When Nicholas G. Carr famously asserted that "IT doesn't matter" in 2003, he backed up his thesis with data gathered by IDC and Orlando-based consulting firm Alinean. After Carr's recent prediction of the end of corporate IT, Alinean CEO Tom Pisello told Computerworld US's Kathleen Melymuka that continued research has raised some very interesting findings about the relationship of IT spending and business success. Is Nicholas Carr on to something in touting the end of corporate IT? Carr's claim that IT has become a commodity utility has fueled a two-year debate on whether technology investments deliver competitive advantage. On one hand, we agree that corporate IT often spends too much to "keep the lights on." Most companies invest more than 65 percent of IT budgets on basic infrastructure like PCs, servers, e-mail and storage.
But it's important to differentiate between infrastructure investments and strategic investments. Strategic IT investments, especially when closely aligned with business goals, prove that technology can deliver a competitive edge.
What do the numbers say? Tell me what the Alinean/IDC pre-2003 research showed about IT spending and corporate performance. IT spending and performance research have to be examined in context with the market. When Carr used our 2003 research in his original Harvard Business Review article, market conditions were really tough. Back then, we found that top-performing companies, or those with the highest Economic Value Added, were notably frugal with IT dollars. These high performers were spending less than 1 percent of overall revenue on IT, while the average company spent 3.7 percent and the laggards were spending 2.7 percent.
And continued research shows essentially the same thing, right? Yes, top-performing companies continue to be more frugal in their IT spending, spending 0.5 percent less on IT as a percentage of revenue versus the average company. But the spending gap has narrowed significantly.
You say the research since 2003 shows that something else is going on. What is it? Leading companies have bumped up spending in recent years as market conditions improve. In 2004, they doubled investments in IT to 1.6 percent of revenue, and in 2005, [they] spent 2.8 percent of revenue. They're making up for frugal cuts in years prior and now are investing rapidly to ensure they're poised to capture market and growth opportunities.
What's the significance of this finding? Leaders are incredibly agile with spending. In contrast, average companies and laggards have held IT investment relatively constant, averaging 3.7 percent and 2.7 percent, respectively, over the past three years.
Also, when you look at IT spending per employee, the picture changes. Tell me about that. Interestingly, leaders spend more per employee on IT than an average company -- in fact, about US$500 more each year. IT investments help these companies do more with fewer people, or better manage outsourcing initiatives.
What the majority of companies care about most is the efficiency of IT spending and its ultimate effectiveness at driving corporate profitability. That's why we created the Return on IT [ROIT] metric, a ratio of a company's financial performance divided by IT spending.
The ROIT findings are dramatic. Leaders boast a 426 percent higher ROIT than average companies, spending less but getting more from each investment. Companies like Anheuser-Busch, Coca-Cola, Sara Lee, U.S. Bancorp, Johnson & Johnson, Dell, BellSouth and Procter & Gamble consistently deliver good performance, even in struggling markets or while facing unique business challenges.
You've tried to distill some commonalities among companies that achieve the highest return on IT investment. What have you found? While there is no single practice common to every company achieving a high ROIT ranking, certain philosophies hold true across the board. First, directing IT investments in support of initiatives that will fuel competitive advantage consistently delivers the greatest success. Second, fiscal discipline is important, but leaders cut costs of ongoing maintenance so that precious funds can be allocated to more-innovative initiatives. Third, agility in ramping or trimming spending keeps companies ahead of market conditions, maintaining profitability and a solid bottom line.
So where does all this leave Carr's argument? In many ways, basic IT infrastructure has indeed become a commodity that should be treated as a utility where cost reductions reign. However, lumping all IT investments into the commodity category is the critical oversight in Carr's argument.
The new model you've developed to look at IT value is what you call the IT Hierarchy of Needs. Explain what the hierarchy is. Much like Maslow's Hierarchy of Needs in human development, the IT Hierarchy of Needs segments IT spending into four progressive levels.
The first level is basic IT infrastructure -- the core foundation for corporate computing including servers, networking, storage, desktops, mobility and telecommunications.
The second level includes the tools to automate manual tasks and processes, streamline transactions and foster creativity and collaboration.
The third level includes all applications to support the collection, visualization and application of information to measure the business and drive improved performance.
The fourth and highest level is how a company uses its information to change the playing field by creating different relationships with suppliers, partners and customers, as well as applying competitive insight.
How does a company apply the hierarchy? Only when the most basic level of IT need has reached maturity can the organization successfully invest in the next highest level. Once the level of need has been met, the company should try to reduce that category's cost of ownership as much as possible, while making sure that the foundation remains solid. But the company can't stop there. Pursuing each next highest level in the hierarchy will keep it from falling behind the competition.
So, what should a CIO do about all this? The savviest of CIOs should be armed to illustrate this hierarchy of investments to their financial and executive counterparts, demonstrating infrastructure cost reductions and the ROI achievable by allocating freed resources to the strategic investments that will drive bottom-line improvements. -- Computerworld (US)
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