"Does IT Matter?" Yes, If You Define Your Terms

In kicking off the core/required course "Strategic Technology & Innovation" that I'm teaching as an adjunct professor at SUNY/Stony Brook's Graduate College of Business—a two-year program leading to an MBA for senior law firm managers (see the SUNY site about the program) —I assigned Nicholas Carr's 2004 book, "Does IT Matter?" and, while I think it clearly does, there's surprisingly little academic literature supporting that view convincingly.

So I was heartened to see this research paper at HBS' Working Knowledge, which examines the return on IT investments at "midsized" corporations, and attempts to come up with an answer to this state of affairs:

"There is considerable confusion among academics and practitioners over how (or if) information technology (IT) impacts corporate performance. Some have stated that IT has become a ubiquitous input, like electricity or railroads, which confers little competitive advantage to a company that employs it. Others have argued that IT is crucial, but failed to find systematic correlations between IT spending and business performance. Others still have claimed that IT is important, but based their arguments on a few, pre-selected examples of outstanding companies, like Dell and FedEx, that have long used information technology as a differentiator. The crucial question has still remained open—can a typical company truly benefit from a focus on information technology to differentiate itself from competitors and achieve business objectives?"

This is precisely the question my students and I have been attempting to address in the MBA program.  What differentiates this study—which, not to hide the ball, concludes that IT does enable profitable growth—is that it doesn't look at macro measures which by and large have proven ambiguous, conflicting, or inherently suspect, but rather it looks at micro measures focusing on exactly what IT can do to improve business processes:

"It is easy to spend a considerable amount of money on technology with very little improvement in the functional capability of the business. In our study, however, we wanted to focus on what IT actually does for a business. To accomplish this, we developed an approach that measures the business capabilities IT can enable. This approach details forty different business scenarios that accurately measure how IT impacts all major areas of the firm: Sales & Marketing; Finance; Operations; Employee Productivity, and IT Infrastructure. Put together, these scenarios provide a comprehensive view of the real impact of IT on firm performance."

They examined 608 "midsized" (100 to 500 employees) product and service firms in the US, Brazil, and Germany, and divided them into quartiles in terms of IT capability.   The bottom line (emphasis supplied) is:

"Our results show a high correlation between IT capability and profitable business growth. Firms that build high capability IT systems grow faster than firms that do not, and do so while increasing both revenue and profits."

Graphically, they separated the firms into quartiles in terms of IT capability, and compared those rankings to the Compound Annual Growth Rate ("CAGR") or revenue for the prior two years; the findings were significant at the 99.9% level.:

The interesting question, of course, is how did they achieve this?  The answer does not lie, as mentioned, in "macro" measures such as total IT spend as a percentage of revenue, or number of PC's per employee; these instruments are far too blunt.  Rather, the researchers focused on nearly 40 highly specific IT-enabled business processes actually put to use at the surveyed firms such as "mobile and remote access to information and processes" (sound like your BlackBerry?).   Conceptually, the ideal IT implementation moves from:

• business strategy (the over-arching goals), to
• business process (the things the firm actually needs to do to pursue those goals), to
• the technology implementation to support that, all culminating in:
• profitable growth.

Among other things, the researchers gave numeric evaluations (1—100 scale) for each of the firms on an "IT Scorecard," evaluating those 40 business processes.  While not all functions were performed in every firm, it's interesting to note that "5 key functional areas" were tested:  Sales and marketing, finance, operations, IT infrastructure, and most notably from our perspective, "empowered professionals."  Specifically scored under that last category were:

• easy to find information
• easy to use information
• easy to coordinate teamwork, and
• easy to communicate.

I doubt many would argue with those four key concepts as covering what sophisticated professionals need IT to deliver for them.

From the professors' perspective, they labeled superior performance on their IT Scorecard as revealing "a high capacity for business process scalability."  What does this mean?  Let me quote the elements that go into their description, and then put it into terms familiar to those of us in law-firm land:

• Improved process knowledge and process standardization, which enables the firm to more easily manage the complexity involved in growth. [Think about repeated "processes" your firm must perform, such as managing discovery in a large litigation:  The better you can understand ("process knowledge") and the more you can routinize ("process standardization") large volumes of discovery, the more large and complex litigations you can handle.]
• Streamlined operations that can grow without significant additions to headcount. [This one is easy:  If your financial systems, for example, can seamlessly accomodate a new office or a new practice group, you're there.]
• Flexibility to take advantage of new opportunities and respond quickly to exogenous changes. [This has to do with much more than IT, starting with the mindset of firm leadership, but an IT infrastructure that can accomodate new opportunities is surely essential to being able to exploit them rapidly and effectively.
• Better visibility into critical business parameters to guide important management decisions.  ["Business intelligence," which explores and exposes how your firm uses resources and creates profits, is what they're talking about here.]

Where are opportunities within your firm to streamline "business processes" through more intelligent and focused deployment of IT?

Published by Bruce at September 11, 2006 7:55 AM | TrackBack
Published to Cultural Considerations | Finance | Globalization | IT | Leadership | Practice Group Management | Strategy