What's the Business Payoff of Infrastructure?
In 1997, David Kronick, Vice President and CIO of CD&L Inc., a $175 million distribution and logistics company based in Hackensack, N.J., went to his CEO and asked for money to beef up the company's infrastructurea legacy of 11 independent firms. Kronick wanted $200,000 to connect all the locations with a frame-relay network. The CEO's reaction? "He literally laughed at me," Kronick says.
Things have changed since then. Over the past two years, the company has spent $1.75 million on its IT infrastructure. That included a new data center and network bandwidth throughout the company. Yet despite a new financial system the CFO wanted, and plans for a hot, redundant data center for disaster recovery, to date, Kronick doesn't think the spending has had any real ROI.
That's in contrast to the 80 percent of respondents to this month's survey on infrastructure who say that top management believes recent infrastructure spending has yielded tangible business benefits. But conversations with a number of CIOs and experts make clear that companies buy infrastructure for many reasons, and that ROI depends on how you view the world.
Consider disaster recovery: Some CIOs, such as David Mikelson, vice president of IT at Altadis USA Inc., a $545 million manufacturer and distributor of cigars, can pinpoint a definite value in disaster-recovery investments. Every one of the Ft. Lauderdale, Fla.-based company's branches, including a Tampa distribution center, connects to the firm's single data center, so downtime means no shipments and no income. A few years ago, a fire in the building that housed the data center kept everyone out of work for four days. At its current size, downtime would cost about $240,000 an hour, or close to $2 million a day. So last year, the company spent $60,000 on hardware, with another $2,500 a month to lease space and additional telecommunications, for a hardened site in Orlando, Fla.
Then there is Stratex Networks Inc., a provider of wireless transmission systems based in San Jose, Calif., that has upgraded several enterprise software packages and replaced end-of-life Solaris servers with Intel-based Linux machines (saving between $80,000 and $100,000 over the cost of Sun Microsystems Inc. hardware and software). Part of the change involves adopting disaster recovery recommendations. Prior to the switch, a full outage would have required 48 to 72 hours for recovery, compared with fewer than four hours now. At almost $54,000 per hour in estimated costs to the company, attributing ROI to improved reliability would seem easy. But the company has seen no downtime in nearly five years, so touting millions in annual savings through better uptime would be disingenuous. "I pessimistically put in a factor that we may be down one hour a year," says CIO B. Lee Jones.
Pinpointing the value of infrastructure is hard because companies make decisions for many reasons, ROI being only one. According to Rebecca Wettemann, vice president of research at Nucleus Research Inc., a Wellesley, Mass., consultancy, the problem with understanding payback on technology is not a problem for the CIO alone: "Some 60 percent of companies don't have any consistent way of evaluating the ROI of a technology project."
So it should come as no surprise that many CIOsand their companies' top managementsimply treat most infrastructure spending as a cost of doing business. Since Moore's Law has allowed companies to get what they need for ever-dropping costs, CIOs can offer to either drop savings to the bottom line or invest it in additional capabilitiesan effective tactic, since management was prepared to spend that money anyway.
Otherwise, CIOs must show how new infrastructure opens possibilities unavailable with older technology. Bellevue, Wash.-based North Coast Electric Co. is moving from a legacy database for its inventory and sales to a relational database. Management has already been able to find problems in the pricing received by each of its 12,000 customers. "We were able to put one-quarter to one-half a percent to the bottom line by making sure our prices were at the right levels at the right time," says CIO Les Johnson. That has translated into between $500,000 and $1 million in pre-tax dollars, significantly more than the $350,000 the upgrades have cost so far.
While justifying infrastructure by improvements to the business would seem reasonable in theory, in practice companies have started doing this seriously only in the last year or so, according to Judith Hurwitz, president of IT strategy consulting firm Hurwitz & Associates of Waltham, Mass. "Prior to that, there were pretty silly ROI metrics, like doing transactions a quarter of a second faster, which meant needing one less server over the next four months." Hurwitz also notes that virtually no one looks back the following year to examine whether the expected return actually came though. Which can only make infrastructure investments look even more attractive.