In today's uncertain business climate, IT
investment is often in the budgetary crosshairs. But in fact, now is the ideal
time to upgrade existing infrastructure and invest in next-stage technologies
that create value.
By Bob Suh Outlook Journal, February 2004
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Help   Management decision making can be fairly
straightforward when the economy is clearly headed in one direction or the
other. When it is growing, business leaders invest to meet demand. When it is
shrinking, they cut costs to meet quarterly earnings expectations.
But what do executives do when the economy has bottomed out
and growth is somewhere on the horizon but not yet robust? When the obvious
cuts have been made and pricing power is a distant memory, how do companies
continue delivering shareholder value while they wait for vigorous growth to
kick in? What will it take to achieve high performance in these uncertain
times?
And speaking of costs, what role does a capital-intensive
function like information technology play in this quest for high performance?
Many business leaders are understandably wary of IT investments. Although
spending on information technology has increased substantially in the past 10
years, many technology projects have been characterized by sketchy metrics,
long cycle times to new products and unpredictable results. No wonder many
executives have come to regard IT investments as a necessary evil and
information technology as something to be managed and purchased like any other
commodity or utility.
Accenture holds a broader, decidedly more positive view. We
believe that technology investment is vital to driving future productivity and
growth—hence, it is critical to achieving high performance. And this investment
can, in fact, be managed with discipline and rigor, which leads to increasing
predictability and decreasing cycle times. Greater discipline in IT investments
will enable companies to attain superior cost positions, which, in turn, can be
used to gain market share, bring new products and services to market sooner,
and serve customers with deeper insight.
Investing to Capture Value
Companies that achieve high performance through technology understand this.
They execute to take full advantage of the IT investments they have already
made, for both short-term gain and long-term competitive advantage. This
forward-looking approach to IT investment is based on their understanding of
information technology itself, which they see evolving along a path similar to
those taken by earlier transformative technologies. This understanding, in
turn, positions the companies to combine the significant investments they have
already made in basic applications, communications and computing infrastructure
with investments in newer value-creating technologies as they emerge.
The late 1990s produced a number of technology
breakthroughs, which led to improved performance at lower prices. At the same
time, technology suppliers increased their capacity. Now, in their own struggle
to keep and gain market share, many of these suppliers are offering significant
incentives—which means this is the ideal time to invest in next-stage
technologies built on existing infrastructure.
High-performance businesses have a perspective on technology
investment that sets them apart. They watch for opportunities to create
business value in the short and long terms—and make a careful distinction
between spending and investing.
These businesses avoid the austerity trap that is sending
too many companies into a downward spiral. This trap is triggered when
companies, responding to short-term pressure for greater earnings and convinced
that information-related technology cannot create value, focus on cost cutting.
As new technology projects are cut, hardware and software are replaced only
when they fail or expire, so all components in the technology portfolio become
older and less efficient.
An Accenture study¹ reveals that most
companies have reduced their technology reinvestment by half in the past three
to four years. These companies are allowing their IT infrastructure to decline.
An outdated, poorly maintained infrastructure cannot be the foundation for
efficient current operations, much less competitive advances.
 In
contrast, high-performing companies look beyond cost alone to the total impact
of a technology project—to its ability to help build a superior cost position
and faster response times and, as a result, greater market share. When they
consider cost, they take the broad view. For example, they look not just at
purchase cost but at total cost of ownership over time. Or they look at the
annual cost savings and other benefits (such as improved security) that can
result from upgrading to newer technology. And these companies measure
investment and risk so rigorously that they are able to predict from past
experience which projects will exceed return-on-capital hurdles.
Virtuous Circle
As a result, they
invest actively and with confidence, managing and upgrading their technology
portfolios to capture value. According to the Accenture study cited above,
companies with the best earnings growth reinvest up to 10 percent more of their
technology budgets on upgrading to newer technologies than do companies with
average earnings growth. Operating in a virtuous circle, these high-performing
companies create the conditions necessary for continued superior earnings
growth and competitive advances.
Finally, high-performing companies invest strategically,
looking for ways that technology can help create competitive advantage. True,
this advantage may not last, as competitors replicate their practices. But a
short- to medium-term advantage can turn into a long-term advantage if the
financial gains are reinvested in making the next advance. High-performing
companies invest and reinvest to stay one step ahead.
IT Factories
High-performance
companies also have a different approach to the procurement of technology
solutions—an approach based on the model of the manufacturing sector.
Manufacturing has evolved through a number of transformative
changes in its long, complex history. Two are especially relevant when using
manufacturing as a model for IT procurement. One was the movement from craft
shop to factory, which involved the consolidation of skilled workers at a
shared location, where they could make use of replicable processes and reusable
components. The other was the movement of production capacity overseas, which
has taken place largely in the past 40 years and is primarily driven by the
desire to take advantage of lower labor costs.
For information-based technology, these two changes are
poised to happen simultaneously. Think of the role IT plays for the expanding
service base of the economy of the developed world. Rather than designing and
assembling cars, the IT function must design and assemble services like online
stock trading. If an investment firm builds its Internet stock trading
capability at too high a cost, margins are sacrificed. If it builds the
capability too slowly, market share may be lost. How can a high-performance
solution be developed quickly and at low cost?
The answer lies in the manufacturing model. In information
technology today, replicable tools and processes do exist. Leading
practitioners are assembling the necessary staff, tools and techniques in
concentrated development centers that are, in effect, IT factories. These
centers may be wholly owned by a corporation, or they may be partially or
wholly contracted with another company.
 Furthermore, because of the ease and efficiency of global
communications, corporations are finding it increasingly feasible to send
portions of this information-based work offshore. The advantage can be not only
reduced costs but a faster production cycle, especially if work centers are
located at points around the globe that enable the work itself to “follow the
sun,” with some part of the team always awake and at work. This
industrial/outsourcing approach to information technology is still relatively
new. To date, only a few leading companies have begun to create factorylike
information technology centers. And the movement to offshore outsourcing is
still relatively modest.
Only about 14 percent of application outsourcing and less
than 3 percent of systems integration and custom-application development goes
to India, which is the dominant offshore technology source. Furthermore, when
companies do outsource or move technology operations offshore, their primary
goal is lower labor costs, which is also the almost exclusive focus of their
metrics.
As a result, technology today, like manufacturing in the
past, incurs extremely long cycle times to new products. Defect rates are often
high, and inventory and capacity inefficiencies abound.
Yet those leading companies that have moved toward this new
industrial/outsourcing model are already reaping the benefits. Consider, for
example, General Electric, which has applied its manufacturing and global
sourcing discipline to the management of IT and back-office processes. GE was
among the first large companies to establish 24-hour customer service and IT
operations. It took an early lead in India, due to both labor savings and the
time-zone difference, which made it possible to offer 24-hour service and
support. GE has even invested in R&D facilities in India. Currently, the
company mandates that quotas be met in sourcing certain percentages of IT work
globally.
Strategic Delivery
The value of
strategically locating delivery centers around the globe goes well beyond
cutting costs. Accenture analysis suggests that this industrial follow-the-sun
model can decrease project cycle times by 30 percent (and up to 50 percent for
some applications delivery processes) and increase existing programmer
productivity by 30 percent. Cutting the production cost and cycle time of IT
projects, while also ensuring that quality outcomes could be delivered on time
and within budget, would propel companies into significantly higher performance
and higher earnings positions.
There is an important caveat that should be part of any
discussion of this industrial model for technology procurement, particularly
when the outsourcing component of this model is driven largely by cost savings.
History has demonstrated that the advantages of labor arbitrage seldom last
forever. Moreover, plentiful labor is not a guarantee of skilled labor. Any
advantage derived from labor arbitrage will ultimately be outweighed in value
terms by accelerated cycle times, reduced defects and greater flexibility. This
was a lesson learned by post-war Japanese manufacturers. Once they lost their
status as low-cost producers, they began to reinvest in their plants and
embrace automation.
Corporations are in an analogous situation today when it
comes to investing in IT infrastructure. This investment will still be creating
value long after the benefits of any labor arbitrage have ended.
  IT
infrastructure continues to play a vital role in high performance. To cut cycle
times, companies need to manage work across IT suppliers, business partners and
geographies securely, in real time, and with high availability. This will
require changes in corporate data centers, software and networks. And, as radio
frequency identification devices and mobility solutions are embraced,
infrastructure becomes the critical foundation for delivering them securely.
Moreover, the very definition of infrastructure will be broadened to include
high-technology devices that can deliver new value on the existing platform
(see Sidebar 2).
Does that mean still more investment in infrastructure? Yes.
It is important to note that at many companies, although major portions of the
infrastructure have been built out, other elements often have not been. For
example, companies may have built core network capabilities to support
communications between locations, but they may still need network
infrastructure to support wireless communications from individual devices.
 Furthermore, there is real danger in not investing to maintain
the infrastructure already in place. Consider this analogy. Great Britain
invested heavily in its railroads during the 1960s and reaped the rewards for
many years while deferring maintenance and upgrades. Performance and financial
returns were good enough that no one asked whether results would be even better
if the system were being continuously upgraded. In fact, infrastructure quality
was slowly declining, and by the 1990s, safety systems had become inadequate,
accidents were on the rise, trains were arriving late and service was being
cut. Massive investment again was needed. Corporations will want to avoid the
same costly deterioration in the quality of their IT infrastructure.
Although more infrastructure investment may be needed, there
is good news: Payback is in sight.
Most executives, though they lack concrete evidence, are
convinced that returns on such investments have been poor. To some extent, this
is true, and the executives’ attitude is understandable: As new web-based and
enterprise applications were approved in the past 10 years, a significant part
of the new project costs required infrastructure upgrades. New web servers,
security software, networking equipment and desktop upgrades all added to the
hurdle rate of technology projects. Many of these upgrades have now been made,
however, which means the returns on future projects will be higher. Although
newer technologies will require some additional investment in infrastructure,
most companies will be leveraging significant prior investments. And increasing
the number of applications leveraging the infrastructure will raise firms’
returns on their invested capital.
Companies must also integrate software, tools and standards
to achieve higher returns and lower cycle times. They must leverage web
services and enterprise integration tools to reuse applications and increase
integration. And they must continue to take advantage of the investment in
packaged software to adopt process best practices rather than develop and
maintain them on their own.
Finally, high-performance companies must continue to value
technology innovation, both at the front end, where information technology
operations themselves are designed and executed, and at the back end, where
information-based products and services perform in the marketplace.
The best companies innovate with an eye toward strategic
goals. That may mean investing in new technology, or it may not. What is clear
is that these companies have a superior ability to discern important industry
drivers of present and future value, and to combine that insight with an
understanding of how information-based technology can contribute to
differentiated operating models and business architectures.
They recognize that technology can power significant
incremental earnings through cheaper and better customer service, more
effective cost of goods and services, and more productive SG&A functions.
They also recognize the value of existing IT investments as a platform for
leveraging emerging technology. The result might be a new product, service or
business model that takes advantage of the power of an integrated
infrastructure.
Many companies, with a little more effort, can achieve
significantly greater returns from their technology investment. Ultimately, of
course, on your journey to high performance it is what you do with technology
that matters—how creatively you put it to work, how diligently you build on it
and how prepared you are for the next genuine breakthrough.
 About the Author Bob
Suh is the Boston-based managing partner leading strategy for
Accenture’s global Technology & Outsourcing business. He is a member of the
Accenture Technology & Outsourcing Executive Committee, which governs the
company’s business in software, applications, core technologies, global
software development and infrastructure.
For more information, please
contact us.
¹ "Business Value Creation
Through IT," Accenture 2003.
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