IT Performance Translates to Top Financial Performance

July 11, 2008
Best-in-class manufacturers have very different IT profiles than their peers.

If your company excels in IT, will that proficiency translate into improved financial performance? Yes, according to research from strategic advisory firm The Hackett Group. Companies that are top performers in what Hackett refers to as IT business value management (Hackett's acronym: IT BVM) also tend to outperform their competitors across a wide range of financial and profitability metrics, including net profitability, return on assets and return on equity. IT BVM refers to management processes designed to maximize the economic value a company can drive from IT capital investments and operating expenditures.

According to Hackett's research, when compared (by industry) to global 1000 companies (revenues over $20 billion), top IT BVM performers generate $1.07 billion more operating profit on an annual basis and $645 million higher net profit. In addition, not a single company in the Hackett study was able to deliver superior financial performance without also being a top performer in IT BVM.

Hackett also found that top performers excel at four key IT process areas: business value governance; performance management; portfolio management; and IT financial management. Top performers have very different IT investment profiles than their competitors. At typical companies, the largest IT investment is for "infrastructure refresh." By contrast, top performers spend most of their capital on "innovation and improvement," usually in the form of discretionary projects.

"IT represents the largest capital investment category in many companies, and the largest general and administrative line item," notes Erik Dorr, senior business advisor at Hackett. "Yet most companies focus on maximizing the efficiency of IT, viewing it simply as a cost to be contained. The ability to maximize IT effectiveness -- the value IT delivers to the business -- is still relatively immature." There is a clear relationship, Dorr states, between IT investment, business value creation and competency in IT business value management.

Top performers manage their IT project pipeline more effectively than their competitors, Hackett's research indicates. The least promising initiatives are weeded out early on, and as a result only half as many projects are approved and funded (40% vs. 88% for typical companies). On the flip side, top performers tend to initiate and complete a much larger percentage of the projects that they do approve. They're also nearly two times more likely to meet cost targets on IT projects as typical companies and nearly three times more likely to meet benefit targets.

"The IT BVM processes we've identified represent only 3% to 7% of the overall IT processes and resources," observes Michael Janssen, Hackett's chief research officer, "yet by excelling in these areas, companies can drive dramatic bottom-line benefits. Companies that accomplish this understand that the need to get IT right' is one of the critical capabilities to stay ahead of the competition."

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