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The Cost Of Bad IT Economics

By Brian P. Watson  |  Posted 02-11-2008 Print
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So how easily can the transition from cost to strategic investment happen?

Rubin: IT will naturally become a player in strategy once it works on getting the transparency of the product and competitive lever level. The CFO can be a big ally in that. The problem we face in business is that the reflexes are wrong: If you start to cut IT without paying attention to this low-level investment model, you don't know what damage you're doing.

In financial services, out of eight investment banks, three will be spending, the others will be holding or cutting IT spending. The three that spend through the crisis, if they make the right investments, put the others in catch-up mode when they come out of it.

If the companies that spend on IT--those that have the right reflexes and do surgical investments--make the right bets, they'll move ahead. When the guys who choke investment decide to catch up, it'll cost them twice as much. And, by the time they catch up, the other guys will have moved on. So the cost of not investing at the right time and the right price in technology is probably four times the original investment.

What's happening now is, we'll see a tremendous widening of the competitive gap. The guys that cut will pay a price in the future because they may never be able to catch up through traditional means. That means they'll have to sell things, source things, buy capabilities or do things they never thought of.

We're at a beautiful time to be a technology-economics voyeur. You'll start seeing splitting in the various sectors of the companies that use technology and move away, while the others are in cost-cutting mode. If the guys who spend continue to do so effectively, they'll create a gap that's insurmountable for those who haven't. That's the problem with the economy today. In a time where they should be spending their way through a crisis and using IT as the lever, they're cutting IT, and operating expense will go the wrong way, and they'll lose any competitive edge they'd ever had. That's my theory.

There's a difference between companies that treat IT as a cost and companies that treat it as an investment. It's probably worth anywhere from 2 to 5 percentage points in gross profit, which is tremendous. You can really show the cost versus investment mentality showing up in gross profit in multiple years.

The people who treat IT as an investment and are IT-savvy have superior business performances measured by profitability, which turns into earnings per share and all this other good news downstream.

What can CIOs do now?

Rubin: The CIO should campaign and communicate, not against the cost focus, but to align with the business. CIOs should focus on IT investment transparency. They should recast the way they spend into business-facing terms. The first set of terms to replace is development, maintenance and infrastructure--substitute that with run the business, change the business and grow the business. They need to change their language.

They must reach out to the business and work with the businesspeople to identify where the competitive levers are, making sure their investments are fully aligned. CIOs should look inward; they need to focus on the charge of managing costs effectively, which means, from an internal cost-transparency commodity standpoint, they need to be able to answer the questions, "Do we have more or less capacity than we need for a business our size? Do we have the infrastructure we need? Are we paying the right price for the commodity?"

They need to do the yin-yang of cost optimization continuously; drive their people to work at market rates; evaluate sourcing opportunities and places for economic leverages. They need to manage their costs down, and manage their investment out.


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