United States

The high cost of maintaining the tech status quo in manufacturing

For manufacturers to compete, technology needs to be fully utilized

INSIGHT ARTICLE

Across industries, an average of 74 percent of a company’s information technology budget is spent on operational expenses; that is, maintaining legacy applications and infrastructure (otherwise known as “keeping the lights on”).

Ideally, middle-market companies should be spending 50 percent of their IT budgets on maintenance and 50 percent on strategic technology initiatives. According to the 2015 Monitor report on information technology and data security, non-U.S. manufacturers appear to understand this balanced approach to IT budget planning. Their IT investments show greater diversity than investments made by U.S. companies and go far beyond simply maintaining the status quo.

For just over half of non-U.S. survey participants, customer requests and client-facing features are the primary factors that trigger technology investments. The products or practices of a competitor as well as regulatory changes are the next most-cited drivers.

Those innovative investments are paying off in several ways. According to the Monitor:

  • Across the European Union, the successful implementation of a range of technologies is extensive as EU companies seek to break into markets outside of their borders. Investments in ERP systems, for example, help to manage the complexities of international reporting and regulatory requirements.
  • In Brazil, technology is one of the only ways to cut operational costs and ensure compliance in a complex regulatory environment. Brazilian companies are successfully implementing relatively simple, low-cost and flexible software suites.
  • China-based companies have the highest percentage of companies surveyed that are very confident in their IT departments’ ability to safeguard data—a percentage nearly twice that of U.S.-based manufacturers.

Why U.S. companies are behind in IT utilization

Conversely, U.S. companies are somewhat more reactionary when it comes to IT investments. A greater percentage of U.S. companies invest due to system failures (nearly 40 percent as compared to 29 percent for non-U.S. firms) and internal problems that result in loss of profitability (30 percent and 22 percent, respectively).

It should be noted that manufacturers based in the United States are investing in enterprise networks such as WAN and LAN at similar levels to non-U.S. manufacturers. Overall, a majority have successfully implemented enterprise resource planning technology; about half of the participants enjoy some success in cloud computing, mobile technology, and big data and business analytics.

However, a closer look at the degrees of successful implementation reveals some starker contrasts. While they are matching some of the investment levels of their offshore counterparts, U.S. manufacturers are doing so with less success.

Executives at domestic companies may also be reluctant to invest in more robust technology for somewhat prudent albeit traditionalist reasons: the risk of the unknown. An older workforce can be less likely to consider a move to the cloud, for example, a necessary expense if the company has gone for years without it. It also takes time and effort to research what can be done and what systems or applications would align with the company’s needs.

This lack of success—coupled with a “maintain, not transform” strategy—may result in lost opportunities for manufacturers who are not taking advantage of the types of innovations and technologies available to them. In addition, a lack of forward-looking technology and innovation can have a negative impact on recruiting a younger workforce that is comfortable with and expecting the latest technology (not to mention leaving the company unprepared for competitors that are taking advantage of all that the latest technologies can offer). The advent of the cloud, the impending retirement of baby boomers and the recruiting new talent are among the drivers of technological change in many manufacturers.

While it may be difficult to demonstrate direct causality between IT investments and revenue generation, the Monitor results suggest that companies continually investing in their technology environments can expect those investments to provide a return.

Systems that help management identify, understand and reach customers have a direct impact on revenue generation. Applications that enable efficiencies and provide supply chain data in real time will help address costs. Implementing and utilizing an up-to-date IT environment effectively can be an important element of strategic planning and a critical factor in a company’s growth.

For more on the current and future role of information technology in manufacturing and distribution, read the 2015 Monitor report.

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Steve Menaker 
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