IT Really Does Drive Business Value

By Doug Bartholomew  |  Posted 2008-04-04

Nicholas Carr, read the software code and weep.

Yet another nail in the coffin laying to rest the premise of Carr’s famous article in the Harvard Business Review asserting that IT is a commodity that doesn’t yield competitive advantage will be driven home Monday. That’s when a new research study from the Hackett Group will be released showing that companies that have mastered the use of information technology to provide maximum business value achieve significantly better financial results than their peers.

In fact, these IT-savvy leaders outperform their competition across a wide range of financial and profitability measures, according to Hackett report.

Companies that are best at managing IT business value deliver 49 percent higher net profitability, 39 percent greater return on assets, and 43 percent better return on equity, than their industry peers, Hackett reports, based on the strategic consulting firm’s study of 50 large companies conducted in late 2007.

These top “IT business value management” (BVM) performers generate $1.07 billion more operating profit annually and $645 million higher net profit when compared to peers in their industry among the Global 1000 companies. 

A key reason for this comparatively better financial performance, the Hackett findings indicate, is more effective management of the IT project portfolio. Top performers in IT BVM weed out the least promising initiatives early on, approving and funding only half as many project proposals (40 percent versus 88 percent for most companies). They also complete a much larger percentage of the IT projects they initiate. And they are nearly twice as likely to meet cost targets on IT projects as typical companies.

Companies that are leaders in IT management also spend a substantially smaller fraction of their capital expense on infrastructure and utilities, leaving more investment for improvement and innovation. While the largest part of the peer groups’ IT investment is earmarked for infrastructure refresh, the top group invests the majority of its capital on “innovation and improvement,” most often in the form of discretionary projects.

Another important area where companies that excel in managing IT outdistance their peer group is in application portfolio management. Top performing companies track and manage their applications rigidly, compare to their peers that have a poor understanding of their application portfolio and manage it inadequately.

The latter group tends to permit a level of application complexity, resulting in higher management and maintenance costs and less capability to respond to business needs.  

The success of this top “IT BVM” group is centered around careful management of the business value created through IT investment. This capability manifests itself in four key areas:

  • Investment allocation:  Top performers reallocate investment from infrastructure and utilities to innovation and improvement.
  • Project pipeline:  Top performers weed out questionable project proposals early, minimizing the project backlog.
  • Delivery performance:  Leading IT BVM companies deliver far more projects on budget and realize projected benefits more often than peers.
  • Application portfolio management:  Top performers actively manage their application portfolio to drive out complexity.

“In our research, we found that these are the processes with the highest impact on business value,” says Erik Dorr, senior business director at Hackett Group, based in Atlanta.

From a strategic perspective, the implications for CIOs are far-reaching. Hackett researchers content that they should shift the debate about whether IT is a core competency to a discussion about which specific IT competencies are core, and which are not. “The case should be made that IT competencies directly related to managing the business value created through IT investment are core and independent of industry and  business strategy,” Dorr explains.

Unfortunately, Dorr says, most companies are still focused on cutting IT costs, not on training their sights on ways to maximize business value. He believes CIOs should focus their attention on those specific IT processes that maximize business value.

“The question is, what within IT specifically is valued most from a business perspective,” Dorr says. While many organizations have invested in ITIL and Six Sigma to improve their IT processes, he asserts that these are “efficiency oriented” improvements. “These will not help IT to make the decisions on what to optimize in the first place,” he says. “The tools and processes around managing business value are far less established than these efficiency-focused IT tools.”