IT Consulting from the Trenches

HOW A WELL PLANNED IT STRATEGY SAVED A WELDING COMPANY

This tale of a welding company is full of lessons. It's an actual company and our client.

Companies, like products, have a life cycle.

A start-up would have a different set of priorities from a mature company. A growing company taking giant steps to reach the next level would also differ from a market leader trying to maintain the course.

Business objectives can be categorized by time period. There are near-term, intermediate, and long-term objectives.

Objectives will also differ based on the company’s place in its life cycle and on the ambitiousness of its owners. Does it seek to simply maintain the status quo? To advance ahead of the pack? Or to innovate, jump to a higher level, and even create a new industry?



Whether they realize it or not, all organizations operate within this framework. Leaders who recognize this can tailor their strategies to optimize the investments they make to achieve their objectives.

Optimize, as used here, means reaping the highest possible return for the dollars and the effort.

Objectives dictate strategy. Strengths, weaknesses, opportunities, and threats shape it further.

Objectives must also be appropriate. How likely will a community bank’s plan to become a downtown commercial bank succeed? Within three years, probably not. Within 10 years, maybe.

Smart and purposeful strategies place the company’s objectives within this matrix.

Enter technology. We use it to achieve business objectives. That said, how do we connect IT strategy with this matrix of objectives?

ALIGNING YOUR IT STRATEGY WITH YOUR BUSINESS OBJECTIVES

Let’s take an actual company, trace its path in its life cycle, and show how it made smart investments in IT in order to meet the objectives in its matrix.

The subject is a growing manufacturer of welding supplies. Its premium products are sold to other manufacturers who share one common attribute. They’re all known for producing high quality products. Its welding supplies are used wherever superior welds are necessary. Its customers are in Japan, Germany, the U.S., and other industrialized countries. This manufacturer is competing globally in a niche with few players. It has decided that it wants to increase its market share and accomplish that by buying a larger but floundering competitor. Its matrix looks like this:



The numbers show how its IT investments are allocated. Notice how the allocation changes according to the nature of the business situation which, itself, depends on the company’s place in its life cycle as well as its place in its long-term strategy.

Let’s understand the nature of the objectives first.

THREE DIFFERENT KINDS OF BUSINESS OBJECTIVES

“Status quo” refers to simply maintaining the necessary infrastructure to operate the business. These investments cover such functions as e-mail, website & web-based services, and company records. These are core operations but also included are some not-so-obvious necessities like regulatory compliance.

The corporate scandals of 2001 spawned a host of legal and regulatory requirements. All publicly-traded companies, for instance, must comply with the Sarbanes-Oxley Act of 2002 (otherwise known as SOX).

SOX is a complex piece of legislation implemented by the Securities & Exchange Commission (SEC). SOX was written with broad brush strokes and this has allowed the SEC wide latitude in interpreting its provisions. It matters for many reasons and only one has to be stated here.

It lifts the mantle of accountability all the way up to the Board of Directors for essentially confirming the truth and accuracy of the company’s financial statements. This sharpens the line between the legal persona of a corporation and the actual persons who run it. Before, the corporation was its own legal entity and its officers stood legally distinct from it. SOX, arguably, still recognizes that but it also recognizes that real people run the corporation. SOX detractors make good points against it but, personally, I believe that SOX, overall, is justified because it brings the legal persona of a corporation closer and more down to earth. Corporate officers are real people. Corporate officers are stewards of money raised from the public. They use other people’s money and if some of that was your money, wouldn’t you demand some accountability for the way they used it?

Thanks to SOX, the Board and every corporate officer down the chain of command are now liable for violations of this law. This naturally compelled companies to establish oversight mechanisms for financial reporting. This means all publicly traded firms must spend IT dollars complying with SOX simply as a part of doing business.

“Advance” refers to advancing ahead of the pack. How do you advance? By creating competitive advantages. That management-speak refers to either of two things. Your costs of doing business are lower or your business is more productive than your competitors.

LOWER COSTS

Assume a competitor and your company spend $5 to create and sell one welding rod. You invested IT dollars to create a web-based service that allows your marketing, sales, manufacturing, and purchasing people to coordinate your company’s purchases of raw materials. This investment pays for itself by minimizing errors in ordering quantities and optimizing the timing of those orders so that you receive them only when you need them.

In management-speak, you created an intranet to improve your supply chain. If you opened up the intranet (that’s a company-wide internet meaning it’s only accessible within the organization) to your suppliers, your intranet has expanded to become an extranet. How do these “nets” help? They should lower your costs by extracting savings. The savings come from committing fewer errors, buying only when you need to, and, of course, from automating the entire process.

If I went grocery shopping and bought two extra milk jugs for a party this weekend and learned that the party had been postponed but I wasn’t informed, then I wasted money by buying two extra jugs, ahead of time, requiring me to choose between spending more time and gas to return the jugs or to keep them and have them spoil. All of these could have been avoided if I had just been informed.

GREATER PRODUCTIVITY

Your company is now using your intranet. Now purchasing is buying your raw materials in the right quantities at the right times and from the most competitive suppliers. Given all that, wouldn’t it be reasonable to expect a more efficient production floor? For example, I would expect fewer incidents of production shutdown because of raw material shortages.

That translates into increased productivity and you can measure it by dividing your overhead into your output of finished goods.

If your competitor and you had similar plants that produced 100,000 welding tips at a cost of $50,000 a month and your output increased to 125,000 simply because you never had shortages, your productivity quotient improved from 2.0 to 2.5

“Innovate” refers to revolutionary, as opposed to evolutionary, changes in the way you do business. The two terms, “revolutionary” and “evolutionary,” allude to the magnitude of change. The former means a radical change and the latter means a gradual change.

Apple’s iPods and personal GPS systems (Global Positioning Satellite) are two familiar consumer examples of product innovations. They were so revolutionary that:

• they didn’t fit in any existing product category; and
• they created new markets and will, in most likelihood, spawn new industries.

Apple knew it had a hit when iPod became a noun (just like “Google” became a verb) and companies in other industries created products to complement the iPod.

Bose®, for example, created its SoundDock® for the iPod.

The Bose® SoundDock® digital music system was specifically designed to expand and enhance your enjoyment of the music stored on your iPod. Just slip it into the iPod docking station for the Bose sound your favorite songs deserve. The iPod charges as it plays, so you enjoy music without interruption.

Innovative IT investments are undertaken on the premise and promise of revolutionary outcomes. Bear in mind that, as with most things, the potential for a greater reward is counterbalanced by the investment’s higher risk. What specifically makes innovative IT investments riskier?

1. The technology might be nascent, i.e., it recently came into existence.
2. The technology might have never been used for the purpose your company is planning to use it for.
3. There are typically fewer (or even just one) companies supporting the technology. What happens if they go out of business?
4. There are fewer qualified personnel to operate the technology.
5. The technology will be expensive. Early adopters of new technology pay a premium for the privilege of being the first consumers. On the other hand, their Return On Investment (ROI) might also be substantially higher than average.

Some risks can be mitigated while others may not.

Let me share these details about the high-risk, high-reward program of our subject welding company. The company is currently in the first half of a 24- to 30-month long $10-million dollar program consisting of three projects.

A program consists of two or more projects. A program has a large scope. Sending man to the moon is an example of a program.

The project managers are introducing a piece of the new technology as each project finishes. So far, so good. If it succeeds this company will be poised to offer new products and services faster than ever before. It will also help the company forge closer ties to its customers -- more so than its competitors presently can.

A PRIMER ON THE WELDING INDUSTRY

Talk about unglamorous but vital. Until I began working with this company, I didn’t give welding a second thought. I found welding to be as interesting as buttons. They hold things together and their absence would change our lives drastically. Unfortunately, they’re so mundane that they don’t even register on my radar screen.

Click here to read about the Welding Industry.

BEFORE WE ANALYZE THOSE NUMBERS

Here, again, is the IT Investment & Strategy Matrix.



At this point, we know the row headings classify business objectives by their nature. Is the objective to simply maintain the status quo? Is it to advance ahead of the pack? Or is it to innovate and aim to leapfrog the industry?

We also know the long-term plan of the company. Let’s refresh ourselves:

The subject is a growing manufacturer of welding supplies. Its premium products are sold to other manufacturers who share one common attribute. They’re all known for producing high quality products. Its welding supplies are used wherever superior welds are necessary. Its customers are in Japan, Germany, the U.S., and other industrialized countries. This manufacturer is competing globally in a niche with few players. It has decided that it wants to increase its market share and accomplish that by buying a larger but floundering competitor.

To that, I’ll add this much more.

THE CURRENT STATE OF THE WELDING INDUSTRY

The metal welding equipment and supplies industry primarily serves mature markets with fully developed technology. Major portions of the welding market are flat or growing proportionately with the Gross Domestic Product.

The U.S. welding industry faces three major challenges:

1. a chronic shortage of trained welders;
2. an increasing number of low-priced foreign competitors; and
3. the continued growth of alternative metal-joining technologies and alternative fabrication technologies.

You can substitute practically any industry in that paragraph and the list will not materially change. In other words, these are not new challenges.

My client realized this and concluded, correctly in my opinion, that the battle has to be taken overseas. Welding is one industry that clearly feels the impact of globalization. The battleground is not in North America; it is everywhere.

Take China’s emergence as an economic power. The average American doesn’t realize it but China has turned into a giant; it’s the biggest news outside the U.S. Its transformation into an industrialized country, has fueled an enormous demand for infrastructure. Infrastructure means roads, buildings, bridges, et al. And infrastructure requires a lot of welding.

It’s impossible to compete against inexpensive Chinese manpower but China requires high-quality welding equipment and supplies. Chinese imitations don’t make the grade. Yet.

Figures are hard to come by, even by the industry’s trade associations, because the industry lagged behind in uniting and creating common standards. In addition, most welding end-users perceive welding as a necessary production input for which costs must be controlled. Consequently, the overwhelming majority evaluate welding with the objective of reducing costs. Very few study the economics associated with it with the objective of increasing welding’s value-added contribution.

The size of the U.S. market was estimated at about $6 to $8 billion dollars in 2005. We’re talking about the market size for welding equipment and supplies. It’s so vague that my client could only make a rough guess about the size of the global market. His low and high estimates were $12 to $15 billion dollars. The $3 billion dollar variance doesn’t inspire confidence (it’s 25% of his low estimate). Independent reports are available but for this article, I wasn't going to spend $4,200 to buy the report to submit a more accurate figure.

We started working with him in 2004. Teamed up with one of my consultants, the owner and his staff, we created the matrix. His company is not publicly traded so SOX doesn’t concern him. On the other hand, in early-2004, his primary factory nearly burned down and took with it almost all his records. Like too many end-users, he ignored the peril of data loss. He paid lip service to a systematic approach to data backups.

That lackadaisical approach nearly killed his business. Studies show that as much as 50% of ongoing businesses that lose most of their data go out of business within 12 months. Another 25% will close its doors by the end of the 24th month. (This subject will be covered in a forthcoming blog post.)

He became our client after that near-disaster.

Our background information is complete.

ANALYZING THOSE NUMBERS

Here, again, is the IT Investment & Strategy Matrix.



In the first two years, my client devoted 80% of his IT budget to rebuilding and creating a robust IT infrastructure.

The phrase, “robust IT infrastructure,” sounds impressive and it is impressive. The IT infrastructure refers to the roads and parking lots that data is channeled through. These are the servers, networking gear, and security-ware.

Robust (as opposed to frail) refers to creating an IT department and a secure physical location staffed with the right people implementing the right processes.

Give data its due respect. My client had a small business mentality before his accident. IT was an afterthought (just like welding is for most end-users!). One observation will suffice. His son and his son’s friend were his part-time IT staff! This, for a business with 150 employees in the $40 million dollar range.

In '04 and ’05, he invested 20% of his IT budget in people and processes to advance his business ahead of the pack.

IT veterans may disagree (as I originally did) but, in this particular case, those investments consisted of creating the disaster recovery and business continuity processes. This consisted of storage and backup equipment and the services of an outside data center. And, of course, people. Always, people.

We agreed to classify this investment as one whose objective was to advance ahead of the pack because his competitors were still using their children to run their “data centers.”

Financial institutions, which are bound by more stringent requirements to protect their records, would classify this investment under the objective of simply maintaining the status quo.

I think you’ll agree that this investment gave him a competitive advantage; a significant one at that.

THE INTERMEDIATE TIME PERIOD: YEARS 3 AND 4

The past two years, 2006 and 2007, revealed the conviction of his aspirations. His company strengthened its market position and become financially stable. Forty percent of his IT dollars went to maintaining the status quo. Half of his budget went to beefing up his infrastructure and developing web-based services (his intranet). This made sense since his operations started leaning more and more on IT. He had to upgrade not only his existing capability but also his IT redundancy.

“Redundancy” refers to the fallback system that he could fall back on whenever his primary system went down.

This is where we patted ourselves on the back. His total operating budget in 2007 was about 30% larger than it was in 2004. This roughly mirrored his company’s growth.

Now for his IT budget. In 2004, his entire IT budget was a third of his total operating budget. Three years later, in 2007, IT consumed only 15% of his total.

IT Budget as a portion of the Total Budget

He was able to devote less of his total dollars to IT since he (with our guidance) had the foresight to build a strong foundation.

A strong foundation only requires regular preventive maintenance. Like a new car, it only requires fuel, oil (regular fluid changes), and lubrication. More significant expenses are incurred only when major components like tires and belts need to be replaced.



When the matrix is charted (below), you clearly see how his IT strategy directed the allocation of his IT dollars to accomplish specific objectives.



With time, he spends less and less of his IT dollars on maintaining his core operations. At the same time, he increases his investments in the Intermediate period to accommodate the needs of his organization after he makes the acquisition. It is also during this time period that he starts investing in cutting-edge concepts. He’s not actually using unproven technology. Rather he’s configuring them in ways intended to make his ideas a reality.

When the third phase begins in 2011, he plans to ramp up his investment in those cutting-edge concepts. He hopes to create a new kind of supply chain for the upstream and downstream. If he succeeds, he will change the rules not only of the welding industry and make an impact on the nature of supply chains in general.

He also thinks that within the next five years, his company could grow to become the third largest in the world. (The current number three grossed $153 million dollars in 2001. I know that was seven years ago but that’s the most current reliable figure I got for this article.)

WHAT DID WE LEARN?

I hope you enjoyed this story as much as you learned from it.

I’d like to emphasize these points.

1. Your data is valuable. Streamline the process of capturing the data. Massage it and make it available for use.
2. Protect it. Treat data for what it is—invaluable information. It’s intangible but in many ways, it’s more valuable than property, plant, and equipment.
3. Use technology to help you accomplish your business objectives. In management-speak, this is about aligning your IT strategy to drive your goals.
4. Understand and differentiate between the nature of your objectives. Align your IT investments accordingly. Budget your IT dollars purposefully.

This entry originally appeared in my other blog. It's been transferred here in order to separate the work-related materials from the personal materials.