Here's a bright spot for U.S. companies, despite the gloomy economy: They're outpacing European competitors and peers when it comes to extracting bottom-line performance from their IT investments.
According to the financial performance of 10,000 organizations in Europe and North America, European companies spend twice what U.S. companies spend on IT as a percentage of revenue, but U.S. companies get much more bang for their bucks.
Two key business strategies -- coupled with differences in cultural behavior -- are driving this:
The U.S. business environment and culture facilitates strategic outsourcing of IT, application development, labor and supply chain. As a result, U.S. companies have cut true labor costs for products by more than 95% over the past decade, to just $1.50 an hour.
At the same time, companies are keeping crucial R&D work in-house. The bulk of information management investments is concentrated on knowledge capital growth and retention -- focusing IT spending on the resources that matter -- rather than on lower elements of the value-chain such as raw materials, components and manufacturing.
Most notably, U.S. companies have greater opportunities for reducing headcount and reducing costs through outsourcing, and enjoy increased strategic freedom to select suppliers and open markets anywhere worldwide.
European counterparts are bound by geo-political and cultural constraints, despite the European Union mantra to destroy such obstacles.
In the U.S., similar constraints are weighed against the benefits of other IT investments, such as supply chain management and manufacturing resource planning -- not because the projects are managed better, or the IT investments are different -- but because of the ability to reap the rewards of IT investments through strategic outsourcing of resources and assets. It is for this reason that U.S. companies achieve higher ROI than their European counterparts.
The European and U.S. companies that are getting the most value from IT investments share some common characteristics: leading market position going into the tightening economy, smaller projects with higher success rates, an ability to react more quickly to reduce costs because of fewer fixed expenses, and a focus on tactical core competencies. Above all, these companies are noticeably more frugal than their peers; spending less is clearly being rewarded in this marketplace of reduced opportunities.
For instance, Europe's top-performers spend just 2.1% of revenue on IT, compared with the average E.U. IT spending of 7.3% –- less than one-third of the "typical" spend.
By comparison, the highest-performing U.S. companies spent less than 1% of revenue on IT, compared to the average spending of 3.7% of revenue on IT for the average U.S. company.
While European companies spend more on IT as a percentage of revenue, they spend one-third less than U.S. companies on a per-employee basis, largely due to bigger workforces and fewer working hours.
U.S. companies have used IT investments and cultural/geo-political strategies to obtain more work hours per employee -- 1,880 hours per year in the U.S., verses 1,600 in E.U. –- and outsource their non-professional workforce to suppliers overseas.
Outsourcing more and smarter
Companies using strategic outsourcing can apply IT investments to significantly change how they run their businesses. The most dramatic impact is a reduction in headcount, which can fundamentally improve bottom-line performance.
Europe's two top-performing nations are the U.K. and Belgium, which are leading the charge on strategic outsourcing. At the other end of the spectrum are France and Germany, which are much more constrained by local labor laws, as well as cultural and political sensitivities to job reductions.
In the past decade, a new area of change has opened up: U.S. companies have moved significant physical operations overseas, particularly raw materials, components, sub-assemblies and production/distribution, where the financial costs of labor and the social and financial costs of environmental laws may be less burdensome. European companies have not yet followed suit to the same level as the U.S.
We don't expect European practices to change anytime soon, in large part because the employment and operational costs are part of the fabric of business. However, it does mean that European companies may not be able to extract maximum value from IT investments designed to reduce employment levels or maximize the supply chain. This comparison will be most acute when European companies' fiscal performances are stacked up against those of American companies.
With the good comes the bad
The U.S. workforce has aggressively adapted to current outsourcing opportunities, migrating to a service-based economy. However, the next wave of outsourcing may present a greater challenge.
Increasingly, information worker jobs are being outsourced to capable providers in India and other countries, where labor is less expensive and education is similar -- or in some instances superior -- to that of the U.S. Should the outsourcing trend continue, the U.S. could be faced with an obsolete workforce, unless education reforms are placed to meet this challenge and provide an even higher-value and productive workforce.
Another challenge for U.S. companies is tax burden, which is often 20-40% higher than international counterparts. Therefore, a sizeable portion of the strategic outsourcing and IT investment value is not available to the companies to invest.
Beware of averages
While these statistics create a compelling case for strategic outsourcing and point out that IT investments don't yield returns unless tactical and strategic changes can be realized, it's important to note that averages can be devastatingly misleading.
Many European companies are indeed following the same or better practices than those of the U.S., despite the challenges of this economic climate. It is essential to compare any company's performance to a specific set of named local and worldwide competitors with similar business models, challenges and goals, and using research averages only as a preliminary and initial guide.
Tom Pisello is the president and CEO of Orlando-based Alinean, helping CIOs, consultants and vendors assess and articulate the value of IT investments. He can be reached at email@example.com.
This was first published in April 2003