BCG: CPG companies facing technology cost pressures

03 February 2016

The consumer packaged goods industry is facing digitalisation, and companies are taking different approaches to meet changing consumer expectations, a recent BCG report highlights. Frugal IT spenders manage the changes differently than their full spending counterparts; pitfalls exist on both sides however. Frugal operators are less able to innovate on small budgets, while full spenders may have too many management layers to act effectively. Global companies tend to spend more, even with their scale capabilities; however, they do perform considerably better following critical system outages.

The consumer packaged goods (CPG) industry is changing as technologies rapidly transform the way in which products are bought and sold, as well as the information consumers have available to them regarding the provenance of products. Advertising is now predominantly done online, and e-commerce has seen the number of people visiting stores in recent years decrease as more and more shoppers choose to buy their products in web-stores. At the same time, consumers are becoming decidedly more critical of how products are made and what they contain, demanding transparent supply chains as well as ethically derived ingredients.

These changes are making considerable demands on the CPG industry to come up with the propositions that meet consumer expectations. Whether it is opening web shops with relevant consumer experiences, or creating the means to make supply chains transparent enough that consumers are willing to trust the company’s branding claims. Many of these propositions require digital technologies in one form or another, technologies that are supported by IT infrastructure.

CIOs are keeping IT costs in line with revenue growth

The consumer side is however, only one side of the story, the demand for companies to cut costs remains a consistent one across most industries. IT can here again provide potential solutions, from the introduction of a SaaS solution to improving in-house IT services. To identify how CPG companies are able to navigate the various demands, and how they are doing so, The Boston Consulting Group (BCG), in association with the Grocery Manufacturers Association (GMA), developed the report ‘GMA Information Technology Benchmarking 2015’. The benchmark looks at a variety of issues within the field, as well as differences between companies in how they currently operate their IT infrastructure. The report is developed from a survey of 37 CPG companies from the US and Europe.

Companies are finding themselves in what the report describes as a ‘storm of digital demands’. E-commerce, online advertising and data analytics are all demanding investment, with CIOs finding themselves in a spot of bother regarding how best to provide what is needed, as well as predict what will be required to meet future demand.

The survey highlights that, for the most part, CIOs are keeping IT costs in line with revenue growth, while operating in ruthless cost efficient environments. The median spend for companies is 1.5% of their revenues, with the low end at 0.5% in 2014 and the high end at 2.8% in 2014. CIOs that are seeking to be innovative, need to do so within relatively constrained budgets, and often by reallocating resources year to year, as well as the proverbial ‘doing more with less’.

Two IT spending approaches: frugal and full

The companies surveyed by BCG can generally be divided into two groups. The frugal spenders, whose IT budget as a % of revenues has a median of 1%, and the high spenders, whose median spend comes in at around 1.8%. The report finds that the two types tend to have a fundamentally different approach to IT spending.

Many of the companies have a low spending mind-set, which can be held in place by a variety of mechanisms. Frugal companies usually have flatter IT structures, with fewer managers, meaning that staff have a wider remit, wider skill set, and are able to make decisions more quickly. In contrast, full spenders tend to have more managerial levels, decreasing decision velocity. Another area in which frugal operators are able to reduce costs is in critical system recovery. Frugal operators have fewer redundant systems and/or procedures in place to limit the damage of a catastrophic system failure – as a result of which it takes an average of 18 hours to bring services back to operations – rather than the six hours it takes for full spenders. The research also finds that frugal IT spenders pay their staff considerably less than those that are full spenders, at around an 18% difference in compensation.

Common pitfalls for frugal and full spenders

While both forms offer some advantages to IT operators, the survey highlights that both frugal and full spenders face a number of pitfalls. Frugal spenders are in danger of missing innovation due to low awareness, while high spenders run the risk of investing in technologies that produce no added value. Even if frugal operators are aware of technologies, they may not invest in them due to being relatively conservative, while full spenders risk invest in too many technologies, driving fragmentation.

Frugal operators also tend to lack complete IT coverage due not having the required expertise in house, whereas full spenders have too many management layers to make key decisions. Frugal operators also have difficulty pulling in high levels of talent, while full operators may have too many roles leading to excessive expense.

IT spending

According to BCG, there are considerable differences between global companies and single-country operators in terms of their IT spend. On the surface it would seem that large companies are better able to leverage their scale to drive down vendor costs, as well as have access to lower cost employees from far flung regions. According to the report, this does not materialise however. Large, often complex, cross border IT systems require considerable oversight required to provide IT services to more employees, and have more mandates for rapid RTOs for critical system infrastructure.

Recovery-time objectives

The extra expense does mean that the majority of global companies produce considerably improved results in terms of recovery time from critical system outages, falling somewhere near 4 hours, compared to 20 hours that the average single-country operator requires to get systems back up and running. “The challenges for CIOs trying to manage IT costs, while driving innovation are intensifying,” comments Jim Flannery, Senior Executive Vice President of Operations and Industry Collaboration at GMA. “The CIO has the best vantage point from which to evaluate broad corporate needs in light of industry disruption and formulate a future-focused technology strategy.”