Do technology companies fare any better than other companies at spending less on IT and getting higher ROI? After...
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all, shouldn't these companies have the advantage from their understanding of technology and best practices -- or do they struggle just as much as the average company to maximize the efficiency and effectiveness of IT investments? The results may be surprising.
The BusinessWeek Information Technology 100 gives us a good list of companies to analyze, representing a Who's Who list of technology leaders. Those who have been selected as "most likely to succeed" include a solid mix of old mainstays, new leaders and aggressive contenders.
In reality, the InfoTech 100 companies aren't better equipped to achieve high returns from IT investments. In fact, the results of our analysis mirror the general population of companies, demonstrating a random array of IT spending practices and ability to derive value. Higher or lower IT spending does not automatically result in higher or lower bottom-line impact. This does not mean that IT is irrelevant, but rather, that some companies apply their investments and manage costs incredibly well for competitive edge, while others squander their investments or spend too little to make a difference in the marketplace. Using several measures of performance correlated with IT spending clearly shows that the top-100 IT companies have no discernable edge in applying IT for higher ROI.
The characteristics of these companies vary: Some invest heavily and wisely to get stellar results. Successful "investing leaders" include Microsoft, Nextel Communications, Oracle and SAP. Others are quite frugal and use IT management skills to drive lower total cost of ownership, while maintaining high productivity and performance. These "frugal leaders" include Dell Computer, First Data Corp, Lexmark and Western Digital.
On the flip side, several companies spend above broad industry averages and their IT peers and are getting miserable performance, including several of the telecommunication companies. These "investing laggards" include AT&T Wireless Services, Inc., France Telecom S.A. and Level 3 Communications.
To measure performance, we use the Information Productivity® metric for the primary analysis and the BusinessWeek InfoTech100 rankings for the secondary analysis. Information Productivity was created in 1999 by Paul Strassmann, who was most recently the CIO of NASA and former-CIO / IT executive for Xerox, Kraft Foods and the U.S. Department of Defense. It measures the macro-economic impact of IT by comparing corporate profitability and the creation of long-term shareholder value with the information management investment and overhead needed to generate that performance. IT investments typically drive two improvements within an organization: increase sustainable profitability and improve operating efficiency through reduced SG&A and R&D costs. The companies with higher Information Productivity generate a higher sustainable profitability with less required information management input than their competition -- and overall, are more effective, productive and efficient. As a formula:
Information Productivity = Economic Value-Added / Sales, General & Administrative Spending
The measure of profitability used in the Information Productivity formula is Economic Value Added (EVA), which measures the how a company leverages its assets to generate returns. A positive EVA indicates that value has been created for shareholders; a negative EVA signifies value destruction. To calculate EVA we use the simple version, which can be calculated easily from published financial metrics:
EVA = Net Profit - Cost of Capital x (Total Assets - Total Liabilities)
It is important to note that within the Top 100 rankings, 43 percent of the companies have a negative Economic Value Add.
|Company||Information Productivity (EVA/SG&A)||Estimated IT Spending /Employee||Estimated IT Spending/Revenue||Business Week Ranking|
|USA Interactive Inc.||108.9%||$8,704||3.2%||33|
|First Data Corp.||77.8%||$5,530||2.1%||13|
|Telstra Corp., Ltd.||75.9%||$27,242||2.1%||66|
|Dell Computer Corp.||54.4%||$10,109||1.1%||2|
|Western Digital Corp.||50.2%||$1,970||0.7%||6|
|Lexmark International, Inc.||46.1%||$6,997||1.9%||24|
|Nextel Communications, Inc.||36.7%||$24,147||4.7%||1|
|CDW Computer Centers, Inc.||36.7%||$12,691||0.8%||88|
|Overture Services Inc.||33.9%||$24,707||2.1%||68|
|SBC Communications, Inc.||29.5%||$5,966||2.7%||41|
|ALLTEL Corp.||23.5%||$8,548||2.6 %||47|
|Sungard Data Systems Inc.||22.7%||$7,071||2.4%||93|
|Samsung Electronics Co, Ltd||22.4%||$21,158||2.4%||3|
|Ricoh Co., Ltd.||6.4%||$8,292||4.4%||79|
|China Unicom Ltd.||6.2%||$5,352||4.5%||86|
|Ster Hellas Telecommunication||5.7%||$30,503||6.5%||21|
|Rogers Communications Inc.||5.6%||$17,867||9.7%||20|
|Verizon Communications Inc.||2.8%||$22,932||8.4%||31|
|Affiliated Computer Services||2.3%||$7,274||5.0%||72|
|Storage Technology Corp.||0.0%||$9,746||3.7%||98|
|CGI Group, Inc.||-1.8%||$9,096||9.9%||96|
|Cisco Systems, Inc.||-17.0%||$19,533||3.9%||45|
|Benchmark Electronics, Inc.||-17.9%||$1,898||0.5%||87|
|L-3 Communications Hldgs Inc.||-27.3%||$859||0.4%||58|
|Hutchinson Technology Inc.||-37.1%||$1,985||1.8%||80|
|Telecom Italia S.p.A.||-71.9%||$6,261||2.1%||52|
|Taiwan Semiconductor Mfg Co.||-75.0%||$2,901||1.1%||94|
|Level 3 Communications, Inc.||-88.5%||$40,737||4.8%||29|
|AT&T Wireless Services, Inc.||-98.9%||$20,672||4.1%||65|
|France Telecom S.A.||-136.7%||$8,668||4.0%||26|
DataSource: Alinean ValueIT™ v2.5 database - June 2003, a resource of proprietary IT spending data and financial performance data from Mergent FIS.
As with all companies in our database, quality of IT spending counts far more than quantity. There is no magic bullet or road-map to follow. Even for the best-ranked technology companies of the world, true value comes from what projects companies pursue and how well the investments are managed.