New Research Shows IT Investments Have Big Profitability Impact

by Dave Hannon

March 30, 2012

By Dave Hannon


No expense goes unquestioned these days. Whether you're a business traveler coding a $20 meal expense or a CIO implementing a new ERP system, you need to have your ducks in a row and be ready to explain the reason and benefit of that expense to the company. For major IT expenses in particular, the return on investment needs to be clear and quick today. In some ways, the CIO has to think like a defense attorney and "build their case" to support the expenditures they approve or initiate.

Well, get ready for "Exhibit A" in the defendant's case.

A recent study by a team of academic researchers looking at the impact of IT on profitability found "something very surprising: Investment in IT had a greater impact on a company’s profits than comparable spending on either advertising or R&D."

Wow, right? You may have believed this all along but to have some clear, non-partisan evidence to bring to the "trial" is new. So the question for those CIOs looking to get a big profitability "bang" is, how do you know which IT investments have the most dramatic impact on profitability?

Well, according to the researchers, who wrote a review of the study for the MIT Sloan Management Review, "We found that in general, IT investments were more effective in improving profitability by increasing revenue than by decreasing operating expenses. In fact, IT investments had a mar ked positive effect on revenue growth."

That little tidbit really surprised me because, having covered procurement technology and strategy for many years, I know cost-focused solutions are usually seen as the path to a clear (and fast) ROI. They are the "quick win" or "low-hanging fruit" that can fund future IT investments. So this research, indicating that sales-focused IT investments are actually the most effective at increasing profitability, is good news. Surprsing news, but good news. It indicates that IT investments on both sides of the house -- sales and costs -- are now showing direct returns and impacting business results.

So what do you think? Does this research match up with what you're seeing? If you're a CIO and you have $XX to spend on an IT investment and you want to get a quick return (which will hopefully help you fund future IT investments) which are you going to look at: sales growth solutions or cost-reduction solutions?

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