Five Ways IT Drives Competitive Advantage

"Does IT matter?"

While considerable difference of opinion about this issue exists among many business leaders, new research finds a conclusive answer. The best companies clearly use information technology (IT) as a strategic enabler to create competitive advantage, according to the latest Book of Numbers findings from The Hackett Group, a strategic advisory firm and an Answerthink company (NASDAQ: ANSR).

Author and former Harvard Business Review executive editor Nicholas Carr sparked intense debate among C-level executives with his 2004 book challenging the conventional wisdom that IT is a strategic business tool. His recommendation, among others, was that IT has become a ubiquitous commodity, and should best be treated as basic business infrastructure. He suggested that IT has little ability to drive competitive advantage, and companies should remain late adopters, minimizing investments in technology. The greatest IT risk companies face, he said, is overspending.

But Hackett's research, which is based on an analysis of benchmark data from over 2,100 companies worldwide, finds that world-class IT organizations - those which achieve peak efficiency and effectiveness -- spend 7% more per end-user on IT operations than typical companies. For a typical Fortune 500 company with a world-class IT function, this translates into increased IT spending of $29 million/year relative to their peers.

This investment more than pays for itself by enabling reduced cost and improved performance in finance, procurement, human resources (HR), and other areas of back-office operations. Hackett's research found that world-class Fortune 500 companies run these functions at lower operational costs of $134 million/year ($7.1 million/billion of revenue) compared to typical companies, and process automation and IT enablement play a very significant role in realizing these lower non-IT back-office costs. In addition to this efficiency impact of IT, a direct correlation was found between performance of the IT function and effectiveness in finance, procurement, and HR.

Hackett's new Book of Numbers edition, "ROI in Technology: The Key to World-Class Performance," finds that in order to drive the maximum value from IT, leading companies pursue five key strategies:

Standardize And Consolidate -- They streamline and simplify, and to ensure maximum ROI they take the critical step of standardizing master data definitions as they reduce the number of ERP systems and other applications. By reducing spending through standardization and consolidation, world-class companies can increase their focused spending in areas which generate greater strategic return.

Focus On High Return Opportunities -- They take a differentiated approach to IT investment and do careful reward/risk analysis, to identify areas that can reap the greatest benefits. Generally these are areas where the gap between world-class and typical companies is large in two key ways -- overall performance and also how heavily technology is used. In many cases, including transactional automation, world-class performance and maximum value can only be achieved by implementing technology in conjunction with best practices and process redesign.

Don't Indiscriminately Minimize Cost -- Rather than focusing on across-the-board cost cutting, these companies take a very different perspective and seek to maximize value at the lowest achievable cost, in part by reallocating spending from technology infrastructure to application management. Hackett's research clearly shows that indiscriminate IT cost cutting has a negative impact on performance in other functional areas.

Maximize Value Of Information Assets -- World-class companies obtain the greatest possible return on their technology investment by maximizing the value of information assets to end-users through data standardization, rich metadata, online information access, analytical capabilities, and alignment of the information architecture with business initiatives such as enterprise performance management.

Outsource Selectively -- They outsource carefully, and use outsourcing as a tool to improve effectiveness rather than efficiency. In fact, Hackett's research shows that for many typical companies the lack of an effective strategy and insufficient consideration of process and infrastructure optimization prevents outsourcing from driving reductions in IT process costs.

To see Hackett's Research Insight, which provides more details on this research, visit: http://www.thehackettgroup.com/insights/roi/