When is a dollar worth more than a dollar?

When is a dollar worth more than a dollar?

Mark McDonald

Few would debate the business impact of information technology in terms of its ability to either create or compromise business value. However, getting the right IT to create the right value can be problematic, leading to the creation of elaborate governance schemes and financial rituals such as business-case development, ROI and investment approval committees. All of these are important elements for focusing the power of IT onto the needs of the business, and all are aspects of highly effective organizations.
When it comes to the business impact of IT, too often CFOs, executives and CIOs apply the old saying “a penny saved is a penny earned.” Using this mindset, IT is viewed as a tool for cost reduction, operational efficiency and addressing other internally focused issues. Recently, CIOs have become frustrated as internal improvement projects with strong ROIs are being canceled in the face of tight IT budgets. These efficiency projects have one year paybacks and strong year-over-year benefits, and are well within the company’s ability to execute. However, CIOs are puzzled when they are told “no” as this seems like an irrational response. It is, when the company’s growth plans are assured and competition is at bay. But in an environment of economic uncertainty, business leaders know that a dollar saved is worth less when the organization is earning fewer dollars.
A dollar earned – top line revenue growth – is always more important than a dollar saved by the simple logic that there are no savings when there are no revenues to save. Sure, it’s sound financial management to adjust costs to match declining revenues. However, when it comes to making investments in tough economic times, business executives and CIOs need to turn their attention to how they will earn more dollars rather than just saving the dollars they have.
A simple case example illustrates the difference between top and bottom line savings. Executives can influence their margins by reducing their cost structure either at the cost of goods sold or SG&A levels in a stable growth scenario (below, top). However, in a growth-challenged scenario, represented by a 10 percent drop in revenue, requires significant changes in expenses to sustain earnings per share. The EPS neutral scenario (bottom) requires reducing SG&A expenses by 32 percent compared to a 10 percent drop in revenue.

Chart of stable growth scenario
Chart of growth-challenged scenario

Executives are likely to see IT as a means of cutting costs rather than raising revenue. However, new technologies, applications of business intelligence and the use of information in products and services all point to areas where IT can contribute to top-line growth. CIOs working in an environment where top-line growth is risky, and operational improvements delayed, should consider realigning their IT projects toward the following areas.
• Forecasting, pipelines and sales projections are based on qualitative judgment and can be unreliable. What are the operational indicators of future revenues? Inject those measures into revenue reports to bring a quantitative measure into forward revenue projections. Executives need to know the top line is secure in order to spend more time on the bottom line.
• Current customers are the best source of future revenue. Target information and technology projects on making it easier for your customers to work with you and generate more business. Don’t just know them better, work with them better.
• Too many growth initiatives rely on low-value customers switching sides. Recognize that the best customers of your competitors are the best customers for you. Being customer-intimate often concentrates on your best customers. Turn that internal focus into an external weapon by crafting offerings that appeal to your best customers and use those offerings to target those same customers at your competitors. After all if you are going to grow, why not grow profitably and avoid putting good money, technology and people after marginal customers.
• New markets and geographies represent untapped revenue opportunities. Globalization is expanding the reach of every company. What are you doing to support acquiring customers and generating revenues outside of your home markets?
• Change cost structures rather than cutting costs. Look for areas where cost, cash, working capital, personnel or exceptions are rising. Those are areas where information and coordination are poor, and therefore opportunities to change the way you work for the better.
Revenue drives the enterprise, executive compensation and shareholder value. Executives who view IT as an operational tool are missing out. Information and technology focused on growth give the enterprise the ability to work smarter, attract higher-quality customers and drive the innovation that defines competitive advantage. Focusing IT on top-line growth projects makes sense in an environment of expanding information, communications and collaboration.
When is a dollar work more than a dollar? When that dollar is a dollar of revenue.

Mark McDonald is group vice president and head of research for Gartner Executive Programs.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.