Classify IT investments for a competitive advantage

Learn Tom Pisello's view on Maslow's hierarchy of needs and how to classify IT investments for a competitive advantage in this ROI tip.

The book written by Nicholas Carr, Does IT Matter, continues to stir debate with various pundits, and certainly remains a hot topic in budget planning meetings. In his book, and related articles and presentations, Carr's main assertion is that the majority of IT investments have become a commodity -- a utility that offers little competitive distinction and therefore no competitive advantage. As a result, Carr asserts that most IT spending...

be minimally based on the lack of bottom-line impact, which can ultimately be derived from such investments.

Indeed, if one examines basic IT infrastructure like servers, storage and basic applications such as e-mail, Carr's assertions are completely correct -- that indeed most infrastructure solutions have become commodities with uniform products, standardization and little pricing power for the IT solution providers. As such, because IT is a commodity, it does not drive competitive advantage and bottom-line impact, right?

Not exactly. As computing infrastructure has moved toward commoditization, it still needs to provide a solid infrastructure of service and performance so the company can achieve higher goals. And clearly not all of the IT landscape has commoditized. IT solutions are indeed evolving from basic infrastructure, through business process optimization and information management. When we examined this progression, from the need for a solid foundation to achieve higher level capability and maturity, a model emerged that likens IT investment decision making to Maslow's hierarchy of needs.

Maslow's hierarchy of needs

The well-traveled theory by Abraham Maslow asserts that people are motivated by unsatisfied needs, and that certain lower needs are the initial focus and require satisfaction before higher needs can be addressed or achieved. Foundational needs include physiological requirements such as air, water, food and sleep, and safety, which includes security of home and family. Higher needs include, in order, love, self-esteem and self-actualization. When each of these needs in turn is satisfied, from lower to higher, new (and still higher) needs emerge, and so on. As each need is met, personal achievement rises and purpose is fulfilled.

A hierarchy of needs for IT investment management?

If we match IT investments with Maslow's hierarchy of needs, a new understanding can be developed that proves Nicholas Carr right -- basic levels of IT capability and maturity have been met in most organizations, and indeed have commoditized. However, the hierarchy clearly proves Carr's assertions wrong, that we have moved the playing field to a higher plane where the investments are innovative, and crucial for future competitive success.

To model this evolution, the IT hierarchy of needs demonstrates investments can be categorized into a four-level progression -- from a solid infrastructure forming the foundation for growth -- through business transformation investments.

The IT hierarchy of needs is useful in that it helps illustrate that, as each successive capability is met, the competitive advantage progresses from those who know how to implement the technology; to those who know how to apply technology to improve business processes; to those who know how to use it to share, manage and grow knowledge and transform the business through application of this business, competitive and market intelligence.

Classifying investments to minimize costs and maximize returns

To gain visibility into current spending, and make better decisions on future investments, organizations should categorize their current IT spending and planned investments according to the IT Hierarchy of Needs. Using this methodology, the team can document which investments are tactical -- forming the core infrastructure, and which are more strategic -- helping to deliver competitive advantage.

By selecting investments across the IT hierarchy of needs, spending can be optimized such that IT costs can be reduced on infrastructure investments, business operating efficiency can be improved and business strategic advantage can be maintained.

Classifying investments into their proper place in the hierarchy will help to determine the proper criteria for head-to-head comparison of various spending scenarios, as each investment classification has a different goal, business contribution and value -- with certain foundation spending designed to lower cost of ownership and provide a solid foundation for growth, while higher order investments are designed to progressively deliver lower operating costs up to competitive advantage.

These project type classifications are from the foundation to the pinnacle as follows:

  • Level 1: IT infrastructure and mandatory/compliance -- These investments form a solid foundation for further advancement. While not delivering competitive advantage themselves, it is hard to advance to the next hierarchical level unless there is a solid foundation for growth. These projects should seek to deliver solid service levels while lowering total cost of ownership. Projects include server and storage consolidation; application development; managed services and outsourcing; security and SOX compliance.
  • Level 2: Process and transaction optimization -- These investments in the business seek to deliver operating expense reductions by automate key business processes or streamline supply chain and customer transactions. Projects in this category include supply chain management; human capital management; ERP; salesforce and marketing automation; and other business process automation projects.
  • Level 3: Information optimization -- These strategic investments seek to empower the organization's decision making with actionable information empowering employees to track key performance indicators; create their own reports and queries; find key information faster; and collaborate more effectively. Projects include business intelligence, scorecards, dashboards and portals, and data warehouse.
  • Level 4: Business transformation -- These revolutionary investments seek to utilize business information and implement new processes to empower business capability and agility -- enabling M&A programs, launching new businesses, empowering different go-to-market programs, launching new channels or launching competitive programs. Projects in this category include acquisitions, direct marketing to capture competitors customers, win-back programs, new channel programs, new products in new market segment capture programs, new geography go-to-market programs, new demographics capture programs or new e-commerce sites.

The bottom line

The generalizations of Carr's assertions to all IT investments certainly do not reflect Carr's full sentiment in his writings, nor does it clearly reflect the realities of return on IT investments. Following such generalized advice can lead to spending misallocation and competitive disaster.

The IT hierarchy of needs helps all stakeholders understand how to categorize various investments -- and how to assess what is most important to solution decision-making. As the hierarchy of needs clearly dictates, for the fundamental needs that have already been met, where the infrastructure has commoditized, requires that solutions be selected which lower total cost of ownership. As the infrastructure remains solid, incremental investments drive the competitive advancement to the next level -- where innovation still reigns, value versus cost matters most and competitive differentiation can be gained with the right projects and spending plans.

As computerization evolves, it becomes harder to compete with each evolving level in the hierarchy, and requires even smarter and often bolder investments to win. Understanding where each investment fits in the IT hierarchy of needs can help to put assertions such as Carr's into perspective, and help the team better align spending plans with bottom-line impact and competitive advantage.

Tom Pisello is the CEO of Orlando, Fla.-based Alinean, a ROI consultancy helping CIOs, consultants and vendors assess and articulate the business value of IT investments. He can be reached at tpisello@alinean.com.
 

This was first published in January 2006

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