CXO

Where to invest your IT budget to reap the greatest rewards

Can shareholders get a return on every pound spent on IT?

Not all IT investment is equal. Stuart Roberts explains which areas can make the most difference to your company's bottom line - and share value.

What exactly do you get for a pound spent on IT?

Despite many attempts in analyst circles, quantifying the value that IT brings to business performance remains a conundrum for most leadership teams.

While CIOs intuitively know that excellence in IT management directly translates to better outcomes for their companies, just how the IT function delivers this economic promise remains difficult to ascertain.

Research from the CIO Executive Board - a programme of the Corporate Executive Board - shows that IT's functional competency, rather than investment, drives value and increases a firm's total shareholder return (TSR).

It should come as no surprise that IT organisations cannot simply buy their way to greater shareholder returns. CIO Executive Board analysis shows that typically, IT spending beyond a minimum threshold does not improve shareholder returns. The threshold varies across industries but our research suggests that, on average, it is one per cent of company revenue.

The key exception is the information-intensive industries, such as financial services, where the threshold is several times higher. For many industries there is also an overspend threshold. Companies that spend more than 3.5 per cent of their revenues on IT can actually see a decrease in returns as spending increases; this indicates undisciplined IT spending past the point of positive returns. (See full results in the chart below.)

The conclusion is simple: in IT, except in cases of significant under-investment, it is functional competency and not investment that drives value. To identify the right competencies, the CIO Executive Board surveyed more than 1,200 business and IT staff in companies of all industries and sizes. Although this research was conducted several years ago, the current situation IT faces brings new relevance to the results.

In the survey a total of 300 attributes of the IT function were assessed in terms of their impact on delivery, partnership, consistency and alignment. Among those tested, a relatively small number stood out, and these can be divided into four buckets: talent management, business enablement, lifecycle ROI accountability and strategic management. Research shows that when done right, investment in these key competencies can increase in TSR by as much as 20 per cent...

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