Maximizing the value from technology investments: Spending smart instead of just spending big

Kumar Krishnamurthy, Varun Sharma, Ramya Sarangarajan, Nakul Uppal
November 20, 2015

Executive summary

As technology reshapes virtually all industries, companies continue to make sizable investments. Yet many such investments fail to deliver their promised returns. We recently analyzed 250 global companies to determine whether increased technology spending could lead to improved financial performance. The results clearly show no direct correlation between technology investments and profitable growth; spending more on technology does not necessarily lead to better financial performance. This by itself is not a new revelation, but our research further shows a strong correlation between technology and profitable growth if the investments are focused on targeted capabilities, augmented with the right operating model and implementation skills.

Based on this research, we developed an index to assess the effectiveness of technology spending in improving corporate performance: the Technology Investment Fitness Index (TIFI). Using TIFI, companies can assess their position relative to peers and better understand the steps they can take to maximize value from IT investments. This index includes four components:

  1. Alignment between IT spending and business capabilities
  2. The technological capacity to execute IT initiatives
  3. The ability to assess the potential value from a particular IT initiative relative to its risk
  4. An optimal IT operating model to sustain results from the new technology

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Key questions for management

In developing a technology strategy to improve corporate performance, management teams should consider several key questions.

  • Investment profile: What percentage of your IT investment is aimed at building critical capabilities versus those that are more foundational? Ideally, foundational investments should be capped at no more than 40 percent of the total investments in any given year.
  • Organization focus: Have you aimed a significant portion of your internal resources at driving innovation and/or growth? Do you have the right mix of operating processes in place to drive these investments?
  • Tenure: Does your workforce have the right experience to get to the target state? Does your team have the right mix of skills in the right roles?
  • Investment economics: Are you still evaluating projects and investments using traditional measures? Can you effectively balance the potential risk and value of specific investments?

Conclusion

As technology becomes more pervasive in all industries, IT investments can make the difference between being a winning company or a losing one. Yet writing a big check is not enough. Rather, IT investments must be strategic. By focusing on the areas discussed in this report, companies can improve their Technology Investment Fitness Index score and make sure they are investing in technology that can have a true impact on the bottom line.

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