The question has often been asked, usually quoting studies from Harvard, “Does IT matter?” In this note, Jyoti Banerjee of KiteBlue investigates research from Keystone’s Marco Iansiti that claims IT, when properly done, delivers profitable sales growth in mid-sized businesses. Iansiti turns out to be a Harvard prof....
Robert Solow is a Nobel Prize-winning economist from MIT who studied US productivity in the 80s and 90s. In these seminal decades, which saw the establishment of widespread ubiquitous computing, Solow could find no evidence that US productivity had been impacted in any way, positive or negative, by technology. This was bad news for an IT industry trying to position itself as a supplier of strong business benefits.
Then Nicholas Carr of Harvard wrote a book entitled “Does IT matter?” where he opined that IT matters in a utilitarian way, in the same way as businesses benefit from electricity or air-conditioning.
For businesses that had spent mega-millions on failed IT projects or stagnant ERP systems, these views made a lot of sense.
Yet, in another sense, these views seemed rather incomplete. After all, there are numerous examples of organisations that have exploited technological opportunities to transform the rules in their industries to their own competitive advantage: Dell, Federal Express, Amazon, and Tesco come to mind. Of course IT matters to these organisations. So why can’t we see the evidence that IT matters when we look across an entire economy?
My own study of 700 European businesses in 2003 (for MyBusiness.Net) found that the leaders were those that had built modern processes using innovative technologies – for the rest, the only interest in technology was to deliver cost efficiencies. Now this study made sense as a piece of work in its own right but it clearly did not fit in well with the broader studies by people like Solow and Carr.
Studying mid-sized businesses
Recently, I came across a 2005 study by Prof. Marco Iansiti of Harvard whose key proposition is that IT does matter: it delivers profitable sales growth in mid-sized businesses. Keystone, an Iansiti research outfit, conducted a study among 600 or so businesses in the United States, Brazil, Germany and the UK which enabled them to make this proposition. The findings make interesting reading for anyone that delivers or consumes business IT solutions.
Iansiti based his research on an IT capability model built by a research team at Microsoft. When Microsoft acquired Great Plains and Navision, it gave itself a key position in the mid-market business solutions marketplace. One way to take the opportunity further was to use its deep pockets to research better business solutions that tied together Microsoft’s existing strengths in desktop, server and productivity applications with its new acquisitions.
One result from Microsoft’s research effort was an enhanced understanding of the processes that are at the heart of any business. The Microsoft team mapped around 1500 processes in a typical mid-market business, which it used to create a condensed IT capability model that captured 40 key processes in an organisation. These processes were in five key areas: sales and marketing, finance and admin, operations, personal productivity and IT infrastructure. Each process blended together a number of sub-processes that together delivered a substantial result for a company.
For example, one key process was seen to be the delivery of real-time stock and pricing data via PDA to sales professionals sitting in front of customers. Obviously, just having a sales force kitted out with PDAs does not deliver that sort of capability if there isn’t real-time integration of warehousing data with finance data, manufacturing data, etc.
In the Keystone study, companies were assessed on these 40 processes to create a consolidated IT capability index that scored them out of one hundred, the higher the score the better their IT capability.
The question boils down to a simple one. Does a company’s IT capability show any kind of correlation with business metrics such as growth, profitability, size and so on?
How does IT matter?
Many argue that larger companies do better than smaller companies in exploiting IT. The Keystone data does not support this as companies in the second quartile in size terms often outperform those that are top quartile in size. They also outperform those that are in the third and fourth quartiles.
Another argument is that companies that spend more on IT get more from it. Again, the Keystone data shows that to be a fallacy. Companies in the top quartile of IT spending show no substantive difference in their IT capability scores than those in the third quartile of IT spending. Basically, these top quartiles spenders could have saved themselves a boatload of cash and still got the same result. Big budget is not as good as smart budget.
But one correlation sticks out: the higher the IT capability, the higher the revenue growth rate of a company. In fact, the correlation is so good it is possible to state that a 10% increase in a company’s IT capability index score delivers a 1.9% growth in sales revenue. Yes, IT does matter.
Multi-step process-led thinking
The lesson is an important one. To benefit from IT, one needs to think smartly about business strategy, map that strategy to smart processes that will deliver that strategy and then think about the kind of IT needed to deliver those processes. This sort of multi-step thinking is essential if IT is to make a proper impact in an organisation.
I am reminded of a study done by Harvard at the turn of the millennium which found that the vastly expensive ERP implementations which were de rigueur in the nineties delivered a one-off productivity boost at the time that processes were redesigned and then failed to show any productivity changes after that. In effect, it was smart thinking around business processes that turbo-charged the business – the technology stuff simply enabled that process magic to be realised in an organisation.
Fortunately, mid-sized businesses do not need to be fussed with massive implementations of expensive software systems that set into concrete by the time they are ready to be used. Today’s mid-market software is cheaper, and is much more flexible out of the box, than the SAP and Oracle systems of the previous decade. So there are great opportunities for today’s mid-sized organisations to benefit from IT in a way that drives growth.
There is great congruence between Keystone's proposition and the research from M Institute (check out www.minstitute.org). The latter points to the formalisation of business processes as the key differentiator between small and mid-sized businesses. In effect, Keystone takes the argument one step forward by saying that the smart application of technology to formalised business processes enables those processes to be scaled up, which in turn enables the businesses to deliver growth.
But consider another point. The companies that delivered the best results were not the ones that were bigger or the ones that spent the most. They were probably the ones that were managed the best. Microsoft’s IT capability index could really be interpreted as a management capability index.
It's the people, stupid
Which should tell you one thing that has never changed from the day the first business opened its doors: the best managers deliver the best results. IT is a tool, just another tool, that great managers use to deliver great results. In their hands, IT does matter.
To check out the Keystone research for yourself, see http://www.microsoft.com/midsizebusiness/businesssummit/keystone.mspx where you can download a document called “Why IT matters in mid-sized firms.”
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