Maximising profit from IT

Following on from last blog entry, IT does matter, more important than ever, I’d like to highlight a study that may have slipped peoples attention. Hardly surprising because the study appeared in an academic journal which is a good place to hide such things - the MIS Quarterly March 2012 (paid for download) if your interested.

Let me cut to the important findings:

• “IT investments have a greater impact on firm profitability through revenue growth than through cost reduction”
• “IT investments have a positive and statistically significant correlation with sales and profitability”
• “an increase in IT expenditure per employee by $1 is associated with a $12.22 increase in sales per employee”

That is, rather than looking to IT to save the company money, i.e. reduce costs, IT spending on generating revenue - innovation, new products, new services, new ways of capturing customers, and so on - is more beneficial to the company.

Second:

• “the effect of IT investments on sales and profitability is higher than that of other discretionary investment such as advertising and R&D expediters.”

So, if you have a few spare dollars you want to invest in the company you are better off spending them on IT than advertising, or research and development. But then, since much of IT - specifically when developing new products - looks a lot like R&D perhaps its not always clear.

And yes, the authors are clear: IT spending has more benefit than advertising. That might come as a surprise.

The research paper speculates on why these findings might be. One reason is that in the Internet age things have changes and IT is now more valuable than it was before. Put this together with my comments in the last blog entry, namely that modern corporate IT may well be able to the customer experience and you can start to see why.

The authors also speculate that the reason why IT does not produce greater savings is a) that many of the savings available have already been taken and b) cost savings are easily copied by competitors while innovations - new products and services - are far more difficult to copy. Which also implies that there is more competitive advantage in using IT for innovation, products, services and improving the customer experience.

(Part of the reason cost saving IT projects are easy to copy might be that they often involve off the shelf software and third party providers - often consultants - who your competitors can also use.)

There is a third finding that is also worth noting:

• “IT has a greater effect on firm profitability in service industries than in manufacturing industries”

What the paper doesn’t discuss, and I think is missing, is: how do these findings stand up when you consider more-effective and less-ineffective IT. After all, less effective IT can be a good way to through money way. For companies with poor IT deliver performance is IT still a better bet than advertising?

After all, the Alignment Trap suggested that less effective IT performance could lead to a decline in sales. I’d like to see this research go further.

10 years on: IT does matter, more than ever

Just under 10 years ago Nicholas Carr wrote a (in)famous piece in the Harvard Business Review entitled “IT doesn’t matter”. The argument was, post dot-com-boom, that IT was now a commodity, companies didn’t need to spend big bucks on it because they could buy just about anything they wanted off-the-shelf.

At the time my response was, “Is IT worth it?” I, unsurprisingly said “Yes it is” and then looked at Carr’s example of American Hospital Supply. My argument here was that rather than be defeated by commoditisation of IT American Hospital Supply could have chosen to make IT their business. It was a strategy decision.

Anyway, 10 years on. Commoditisation of IT has continued but it is hard to imagine anyone arguing like Carr that IT doesn’t matter any more. Indeed, IT is more important and in more and more cases is becoming the business.

Technology has destroyed the music business as we knew it and is in the process of remaking publishing; television is going to be changed soon.

IT forms the marketing channel now - Facebook, Twitter, LinkedIn.

Logistics is IT based - DHL, drop shipping, Amazon.

iPads, iPhones, Web - are the way you talk to your customers.

And thats the vital bit: information technology, computer technology, software technology is no longer a back room cost cutting tool. It is the customer interface. It is the customer service experience.

Take the travel industry for example. Go back 15 years, 1997. I remember booking my first flight to the US that year. I went into a travel agent, a young lady sat on the other side of the table and poked at a green screen. We talked, she booked me a flight. In 1997 how many of us ever saw the inside of a travel companies IT system?

OK, in 1997 a few were appearing on the web, go back to 1992 and I can safely say: if you didn’t work in the travel industry you didn’t touch travel IT.

IT was a back room activity. Yes the company needed it but the dependency was recent. Customers were unaware of all this.

Today that has changed. This year I’ve booked flights on BA, KLM, S7 and Virgin Atlantic. How I book them - the company web site, Opodo, Expedia, SkyScanner has a lot to do with the customer service experience. I normal start a flight search on SkyScanner, switch to Opodo or Expedia to book and complete things on the airlines own site. If a site is difficult to use I stop and switch elsewhere.

Thats flights. Booking the family holiday is even more IT dependent. Crummy interface, can’t get the answer and I drop the holiday plan and go to another supplier.

I’ve been making this argument for a few years now. So it was good to see McKinsey & Company catch up with me in April when they published “Are you making the most of your company’s ‘software layer’?” Its the same argument:

Software now forms an integral part of the customer service (i.e. buying) experience. Get it right (Amazon) and win big. Get it wrong and you will never be heard of again.

Underlying your delivery might be commodity products but choosing when and where to use off-the-shelf and when to write your own is more important than ever.

Now, imagine for a moment you were a newspaper editor in 2003. You read Carr’s article, you agreed with it, you commoditised your IT. Does that still look like a smart decision?

IT systems might be commodities under the hood but your thinking needs to be ahead of the pack and you need to be able to deliver on what you decide.

Kelly's Law - concluding principles (3 of 3)

Preface: this is the third of three articles on the subject of “Principles - in Software Development” and Agile Software Development specifically. The previous pieces are: Software Principles 1 of 3 and (Agile) Software Principles 2 of 3

Many years ago, so many I’ve actually lost track, but I think I can trace some of these back to ACCU Overload in 2002, I penned my own rules and law of software development. In writing the principles blog entries I though it would be worth revisiting them and seeing if they still held.

(Given that it is so long since I coined these laws it is also a question of whether the next generation of programmers agree with them.)

Kelly's law of advanced code complexity:

• Any code that is sufficiently advanced will appear as unmaintainable to a novice (Adapted from Arthur C. Clarke)

This came from looking at C++ meta-programming and some of my own experiences handing over C++ projects - see High Church C++ and The Developers New Work.

I still think this law holds. I still hear from developers who have taken over a code base and find that the original developers used some whacky coding techniques. In some cases the code was simply bad but in a fair few cases it is really advanced stuff. C++ is still the worth offender but Java generics and Aspect Oriented programming also feature.

Kelly's First Law of project complexity:

• Project scope will always increase in proportion to resources

I am even more convinced of this law than I was 10 years ago. The more people, time and money put into a work effort the higher the expectations. Plus, add in dis-economies of scale and big efforts are doomed.

You could argue that this law is an application of Parkinson’s Law (“Work expands so as to fill the time available for its completion.”) and I’d be prepared to concede.

Funnily enough, there is another Kelly’s Law, coined by another Kelly, a Mike Kelly (Kelly is a very common name). Mike Kelly’s Law is: “Junk will accumulate in the space available.” Substitute jump with scope, and space for resources and you have the same thing - QED :)

Kelly's Second Law of project complexity:

• Inside every large project there is a small one struggling to get out

This law is really consequence of Kelly’s First Law. If you have a project with lots of resources the original project will get lost inside of it. All too often the real mission in turning around a failing development effort is liberating the small inner project.

Kelly's Law of Software Subtlety:

• Subtlety is bad - if it is different make it obvious - Write it BIG!

This law is really about communication. Its saying “If something is worth saying then say it properly”. I think the law still stands. In many ways the visual tracking, Kanban boards, cards and what not in Agile is an example of this law.

This is also thinking behind The Documentation Myth in 2006. These days I tend to state this as:

• The bigger a document is the less likely it is to be read
• The bigger a document is, if it is read, the less that will be remembered

While this has obvious applicability to requirements documents it is generally applicable to just about all the documentation we write.

Epilogue

There you go, over three entries I’ve documented some general principles, some Agile principles and some Laws. Let me know what you think.