How can it keep on doing more with less? Think about this: Cutting business costs or becoming more efficient with a dollar spent deals with only half of the bottom line. The other half is revenue improvement–a neglected target for most companies intent on improving total profit margins in static markets.
In this article, we show how some CIOs have engineered big revenue-improvement efforts. But first, let’s look at how business goals have changed over the past two decades, and how much IT has contributed to their achievement.
Our data show that among business managers, the goals of cost-cutting and efficiency improvement are down about 33 percent, declining from 11.9 percent of total goals between 1991 and 1994 to 8.0 percent of total goals between 2006 and 2009. During that period, revenue-improvement goals almost doubled, increasing from 13.5 percent of total goals to 26.1 percent. (See figures 1 and 2 in downloadable PDF)
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So the long-term trend for cost and efficiency goals is downward, even in the current economy. For IT to continue to focus heavily on cost and efficiency means it is out of synch with most businesses’ longer-term strategies.
Cost and efficiency have been a focus for so long that, in many companies, there’s not much fat left to cut. Most business managers recognize this, as shown by their shift in focus from cost-cutting and efficiency toward revenue-improvement goals. They’ve had more than three times as many revenue-improvement goals as they have cost and efficiency goals during the past four years, compared with the 1991-1994 timeframe.
Furthermore, over the past 20 years, IT has perfected its ability to contribute to the business projects that are critical to the successful achievement of business managers’ cost-cutting and efficiency goals. IT scores on CogniTech’s IS Contribution measure have improved by 10 points during those years–a full standard deviation improvement or a whole order of magnitude improvement.
(CogniTech’s IS Contribution score measures business managers’ ratings of how well IT supported their business goals achievement. This measure correlates strongly with profit margins in the private sector and has been used in more than 230 organizations over the past two decades.)
A Declining Contribution
However, over the same years, business managers have indicated that IT’s contribution to their achievement of business revenue-improvement goals has declined. In the early years, these business managers scored IT higher for supporting their revenue-improvement goals than for cost-cutting and efficiency goals, but that has reversed itself during the past four years. In fact, IS Contribution scores on revenue-improvement goals have sunk below the level (48) that is the cutoff score indicating where IT is contributing at all to business-goal achievement.
A big reason for the lack of revenue-enhancing efforts is that business managers typically don’t ask for them. That’s because, unlike with cost-cutting and efficiency projects, they don’t know what IT’s capabilities in the revenue area might be, so they don’t know what to ask for.
Automation was originally envisioned as a cost-saving initiative, so years of experience with IT in this role has made business managers conversant with the many ways IT can help them reduce costs. IT assistance in revenue generation is not as clearly understood. As a result, in order to engineer these projects, the CIO has to look for them.
Although cost-cutting may be at the point of diminishing returns, some relatively new IT capabilities can show business managers how IT can aid their revenue initiatives. One example is the recent emergence of revenue- and customer-relevant packaged software: CRM to hold customers, sales force automation to make salespeople more effective, ERP to let customers see product availability and instant price updates, and the like. Another example is the explosion in Internet-based sales and service systems, which are game-changers.
