In service industries such as banking and airlines, information technology has established itself as a vital strategic tool. Yet in manufacturing, it has largely failed to live up to its promise. Widespread early euphoria—visions of productivity gains from reengineering and the integration of IT into every facet of manufacturing operations—had evaporated by the beginning of the decade. The introduction of so-called integrated standard software had proven time-consuming and risky. Not only did implementation costs quickly outstrip initial estimates, but anticipated benefits failed to materialize in all but a few cases.

Plant managers complained that production planning systems were not up to the job. Sales managers unable to reorganize order processing condemned their sales information systems as inflexible. Only in handling basic administrative tasks concerned with accounting and personnel, it seemed, could IT demonstrate clear efficiency gains.

Companies now recognize that the use of a particular software application cannot guarantee business success; strategic benefits, they have learned, rarely emerge from a simple increase in IT resources. In response, some manufacturing companies are managing IT purely on the basis of cost, eschewing strategic considerations. In Germany, auto maker Porsche and wire manufacturer Continental have gone so far as to outsource their entire data processing function. Fueled by such developments, the IT outsourcing business is now valued at more than $32 billion worldwide.

None the less, IT can still serve as a powerful driver of process innovation. Technologies such as the Internet and multimedia-supported simulations hold enormous commercial potential.

How, then, can a manufacturing company harness superior IT to gain competitive advantage in strategic business processes? What can IT contribute to corporate success? To answer these questions, McKinsey and the University of Darmstadt conducted a survey of some 70 companies in Europe, the United States, and Asia.

We found that strong performance in IT does make a real difference: better information managers are also better at core processes such as R&D, order processing, sales, and service. In turn, excellence in core processes produces tangible payoffs: solid competencies in core operational processes improve profitability, and superior product development promotes growth.

But there were also some surprises. Sales, where IT penetration has historically been weak, presented a major opportunity. On the other hand, production control at shop-floor level is often best managed with traditional methods.

Few companies, it emerged, are good at IT. Exhibit 1 illustrates the distribution of four IT cultures—stars, big spenders, cautious spenders, and laggards—among the companies surveyed. Exhibit 2 correlates these cultures with the four business measures used in the survey. It suggests that, while efficiency is important, effectiveness makes a particularly powerful contribution to business success: big spenders are about as successful as stars, while cautious spenders fare little better than laggards.

Analysis of the survey results reveals that highly effective IT organizations share seven habits. While no manufacturing operation can guarantee to transform itself simply by following a set of guidelines, there is ample evidence to suggest that the journey from IT laggard to IT star will make a striking difference to a company's bottom line.

Rule 1: IT is a top management affair

Information management must receive the attention of top management. On average, the top managers at IT stars together spend about 45 hours per month on IT, compared with 20 hours for laggards. The stars also charge on average three senior executives with IT management tasks, who each devote about 15 hours a month to them, about three times as much as their peers at laggard companies, where four or five top managers typically share this responsibility.

Not surprisingly, top managers at low-performing companies, who spend an average of just 4.5 hours on IT per month, tend to have vague and unrealistic expectations. These range from the over-ambitious ("halving IT costs through outsourcing," wrote one) to the gloomy ("new media and IT tools are unsuitable in heavy engineering," said another). At such companies, business processes are seldom linked with IT goals, and even major IT projects receive scant top management participation.

At IT stars, by contrast, top managers devote time and energy to developing an IT strategy, and get actively involved in the introduction of new systems. In particular, they play a critical role in defining projects and agreeing measurable goals in specific business processes and technologies (for example, reducing the time spent preparing products for specific customers by expanding intranet connections between sales centers and plants). In major reengineering projects, each sub-project has a set of concrete goals and is broken down into work packages for individual employees. Executive management and users keep in touch with the progress of new projects via IT training sessions. Indeed, managers at star companies spend more than twice as much time on IT training (for example, courses introducing new technologies such as digital channel products) as those at laggards.

Without the intimate involvement of top management in critical IT issues, information management rarely performs well.

Rule 2: Make IT a priority in product development

Companies with superior IT management tend to be better at developing products (Exhibit 3); they achieve better results with smaller budgets. As best practice moves beyond heavy investment in CAD software and engineering databases, two areas are emerging as the future focus of first-class product development.

Simulation and calculation software. The use of software to perform simulations and calculations in product development is nothing new. But successful developers boost development output by using them earlier and more intensively. In our survey, approximately 50 percent of stars claimed to be able to identify development errors such as design misspecifications quickly and reliably, compared to only 25 percent of laggards.

The application of simulation software to modeling is already cutting development time and cost, but its future holds even greater promise. Through rapid "virtual" prototyping rather than conventional tooling up, one auto parts manufacturer managed to reduce manufacturing costs on rear lights by 60 percent, and shorten its delivery time by 12 weeks.

The use of simulation in assembly and production enables the production process to be adapted to the product much earlier in development, thus reducing manufacturing costs.

Electronic integration of engineering data and tasks. The integration of data (such as CAD data, simulation results, work schedules, and project status information) with tasks in the development process has much to offer. Key challenges in R&D management, such as reducing development time and broadening technical expertise, are forcing companies to integrate both their own core processes and their development partnerships with other companies.

Successful developers are ahead in integrating engineering data manage-ment (EDM) with other applications: 50 to 70 percent of these companies have integrated calculation and simulation results and work plans into their EDM systems, while for poor developers the figure is only 13 to 31 percent. Successful developers also use EDM earlier in product development to estimate product costs.

The integration of CAD and simulation databases can serve as a springboard to faster, simpler communication with engineering partners. A 3D CAD system with spatial geometric representation of objects is usually required for this purpose.

Seeking to encourage superior "design to manufacture"—the design of products to optimize quality/cost tradeoffs—more than 75 percent of successful developers have built up interfaces between direct numerical control (DNC) machinery management in the production area and CAD databases, more than half of them with integrated functionality (allowing the transfer not just of raw data but also of DNC programs). Among less successful developers, only 40 percent have achieved this degree of integration. The story is much the same in relation to the integration of CAD and simulation applications in manufacturing and assembly, and with development partners.

A comparison of companies' goals for product development and the application of new technologies in the coming years reveals that the gap between more successful and less successful developers in the application of IT will continue to widen.

Rule 3: Integrate IT into sales and customer service to boost performance

Sales is traditionally an area of low IT penetration. Management attempts to use management information systems to make the sales process more transparent have been met with skepticism from sales staff. Even so, master databases for customer files have become standard, as have order processing systems that permit faster and more consistent order transfers. In addition, over 60 percent of the sales staff surveyed are now equipped with laptop computers and mobile phones, and many companies provide product and price information in CD-ROM catalogs and other digital formats.

Companies whose sales performance is above average tend to use integrated standard software more intensively, allowing them to integrate sales data to a greater extent. Their sales information systems also provide direct access to data on capacity and production scheduling, so that the feasibility of any customer request can be checked before an order is placed.

Some companies have gone further, allowing regular customers to enter their orders directly into EDI systems. Manufacturers of standardized industrial products that carry out more than 50 percent of their business transactions by EDI spend only 0.7 percent of revenues on back-office sales work. Those processing less than 50 percent of their orders via EDI spend twice as much. Companies with more complex product ranges currently process fewer orders via EDI; however, those processing more than 10 percent of orders via EDI achieved a cost advantage of about 50 percent over companies that did not use EDI.

Most important, the survey suggests that the use of product configurators—electronic tools that simulate the putting together of a product from thousands of possible features—will make an important contribution to business success in the future. During a sales pitch, staff will be able to show customers the full range of products, variants, and types, calculate the price of the product chosen, and agree a realistic delivery date.

By using configurators, one manufacturer was able to replace a full 90 percent of special customer requests with a set of pre-costed variants

The advantages are obvious. Contracts for products that a company cannot manufacture would become a thing of the past, as would most delivery delays. Jobs could be scheduled on the spot, and products engineered at estimated cost. By using configurators, one manufacturer was able to replace a full 90 percent of special customer requests with a set of pre-costed variants.

Rule 4: Use IT selectively to integrate order management across the company

Purchasing, materials management, and production planning have long been key areas for IT applications. By monitoring materials and comparing stock levels against production requirements, IT can help organize orders efficiently. Information systems are also indispensable for planning production jobs down to the calculation of daily job lists for individual production areas.

Despite these advances, the "factory of the future" has yet to become a reality. Many companies feel their production planning and control systems are ineffective, inappropriate, and brittle. Companies with complex production programs and small batch sizes complain that their production planning software doesn't cater for their needs. Even manufacturers of standard products find their systems inflexible when orders are changed.

So how do successful manufacturers cope? The answer is that they know when IT works and when it doesn't. Surprisingly, while IT plays an important role in other core operating processes, it seldom offers much help with production control at a detailed level. Almost eighty percent of companies that excel at order processing dispense with IT-supported control at the shop-floor level, instead using simple organizational processes such as Kanban (Exhibit 4). Their importance as a substitute for IT increases with the complexity of the production process. Successful developers also limit their customers' flexibility over scheduling orders: their "freeze point" for placing orders in their MRP system is much earlier, and once it is reached, they change orders less often to avoid disrupting production schedules.

IT has an important contribution to make to purchasing and logistics. IT-supported inventory management is standard; what makes the difference is the monitoring of orders between a company and its customers and suppliers via EDI. Although EDI is not widespread on the supply side—suppliers of standardized goods are the main users thus far—more intense use of EDI for customer order calls leads to much lower logistical costs (Exhibit 5).

When it comes to service, companies with excellent performance stand out not so much because of the IT equipment they use in the field but because of the data and applications (such as diagnostic systems) they employ. Partly as a result of this broader range of applications, companies with the best service performance use their IT systems twice as intensively in the field (at 25 hours per week) as companies with poor service performance.

Rule 5: IT applications in administration have reached diminishing returns

Historically, administration—finance, accounting and control, and personnel—was the first part of a company to apply IT. All businesses now use IT extensively in this area, to the point that standard software seems to have largely exhausted its potential for efficiency gains. True distinction can be achieved, however, in the intelligent deployment of executive information systems (EIS), which give senior executives daily, weekly, or monthly updates on key dimensions of business performance. High-performing companies have integrated EIS systems twice as flexible as those of their low-performing peers, whose data and analysis capacities are so poor that many of them could not even assess their systems' effectiveness for our survey.

In addition, the more advanced players use IT extensively in human resources for staff development and assignment planning, and place greater emphasis on generating employee profiles and job descriptions. Emerging workflow management systems may even create fresh administrative roles in IT to manage and organize knowledge within the organization.

Rule 6: Create a customer-oriented IT service network to fit the needs of the business

The transition from mainframe computers to distributed client-server architectures is well under way. Though traditional mainframe and midrange systems still control most operational applications at over 80 percent of manufacturers, conversion continues to gain ground. About 20 percent of companies surveyed have already migrated from a mainframe to a client-server architecture; in coming years, many more plan to follow them.

Many computer specialists have spent their entire career cloistered in the IT department, and simply do not understand what the business side wants

Unfortunately, some IT departments are failing to keep up. Many staff prefer the mainframe systems they grew up with, and are out of touch with the possibilities of current systems. Worse, many of those trained as computer specialists have spent their entire career cloistered in the IT department, and simply do not understand what the business side wants out of applications.

Leading-edge companies have reinvented their IT service structure. First, they create a network distributing IT service tasks throughout the company in dedicated units, committees, and project teams, rather than assigning them to a single department. They set up an information management group to concentrate on IT planning and consulting, including process redesign. Its head chairs a steering committee—comprising top management, IT department heads, and members of a core user team—that makes decisions on key corporate IT issues. The core user team brings together leading users from all areas of the business, and defines user requirements in collaboration with the revamped IT department, which now concentrates on providing infrastructure and operating the system. Users also play a critical role in adding pivotal resources to software implementation projects, and sometimes even have their own software development staff.

Second, although third-party providers are a central part of IT service networks, IT stars are much more careful about what they outsource. Only 24 percent outsource core operational IT services such as running the computer center; laggards do so at twice that rate. And when they do outsource, IT stars rigorously monitor providers, assessing their performance through external benchmarks and meticulous goal-setting, and paying close attention to the negotiation of contract extensions.

Third, IT stars are much more professional about their planning and control processes, relying on their information management group with its close links to top management. They understand their costs in greater detail; 53 percent of stars were able to produce detailed cost structure analyses, compared with just 7 percent of laggards. Poor players often set IT budgets purely on the basis of historical data, while stars conduct zero-based budgeting, reassessing projected and current tasks every year.

Detailed planning allows top performers to develop their IT capabilities deliberately and systematically

Most IT stars study the market systematically to identify important innovations: 88 percent regularly invite vendors to make product presentations, as against 46 percent of laggards; 36 percent assign staff to watch the market, compared with 13 percent of laggards. Armed with up-to-date information, they plan for the long term: 65 percent formulate three- to five-year plans for hardware, software, and netware projects, as against 37 percent of laggards. Similarly, 50 percent of stars are planning major IT projects in the next three to five years, while only 25 percent of laggards have such projects planned that far ahead. Such detailed planning allows top performers to develop their IT capabilities deliberately and systematically, instead of wasting energy on fire-fighting.

Rule 7: Introduce integrated standard software on a "fast follower" basis (but redesign the business first)

In most situations, it is better to use functionally integrated standard software than invest in proprietary solutions. Seventy-five percent of the implementation costs of the IT stars are devoted to integrated standard software, compared to 42 percent for laggards. Pioneering proprietary software is the right strategy only when it produces a clear competitive advantage, as with some product-specific simulation software.

When to introduce integrated standard software is a key decision. A "fast follower" strategy is the best bet: companies should wait until early software bugs have been fixed and external consulting knowhow has become available before making a commitment. But once new releases can offer greater functionality and user-friendliness, companies should act fast.

Over 60 percent of IT stars follow this approach; laggards tend to adopt more reactive strategies. Because they also continue to use large parts of the old software after new systems are introduced, they experience many more problems with compatibility.

The survey confirmed the importance of redesigning business processes before new systems are introduced, rather than at the same time. The sequential approach followed by over 41 percent of stars (but just 24 percent of laggards) reduces both project duration and costs by more than 50 percent. It enables stars to refine their selection criteria for software and gain a better understanding of how standard packages could be adapted to their needs, thus avoiding the need for expensive custom programming.

IT stars apply to these projects the same planning and project control that distinguishes them in other areas. Although they resort to external implementation partners twice as often as do laggards, they tend to focus their partners' efforts on implementation and early pilots, and strive to involve their own staff—users as well as IT managers—more closely in the roll-out.

Because they monitor IT milestones rigorously, stars stray from planned cost far less than do laggards. After new systems have been introduced, they monitor degree of use, evolution of users' knowledge, ongoing expenses, and improvements in business performance in order to pursue continuous improvement.

By contrast, laggards often fall into a downward spiral. Frequent failures to meet objectives, combined with dissatisfaction among users, make it hard to win support for follow-up projects. Problems are swept under the carpet. Control over outsourcing lapses. The result is excessive spending for only mediocre results.

The future

As ever, the future holds both opportunity and threat. On the one hand, new technology will continue to enable IT stars to make quantum leaps in effectiveness. On the other, poor management of IT can result in a cost explosion.

One systems manufacturer saw its IT spending soar from 2.7 to 3.9 percent of sales in just three years, an increase of 44 percent. Yet nothing in its applications portfolio had changed. The reason for the rise? Software costs more than doubled as standard soft-ware was introduced, then heavily modified (especially in production and sales); as a result, interfaces (70 percent of which were specific to the company) had to be specially programmed.

The road to improvement takes a different course for each of the four IT cultures we identified (Exhibit 6). We believe that a laggard can become a star in two to three years, but only if it rethinks its notion of IT. Instead of being regarded as a limited specialist task, IT must become a key concern of top management. No longer simply a means of reducing manufacturing costs through automation, it must be seen as a tool for optimizing almost any business process. From an all-powerful, centralized data processing department, a lean, customer-oriented IT network must emerge.