Nick Carr Underestimates the Most Important Parts of IT - ' Using Lessons '

We measure superior financial performance across 150 dimensions, summarized best in the EVA (Economic Value Add) metric—an estimate of true "economic" profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk.

In an analysis of the top-performing 200 companies (those with the highest EVA), the leaders consistently prove to be the most frugal in their IT spending as a percentage of revenue, spending on average 0.5 percent less on IT as a percentage of revenue versus the average company.

But placed in context, these leaders are spending increasingly more year after year: 0.82 percent of revenue in 2003, 1.6 percent of revenue in 2004, and 2.8 percent of revenue in 2005. They're making up for frugal cuts in years prior, and are investing rapidly for future growth. As market conditions improve, these agile companies are turning up spending.

Another metric—IT spending per employee—tells another story: Interestingly, leaders spend more per employee on IT than an average company—about $500 more each year, in fact. In these leading companies, IT investments are often made to help the company do more with fewer people or better manage outsourcing initiatives.

Alinean's own ROIT (Return on IT) metric is a ratio of a company's financial performance (EVA) divided by IT spending. ROIT highlights the efficiency of IT spending and its ultimate effectiveness at driving corporate profitability. Leaders have a 426 percent-higher ROIT than the average companies, spending less but getting more from each IT investment.

Inspired by the actions of their top-flight peers, CIOs should be asking a series of forward-looking questions:

1. Is the business facing a period of rapid growth? The degree of frugality in IT budgets should be determined to keep pace with market conditions. Scaling back spending to maintain profitability in lean times—or ramping up spending to capture ripe opportunity—are the mark of a leader.

2. What are the business' most strategic operational and competitive goals? IT dollars spent on initiatives aligned with these goals deliver the most strategic value and highest return. Perhaps this will point to initiatives for automating manual tasks; streamlining interactions' fostering creativity and collaboration; bringing better collection, visualization and application of data to measure the business and drive improved performance; and using information to change the competitive playing field by creating different relationships with suppliers, partners and customers.

3. How mature is the IT organization? Every company must manage IT investments in a hierarchy, where basic levels of IT infrastructure must be solid before more advanced applications can be pursued. Once this infrastructure is in place, however, the company should indeed seek to reduce the cost of ownership as much as possible and manage it as a utility, much as Carr suggests. However, the company that stops here will fall behind the competition.

As CIOs begin thinking about priorities for 2006 IT budgets, now is the time for analyzing business needs and setting goals to support them.

Tom Pisello is the CEO of Orlando-based Alinean, the ROI consultancy helping CIOs, consultants and vendors assess and articulate the business value of IT investments. He can be reached at tpisello@alinean.com.