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. 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.