August 2003

 

WHAT'S NEW!
Alinean releases ValueIT v3.0 Just in time for budget-planning season! New features include enhanced peer comparison metrics from Compustat S&P and Mergent, GAP analysis, ROISolutionFinder™ and ValueMap™ business process improvement analysis.

Free e-book now available: IT Value Chain Management: Maximizing the ROI from IT Investments - written by Alinean CEO, ROI expert and co-founder Thomas Pisello
 
 

IN THIS ISSUE:

FEATURE STORY:
In This Issue: What We Can Learn from Tech Companies »

Are there “secret” best practices?
Apply the metrics to evaluate your performance
The numbers: How top tech companies really stack up
 
 

Quote of the Month

“Capital is a commodity, right? Yet somehow we consistently see enormous disparities within industries in their return on capital. We could keep feeding these companies free capital and the disparities would persist. Would Harvard Business Review publish ‘Capital Doesn't Matter’?”

“…It's always easier to be provocative than do the hard work of turning commodity technologies into value-added business products.”

-Michael Schrage,
MIT Media Lab's eMarkets Initiative, as quoted in
CIO Magazine


Did You Know?

As IT stakeholders launch into 2004 IT budget planning, a helpful way to manage resource allocation is similar to a financial portfolio: Select projects to create the right balance of risk and reward, in line with corporate goals.

Here’s one way to classify projects; the ideal IT budgets will fund projects in all of these categories:

IT Cost Reduction
 IT focused initiatives that help to reduce IT operating expenses by increasing IT productivity, avoiding IT purchases, reducing fees and contracts or reducing IT headcount

Business Operating Efficiency
Business-unit focused initiatives which help reduce business operating expenses, cost of goods sold, or depreciation by helping business units to increase productivity and efficiency, avoid purchases and expenses, avoid risk related losses

Business Strategic Advantage
Projects focused on increasing revenue and sales such as those which help to increase sales productivity, customer acquisition and loyalty, increase sales effectiveness or the launch of a new business

Mandatory
Projects that meet corporate governance rules, legal requirements, or other mandated initiative; these projects sometime include vendor mandates, such as migrating to a new platform due to lack of continued support
   
 


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How Top Tech Companies Fare at Investing in Technology

Technology companies should be among the best positioned to use IT to drive business performance. Yet, this often isn’t so – as seen in BusinessWeek’s recent ranking of the Information Technology 100. The data is revealing, and confirms the growing importance of IT governance.

The BusinessWeek annual ranking of its Information Technology 100 represents a Who’s Who list of technology leaders. Those selected as “most likely to succeed” include a solid mix of old mainstays, new leaders and aggressive contenders in virtually all sectors.

Yet a deeper look at these companies’ performance reveals that the InfoTech 100 companies aren’t better equipped to achieve high returns from IT investments. We found a near-random array of IT spending practices and ability to derive value. As a group, they fare no better – or worse – than the 20,000 companies we track ourselves; in fact, they mirror this larger group’s overall performance.

The strongest finding: Spending more on IT doesn’t automatically result in a bigger impact on the bottom line; spending less doesn’t mean the bottom line will suffer, either. Some companies apply their investments and manage costs extremely well, deriving significant advantage; others squander these investments, or spend too little to achieve a meaningful results in a competitive market.

BusinessWeek’s top-100 IT companies show no discernable edge in applying IT for higher ROI, when correlated with multiple performance metrics. Some invest heavily and wisely to get stellar results; these “investing leaders” include Microsoft, Nextel Communications, Oracle and SAP. Others are quite frugal and use IT management skills to drive lower total cost of ownership, while maintaining high productivity and performance. These “frugal leaders” include Dell Computer, First Data Corp, Lexmark and Western Digital.

As is true with the broader population, some of the InfoTech 100 spend much more than their IT peers, on average, and yet have little to show for it, because they generally invest after their more aggressive peers. These “investing laggards” include AT&T Wireless Services, Inc., France Telecom S.A. and Level 3 Communications.

More Solid, Knowledgeable End?
The BusinessWeek group confirms our own findings, that how IT investments are initiated, managed and executed count far more in driving performance than the actual dollar amount spent. The greatest value accrues when companies select the most significant projects, and manage them well.

Applying The Metrics
To measure performance, we applied the Information Productivity® metric to the BusinessWeek InfoTech100 rankings for the analysis. This measure, created by Paul Strassmann, former CIO of Kraft, Xerox and NASA, demonstrates the overall impact of IT by comparing corporate profitability and the creation of long-term shareholder value with the information management investment and overhead needed to generate that performance.

This metric notes the two ways in which IT investments can impact an organization: increase sustainable profitability and improve operating efficiency. The companies with higher Information Productivity achieve a higher sustainable profitability with lower information management input than their competition – and overall, are more effective, productive and efficient.

To apply this methodology to assess your company’s performance, use the following formula:

Information Productivity =
Economic Value-Added / Sales, General & Administrative Spending

The measure of profitability used in the Information Productivity formula is Economic Value-Added (EVA), which measures the how a company leverages its assets to generate returns. A positive EVA indicates that value has been created for shareholders; a negative EVA signifies value destruction. To calculate EVA we use the simple version, which can be easily calculated from published financial metrics:

EVA = Net Profit – Cost of Capital x (Total Assets – Total Liabilities)



How They Stack Up

This chart details additional performance metrics, applied to a sampling of more than half of the BusinessWeek InfoTech 100, with top performers noted first. As a group, they under-perform; 43 percent of the companies have a negative Economic Value-Add.

Company

Information
Productivity
(EVA / SG&A)

 Estimated IT
Spending/
Employee

Estimated IT
Spending/
Revenue

Business-
Week
Ranking

SAP AG

145.7%

 $              10,104

3.8%

40

USA Interactive Inc

108.9%

 $                8,704

3.2%

33

First Data Corp.

77.8%

 $                5,530

2.1%

13

Telstra Corp., Ltd.

75.9%

 $              27,242

2.1%

66

Oracle Corp.

62.7%

 $                9,303

4.0%

12

Dell Computer Corp.

54.4%

 $              10,109

1.1%

2

Western Digital Corp.

50.2%

 $                1,970

0.7%

6

Lexmark International, Inc.

46.1%

 $                6,997

1.9%

24

Microsoft Corporation

41.3%

 $              17,037

3.0%

18

Nextel Communications, Inc.

36.7%

 $              24,147

4.7%

1

CDW Computer Centers, Inc.

36.7%

 $              12,691

0.8%

88

Overture Services Inc

33.9%

 $              24,707

2.1%

68

UTStarcom Inc

31.8%

 $              15,754

1.3%

37

Telenor ASA

30.4%

 $                9,599

3.0%

75

SBC Communications, Inc.

29.5%

 $                5,966

2.7%

41

ALLTEL Corp.

23.5%

 $                8,548

2.6%

47

Sungard Data Systems Inc.

22.7%

 $                7,071

2.4%

93

Samsung Electronics Co., Ltd

22.4%

 $              21,158

2.4%

3

Unisys Corp.

14.3%

 $                3,742

2.6%

53

Fiserv, Inc.

13.8%

 $                8,576

6.1%

100

BCE Inc.

9.6%

 $              18,312

9.7%

23

Expedia Inc

8.9%

 $              22,317

3.4%

25

IBM

7.5%

 $                7,258

3.0%

7

Ricoh Co., Ltd.

6.4%

 $                8,292

4.4%

79

China Unicom Ltd.

6.2%

 $                5,352

4.5%

86

Hotels.com

6.1%

 $              20,486

1.7%

32

Canon, Inc.

6.1%

 $              12,508

4.7%

22

Stet Hellas Telecommunication

5.7%

 $              30,503

6.5%

21

Rogers Communications Inc.

5.6%

 $              17,867

9.7%

20

Verizon Communications Inc

2.8%

 $              22,932

8.4%

31

Affiliated Computer Services

2.3%

 $                7,274

5.0%

72

Storage Technology Corp. (Un

0.0%

 $                9,746

3.7%

98

CGI Group, Inc.

-1.8%

 $                9,096

9.9%

96

TDC A/S

-3.3%

 $                8,221

2.4%

30

Amazon.com Inc.

-3.5%

 $              10,417

2.1%

46

TELUS Corp.

-4.3%

 $              13,652

8.3%

81

Electronic Arts

-4.8%

 $              12,341

2.5%

39

Intel Corp

-5.8%

 $                7,147

2.2%

82

Sharp Corp.

-7.0%

 $                9,751

3.0%

69

Pioneer Corp

-8.1%

 $                6,362

3.5%

73

Intuit Inc

-12.2%

 $              12,399

5.5%

99

Cisco Systems, Inc.

-17.0%

 $              19,533

3.9%

45

Benchmark Electronics, Inc.

-17.9%

 $                1,898

0.5%

87

Tele2 AB

-25.4%

 $              46,751

4.0%

48

eBay Inc.

-26.2%

 $              23,478

5.0%

38

L-3 Communications Hldgs Inc

-27.3%

 $                   859

0.4%

58

Qualcomm, Inc.

-30.0%

 $                9,129

2.0%

51

Symantec Corp.

-31.8%

 $              15,236

5.5%

55

Yahoo! Inc.