Value Discovery: A Better Way to Prioritize IT Investments

By Gary A. Curtis,

Richard M. Melnicoff

and Tor Mesoy

Today’s senior business managers understand that strong IT capability is crucial to competing effectively, but many line managers perceive IT as misaligned with current business needs and under delivering. They aren’t sure what they get for their IT budgets, and they worry that the problem has been resistant to remedy. These unflattering views have not been widely debated, until recently.

In his controversial Harvard Business Review article “IT Doesn’t Matter,” Nicholas G. Carr posed the question “how much IT is enough?” Carr’s thesis: The competitive value of IT is overestimated and widely misunderstood, and the major IT risk facing companies today is overspending.

In Accenture’s experience, the more accurate word is misspending. The challenge is separating critical IT investments from those that are nonessential.

This prioritization of IT investments is important, but the more significant possibilities lie in the creation of new business value through IT-enabled business improvements. The goal should be selective, profit focused spending – justified by a rigorous, measurable process of discovering exactly where value-creating business opportunities lie – rather than simply reduced spending. Put another way, the real differentiator in a company’s financial performance is not overall IT spending but how spending is allocated to IT-driven business improvement.

Eating the seed corn

IT budgets are more vulnerable than ever, and IT leadership is facing unprecedented pressure to deliver demonstrable returns on investment. Surveys show that across industries most companies spend about 3 percent of their revenues on IT, with spending primarily determined by past practice rather than strategic alignment to business imperatives. While some companies mandate sweeping cost-reductions, others attempt wholesale IT renewal without the benefit of reliable metrics or an accurate understanding of the business vision that IT must support.

In this environment, value-adding and innovative IT initiatives are often the first to go. Like eating the seed corn during a famine, the organization has eliminated the very initiatives that underpin future revenue and profit growth. Recent Accenture research across 100 large European companies suggests that this approach almost invariably results in higher spending down the line. Eventually, IT capabilities (and productivity) deteriorate and IT maintenance costs rise.

Muddying the issue is the idea that there is a direct correlation between IT ubiquity and competitive advantage. Actually, scarcity of value generating IT capability drives competitive advantage. Accenture’s experience shows that IT can confer short-term competitive advantage for first-mover companies. And as Carr also acknowledges, in some cases IT innovation confers advantages such as critical mass and brand awareness that outlast the innovation itself. But windows of IT opportunity based on nonproprietary processes and assets are invariably finite, because able competitors eventually catch up.

Sustained competitive advantage derives not from proprietary IT assets, which are vulnerable to replication and commoditization, but from proprietary business assets, such as customer relationships and intellectual property. As long as they remain protected, these assets can be the foundation for long-term sustained competitive advantage.

Value discovery

IT can play an essential role in building such assets. In the pharmaceuticals industry, for example, IT spending is disproportionately focused on manufacturing, which accounts for a far lower percentage of added value (and margin) than research and development. From a potential earnings-per-share perspective, focusing discretionary IT spending on processes related to research and development including improved clinical testing or faster government approval processes, can create more impact.

At any company, the range of strategic IT options will be determined by the discretionary side of the budgetary ledger-that is, the portion of the budget not fixed because of previous decisions and commitments. In our experience, initiatives that create new strategic IT capabilities and corresponding new business capabilities and sources of revenue are at the apex of the value-discovery process.

This is not to say that other categories of IT investment in workflow automation, for example do not produce returns. The rates of return from this type of IT investment may vary by industry, but they are measurably less than those created by IT investment in new business activities.

Strategic foresight

IT investments must be understood in terms of their contribution to improving operating results and building shareholder value. Without a rigorous value discovery process, efforts to create IT-enabled business value become educated guesswork. The challenge is to systematically and rigorously identify the precise points in the business system where discretionary IT expenditures can add business value.

Over a decade ago Wal-Mart developed business systems that have become standard industry practice in large-scale retail distribution. In response to just-in-time store restocking, Wal-Mart built the first supplier-accessible, real-time supply chain management system. The system’s success was dependent on IT innovation, which was envisioned through an unusual marriage of front-office line management and senior IT executives. Wal-Mart might be considered an early adopter of the value-discovery process using an incremental and methodical approach.

On the other hand, FedEx built not only a company but an entire industry, guaranteed overnight delivery, by developing and launching one IT-enabled innovation after another, at considerable expense. The company’s executive team understood that IT and the business enabled each other, so FedEx innovated at considerable risk, through a tight IT and line partnership, and through extremely strategic and farsighted IT investment planning.

How much to spend?

Studies show that leading companies almost always spend less than their industry peers on IT. The explanation for this lies in differing IT management philosophies and objectives. Industry leaders understand that IT is a business enabler measured by market position, operating results and earnings. If such a company happens to become a technology innovator as a by-product of these objectives, fine. Otherwise, they let competitors absorb the cost and risk of technology experimentation.

While Carr concludes his Harvard Business Review article with, “Follow, don’t lead,” Accenture’s research indicates that companies may actually find a shifting of IT effectiveness metrics. Traditional productivity oriented top management teams tend to have intratechnology concerns, such as “keeping up with platform lifecycles.” Profitability oriented management teams, on the other hand, tend to focus more on line-driven issues, such as “internal customer adoption,” “fulfillment of business expectations” and “time to market.”

We acknowledge that discretionary IT investment decisions cannot be separated from nondiscretionary considerations. Also, the favorable cultural and operational situation found at Wal-Mart does not exist at every company.

Given these realities, top management might benefit from asking some pointed questions about their company’s IT spending. Is IT spending growing faster than revenues? Does it increasingly support older applications that require continual work to adapt to business changes rather than applications that accommodate business changes faster and at lower cost? Is there a mechanism to determine how IT spending aligns with the business’s value-adding processes? Is there conflict over IT budgets absent an analytical business case-based decision process? Is there a process in place to cancel unpromising IT projects in mid-flight?

Top managements at some companies will follow the logic of their answers all the way through to an ROI-driven perspective that is founded on systematic value discovery. In Accenture’s experience, the operative word is systematic, resting on a true understanding of how the business delivers value and the role that IT plays in enabling high performance. Executives who reach this understanding will wield a powerful competitive weapon.

This article is based on one that originally ran in Outlook, the journal of high-performance business, Vol. XV, No. 3 © 2003 Accenture.

About the authors

Gary A. Curtis, a partner in the Accenture Strategy & Business Architecture service line, is global head of the Strategic IT Effectiveness group. He can be reached at gary.a.curtis@accenture.com

Richard M. Melnicoff is a partner in Accenture’s Strategy & Business Architecture service line, and leads the company’s Strategic IT Effectiveness group in North America. He can be reached at richard.m.melnicoff@accenture.com

Tor Mesoy, a partner in the Accenture Strategy & Business Architecture service line, leads the company’s Strategic IT Effectiveness group in the Nordic region. He can be reached at tor.mesoy@accenture.com

Accenture’s Strategic IT Effectiveness group helps organizations achieve greater business value from IT. Specialists bring a boardroom perspective to IT, focused on optimizing IT investments and transforming IT capabilities.