Is it spending worth while?

Since myself and all the readers of this column are directly involved with the IT industry in some capacity, there is an inherent assumption that we are neccessary. It is something of a shock therefore to read a report by Paul Strassmann that indicates that there is little or no relation between the spending on IT and the profitability of the company making the investment. Possibly it should not be so surprising, but we don't like it to be made public.

There has always been the one unsolvable problem - how can the effectiveness of IT be measured? IT investment is only one of many factors that affect the state of any company, and it surely can not be as influential as major changes in technology, in fashion or in the economy. It goes without saying that a company that invests in IT and sees a growth is likely to put that down to the investment, but it in fact may as easily have been due to a timely advert on TV! On the other hand we seldom question the IT investment if there is a fall in the fortunes of the company.
The problem of measuring IT cost effectiveness is difficult on two fronts. On one hand it is difficult to work out what it has cost, because of the distributed nature of PCs. On the other hand it is even more dificult to measure the effectiveness in business terms.
For years PCs were sold as cheap replacements for mainframe computers, until this myth was exposed about five years ago, when industry analysts estimated the total cost of ownership as opposed to the cost of buying a PC. No one would make a similar claim today, but it does serve as a reminder of just how easy it is to make serious errors in estimating costs, and even worse just how easy it is to mislead people. In retrospect a lot of current problems stem from the fact that no one seems to have been punished for the misrepresentation, again because of the difficulty of measuring efectiveness. In any case the responsibility for buying PCs was diversified in most companies, so that there was no single unit to blame. I suspect that today, while the cost of data warehousing is controlled, the investments in e-commerce are proving just about as difficult to monitor as it has been for PCs.
Measuring the effectiveness of an IT investment is a near impossible task. For a start there are many different criteria with which business success can be accounted. Some companies are driven by profit, others by market share, others by growth and many others by stock value. In many cases huge spending on IT is forced on companies simply because the competitors have invested. Nowhere was this more obvious than in data warehousing and CRM. Wal-Mart probably started it all. To give them credit they gambled on data warehousing and won; the competitors could have done the same, but they would not take the gamble. Once Wal-Mart had won dominance of the market then the other super-stores had to follow suit, or so it has been universally assumed. But there is no proof that it was the Data Warehouse alone that won the day, it could just as easily have been bulk purchasing or better store locations, in other words simply a better business model than the others.
The bottom line of all this is that companies should be spending far more of their resources on other things than IT. To quote Paul Strassmann "the lack of correlation between IT spending and profitability should be seen as evidence that other influences such as strategic advantage, competative positioning and leadership are likely to be more effective".
The desktop is the obvious place where vast sums of money are wasted. How could anyone justify the cost of upgrading current PCs, both hardware and software, just to run another version of Office? In fact most companies are going to resist that upgrade and are significantly extending the life of their existing investment. But it is not just PC investments that need to be analysed. Are there any real advantages from the introduction of ERP systems? I wonder! I come back to an old adage, the real benifits of IT lie in data processing, "keep the stock levels down and get the invoices out early". That is easy to cost justify.


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article 2001-08-03T00:00:00.000Z Martin Healey
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