Spenders and savers

Analyzing your peers’ IT investment styles can help bring greater returns.

IT spending is still under intense scrutiny as companies continue to shrink expenses and tighten their belts. Factor in new legislation such as the Sarbanes-Oxley Act, which requires companies to report investments that may affect operating performance, and budget battles are shaping up to be ugly.

Today’s IT leaders must prove that IT investments deliver strategic and competitive advantage. This requires a fundamental shift from managing expenses to managing corporate success. The results of IT spending should be measurable in key financial metrics and ratios, such as improved revenue growth, increased profitability, and lower overhead.

Planning teams need to look outside the company’s walls to its peers to determine whether progress is being made on the competitive landscape. You might choose peers for this comparison based on industry, business model, revenue, geography or number of employees.

Examining the spending practices of the group leaders, or those with the highest value and spending efficiency, can reveal insight into how to adjust spending levels and invest more effectively to gain greater ROI. On the flip side, comparisons against the group’s poorest performers show what practices to avoid.

To compare your firm to peers is to graph overall financial performance vs. IT spending to determine if there is any correlation. This requires researching key performance metrics, many of which are available from annual reports and 10-K filings, although it often takes some digging. For detailed IT spending information on specific companies, you could use a software tool that contains a peer comparison database, subscribe to analyst benchmarking services or use a larger accounting consultancy.

Use the average of the peers as the demarcating line to evaluate the relationship of IT spending vs. performance, categorizing each company within one of four quadrants, classified by leaders and followers:

Frugal Leaders: Frugal leaders spend less than their peers on IT, on average, and derive higher impact from their lower-than-average spending. These companies often aren’t innovators in how they invest in IT; rather, they take a wait-and-see approach, investing in new technologies as they become mature. They frequently have more established processes than their peers. In tight markets, frugal leaders have proven to be the best performers – being adept at scaling spending down to meet revenue slowdowns while still maintaining profitability.

Unless these companies misstep, their leadership position is normally secure. The biggest danger is if the market grows or shifts dramatically, they could lose significant ground and market share by not investing quickly enough. Frugal leaders must monitor their mix of IT, and spend more when product life cycles dictate and growth opportunities emerge.

The frugal leaders should be sure spending still occurs on innovative projects such as Web services, wireless, and business intelligence.

Investing Leaders: Investing leaders generally spend more than their peers on IT, but their IT and other business investments still pay off. These companies tend to have higher-than-average budgets for innovative projects or near-term initiatives to reinvent the business or process change using technology. In general, the goal is to improve competitive positioning with strategic spending.

When a market retracts, these companies may not be quick to scale back. Within a few years, these companies should become frugal leaders or risk becoming habitual over-spenders. Sustained higher spending levels shows that a percentage of the spending is being squandered.

Investing leaders should look to maximize investments from existing technology and reduce costs with projects such as enterprise application integration, warehouse consolidation and data center consolidation.

Investing Followers: Investing followers spend more than their peers on IT yet don’t achieve comparable returns. These companies could be investing in reinventing their business, improving processes, launching new products or other important short-term investments to reap long-term rewards. Or, the company simply could be investing in the wrong IT projects.

This type of company is ripe for opportunities in reducing costs and deriving business value. If the Investing Follower doesn’t move to become an investing leader or frugal leader over time, change is in order.

IT operations savings need to be derived via server and storage consolidation, client standardization, and IT manageability improvements. Business projects should be focused on cost savings in most important business process improvements in the supply chain, CRM, financial management or human capital management.

Frugal Followers: Frugal followers spend less on IT than their peers and often are technology investment laggards. This frugality often entails some positive traits, such as best practices to reduce costs. Whether because of a lack of investing in innovative technology, a product life cycle challenge, or not recognizing some other fundamental business shift, these companies have fallen behind their peers on IT ROI.

These followers often need to migrate to an investment phase in the near term to change their competitive position. They can start by selecting one or two modest high-impact strategic projects that could help change the market or target a competitor.

IT should focus on a mix of cost savings and revenue growth, focusing on the highest opportunity business process improvements in supply-chain management, CRM, financial management, human capital management and analytics/business intelligence.

Once the planning team has determined where its company is competitively positioned, uncovering opportunities for improvement is the next step. Rather than looking at project requests reactively, teams should proactively explore and quantify ROI options.