U.S. Social Security Administration early accounting operations in Baltimore circa 1936 (Source: Wikimedia Commons)
Ideas for Leaders #219

Computer Says ‘Yes’ – The Impact of IT Investment

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Key Concept

The impact of information technology on an organization’s profitability can be significant but it needs to be strategically managed, from the top down. View your IT management as a corporate rather than a departmental issue.

The key message for today’s leaders is, choose the right kind of IT projects, spend your money wisely, and focus on growth over cost savings. 

Idea Summary

Investments in IT account for a large proportion of corporate discretionary spend and leaders need to understand the likely impact of such investments before allocating resources to it.
The amount of ‘cash you splash’ on your IT systems has been a perennial problem for many leaders. What type of IT investment should I opt for? What are the expected returns? How much should I be spending on IT compared to other areas such as R&D, advertising, or PR?

The answers, according to recent research, seem pretty clear cut. Invest well in revenue growth-related IT (as opposed to systems that focus on cost reduction) and your profits will increase. Indeed, the effect on profitability of your investments will be higher than comparable spending made in other areas.

IT departments have often faced an uphill battle when it comes to arguing the case for more spend. New systems can be expensive and complicated and there is often a historical resistance to moving forward because of failed IT projects in the past. But it makes sense to invest. The research shows that IT projects implemented since 1995 have enjoyed a significant and positive effect on firm profitability, returning more to the bottom line than both advertising and R&D.

Many leaders will be familiar with a ‘legacy system’ approach to IT, where an organization has historically invested in IT systems, upgraded to another more recent version, upgraded again, but often ended up with a complete mismatch of IT infrastructure. The key to profitability lies in IT projects that increase revenue rather than those that focus on efficiency and cost savings. To quote from the study “…an increase in IT expenditure per employee by $1 is associated with $12.22 increase in sales per employee. However, the effect of an increase in IT expenditures on reducing overall operating expenses was negligible…”

Business Application

Change the way you think about IT investment and allocate resources wisely. Be aware that the revenue growth pathway can be more profitable than the cost reduction pathway when prioritizing among IT projects that have different levels of revenue generation and cost reduction potential.

The way you manage IT investment over other discretionary expenditure can affect the way your company is perceived in the marketplace. If leaders are seen by financial analysts to be shifting resources towards IT and away from other areas, thus providing positive signals about subsequent sales growth, it could affect your market valuation.

The impact of IT investment on profitability needs to be recognized by the whole leadership team. Develop a business case and justification for continual investment in IT, encouraging your top management and/or board to view it positively in its governance and resource allocation.

Have no doubt about the strategic importance of investing in IT, as new technologies create opportunities for value creation. If you are keen to grow and evolve your business, the IT projects you invest in will help that transformation. 

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Authors

Institutions

Source

Idea conceived

  • March 2012

Idea posted

  • September 2013

DOI number

10.13007/219

Subject

Real Time Analytics