Driving RevenueBy Kay Lewis Redditt and Thomas M. Lodahl | Posted 06-24-2010
The CIO as an Engineer of Revenue
How can it keep on doing more with less? Think about this: Cutting business costs or becoming more efficient with a dollar spent deals with only half of the bottom line. The other half is revenue improvement--a neglected target for most companies intent on improving total profit margins in static markets.
In this article, we show how some CIOs have engineered big revenue-improvement efforts. But first, let's look at how business goals have changed over the past two decades, and how much IT has contributed to their achievement.
Our data show that among business managers, the goals of cost-cutting and efficiency improvement are down about 33 percent, declining from 11.9 percent of total goals between 1991 and 1994 to 8.0 percent of total goals between 2006 and 2009. During that period, revenue-improvement goals almost doubled, increasing from 13.5 percent of total goals to 26.1 percent. (See figures 1 and 2 in downloadable PDF)
So the long-term trend for cost and efficiency goals is downward, even in the current economy. For IT to continue to focus heavily on cost and efficiency means it is out of synch with most businesses' longer-term strategies.
Cost and efficiency have been a focus for so long that, in many companies, there's not much fat left to cut. Most business managers recognize this, as shown by their shift in focus from cost-cutting and efficiency toward revenue-improvement goals. They've had more than three times as many revenue-improvement goals as they have cost and efficiency goals during the past four years, compared with the 1991-1994 timeframe.
Furthermore, over the past 20 years, IT has perfected its ability to contribute to the business projects that are critical to the successful achievement of business managers' cost-cutting and efficiency goals. IT scores on CogniTech's IS Contribution measure have improved by 10 points during those years--a full standard deviation improvement or a whole order of magnitude improvement.
(CogniTech's IS Contribution score measures business managers' ratings of how well IT supported their business goals achievement. This measure correlates strongly with profit margins in the private sector and has been used in more than 230 organizations over the past two decades.)
A Declining Contribution
However, over the same years, business managers have indicated that IT's contribution to their achievement of business revenue-improvement goals has declined. In the early years, these business managers scored IT higher for supporting their revenue-improvement goals than for cost-cutting and efficiency goals, but that has reversed itself during the past four years. In fact, IS Contribution scores on revenue-improvement goals have sunk below the level (48) that is the cutoff score indicating where IT is contributing at all to business-goal achievement.
A big reason for the lack of revenue-enhancing efforts is that business managers typically don't ask for them. That's because, unlike with cost-cutting and efficiency projects, they don't know what IT's capabilities in the revenue area might be, so they don't know what to ask for.
Automation was originally envisioned as a cost-saving initiative, so years of experience with IT in this role has made business managers conversant with the many ways IT can help them reduce costs. IT assistance in revenue generation is not as clearly understood. As a result, in order to engineer these projects, the CIO has to look for them.
Although cost-cutting may be at the point of diminishing returns, some relatively new IT capabilities can show business managers how IT can aid their revenue initiatives. One example is the recent emergence of revenue- and customer-relevant packaged software: CRM to hold customers, sales force automation to make salespeople more effective, ERP to let customers see product availability and instant price updates, and the like. Another example is the explosion in Internet-based sales and service systems, which are game-changers.
These visible IT capabilities--along with IT participation in the project identification process--can drive the infusion of IT into revenue-improvement projects in much the same way as IT has leveraged cost-cutting and efficiency.
Here are some examples of what CIOs can do to drive the revenue side of the profit margin.
At Beta Retail, a major apparel retailer with more than 300 stores, the CIO found that, across the company, revenue goals ranked third in importance, at 11 percent. But he found no projects in his entire portfolio that dealt with revenue improvement, not even in merchandising, where revenue goals ranked first. And IT's contribution to merchandisers' revenue goal achievement was 48, below average. (A score of 50 is average, and IT impact on profitability begins at an IS Contribution score of 48.)
The CIO held a number of discussions with the merchandising managers and learned about a major problem: All the stores were plagued with both stockouts and overstocks. This meant that they could not sell some of the hottest merchandise because they did not have it, and they had to sell leftovers at big discounts.
Reason: The merchandisers used an "average store" model to determine stocking orders, based on sales averages across all the stores. Although the merchandisers knew there were major regional differences in what sells, none of their systems could access the existing data on item sales by individual stores to let them create custom orders by store.
Once he understood the problem, the CIO knew there was an IT solution: Bring all the relevant data together into a data warehouse and put a business analytics front end on it so merchandisers could make the right decisions for each store. The merchandisers--not being IT people--did not know such a solution was available. Once they understood what was possible, they helped draw up a proposal for building the data warehouse. It was expensive in the merchandisers' terms: It would cost more than $1.5 million and take about a year to complete--one of the biggest projects IT had ever undertaken.
The warehouse, which was approved and built in less than a year, solved the problem. Overstocks and stockouts declined drastically, IT's contribution improved from 53 to 60, and profit margins went up substantially--from 2 percent over the apparel industry average to just over 4 percent--compared with other divisions in Beta Holding, Beta Retail's parent company (See Figure 3 in downloadable PDF).
By talking with the client and understanding the revenue issues, the CIO engineered a revenue-improvement solution that went right to the bottom line. In doing this, he bypassed the normal "request" process, which wasn't working because the merchandisers didn't know enough about IT to make the right requests.
That's probably true in a majority of companies today, so the first lesson here is: If you are not getting revenue-improvement requests for IT support, find out why you aren't. Talk to the marketing and sales people, the product developers and others whose main goals are improving revenue. Find out what their issues are, and figure out what IT can do to help.
Looking for Projects--and Payoffs
Looking for Projects--and Payoffs
Another story illustrates how it is sometimes easy to find revenue-enhancement projects, and how big the payoff can be. Aerospace 1, a manufacturing company and primary government contractor with revenues in the $5 billion range, was assessed by CogniTech twice within a 13-month period.
Its IS Contribution score at the time of its first measurement was only 40.7--well below the average of 50 and the IS Contribution score of 48--which indicates that the IT organization was making little contribution to the managers' ability to meet their goals and strategic targets.
CogniTech held meetings with the CIO and business leaders and shared its findings. As a result, the executives identified a previously undiscovered business need that was not included on any business manager's IT request forms.
They found that the biggest deterrent to obtaining new government contracts was the manual proposal process. This involved bringing team members from all over the world to one location, where each member was responsible for gathering the required information to complete one section of the proposal. This lengthy, paper-based process resulted in proposals that missed deadlines or were incomplete, making the company lose bids.
Based on these meetings, the business managers across several business units funded the development of an IT-based proposal system that took only six months to complete. As a result of the new proposal process, the company was able to complete a complex government proposal in only six weeks--rather than the six-month estimated time without the new system--and landed a $2 billion contract.
IS Contribution scores increased to 53.3 in the second measurement from the initial 40.7, clearly reflecting the improved IT support for business managers' goals. At the same time, profits beyond the increase in the industry average totaled $58.1 million in that year.
As a CIO, you're going to look for revenue-improvement opportunities among your IT clients. But how do these projects stack up when it's priority-setting time? Companies that use ROI calculations when they select projects have a built-in bias toward cost-reduction projects because everybody in the business understands "savings."
Revenue improvement is harder to present, but you can translate it into hard dollars by forecasting the higher revenues that should result from the completed project. From there, the cost-benefit analysis is the same as for cost-cutting projects.
CIOs who want to engineer revenue improvements can learn some lessons from the examples we've discussed.
1) Revenue-enhancement projects can contribute as much to bottom-line profitability as cost-cutting and efficiency projects do.
2) Businesspeople with revenue-enhancement projects often don't request IT projects to support them because they don't know what IT can do. You have to find these projects and then talk with the business managers responsible for them about what could be done.
3) The typical request process in many companies must be augmented by direct interaction between IT and line-of-business managers.
4) Standard ROI calculations are biased toward cost reduction--not revenue enhancement--because everyone understands savings, whether or not they are ever audited.
5) There is no substitute for the IT organization knowing the business of its clients. The old saw, "I am aligned with the business because I do what they request," no longer works--if it ever did.
Kay Lewis Redditt is co-founder and CEO of CogniTech Services. She has a background in labor economics research and has held the positions of MIS director and division CFO at American Express, as well as division COO and CIO at MacMillan Publishing.
Thomas M. Lodahl is co-founder and principal of CogniTech Services. Previously, he was director of office automation at the Diebold Group. Lodahl held professorships at both MIT and Cornell, and, for 10 years, he was the editor of Administrative Science Quarterly.