How CIOs Make Technology Investments
The BTM Institute recently sat down with Professor T. Ravhichandran of Rensselear Polytechnic Institute's Lally School of Management and Technology to discuss his research findings about the influencers that drive technology investment decisions, the way organizations monitor investments, and the role innovation plays in the investment mix. Here's what he had to say:
Q. How do CIOs go about making technology investment decisions, and what affect do institutional pressures have on their decisions?
If you look at all the practitioner press has written about technology investments, you'd get the impression that managers, CIOs, and CEOs go through a rational process where they look at the IT needs of the organization, and where they decide how much money they need to put into IT to support their strategic goals for IT. We found that this might be one set of investment influences. Most likely, CIOs also look at what others in their industries are doing or they have pressures from their customers or stakeholders. These latter sources might actually influence CIOs to how to decide how much they want to invest in IT.
Many companies have started to use benchmarking figures. Companies spend an average of eight percent of their revenues on IT. They start the dialog from the standpoint of trying to answer the questions: Are we doing more or less, and why? We found that pressures from institutional shareholders might be influencing people on the board, who, in turn, might start asking questions about how much CIOs are spending on IT. In smaller companies customers, that need to maintain specific transaction requirements, can put pressure on CIOs to invest in certain technologies to comply with the customers' demands.
About a decade ago, many customers were asking companies they did business with to invest in electronic document access capabilities so transactions would take place electronically. In a similar way, other types of mandates come into play when CIOs decide what the organization needs, what they should invest in, and how much they should allocate for each investment. We're finding that, in addition, to the rational process that might drive the needs of the organization, institutional forces might actually be shaping how much a firm spends on IT.
Q. Did you find in your research that many of the boards are involved in IT investment decisions?
If the investments are fairly larger or substantial, the board might give its approval and signoff, or the board at least gets the information via a board technology subcommittee. I see this happening in many companies in relationship to IT investments. I also find the involvement of the board in a different way than just asking questions. If IT is considered to be a strategic driver for the organization or if it is considered to be a major expenditure, where an organization spends much of its resources, the board can become increasingly vocal about how the organization prioritizes those investment or how the organization does on that front with respect to investing and targeting their investments.
During the past five years, many IT systems have become more sophisticated to meet compliance requirements, such as Sarbanes Oxley. In these cases, boards have become more involved in making sure the organization complied with regulations. After all, there is significant risk for not doing so. To this end, boards ask the legitimate question: Are our IT systems equipped to meet compliance needs.
Q. Are you finding many organizations automating the way they go make about making IT investments and monitoring those investments?
It is a mixed bag of things. Some companies do use sophisticated tools, such as some type of a scorecard, for trying to link higher-level goals with project- level IT investments, and subsequently for tracking those investments through dashboards or spreadsheets.
IT departments are at the forefront of streamlining their organization's processes and feeding decision-making information back to the rest of the organization. On the other hand, some IT organizations have a big disconnect between making investment decisions and the use of automation to do it. Some IT organizations have automated project management.
Q. How do IT organizations go about selecting their investment portfolio mix?
Portfolio picking has become common among IT organizations. CIOs clearly understand the risks the involved in making IT investments, even in proven technologies where implementation risks might delay projects. CIOs need to balance the portfolio of investments based on risk tolerance (some high risk and some low risk), and also based on potential payoff. Some investments might have a simple implementation for systems that will take cost out of some processes.
Q. Are CIOs looking at a portfolio mix of investments for innovation, exploitative, and explorative initiatives?
Many IT organizations understand that they can enable innovation, particularly when it comes to innovating with the services. Even product companies derive a substantial component of revenues through services, in addition to the products. IT enables many service innovations. In industries that primarily deal with information, such as banking or insurance, IT enables most new product innovations, especially for e-commerce. Even if you make products, such as cell phones or automobiles, IT still drives those organization's distinct service components.
The need to drive new services, experiment with new ideas, or to create new business models to go after new business opportunities factor into how CIOs pick their portfolio of investments to keep the capabilities of their IT infrastructure current. There, however, might not be direct correlation between investments that enable these innovations and experimentation and exploration and risks. For example, carrying out a new business portal might not involve substantial risk because it might use simple proven technologies. In contrast, upgrades to the infrastructure to deliver information in a new way might require sophisticated, expensive technology. The element here might be higher.
I'm not sure how companies balance these different investment elements. I haven't seen a nice methodology that allows companies to look at portfolios, which have experimentation, exploration, and exploitation on one side, versus service returns on the other side. The damages from the risk on service returns vary differently from the damages from the risk on exploitation.
Q. Are you seeing large organizations making significant investments to extend their enterprise to all constituents?
Many large companies recognize that they can scale up whatever efficiencies they can gain from going to these extended platforms, either internally or with business partners. Companies are taking the initiative to create these platforms and then making them available for everybody else to subscribe or to be part of it.
For example, in the early 1990s, Procter & Gamble and IBM worked together to create this efficient consumer response system as a platform. P&G wanted to streamline its internal process and its interaction with dealers. Once it realized the efficiencies it could gain by doing it, P&G wanted to scale with every retailer it dealt with. P&G invested in this development and then make it available for us to adopt. It has become a standard type of platform in the retail industry.
Eastman Chemical also took the initiative to create a platform and make it available to its business partners in the chemical industry. These companies think that if they can get efficiencies by using these technologies with a small set of partners, they can gain more economies of scale with a standard platform everyone uses.
Q. What challenges do companies that create a standard extended platform face?
Who governs these platforms has become a big issue for these companies? Obviously, companies that initiate and create these platforms would want to govern them. However, companies might face the challenge of selling the idea to their business partners. Using the platform could cause partners to incur the cost of changing their internal processes to work with it. Business partners might not have the incentive to sign onto these platforms unless it is mandated. On the other hand, a major business partners might be pushing the platform for their own needs. Again, it goes back to the institutional pressures being a driver of what the organization needs to do, and how it wants to make IT investments decisions.
Q. Can you sum up what are the strategic implications of IT investments?
If companies today want to be successful, they need to do a good job of leveraging IT. To this end, successful companies have made a sustained effort to invest in IT, and have doubled up on the capabilities necessary to leverage IT effectively. These entire organizations have developed a mature attitude about IT, rather than just enhance the IT organization's capabilities. They learned that to get more out of IT, they needed to change practices and routines, and even to change the organization's structure.
On the other hand, many companies go from one extreme to the other. When things are good, the CIO promotes the idea of IT begin a strategic enabler. When the business is in a downturn, the CIO is back to running IT as a cost center and trying to outsource as much as possible. Even in a down market, CIOs can still find ways to cut costs by improving processes. Two years down the road, these CIOs realize they've lost many capabilities and need to regroup.
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