Getting IT Spending Right This Time

Who can blame executives if half a decade of overspending on information technology now makes them obsessed with costs? Companies in much of the world are capping their IT expenditures. Some even peg the performance bonuses of chief information officers to how much money they cut from technology budgets.

Yet companies underinvest in technology at their peril--even in lean times. New technology, deployed intelligently, can help organizations make dramatic leaps in productivity and redefine competition within whole sectors, as Wal-Mart (nyse: WMT - news - people ) and Dell Computer (nasdaq: DELL - news - people ), among others, have shown.

The essence of smart deployment is knowing where and when to invest. Which technology expenditures will yield a sustainable, differentiable advantage? Will the bleeding edge of technology bolster a company's bid to be a leader, or should executives wait until the risks and costs fall? These perennially difficult questions--which hinge on a complex array of industry-specific factors--become even thornier when earnings pressures are high.

Compounding the challenge is the tendency to view technology, first, as a panacea and, then, after the hype proves unrealistic, as anathema. The experience of the leaders shows that new technology alone won't boost productivity. Productivity gains come from managerial innovation: fundamental changes in the way companies deliver products or services.

How can companies invest in technology to achieve meaningful gains? The McKinsey Global Institute (MGI) spent two years investigating the relationship between IT and productivity and found that the former most effectively stimulates the growth of the latter by helping companies to innovate.

Innovation sometimes means creating new products (such as faster microprocessors), services (mobile telephony) or processes (on-line securities trading). But it also involves using technology to turbocharge existing processes by helping companies to extend their current advantages in key areas. When Wal-Mart linked IT with its efficient distribution network, it advanced both the state of the art in supply chain management and the productivity frontier of its sector.

MGI's research suggests that to foster innovation, companies should focus on two priorities. The first is to identify the productivity levers offering the greatest opportunity for competitive differentiation: Targeting the few specific levers that could well create a competitive advantage produces results more reliably than striving for improvement everywhere.

The second is to master the sequence and timing of investments. Many technology-based advantages, particularly those that don't involve fundamental business changes, have a limited life because they diffuse rapidly through the sector. Timing is therefore critical if IT investments are to generate returns.

Companies that get it right develop a clear understanding of how IT-enabled competition is evolving in their sectors. Investing ahead of the pack makes sense if the technology is hard to mimic, continues to yield benefits even if imitated, or offers great near-term value. Otherwise, companies can often hold down their spending and boost their returns by diving in only after others have made investments--and mistakes.

Smart IT investing doesn't require a return to the spendthrift ways of the late 1990s. Companies that understand where to focus and how to time their efforts can find IT investments that will not only differentiate them from competitors but also provide a lasting competitive advantage--and avoid investments that won't.

Ebusiness India
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Vorks Software India private Limited