Investing in IT Can Lead to Big Gains, Study Says
New research turns conventional wisdom on its head: Investing in IT delivers greater financial returns than does investments in research and development (R&D) and advertising.
But the findings aren't black and white. Researchers found that the impact an IT investment had was related to the kind of project undertaken, while comparable investments in R&D and marketing provided more consistent results.
IT projects that focused on cutting costs had a less pronounced effect on profit, whereas an increase in IT expenditure had a distinct and positive impact on revenue. "A $1 increase in IT expenditures per employee was associated in our study with a $12.22 increase in sales per employee," wrote the authors of a report published in the MIT Sloan Management Review. The study found that IT projects deployed since 1995 have had both a discernable and positive correlation with profitability as well.
There is another catch, however. The service sector is more likely to see these benefits than the manufacturing sector. "A possible explanation for this finding is that services allow greater IT-enabled customization and personalization," suggest the authors.
The team arrived at their conclusions after reviewing archival data from 1998 to 2003 for more than 400 global companies. The full study can be found in the March 2012 issue of MIS Quarterly.
The results of the study underscore what many IT professionals have said all along: Investing in information technology can produce substantial benefits for an organization over the long-term, while siphoning funds away from the IT department can slow business growth.
Common sense would dictate that investment in advertising would lead to financial gains, but according to the research, investing in certain IT projects can lead to increased sales as well. The authors suggest that increased customer satisfaction and improved customer retention strategies are some possible benefits that can result from increased IT expenditure.
IT professionals can use this report as leverage when making the case for better IT funding. While some organizations are willing to discuss cost-cutting measures, businesses are often less inclined to consider diverting funds toward novel technologies. But it's these creative and innovative methods that are responsible for enhancing profitability. For example, health care companies are now utilizing supercomputers to diagnose and treat patients and are finding that data analytics can lead to major breakthroughs in medicine. And yet, it isn't an established technology; it's highly experimental and many companies are just now attempting to understand how to put big data to use.
Midsized businesses that refuse to invest in novel technologies are bound to find themselves stagnating in the long run, as competitors embrace new IT projects in order to discover new solutions to existing problems.
This post was written as part of the IBM for Midsize Business program, which provides midsize businesses with the tools, expertise and solutions they need to become engines of a smarter planet.