New research has shown that IT investments increase profitability more than investments in advertising or R&D. The study, which was performed by US academics and reported in the MIT Sloan Management Review, shows that investment in more recent technologies (i.e. those deployed from 1995 onwards) have a significant impact on profitability. The study also shows that this impact is greater than comparable spending on advertising or R&D.
Three other interesting points also came out of the study:
- IT investments exhibit more variability in their impact on profitability, something the authors attributed to the levels of innovation inherent in IT projects and the inevitable risks that come from breaking new ground. The authors also suggest that the different levels of variability may be a reflection of the relative maturity of businesses processes and capability for managing advertising and R&D spend compared to delivery of IT projects, which is less mature in many businesses.
- IT projects that support sales growth have a larger impact on profitability than those that focus on increasing efficiency and/or reducing costs. In other words IT projects were more effective in improving profitability by growing turnover than by reducing the cost base.
- As an industry becomes more competitive IT has a greater impact on profitability. IT was also seen to have more impact in the service sector than in the manufacturing sector. The report’s authors believe that this could be because the service sector has more opportunity to use technology to offer customisation and personalisation.
So the message to CEOs and CFOs is fairly clear: if you want to improve the profitability of your business by growing turnover then invest in IT, particularly if you are in a competitive industry or if you operate in the service sector.
But what does this mean for the CIO? The findings of the study give CIOs two key actions. Firstly, CIOs need to be able to position IT as an enabler of growth. Central to this is demonstrating the linkage between IT investments, turnover and profitability. To do this the CIO needs to become more commercial, more business focused and capable of talking in terms of the bottom line. They also need to work closely with their C-level colleagues to understand how technology can help each business unit to grow, design solutions and produce business cases that demonstrate how the required investment will impact profitability.
Secondly, CIOs need to reduce the variability in the success of IT projects to ensure they deliver the projected benefits on a more consistent basis. This requires a governance framework to be established for identifying, prioritising and managing IT investments. It also means being selective about when to use mature and emerging technologies. This doesn’t mean being overly cautious and avoiding the latest technology; CIOs have to use their judgement about what the most appropriate technology is for each requirement, taking into account factors such as risk, the need for innovation, timescales and budgets.
The results of the study are very encouraging for CIOs. The research demonstrates the importance of technology (and hence the CIO) to growing profitability. It also gives us some clear pointers for positioning technology (and the CIO) as an enabler for growth as well as providing us with a reminder about the importance of delivery and using technologies that are appropriate to the business context. If we follow this advice then it will be another step in the evolution of the CIO role.