IT SPENDING STUDY RAISES WARNING SIGNALS

WASHINGTON -- A study that was designed to answer what the grocery industry is spending on applications development, where the money is being spent and why the industry is spending those dollars in that direction raised a few red flags in the area of information technology.Grocery manufacturers spend 1.14% of annual revenues on information systems activities, which is low compared with other industries

WASHINGTON -- A study that was designed to answer what the grocery industry is spending on applications development, where the money is being spent and why the industry is spending those dollars in that direction raised a few red flags in the area of information technology.

Grocery manufacturers spend 1.14% of annual revenues on information systems activities, which is low compared with other industries such as telecommunications, according to a survey conducted by the Grocery Manufacturers of America's information systems committee here and Computer Sciences Corp., El Segundo, Calif.

Of this amount, just over half of the average grocery manufacturers' IS budget goes to applications while the rest goes to infrastructure, including hardware and telecommunications.

Of the half that goes to applications, 42% of the budget is dedicated to maintenance and enhancement of existing systems; 39% for the development of new systems, and 11% for consulting and business support. Only 8% of respondents' applications budgets are dedicated to year 2000 compliance efforts.

This low number for year-2000 compliance indicates grocery manufacturers may have underestimated the commitment required for it, according to the study.

In addition, 20% of companies that participated in the study said they are currently spending no IS funds on the year 2000. Approximately 16% of smaller companies are spending in excess of $1.5 million per year on year 2000, while 14% of larger companies are currently spending in excess of $5 million per year on year 2000, according to the study.

One possible explanation is that companies are masking their year-2000 spending in new applications development.

"Companies are justifying new packages and new implementation, and, by the way, they are solving the year-2000 issues along the way," said Susan Buddenbaum, principal for national consumer and industrial products practice of Computer Sciences Corp. "That makes sense if you can capitalize new packages and applications but must expense year-2000 remediation.

"There is some of that in the number being exceptionally low," she added. "Nonetheless, this is a bit of a red flag and it's a bit alarming. If a company really is in the discovery phase and not yet in the fix phase," the time is really now to address the year-2000 issue.

Another finding from the study is that companies are spending significant amounts of money to acquire and implement enterprise-wide systems and packaged software capabilities. Smaller companies are spending 60% of their application dollars on enterprise systems vs. larger companies, which are spending 39% in that area.

The study also indicated 35% of all applications dollars target cost reduction, 24% focus on improving customer relationships, 19% on increasing sales, 10% on replacing obsolete technology, 10% on improving performance and 2% on resolving the year-2000 issue.

Grocery manufacturers investing in sales systems expect high economic and strategic returns, the study said. Consistently high returns are expected from areas that involve customers, including advertising/marketing, customer service and logistics.

"The only question here is, if everyone is going to get a competitive advantage, who is really going to get competitive advantage?," Buddenbaum said. "It's an important place to invest but if everyone's doing it, you have to recognize that you're not doing anything different to differentiate yourself."

Given these high expectations, the return on investments raises another red flag. Despite the fact that 80% of the money spent on applications is aimed at business development, there is often no formal process to understand whether the business improved at all, according to the study, which was released at this year's GMA Information Systems and Logistics/Distribution Conference.

"Only 34% of the companies actually attempt to measure return on investment," Buddenbaum said. Approximately 33% of responding companies consider an initiative successful if it comes in on time and on budget. Another one-third query users and, if they are happy with the system, the project is considered successful.

"The challenge is to move to the one-third of the time when you really know what return on investment is achieved," Buddenbaum said.

Other red flags concern the me-too thinking that surrounds implementation of similar business processes in the industry. "This leaves us with a challenge, which is to break away and develop a mechanism for managing a portfolio of applications of investment opportunities we have," Buddenbaum said.