The Value of I.T. in an Economic Downturn
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Loading ...I.T. metrics guru Howard Rubin explains in this video interview that IT executives must impress upon corporate management that companies see better results when they make good IT investments during economic downturns. When companies fail to do so, they fall behind and cannot catch up with their competitors.
The challenge, however, is that IT departments have not effectively communicated the true value of information technology. Rubin says that IT executives must recast the conventional language around the IT budget and the strategic role of IT.
Topics on this video about IT metrics:
Problem of viewing IT investments as costs (and therefore trying to minimize that cost)
Lack of ability to communicate to the enterprise as a valued strategic partner:
Most IT departments do not have effective communication and marketing programs. Again, in business history, these organizations are young, and their strategic value is clouded and not clearly articulated. Most technology people revert and talk about things in technology terms. Having someone at a table for strategic planning when the business is trying to identify how they’re going to grow products, grow business, where future revenue is coming from, how they’ll launch into new markets … until you get the special CIO who’s able to communicate in business terms and not this technology or that technology, it really doesn’t work on the pure side of driving the business forward.
The complexities of having CIOs report to CFOs:
There are companies whose CIO channel is through strategy, CEO and the business executive table, and those whose CIO channel is through the CFO side. The language they speak depends on what channel they’re planted in. If you speak the language of cost, you’re condemned ever to deal with reducing cost; when you’re on the business strategy side, then you’re speaking the language of investments. So the channel controls the language and the interface, and CIOs who are constrained in the cost side need to learn the new language and move themselves across.
In tough economic conditions, companies are concerned about revenue growth. You need to protect revenue, but you also need to control operating expense. IT comes up on the expense radar and is usually whacked. In a time of crisis, companies typically revert to treating IT as a cost, and they put it under the CFO and get into cost-containment mode. They don’t pay attention to the fact that, in the average company, IT is 7 percent of operating expense—maybe 15 to 20 percent in financial services—and maybe they want to reduce that. But if you’re 7 or 15 percent of operating expense, that means there’s 93 to 85 percent of operating expense that isn’t IT, and they’re squeezing the wrong side of the equation. The business reflex in a crisis is to cut the most visible costs and that’s usually IT. The value of IT is visible enough, and they don’t understand that when they reduce IT cost, they reduce the possible leverage to get a big multiplier out there.
The problem of poor IT metrics:
That’s a failure of the CIO, and it’s also a failure of the current metrics that are out there. Most companies will look at calibrating their performance against competitors and say, “Let me look at my technology spending versus revenue, and is it too high or too low.” But CIOs don’t control revenue. They should look at technology spending versus operating expense to understand if they’re under- or overinvested in technology. In a healthy company, spending versus operating expense will rise in terms of IT because as you spend more in IT, you drive operating expenses down faster.
Falling into the trap of not spending enough on IT:
We’re at a beautiful time to be a technology-economics voyeur. You’ll start seeing splitting in the various sectors of the companies that use technology and move away, while the others are in cost-cutting mode. If the guys who spend continue to do so effectively, they’ll create a gap that’s insurmountable for those who haven’t. That’s the problem with the economy today. In a time where they should be spending their way through a crisis and using IT as the lever, they’re cutting IT, and operating expense will go the wrong way, and they’ll lose any competitive edge they’d ever had. That’s my theory.
There’s a difference between companies that treat IT as a cost and companies that treat it as an investment. It’s probably worth anywhere from 2 to 5 percentage points in gross profit, which is tremendous. You can really show the cost versus investment mentality showing up in gross profit in multiple years.
The people who treat IT as an investment and are IT-savvy have superior business performances measured by profitability, which turns into earnings per share and all this other good news downstream.
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