Study Links IT Spending to Profits

Earlier academic studies didn’t find a connection between IT spending and profits, but new research has a more upbeat conclusion: Investments in IT can have a positive effect on profitability–one even more pronounced than comparable spending on advertising.

The study, published in the March issue of MIS Quarterly, examined data gleaned from more than 400 companies around the world between 1998 and 2003.

The study is good news for CIOs, but the authors note that some companies are better at wringing profits out of IT than others. Moreover, the IT projects that boosted profits were those that focused on raising revenue–not those that aimed to cut costs. For growth-oriented projects, an increase of $1 per employee in IT spending was associated with an increase in sales of $12 per employee, the researchers say.

In a summary of their research in the MIT Sloan Management Review, the researchers offer this takeaway: “All other things being equal, executives should accord higher priority to IT projects that have the potential for revenue growth over those that focus mainly on cost savings.”