Rx for Corporate Performance: Spend Less on IT, Leave Competitors in the Dust

The gap between top-performing and middling companies is widening. Could some organizations be left permanently behind?

As we've reported, it may seem paradoxical that the world’s best companies spend less on IT—and do so with fewer staff—than their competitors (see http://www.esj.com/news/article.asp?editorialsId=1005).

What’s more, the gap between top-flight companies and their middling competitors is widening—especially with respect to how much both groups spend on IT and IT staffing resources.

That’s the conclusion of a recent report from Atlanta-based consultancy The Hackett Group, which performs research into the best practices of what it calls “world-class” companies. The latter are determined by how well they rank on Hackett’s Business Value Index, an assessment of companies in terms of both efficiency and effectiveness. To make the grade as “world-class,” a company must score in the top 25 percent in both efficiency (measured in terms of cost and productivity) and effectiveness (measured in terms of quality and value) output metrics in a given functional area.

How much more cost-efficient are top-flight companies than their competitors? Incredibly: According to Hackett’s data, world-class companies in finance spent 31 percent less than their median peers on finance operations in 2004. In IT, the difference is almost as profound—on a per-end-user-basis, world-class companies spent 18 percent less than also-rans.

The upshot is that world-class companies typically spend less than their peers in every major operational area. Take labor, for example, which—even with the rise of outsourcing—remains the biggest drain on corporate coffers. Unless you’re a world-class company, that is: Hackett researchers report that top-flight organizations dedicate 54 percent fewer staff per $1 billion in revenue to support transaction processing, largely because they’ve embraced a combination of technology, outsourcing, and process optimization to reduce their dependency on labor.

“The economic climate has improved significantly over the past year, but senior executives are still focused on driving out costs and ensuring optimal efficiency. World-class companies are better at doing this, which is why the cost gap between world-class and median companies is widening," said Hackett Chief Research Officer Richard T. Roth, in a statement.

Roth and other Hackett officials warn that this disparity isn’t going to go away by itself. "Companies that are squarely in the median today have to realize that this is simply not good enough. They risk being left behind, and may find it difficult to remain competitive," Roth said. "What is median today may be solidly fourth quartile in a few short years. Our research also clearly shows that companies can have the best of both worlds if they want to, as world-class companies spend less, and are also significantly more effective."

Similarly, Hackett researchers say, top-flight organizations realize much more rapid turnaround times for activities such as accounts receivable, or for strategic activities such as information delivery. Similarly, world-class companies champion process simplification as a means to improve productivity, and leverage key technologies such as self-service and electronic processing.

Hackett researchers identified several best practices that help to separate top-flight companies from their also-ran peers. For example, world-class performers maintain an overall focus on operational excellence, which lets them close their books more quickly and complete more of their projects on time and under budget. At the same time, Hackett researchers note, top-flight companies typically have lower rates of voluntary employee turnover, a difference that could result from the fact that world-class performers typically allocate more staff to address employee life-cycle issues.

Secondly, top-flight companies have effective—that is, hybrid—business process sourcing strategies that result from a combination of shared services and outsourcing. For many common financial operations—such as credit, accounts receivable, and accounts payable—world-class companies are from 25 to 140 percent more likely to tap shared services than are their median competitors. Not surprisingly, world-class companies also make effective use of outsourcing as a means to drive down costs. In addition, top performers typically spend 23 percent less than their peers on IT infrastructure and 27 percent less on HR processes per employee.

Thirdly, top-flight companies are able to improve data access by standardizing on a common data repository and, Hackett researchers stress, by helping executives exploit this information to guide strategic planning, budgeting, and forecasting activities. One upshot of this is that world-class companies are 105 percent more likely than median companies to generate business performance reports from a centralized data repository.

Elsewhere, top performers typically simplify their infrastructures by standardizing on fewer applications and hardware platforms. For example, world-class companies have 67 percent fewer database platforms per 1000 end-users than their median peers, and—similarly—have 46 percent fewer compensation plans.

Finally, top-flight companies are 45 percent more likely to have IT participation at the senior management level, Hackett researchers found.

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.