Article

Who decides how much to spend on IT?

Jeanne W. Ross and Peter Weill, special to SearchCIO.com

FOR several years now, we have observed the frustration -- sometimes even exasperation -- that many business executives feel toward information technology and their IT departments. Our center runs a seminar called "IT for the Non-IT Executive," and the refrain among the more than 1,000 senior managers who have taken the course runs something like this: "What can I do? I don't understand IT well enough to manage it in detail. And my IT people -- although they work hard -- don't seem to understand the very real business problems I face."

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Perhaps the complaint we hear most frequently from the executives -- most of them CEOs, COOs, CFOs, or other high-ranking officers -- is that they haven't realized much business value from the high-priced technology they have installed. Meanwhile, the list of seemingly necessary IT capabilities continues to grow, and IT spending continues to consume an increasing percentage of their budgets. Where's the payback?

Six decisions IT shouldn't make:

1. How much should we spend on IT?

2. Which business processes should receive our IT dollars?

3. Which IT capabilities need to be company-wide?

4. How good do our IT services really need to be?

5. What security and privacy risks will we accept?

6. Whom do we blame if an IT initiative fails?


Excerpted from "Six IT Decisions Your IT People Shouldn't Make," Harvard Business Review, Vol. 80, No. 11, November 2002.

Indeed, our research into IT management practices at hundreds of companies around the world has shown that most organizations are not generating the value from IT investments that they could be. The companies that manage their IT investments most successfully generate returns that are as much as 40% higher than those of their competitors.

While a number of factors distinguish these top-performing companies, the most important is that senior managers take a leadership role in a handful of key IT decisions. By contrast, when senior managers abdicate responsibility for those decisions to IT executives, disaster often ensues: Recall the high-profile instances of botched adoptions of large-scale customer relationship management and enterprise resource planning systems. It would be reasonable to assume that the CRM and ERP fiascoes were the result of technological snafus in getting the complex systems up and running. But in fact the problems generally occurred because senior executives failed to realize that adopting the systems posed a business -- not just a technological -- challenge. Consequently, they didn't take responsibility for the organizational and business process changes the systems required.

Such unfortunate scenarios are likely to be replayed as companies face the next rounds of IT innovations: the increased use of Web services, the adoption of handheld devices by employees and customers, and the integration of multiple electronic sales and service channels such as Web sites, call centers, ATMs, and wireless phones.

Don't get us wrong. IT executives are the right people to make numerous decisions about IT management -- the choice of technology standards, the design of the IT operations center, the technical expertise the organization will need, the standard methodology for implementing new systems. But an IT department should not be left to make, often by default, the choices that determine the impact of IT on a company's business strategy.

To help senior managers avoid IT disasters -- and, more important, to help them generate real value from their IT investments -- we offer a list of six decisions for which they would be wise to take leadership responsibility. The first three have to do with strategy; the second three relate to execution. Each is a decision that IT people shouldn't be making -- because, in the end, that's not their job.

How much should we spend on IT?

Given the uncertain returns on IT spending, many executives wonder whether they are spending too much -- or perhaps even too little. If we can just get the dollar amount right, the thinking goes, the other IT issues will take care of themselves. So they look to industry benchmarks as a way of determining appropriate spending levels.

But in the successful companies we have studied, senior managers approach the question very differently. First they determine the strategic role that IT will play in the organization, and only then do they establish a company-wide funding level that will enable technology to fulfill that objective.

IT goals vary considerably across organizations. They may be relatively modest: for example, eliminating inaccuracies and inefficiencies in administrative processes. Or they may be central to a company's strategy: for example, supporting a seamless global supply chain, flawless customer service, or leading-edge research and development. Clearly, these different objectives require different levels of spending. And if you have determined that technology should play a central strategic role, the nature of that role will affect the required level of spending.

Take arch rivals United Parcel Service and FedEx. Both companies report spending around $1 billion on IT each year, but FedEx, which has annual revenues of about $20 billion, is just two-thirds the size of UPS. Does that mean IT plays a more important role at FedEx? No, simply a different one. UPS's IT strategy, which evolved from its industrial engineering roots, has focused on introducing efficiencies to a business that demands consistency and reliability. The company's centralized, standardized IT environment allows for dependable customer service at a relatively low cost. FedEx, on the other hand, has focused on achieving flexibility to meet the needs of its various customer segments. The higher costs of this decentralized approach to IT management are offset by the benefits of localized innovation and a heightened ability to respond to customers' needs.

Of course, UPS also uses technology to meet the needs of individual customers, and FedEx uses technology to provide consistent service across customer segments. But the thrusts of the two companies' IT and business strategies are different. Both are successful because they have matched their spending levels to those strategies -- not to industry benchmarks.

In most companies, senior management has not defined IT's role so clearly, in effect abdicating that responsibility to IT people. In those organizations, the IT department can deliver on individual projects but can't build a "strategic platform," one that not only responds to immediate needs but also provides escalating benefits over the long term.

UPS's experience illustrates the benefits of a broad strategic platform. The company began investing heavily in IT in the late 1980s, at a time when FedEx was touting its package-tracking capability. But instead of simply creating a tracking system, UPS's senior management decided to build a comprehensive package database that had the potential to become a platform for numerous applications. To gather information for the database, UPS developed the Delivery Information Acquisition Device, a handheld computer used by drivers to collect customers' signatures and other information electronically. The device saved drivers thirty minutes a day by reducing the manual input of delivery information. But these electronic tracking capabilities were only an initial benefit. The electronic data provided a more accurate record of deliveries, enabling UPS to collect hundreds of millions of dollars in revenues that had been lost when customers self-reported deliveries, which UPS couldn't easily verify. In subsequent years, the database allowed UPS to introduce new products, such as guaranteed delivery, and new processes, including online package tracking by customers. Recent enhancements will optimize the scheduling of routes and help UPS's business customers get paid faster once their goods are delivered.

Those benefits grew out of UPS's decision to make significant and consistent investments in a system that, before long, outgrew its original purpose. UPS's CEO, Mike Eskew, calls the new applications, each of which furthers the strategy of providing consistent and reliable customer service, "happy surprises." Such unforeseen benefits lead to a total return on IT investment that exceeds the sum of the ROIs of individual projects -- a return far greater than many companies can imagine.

IT spending can be designed to meet immediate needs and allow for an array of future benefits only if IT and business goals are clearly defined. Some management teams offer only a vague vision -- for example, "providing information to anyone, anytime, anywhere." IT units respond to such ill-defined goals by trying to build platforms capable of responding to any business need. Not surprisingly, the typical outcome of such large, undirected projects is millions of dollars spent chasing elusive benefits.

Excerpted from "Six IT Decisions Your IT People Shouldn't Make," Harvard Business Review, Vol. 80, No. 11, November 2002.


To read more articles like this one, visit HBS Working Knowledge, an online source for business analysis, information and research.

© 2003 President and Fellows of Harvard College


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