Information technology has the reputation of being a "black box" -- an area where computers mystically perform tasks that only a handful of executives understand. But IT also can become a black hole into which millions of dollars can disappear, without much to show for the investment, if companies don't link technology to business performance.
According to a recent study, "Technology Issues for Financial Executives," by the Financial Executives Research Foundation, many executives are dissatisfied with how their organizations use information technology to improve business performance.
- Only 7% of the survey respondents said they had made substantial progress with their top information need in the past year.
- About 70% of the surveyed financial officers said they believe their current level of information integrity is negatively affecting their organization's ability to achieve its business objectives.
- Perhaps most revealing, about 40% of the responding financial officers reported unknown, low or even negative returns on their IT investments.
To minimize problems, companies need to follow an objective, performance-based methodology for developing an appropriate IT strategy, making sound IT investment decisions and then executing and managing the chosen initiative in a way that relates these steps directly to organizational performance measures, including both financial and nonfinancial metrics.
Concerns About IT Effectiveness
Many executives question the value they are receiving for their level of investment in IT -- and whether that investment truly aligns with the strategic direction of their company. Management asks: Are we overspending? Underspending? Spending on the right initiatives? The answer is that companies just don't know.
Despite the misgivings they may have about IT, most businesses expect to continue making significant IT investments in the near future. When hundreds of manufacturing industry executives were surveyed by IndustryWeek and Crowe Horwath LLP ("The Future of Manufacturing 2009," Nov. 2009), 70% said they expected to increase their IT investments during the coming three years.
Why are financial executives resigned to spending more on IT while achieving less? In many cases, executives recognize the problems but simply might not recognize the potential impact IT investment could have on solving those problems. For example, they may not link a business-intelligence investment to potentially increased sales. Or they may develop inflated expectations for sales increases that are unrealistic, given a scope of implementation that is limited or misaligned.
The challenge can be especially acute in companies where the executives who make IT decisions are managing multiple initiatives at once and do not have adequate time or resources to analyze IT initiatives thoroughly. As a result, they may fail to fully understand how deeply rooted IT is to overall business performance.
Compared with other investments that companies make, the benefits of investing in IT are typically not as clear-cut. Investments in product development and marketing, for example, create a tangible awareness among employees and customers -- people can see what they're getting for the investment. IT investments, on the other hand, may be less visible to the organization, and the payback may be less evident, leading management to question the value of IT investments.
This point of view is especially true in today's challenging economic climate, where companies that might have deferred making IT investments over the past several years now find themselves playing catch-up. Given the need to make up for lost time, the spotlight today is on making the right decision.
The IT Struggle
If it is so important to invest wisely in IT, why do so many companies struggle with IT issues? This situation can result from a number of ongoing challenges, including:
- Poor communication between nontechnical business leaders and those in charge of the IT effort;
- A lack of common references, priorities and expectations;
- Internal biases or inaccurate perceptions of technology providers, based on outdated history or word-of-mouth impressions; and
- Limits on funding for IT priorities, mismatching expectations in terms of real results from IT investments. In short, IT is expected to "do more with less."
Recently, a manufacturer of consumer products conducted an investigation into its own struggles with IT. Although the company, which sells to large retail chains as well as through other channels, had invested in an enterprise resource planning system, it still took too long to bring products to market, reconcile inventory and close the books. The investigation revealed that despite the significant investment in advanced technology, 95% of the company's business was being run through manual processes and spreadsheets. In this case, old habits die hard.
A number of warning signs can disclose potential problems with IT strategy, prioritization, implementation and management. Some of the more common indicators include the following:
- There is a lack of proper evaluating and planning for IT investments.
- Poor implementation destabilizes the ability to transact with customers.
- Complex IT decisions are made more on the salesperson's strength than the technology fit.
- IT spending is considerable, but the business sees little or no measurable improvement.
- Upgrades to the IT platform do not produce new benefits or capabilities but merely do what the old systems did.
- Compliance still depends on manual detective-type financial controls rather than automated preventive systems.
- Spending on noncore and costly items, such as internal data centers, does not consider innovative alternatives, such as outsourcing or virtualization.
- Financials must be restated on a regular basis.
- The organization is not reacting to IT trends, such as social networking and mobile applications.
Many of the items in this list highlight the often unseen cost of poor IT planning and management. Beyond the significant price of the technology itself is the often greater cost that comes from failing to achieve the expected results. These costs include internal inefficiencies, poor information to support management decisions, reduced financial performance and a frustrating customer experience.
Critical Business Triggers
A number of significant business events often add urgency and importance to IT decisions.
Leadership Changes
Organizations require different management skills at different stages of their lifecycle. The new chief financial officer who comes on board after an initial public offering, with a mandate to help the company grow, may or may not have the experience required for oversight of the IT function. If not, the company could be in for a difficult period of adjustment.
Cost-reduction Initiatives
Reducing costs has become a way of life for many organizations. In many cases, technology may actually help reduce organizational costs or help improve flagging revenues. When cutting is applied to the IT investment category, a refined prioritization mechanism is important when choosing between alternatives. Technology can enable a reduced labor force to be more productive, allowing organizations to accomplish greater performance measures with equal or lower fixed costs.
Mergers and Acquisitions
Business combinations also present challenges to IT. There is a window of time -- typically, three to six months following a merger -- where organizations are more receptive to change. The ability to capitalize on this receptivity and initiate that change is important. Otherwise, companies lose momentum and a tendency to resist change settles in.
Carve-outs
The type of merger or acquisition can also impact the strength of the trigger. When companies sell a portion of their business to another organization, they typically oversimplify and overestimate what it is really going to cost the buyer to take on that new challenge. Such carve-outs are very complex and costly. Businesses that don't participate regularly in carve-outs often find them difficult to implement.
Changing business models. One of the most widespread triggers in this age of global sourcing is the changing business model. Companies that used to manufacture products now become importers and distributors when they outsource production abroad. They transform themselves from local manufacturing organizations into international sales and marketing organizations. Instead of operating IT systems focused on the purchase, delivery and assembly of raw materials or components, they need systems that can help them forecast demand for products made halfway around the world that won't be shipped for six months or more.
Linking IT to Business Performance
A formal, structured approach that links IT investment to business performance can help companies avoid many of these problems by providing a focus to the investment that is often missing. Such an approach typically spans four broad stages: assessment, evaluation, implementation and sustainability.
Assessment. Assessment explores and analyzes business systems, security, spending, integrations, hardware, communications, personnel, policies and procedures, and intellectual property. An IT assessment is designed to uncover hidden risks and opportunities, and communicate complex issues in a format that is accessible and actionable by management. For example, an assessment may reveal that a manufacturer is using the wrong software tools for planning and forecasting, or that manual spreadsheets are not integrated into the distribution system. With an assessment as a foundation, it is possible to create a plan that links IT investment to strategic growth.
Evaluation
Evaluation encompasses the selection and implementation of IT systems to support the business. IT systems represent a significant investment -- frequently seven figures or more -- and the cost of making an incorrect decision is high, so companies reach out to "experts" for advice. Sometimes, these experts include vendors with a vested interest in the outcome. While vendors may have a lot of technical knowledge about IT systems, they are no substitute for independent advisers.
Implementation
Once a company has made a decision to go with a specific system, the next step is to install the hardware and software -- a job that is easier said than done. In many companies, implementation of a major IT system is not an everyday event and certainly not a core competency for many manufacturers and distributors. Bringing in professionals who install systems for a living improves chances for success.
Sustainability
After new systems are up and running, companies need to monitor them to make sure they continue to deliver the expected level of performance. How much attention a company pays to each of its systems depends upon the value those systems deliver. For example, an enterprise resource planning system may keep production humming on a daily basis, but a planning and forecasting system that adds efficiency to the supply chain can change bottom-line profitability.
Cover the Basics, Too
Taking a structured approach to IT investment can help companies sidestep many problems and improve both the effectiveness and the efficiency of their technology systems. But even the most rigorous approach to planning can go awry if companies fail to take care of the most basic requirements.
Several years ago, a midsize manufacturing company in Southern California embarked upon an initiative to align its IT systems more closely with its business performance. Business was good, and the company wanted to do what it could to help ensure future growth.
One day, when the project team was meeting with its outside IT advisers, the building started to shake and the fluorescent lights started to flicker. Everyone in the meeting looked at one another and thought the same thing: earthquake.
The people in the conference room got up from their seats and started to hurry out of the building. But before the IT managers could flee to safety, they had to run into the computer room, load all of the back-up tapes from their mainframe into a walker basket, and wheel the cart outside. That was their disaster-recovery plan.
It doesn't take living on a fault line to realize that managing IT investment requires a heavy dose of common sense. A company can have the most robust plan in the world, but if it doesn't also cover its basic needs, that plan won't be worth the paper on which it is written.
Doug Schrock is a principal in the Indianapolis office of Crowe Horwath LLP. Josh Cole is a principal in the Grand Rapids, Mich., office of Crowe Horwath LLP. Jeff Shaffer is with Crowe Horwath LLP in the Chicago office.
