Do You Have Too Much IT?

In the late 1990s, companies often bought huge quantities of IT for reasons that had nothing to do with their business models or long-term strategies. In a common scenario, a company saw that its rivals had bought ERP or CRM applications, say, or had signed on to participate in a B2B exchange, and felt compelled to do the same. This fear of being left behind was reinforced by many constituencies, including software and hardware vendors, consultants, technology analysts, pundits, and the large, loud and growing e-business press. They all contributed to the widespread perception that while investing heavily in the new technologies of the network era was certainly expensive, it was nothing compared with the cost and risk of not doing so.

This follow-the-pack approach resulted in lots of IT overspending — Morgan Stanley, for example, estimates that between 2000 and 2002, companies threw away $130 billion of the IT they’d purchased. But what’s the alternative to such fear-induced spending? After all, new applications can, in the right circumstances, have a major impact on company performance, and no manager wants to be known as the one who blew it by moving too slowly on the new new thing. For those seeking to break out of a herdlike mentality, however, an example of wise IT investment comes from an unlikely source: Inditex Group, a clothing manufacturer and retailer based in northwestern Spain and best known for its Zara stores. Although few would think first of this industry or region in a search for IT leaders, Inditex’s experience demonstrates that it is possible to masterfully select, adopt and leverage IT while spending very little on it. Moreover, Inditex’s approach is based on a set of principles that is applicable to companies in a wide variety of other industries.

Thanks to its ability to offer a steady barrage of fresh styles, Zara is shaking up its industry and has other large clothing retailers running scared. Like its main competitors — Benetton, Gap, H&M and others — Zara offers a large new collection at the start of each selling season. Instead of treating the new items as the end of its design and procurement efforts, however, Zara considers them to be only a starting point.

Throughout the season it constantly modifies garments — changing colors, cuts, fabrics and other details — and also introduces entirely new ones. To do this, it continually canvasses its worldwide network of stores to understand not just what customers are buying but also what they want to buy. Design teams rapidly translate these desires into patterns, which are sent to a large supply network of internally and externally owned factories. Finished garments are sent to a large distribution center and then shipped to more than 550 stores around the world.

Incredibly, Zara’s total lead time for a new garment — from conception to volume delivery into stores — can be as short as three weeks. And this responsiveness is repeatable; it causes no stress, disruption or added expense to the company’s operations. In a typical year, Zara introduces 11,000 new garments. Other clothing chains simply cannot match this; they average 2,000 to 4,000 new items per year. As a result, they are at a serious disadvantage when catering to young, fashion-conscious consumers around the world. These young buyers, whose tastes change quickly and unpredictably, have a constant thirst for new clothes, and Zara has proved adept at quenching it.

IT Expectations, IT Reality

One would expect that this dynamic global operation would have an impressive array of complex and expensive IT systems: a CRM system to track and anticipate customer purchases and desires; sophisticated forecasting and advanced planning and scheduling (APS) software to convert demand information into production requirements; logistics software to run the distribution centers; an SCM system and an extranet to oversee factories and subcontractors; an intranet within and across stores; and some kind of ERP transaction platform to underpin the whole infrastructure. The integration and use of such systems would require a large IT department, a formal technology budget and IT spending at a higher rate than the U.S. retail industry’s average of approximately 2% of annual revenue (per a 2001 report from Gartner Inc.).

But the reality is quite different. When I showed up at the Inditex headquarters in the Galician city of La Coruna and started asking questions about these hypothetical systems, I received blank stares. Eventually, CEO José María Castellano Ríos and IT head Xan Salgado Badás asked if I’d like to see the actual IT infrastructure in use, instead of the hypothetical one I’d sketched out in advance. And what they showed me was a revelation.

Zara runs an information-intensive business with remarkably little information technology. Many crucial activities are accomplished without much help from computers. For example, production requirements for new and existing garments are distributed to factories without using any “smart” supply-chain optimization software. Planning and scheduling within each factory is similarly informal, as is the process of deciding which stores get garments whenever demand exceeds supply. Every section of every store sends headquarters a detailed order twice a week, but store personnel cannot look up their own inventory balances when preparing this order; in-store systems do not track inventory. In fact, the point-of-sale (POS) terminals in Zara stores are not connected to one another or to headquarters. Stores use dial-up modems to send daily sales totals and twice-weekly orders; beyond this, there is no network that links the stores to La Coruna. Similarly, no “private exchange” or extranet covers the supply chain of factories, subcontractors and distribution centers.

The relative absence of computers throughout Inditex is nothing short of amazing. Stores have no PCs; they record sales on DOS-based POS terminals and submit orders for more clothes using PDAs. At company headquarters, computers run only internally developed applications; Inditex uses no commercially available enterprise software.

Applications at Inditex are written and maintained by an IT staff of 50, which accounts for less than 0.5% of the company’s workforce. (The 2001 Gartner survey of large North American retailers found, in contrast, that 2.4% of employees worked in IT.) The company does not track its IT budget, but Castellano estimates it to be 25 million euros per year or approximately 0.5% of revenue. Inditex also has no formal process for defining and prioritizing IT initiatives — Salgado and Castellano participate in a steering committee that convenes when new applications and infrastructure are needed to support the company as it grows.

Principles of IT Management

Zara’s business model does not work despite Indi-tex’s minimalist approach to IT but to a large extent because of it. The company implicitly adheres to several principles in the way it manages and exploits information technology. And even though the company is in some ways a special, simple case with respect to computerization — its products, for example, have few components and don’t need to be tracked or maintained after the point of sale — these principles can be usefully applied in many other settings. They also expose flaws in the way many companies have recently been pursuing benefits and advantage from IT.

Principle No. 1: IT is an aid to judgment, not a substitute for it. Inditex relies heavily on the decision-making abilities of its people. Store managers determine what to order, and employees at La Coruna, called “commercials,” make ongoing production, volume and allocation choices for each garment. Those critical decisions are not made by computers or even suggested by them. But IT does help managers and commercials deal with the huge amounts of data they must stay on top of at all times. While many companies try to use IT to get people out of the business of making complex decisions, Zara takes a very different approach. The company has made the often fuzzy notion of empowerment concrete and has supported it with technology.

Principle No. 2: Computerization is standardized and targeted. When building new computing capabilities, Inditex follows what I call Occam’s Law of IT: “As many as you must, as few as you may.” This applies both to infrastructure and to applications. Stores, for example, have to be able to record sales and send the information back to headquarters, so a POS system with a communications link back to La Coruna is required. When developing and rolling out this system, Inditex resisted the temptation to make it more complex than it needed to be.

First, stores and regions were not allowed to deviate at all from the single solution (unless tax laws required modifications), no matter what their circumstances. Second, developers minimized systems capabilities instead of maximizing them. Because the POS terminals are not linked, they are useless for anything except recording sales and performing such “housekeeping” tasks as recording inventory transfers between stores. (At the end of each day, floppy disks — remember them? — from each terminal are brought to the single one with a modem, and daily sales are transmitted to La Coruna.) While these restrictions on flexibility and capability may appear archaic, they reflect a consistent approach that’s not just a matter of thrift or skepticism about what IT can do but instead demonstrates a rigorous focus on addressing business needs with the smallest possible IT “footprint.”

Principle No. 3: Technology initiatives begin from within. In other words, business goals always shape the company’s use of technology, never vice versa. Three implications follow. F irst, Inditex does not build “bloated” applications —those that contain more functionality or modules than are needed. Second, the IT department does not take the lead by suggesting new initiatives and explaining how they could benefit the business; instead, technologists work with line managers to understand what the business requires and then start proposing solutions. Finally, and most fundamentally, Inditex’s managers do not take an outside-in approach to IT, reading the press and attending trade shows to identify the latest “must have” technologies. They begin by looking inside the business to identify needs and challenges that are best met with IT and only then scan the technology landscape to find solutions.

The PDAs used by store managers to place orders are one result of this approach. In 1994 Inditex saw that it was taking too long and costing too much to fax order sheets to stores around the world, so it began experimenting with handheld devices. The company became one of the largest users of this then-new technology and has continued to find it an efficient and inexpensive way to handle orders.

All of this may sound obvious, but remember: Many companies, and even entire industries, took the opposite approach in recent years. They allowed large parts of their IT agendas to be set by outsiders who promoted one wave of must-have technology after another as a universal solution. Inditex refused to take part in this trend, strictly maintaining its inside-out approach.

Principle No. 4: The process is the focus. Although Zara sells always changing products in more places every month, it remains a simple business. It accomplishes this neat trick by building itself around a small set of standardized, repetitive processes: transmitting sales each day; ordering, allocating and shipping twice a week according to a set schedule; and so on. Employees have a lot of freedom at some points in these processes; other parameters are cast in stone. Store managers, for instance, have wide latitude about what garments to order but are not allowed to set prices. They also know that they must transmit their orders, via the PDA, before the deadline; if they miss it, they can’t phone in their order.

The role of IT, then, is to support the process. PDAs, for example, are not “personal productivity devices” for store managers; rather, they allow every manager at every Zara store to follow the ordering process consistently.

Principle No. 5: Alignment is pervasive. At Indi-tex, the general managers all talk like technologists, and the technologists all talk like businesspeople. This is partly due to the influence of the company’s founder, Amancio Ortega, who saw the potential of computers for his business early on (and is now the richest man in Spain), and of CEO Castellano, who had previously been an IT manager. Leaders who believe in IT are probably a necessary condition for deep and lasting business-IT alignment, but they are not sufficient. It’s becoming clear that several other attributes, particularly a process focus and an inside-out approach, foster and maintain this alignment.

The Performance Connection

How valuable is this alignment and the ability to exploit IT that comes with it? Is it competitively critical? Consider Inditex’s performance: It has higher operating profit than Gap, H&M or Benetton (despite being one-fourth the size of Gap) and much better recent stock-price performance than its competitors. But is there a link between these results and the company’s IT excellence?

I believe that there is. When aligned and managed properly, IT provides benefits — including process standardization and deployment; assurance of compliance with new processes; optimization; automation; and monitoring, analysis, control and reporting — that are difficult or impossible to attain otherwise. In industries where such benefits are competitively important, it seems likely that poor exploiters of IT will have great difficulty keeping up with or countering brilliant exploiters. I expect, in other words, that substantial advantages in years to come will go to those companies, like Inditex, that internalize this lesson: IT is a critical component of thoughtful management — but is not a substitute for it.