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 NEWSMaking the case for IT By Owen Linderholm May 11, 2001 1:01 pm PT DURING THE PAST 10 years, IT spending has accelerated dramatically, ending with two years of almost excessive Y2K and e-business investment. At the same time, productivity in the U.S. economy has boomed, and there is growing consensus among economists and business leaders that this rise is directly linked to IT investment. Nevertheless, IT executives are still under pressure to prove and measure the worth of their departments, while naysayers continue to challenge the costs and returns associated with IT. And today's current economic downturn has brought questions about the value of IT into even sharper focus.
The results are surprising because they reveal just how positively IT is viewed and valued by American business today. The core question in our survey asked respondents simply how valuable IT was to their company. The majority of respondents (70 percent) said IT was absolutely essential to their company's business objectives, whereas only one person in 200 said that IT didn't affect the company's business objectives at all. Dawn Lepore, vice chairman and CIO of financial brokerage house Charles Schwab in San Francisco, says that every single product and service Schwab offers is touched by technology. "On the very busiest day at our Web site ... we had just under 100,000 simultaneous sessions, which means that we had 100,000 of our customers interacting with us at the same time. All you have to think about is what it would cost to build enough call centers to have 100,000 employees be able to handle 100,000 phone calls at any point in time and you can see the value that technology adds," she says. But critics want to hear harder numbers than that. They want to know about total costs and revenues and measurable gains in productivity. Productivity numbers in particular are difficult to measure adequately, especially if metrics weren't adopted before the installation of technology. Unfortunately, most systems are put in place strictly as support functions (accounting systems, for example), so they aren't attached to the business goals of generating revenue or of cutting costs for a specific business unit. Paul Strassman -- consultant, author, and CEO of Information Economics Press -- is an outspoken skeptic of the claims linking IT investments to productivity. In his 1999 book, Information Productivity, he contends that U.S. corporations have shown an improvement in information management metrics, but that overall, business falls far short of its potential. "For my first 30 years as a CIO [1961 to 1991] just about all of my attention was devoted to coping with intracompany issues [such as invoices, inventories, cost accounting, etc.]. Despite pretentious claims, the IT organization was nothing more than running an orderly boiler room on a ship sailing somewhere. When the captain wanted more steam, he just commanded the engine room," Strassman says. In contrast, Harris Miller, executive director of the Washington trade group Information Technology Association of America (ITAA), believes that a substantial amount of the increase in productivity within the U.S. economy during the past 10 years can be attributed to IT. "The fundamental transformation was the ability to have information available better, faster, cheaper than anybody had projected before. And that's the explanation of the productivity gains that helped to drive much of the economic growth. And I do believe it is going to continue [because] it's sustainable; it's not just a short-term phenomenon," Miller says. In our survey, we attempted to answer some of these traditional ROI questions more precisely by looking at the impact IT had on generating revenue within a business rather than just focusing on the cost of technology. Although there were differences between the responses of IT and general business executives polled, they agreed substantially: 52 percent of IT executives thought that IT had a significant impact on generating revenue at their businesses; 34 percent thought it had a moderate impact. Although less bullish, business executives felt IT had a similar impact: 45 percent thought it was significant; 37 percent thought it moderate. In addition, over 60 percent of both groups thought that the impact of IT on revenue generation was growing, and only 1 percent thought it was declining. Overall, when InfoWorld asked about the cost of IT versus the revenue directly attributable to it, the mean net result was clearly positive with a net increase of 20 percent in revenue after accounting for the IT costs -- and again, business executives matched IT executives in their responses. Interestingly, business executives attributed both slightly lower revenues to IT and also slightly lower costs than did IT executives, but the net increase in revenues for both groups remained at 20 percent. That's a pretty clear signal that businesses have found a concrete, bottom-line return for their IT investments and also that companies are looking more carefully at what IT contributes to the bottom line. Although unconvinced that IT is putting the wind in businesses' sails the way it should, IT critic Strassman concedes that there has been progress. "IT now has a place on the bridge where the steering is done. In short, IT has been transformed from housekeeping to an active agent in the information-based, competitive race," he says. This sea change is reflected in the level of importance placed on understanding the business for IT executives and managers as well as the emphasis placed on understanding technology for business executives. In our survey, 42 percent of executives said it was critical that IT employees understand the business strategy of their company, and 32 percent said it was very important. Only 2.5 percent said it was not important. Conversely, 27.5 percent said it was critical that the business unit's management understand technology, and 42 percent said it was very important. Sometimes understanding the importance of IT can provide a boost to a business beyond what's expected, and that can mean discarding standard ROI measures. "If you had asked us when we first put up our Web site whether we envisioned the kind of profitability that we've gotten from it, we would never have projected [the huge growth in online trading]," Schwab's Lepore says. Despite all the integration of IT and the elevation of its role within business, not everyone agrees that IT has made the full transition from being an operational arm of the organization to being a full and productive core business unit. Strassman argues that IT's value within an organization has not yet shifted from a value based on improving operational productivity to a value based on helping the core business itself. "If the IT organization is not operationally productive and operationally superb, all other bets are off, and the IT leadership gets decapitated or outsourced or both. Only after the business is operating smoothly and productivity is increasing will top management allow the IT organization to become a business transformation agent. The politics of making such a change is messy, since the IT organization will always be seen as intruding on existing interests who already claim to be responsible for advancing the business," Strassman says. Vince Caminiti, senior vice president for e-business at Delta, is a business executive charged with driving the adoption of e-business processes across Delta's various business units; he is one among many who think the relationship of IT to business is changing. "I didn't realize how complex, comprehensive, and expensive it is to get world-class technology and get it right," Caminiti says. "It's also given me an appreciation for the fact that [IT] doesn't always get what they need from the business side to do the job in terms of describing the business process." The ongoing division between business and IT executives arises out of the tensions inherent in important political and business decisions made by executives: Who sets the direction for technology strategy within a company, who decides what budget levels are, and who ultimately authorizes expenditures. One of the clearest and most surprising findings in our study was the agreement in the opinions of the IT executives when compared to the business executives -- except in one area. When asked who made the final decision about technological direction for a company, IT executives said that executive IT management made the call 47 percent of the time and corporate executive management made the call 28 percent of the time. But business executive management reversed that, placing the decision with corporate executive management in 59 percent of companies and with executive IT management in 22 percent. In addition, business managers felt that corporate executive management selected technology vendors more often than IT executive management did, while IT executives again felt the reverse was true. That tension is not necessarily a bad thing for IT executives. IT has become so important to business that pioneering companies, such as financial exchange Nasdaq, are starting to transition their top IT managers to other operational management roles (see " Nasdaq takes stock of integration"). Ultimately, more CEOs will have spent time in IT on their way to the top, says Hardwick "Wick" Simmons, CEO of Nasdaq. Our research echoed that sentiment, finding that IT is extremely important to the modern business: 54.5 percent of all executives questioned for our survey said that IT had a significant impact on their business strategy and 70 percent said that the role of IT for business strategy was increasing. "For many of us, we all had our stints in operations and things of that kind. Today, to understand the guts of the business, [IT] is extremely important," Simmons says. "So it wouldn't surprise me at all if at some level ... we found that individuals that were considered up-and-comers in an organization would matriculate through the IT organization." Return to our Special Report on the True Value of IT.   
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