Bain & Company: IT spending is 57% higher in companies where it's considered a significant enabler of growth
25-Aug-2004 :
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It's no surprise that as the economy is looking up, 70 percent of senior executives agree that information technology (IT) is highly relevant to enabling their companies to grow, but 60 percent complain that IT is inhibiting growth in key areas – and these attitudes affect IT spending.
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These are two key findings of Bain & Company's new survey, "Is IT a Bottleneck to Growth?" of executives from 359 companies, largely based in North America. The majority of participating executives serve in C-level finance, IT or general management positions.
"Hopefully, the survey is a wake-up call for CIO's when 60 percent of business executives think IT choices have been obstacles to achieving growth," said David Shpilberg, who heads the Global IT Practice for Bain.
The survey results reveal that IT spending averages 7.4 percent of revenue in companies where executives view IT as a significant enabler of its growth strategy, but only 4.7 percent of revenue in companies where executives view IT as an inhibitor – more than a 36 percent decrease.
"The lack of measured results continues to keep a choke hold on IT spending in many companies," added Shpilberg. "IT organizations need to deliver a consistent stream of business value to win the confidence of senior executives and make the case for increased IT spending."
The survey also finds IT's impact on growth correlates with whether companies choose to invest in IT that supports new capabilities and innovations. In companies where senior executives view IT as a significant growth enabler, 42 percent of IT spending went toward new systems and capabilities versus maintenance of existing IT platforms. In contrast, spending on new systems and capabilities drops to 30 percent in companies where business executives view IT as an inhibitor.
Bottlenecks to Growth
Of the 203 respondents that viewed IT as a growth inhibitor, more than half felt that the lack of information or transaction capabilities were causes for the bottlenecks to growth, while only 30 percent of the respondents said lack of infrastructure was a key underlying issue.
"Senior executives think they have enough IT spending, just not enough good results," said Steve Berez, co-founder of Bain's Global IT Practice and survey leader.
Further analysis of the survey responses reveals four factors that largely contribute to the perception by executives that IT is a bottleneck to growth in their companies:
1. Poor business alignment – two-thirds of senior business executives strongly agreed or agreed that IT didn't understand their business needs or their companies failed to adequately coordinate business and IT changes;
2. Weak value delivery – 67 percent of respondents strongly agreed or agreed that existing IT was underexploited or systems didn't deliver promised capabilities;
3. Capability sourcing gaps – one-third of respondents strongly agreed or agreed that there was a lack of IT or vendor skills;
4. Ineffective complexity management – nearly half of respondents strongly agreed or agreed that their complex legacy systems lacked the flexibility to stay current with business needs.
Stick To Your Knitting
When it comes to understanding the value of IT, Bain finds that the distance from a company's core business plays a major role in shaping executive attitudes. Twice as many survey respondents viewed IT as enabler of growth rather than an inhibitor when IT was applied to their core business. Core business growth initiatives include those that aim to: retain customers, grow current customers or acquire new customers in the same line of business.
However, based on survey responses, overall IT effectiveness wanes as it gets applied to growth adjacencies that extend further and further from a company's core business. In order of increasing distance from the core, these growth adjacencies include:
— New products or services
— New types of customers
— New channels
— New geographies
— New steps in the business value chain
And an even more dramatic reversal in attitudes occur when senior executives are asked if IT is a enabler or inhibitor for growth initiatives that are totally unrelated to a company's core business. The number of respondents that believe IT inhibits growth was 50 percent higher than those believing IT enables growth when applied to new, non-adjacent initiatives.
Berez summarized, "There's no place like home when it comes to creating profitable growth," adding, "Bain's survey results show that IT is an important contributor to the increasing difficulties firms face when seeking growth farther from their core business."
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