28 Jan Sizing Up the Bill for Information Technology
Editor’s Note: This is the inaugural column of a new feature on WTN called IT INSIGHTS. We are pleased to feature the experiences and insights provided by the team at Coherent Partners. They will share a multi-dimensional approach about the alignment of business process and IT solutions. IT INSIGHTS will look at issues such change management, business process automation, knowledge management and the changing rules of business through the lens of IT technologies and solutions. We welcome your feedback and suggestions for future columns at firstname.lastname@example.org.
The days of technology for technology’s sake are long gone and not much mourned. However, the recent round of cost cutting has not led toward an obviously more valuable and satisfying technology portfolio either. Companies are left knowing they have to invest in information technology somehow, but wanting more confidence that the dollars they spend will achieve results for the bottom line.
Recent research suggests the integration of IT investments with other business investments is a better predictor of IT success than simple quantities of money spent. The number at the bottom of the IT bill may not be nearly as important–or nearly as large–as the numbers in other budgets for complementary spending on professional and organizational development.
What’s IT cost?
By anybody’s measure, a lot of money is spent on IT. According to Global Information, IDC estimates that the worldwide tab for IT in 2003 will be $925 billion. If that seems too modest, Gartner Dataquest’s cheery estimate of $2.3 trillion, which accommodates the cost of telecommunications, may sound more realistic. To no one’s surprise, the United States accounts for the biggest share of the combined information and communications technology bill, about $812 billion in 2002, according to Harris Miller. Japan spends roughly half that, and Germany about a fifth. China is down in the pack, but deserves honorable mention for its 15 percent growth rate in IT. A few comparisons help ground the discussion.
It is important to note that these IT figures are just the tip of the iceberg for spending in companies that actually realize a benefit from their IT investments. Eric Brynjolfsson of Massachusetts Institute of Technology and his colleagues studied dozens of companies to see how they generate value from their IT investments. His research states “The greatest IT benefits are realized when an IT investment is coupled with a specific set of complementary business investments. Companies that use IT intensively work differently from their competitors.” Their research suggests that for every one dollar a successful company invests in IT capital, it invests as much as 10 dollars in complementary assets and activities.
Brynjolfsson offers the example of Wal-Mart, which developed a new way of selling retail based on efficient IT that tracks goods throughout the supply chain. But Wal-Mart was also making even more important investments in a different customer experience: marketing everyday low prices and taking charge of its relationship with its suppliers.
“IT has been the catalyst for a broader host of changes in information flow from Wal-Mart’s customers all the way to its suppliers,” Brynjolfsson wrote.
This broad organization development is crucial because competitors can not catch up just by IT spending alone. They must also understand Wal-Mart’s IT-enabled processes and improve upon them. Wal-mart and other successful companies have co-evolved their organizations with their IT, making as many, if not more, investments in changing the organization as they did in their technology.
What’s IT worth?
Based on Brynjolfsson’s research, companies that equate their technology investment with the bottom line of the IT department budget will realize less value from their technology dollars. Companies that understand the IT budget is just a small part of a much larger investment in technology will get more value from their technology dollars.
It is easy to understand why many companies persist in the first approach despite the inevitably disappointing results. Even without the sound and fury created by the current return on investment (ROI) craze, it is tremendously difficult to tally the complete investment a company makes in information. Budgets and organization charts do, not nicely bind innovation, and the competitive advantage it delivers. The information that feeds and sustains innovation needs to flow across those budget and organizational boundaries, as does the technology investment that information relies on.
To get it right, the facts that there is a lot of intangible value associated with IT and that intangibles are notoriously hard to measure must be faced. Even accounting experts who are trying to develop better rules for displaying intangible assets in financial statements admit this is a big problem, according to Baruch Lev. We believe there a middle ground.
First, do not give up on measurement. Traditional financial ratios, like ROI, have their place, especially when evaluating routine operations that are well understood. For IT departments, this would include things like replacing aging servers because of extreme maintenance costs, or adding call center staff to manage wait times as call volume grows.
Second, for the activities being evaluated cover new ground, tie assessment to things the company cares about enough to put into strategies and business goals. Marketers and quality improvement teams have been using statistical tools in this regard for years.
Third, be flexible in methods of analysis and depend on experience and judgment when numbers fail. Be willing to follow apparent value wherever it leads, even if this leads into the terra incognita off the edges of the balance sheet.
So what is the value of IT? As the bubble burst and layer upon layer of hype burned away, it seemed as if there might not be anything left. Several years later, it is becoming clear that there is still great potential, but that potential is far more difficult to realize than we first assumed. As with any great change, this one will take great patience and a tolerance for experimentation. Applying known techniques will be appropriate some of the time. Developing new ways of managing and leading business will be necessary other times. In the end, the value of IT is what we make of it.
Byron Glick and Sandy Plisch are principals at Coherent Partners, LLC, a technology management-consulting firm in Madison, Wisconsin. They can be contacted via the web at www.coherentpartners.com or via telephone at 608/442-0120.
The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.