Making Wise Investments in IT

CIOs, by and large, did not get into IT for the fun of budgeting, and they welcome the fact that their businesses seem to be emerging from the bad old days when good IT meant little more than low-cost IT.

We hear it over and over again: The CIO role has become increasingly strategic. No longer an order taker awaiting the business’s sometimes ill-defined demands for this, that or the next capability, the CIO’s job today is to drive innovation, to use IT to devise new products and services that can generate new revenue for the business, or at the very least, to improve dramatically the enterprise’s efficiency and productivity. The key idea here is the importance of differentiating your company from the competition, and the growing belief that IT is the best way to achieve that.

Unfortunately, money (still) keeps getting in the way.

As sophisticated as the technology and its countless uses have become, all too often the benchmark used to determine the proper level of an enterprise’s IT spending is alarmingly simplistic: the percentage of overall revenue for which IT accounts. As Executive Editor Christopher Koch reports in this issue’s cover story, “The Metrics Trap…and How to Avoid It” (Page 56), benchmarking IT spending by industry averages produces average IT departments. And average IT departments do not generate competitive advantage.

In fact, a recent survey Koch dug up found that companies that spend much less on IT than the average for their industry are three times more successful than those in the middle.

But companies that spend much more than the average are six times more successful.

Benchmarking IT spending as a percentage of revenue is a truly useless metric. Unfortunately, according to Koch, it remains the most popular way to evaluate IT spending, and also unfortunately (as most of you already know), it doesn’t say anything about how effective or productive your spending is. Even more unfortunately, benchmarking by percentage of revenue casts IT in the role of a cost to be controlled, defining success simply as lowering the percentage over time.

Complaining about this metrics trap is of limited utility. What is useful is doing what some of the CIOs Koch interviewed have done: They’ve created their own metrics to measure what they’re supposed to be doing—adding value—and not what they aren’t, increasing the cost of doing business.

Give some of these metrics a trial run. (You know your peers will.) Let us know how they work out for you.