IT Spending Doesn’t Always Equal Business Success

Supply Chain Management software may be the key to increasing cash flow, growth, and return on assets, study finds

• By Stephen Swoyer
• 11/12/2002

As Forrester senior analyst Tom Pohlmann readily acknowledges, that’s sort of the no-brainer upshot of his firm’s assessment of almost 300 companies in a variety of different industries. Forrester’s study—“Linking IT Spend [sic] to Business Results”—compared the financial performance of participating companies with their expenditures on IT.

Forrester’s methodology broke overall company financial performance into four quartiles. Not surprisingly, says Pohlmann, companies in the lowest quartile spent 2.6 percent of their total revenue on IT—the lowest percentage among all sampled quartiles. They’ll also spend an average of 1.4 percent less on IT in 2002 than they did in 2001.

In a twist, however, the best performing companies, measured against competitors in their own industries, spent only 3.3 percent of their gross revenue on IT—and that’s less than companies Forrester rated as Below Average (4.2 percent) and Above Average (4.5 percent).

“What’s important is figuring out which technologies do matter, and the most important variable affecting the overall IT organization is how well you manage your assets—the people, the dollars – and the better performing companies naturally do much better [in this respect],” Pohlmann observes.

Surprisingly, the Forrester study found that the best performing companies haven’t necessarily slashed their IT spending budgets during the economic downturn. “The companies that we consider to be first movers in this case are the ones that have very healthy IT budgets. They’re spending more on IT, they’re increasing their budgets, but at the same time they’re not shifting external dollars into additional hardware, networks, or storage.”

By the same token, Pohlmann acknowledges, struggling companies are more likely to invest rashly in IT, often siphoning funds away from the budgets of other business units. “Companies that are struggling with their budgets are pulling dollars from other areas to fund new servers, storage or networks. They are doing this in a haphazard way.”

According to Forrester, healthy companies effectively balance the scales between spending for IT essentials—which ensures the continuous operation of servers and networks—and investment in new innovative projects. “Companies usually go back to the basics, and they usually are cutting anything that’s at all risky, and we’re saying to always reserve a little bit of funding for innovative-type projects, because you never know when they’re going to pay off.”

In a boost to supply chain management vendors, Pohlmann says that companies that implement SCM solutions typically experience a corresponding increase in “cash flow, growth and return on assets” even though their gross revenues stay about the same. “We’re not saying that buying supply chain [software] is going to dramatically increase your cash growth. We’re just point out that if you want to see what your top performing companies and competitors are doing, they’re out there buying supply chain software.”

How, then, to explain the woeful financial performance of many supply chain management vendors? Pohlmann points out that as a result of the economic downturn, “budgets are preventing IT organizations from tapping into best-of-breed products. It’s not a reflection on the vendors as much as a reduction in IT spending.”

Another surprising upshot of Forrester’s study is that struggling companies are very likely to increase the amount they spend on outside consulting services. The result, Pohlmann points out, is that both the poorest performing and best performing companies each outsourced roughly the same amount. “'Outside consultants' is the one category of IT spending that pretty much across the board has always been ruthlessly cut the most, so I was most surprised that the poorer companies are less likely to cut their outside contractors.”