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Paul Bell, Senior Vice President Europe, Middle East and Africa (EMEA), Dell Inc

The 2005 forecast of expenditure on Information Communication Technology (ICT) across the Europe Middle East and Africa region was an incredible US$987,998 million.¹ That is 5.4 per cent of EMEA’s nominal GDP. CEOs directing their share of this enormous spend must ask themselves, how well do I really understand IT?

More fundamentally, how well should I understand it? It is difficult to know where to place your marker between Luddite and technologist. Rest assured, this article will not recommend that European CEOs divert all of their attention to what can be a very complex subject. It does however attempt to show the return on time invested in gaining a deeper understanding of IT as well as highlighting some of the dangers of ignoring it. Major €10m IT projects are not undertaken lightly, but there are also compelling reasons to stay abreast of more general technological developments. Consider these arguments for deepening your knowledge of IT:

• IT is a huge part of your capital expenditure. In Dell’s experience, companies in developed countries now spend up to 50 per cent of their capital expenditure on IT.
• IT will have almost certainly become a crucial factor in the delivery of your company’s competitive advantage.
• IT expenditure is one of your harder budgets to manage. The magnitude of expenditure means it carries significant short-term financial impact, yet major projects can take many years to roll-out.

At best, CEOs with a poor understanding of IT miss the opportunities and competitive advantage that new technology presents. At worst, they create a culture in which IT expenditure is not tightly aligned to the objectives of the business. Any strong Chief Information Officer (CIO) will tell you that such a disconnect is a recipe for wastage of those funds and a potential misdirection of the business.

You would be forgiven for assuming that as head of Dell’s EMEA operation, my marker would be closer towards the technologist end of the continuum, fluent in the language peculiar to the server-room. Not so. Think of me more as a business school graduate and general manager of an organisation that is hugely dependent on technology to deliver customer satisfaction, the lifeblood of the Dell Direct model. Far more important than a deep understanding of technology is the ability to interpret the information given to you. I would suggest that a strong working relationship with your CIO is central to success in this area.

As a simple test, can you answer these questions related to your IT expenditure and strategy?

Do you really know what you spend on IT?

At first glance this will sound like a simple question but it is complicated by the definition of IT. Do you include telephone systems? Do you have a strong grip on the rogue IT related projects sitting in spurious cost centres across the business?

A good way of benchmarking your expenditure is to consider it as a percentage of revenue. Dell’s IT expenditure across Europe is US$139 million. That represents 1.2 per cent of revenue, down from 1.4 per cent in 2004 (that’s including telecom). There is no perfect percentage, it varies by sector and individual company. For example, it is not uncommon for banks to spend 8 per cent of their revenue on IT, while a retail operation might spend closer to 1 per cent. Wastage creeps in when the number and the trend is not known and discussed.

Is that expenditure aligned to the objectives of the business?

Once you have understood the amount spent, you will want to know if it is being spent wisely and on projects that directly support the business. What use is the application of expensive cutting edge technology on a project with only a vague correlation to the direction of the business?

What are your areas of competitive advantage? For Dell, they are things like the Direct Model and supply chain velocity. The former allows Dell to get closer to the customer by talking directly rather than through the channel. The latter creates an environment where inventory is down to just four days. A business or consumer customer can configure a system online, have their specification built to order and delivered quickly, giving them access to the latest technology at the best market price. That is a powerful point of differentiation over those forced to market what inventory they have in stock. The competitive advantage of the Direct Model is customer intimacy. Dell (like its competitors) understands that large multinational customers expect to be able to talk to one central person on matters relating to their account, it is an important part of customer relationships. However, our ability to provide that service for much smaller customers represents a very powerful competitive advantage and Dell’s investment in IT projects reflects that. Looking purely at conversations over Dell.com, our IT infrastructure supports 2.2 billion page requests every quarter at up to 65,000 requests per minute, in 81 countries using 24 languages, serving 100m users per quarter.

Do you regard your CIO as a strategist or manager of a cost centre?

A CEO focused on innovation and strategic advantage should lean heavily on the technological knowledge of the CIO. CIOs can share new developments in IT that open broader strategic horizons for the company. When working in support of a CEO’s vision, they can often develop more cost-effective IT solutions if they are part of the initial strategic discussion.

A big part of innovation at Dell is the use of technology to listen to customers and then deliver what they want more cost effectively. Our CIO works hard to ensure IT is integrated into every aspect of Dell’s day-to-day operations, spanning manufacturing, logistics and customer service. Managers responsible for each aspect of the business understand the big picture of what technology can do to improve the quality and profitability of their department’s contribution. The result is an operation that ships in excess of 150,000 systems per day and Internet sales revenue that exceeds amazon.com, Google, Yahoo! and ebay....combined.

How much do you spend just keeping the lights on?

By this I mean, how much of your IT budget is spent propping up costly legacy systems as they struggle to deal with new demands driven by the growth of your business? Often, support of the status quo may appear to be the safer and more conservative option - if it is not broken, do not fix it. The reality is that a lack of spending on the development of new systems will seriously hamper growth and lead to an inappropriately high IT spend to revenue ratio.

It is not uncommon for organisations to spend just 20 per cent of their IT budget on new development with the remaining 80 per cent being focused on maintaining existing systems or “keeping the lights on’’. In 2003 Dell’s split was roughly 25/75, it took the strategic decision to invest more in development. Expenditure has moved to 35 per cent in 2005 while headcount working on IT has moved from 35 per cent allocated to development in 2003 to 64 per cent in 2005. Those added resources are streamlining systems where possible and making them scalable for the future. Dell has an obsession with the return on investment of IT projects and measures their impact constantly against factors crucial to our business.

What percentage of your business runs on standards-based technology?

A major factor in Dell’s ability to reduce its cost of “keeping the lights on’’ has been its avid support of standards-based technology. By design, proprietary systems will be difficult and costly to integrate with other systems. Dell prefers technology supporting open standards, comprised of equipment and software that conforms to industry standards of interoperability between different operating systems. Things work better, faster and at a lower cost. In 2000, 26 per cent of Dell’s systems ran on proprietary technology, that percentage has been reduced to just 5 per cent in 2005.

Companies looking to bring a common platform to IT systems will find the path smoother with open systems. A company like Dell that has similar operations in multiple countries will find a move to common systems easier than a complex conglomerate. However, there are still tremendous cost and operational benefits to be gained by brining standardisation to the parts of a conglomerate that fit well together.

Finally, can you pick which IT projects deserve investment?

At what level should a CEO get involved? Again, there is no easy answer, but I offer the following tips from my own experience as a general manager as well as one fortunate enough to engage in dialogue between CIOs and CEOs across multiple companies. Here are a few observations of the things you should be thinking about doing:

1. Over the longer term, driving down the percentage of IT spending against revenue.
2. Increasing the percentage of that expenditure focused upon development of new systems rather than support of the old.
3. Evaluating IT projects against their contribution to your competitive advantage.

This last point perhaps represents the greatest challenge. The easiest decisions to make are the proposals that have clearly measurable impacts on your bottom line. When Dell entered the printer consumables market, it invested in the development of new IT systems to deliver them. Getting that right is measurable. Far harder are decisions on projects promising benefits to the softer side of your business, the harder to measure impacts like improved customer experience. It is these where more of a gut feel is required and a deeper understanding of the technology driving the benefit will help enormously as you weigh each up.

If there is a catch-all measure of ROI on IT spend, it is the annualised benefits of that spend to the business. Different companies will always calculate this differently, but again, the trend is all-important. In 2000, Dell put those global benefits at US$350 million. By following the broad strategies described in this paper, Dell moved that contribution to US$1.8 billion in 2005.

As I have said throughout this piece, a strong working relationship with your CIO as a strategic advisor rather than cost-centre will help you both sort the wheat from the chaff and spend your IT euros wisely in support of your business.

Biography

Paul Bell is Senior Vice President Dell Europe, Middle East & Africa at Dell Inc. Mr Bell serves as Vice President of Europe, Middle East and Africa (EMEA) for Dell Inc. In this role he is responsible for all business operations and manufacturing activities across the region and reports to the CEO.

Prior to his current role, Paul served as Senior Vice President and General Manager of the Worldwide Home and Small Business Group. He was responsible for all sales, marketing and customer service activities within the Group, and shared responsibility for manufacturing and product development.

Prior to joining Dell in July 1996, Paul, 44, was a consultant with Bain and Company.

Dell EMEA is made up of over 12,000 people in 28 sites in 24 countries. These include sales and service centres and the European Manufacturing Facility in Limerick, Ireland.

References

1. (Source: Gartner Dataquest Market Databook Update June 2005, George Shiffler et al.)

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