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.