies planned to spend in 2004, and somewhat more than the 2.1

percent they actually spent, but the discrepancy is easily explained by variations in

the two survey samples.

6 Ibid. Forrester Research ound that IT FTEs represent 1.6 percent o the totalworkorce in CP companies. This is signifcantly lower than the 2.4 percent they

represent in GMA-member companies. Variations in the sample and measures used

account or the discrepancy.

7 IBM Global Business Services. EPC/RFID: Proposed Industry Adoption Framework.

Manuacturer Survey and Pilot Learnings to Date. April 2006. Available at www.

gmabrands.com

ACKNOWLEDGMENTS AND REFERENCES

REFERENCES


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Complete descriptions or items in Figure 49.

Ability o IT and your organization to work together

Alignment o IT activities with business strategies

Understanding o, and sensitivity to, business objectives, goals and strategies

ITs ability to provide reliable and dependable perormance o systems,products and services

Ability to identiy improvement opportunities

Application o innovative solutions

Degree to which IT demonstrates leadership

Impact IT has on business organization

Problem identifcation and resolution

Inormation provided regarding new IT products and services

ITs ability to provide systems, products and services that contribute to

business success

Delivery o systems, products and services in cost-eective manner

Provide eective business applications (e.g., ERP, fnance, etc.)

Provide eective business decision support systems and tools (e.g., datawarehouse and data analysis tools)

Level o experience and expertise

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It Investment and Efectiveness