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.