Spending on revenue-enhancing IT systems more beneficial than focusing on streamlining processes to cut costs

Investing in IT departments can have a big impact on a firm’s profits, more so than similar spending on R&D and some marketing endeavors, according to a team of university reasearchers.

The researchers reached their conclusions after examining the IT investments and financial data of about 450 companies in an effort to draw a link between IT spending and profits.

The work, published in the journal, MIS Quarterly , led to several key conclusions.

First, IT investments are “positively associated with profitability,” according to the research paper .

The researchers said they were able to look deep enough at these unidentified global firms to draw insights into the type of IT investments that are most helpful. They found that companies are better off spending on projects that create revenue instead of reducing costs.

For instance, a company that builds or buys a business intelligence system that helps sell products will see more bottom line benefits than a company that spends IT dollars to automate internal processes to trim expenses, said the paper’s lead author, Sunil Mithas, an associate professor Robert H. Smith School of Business at the University of Maryland.

He noted that cost cutting systems are likely not unique, and thus don’t offer a competitive advantage. “Your vendors will sell the same system to your competitors,” Mithas said.

But firms that spend IT dollars on revenue generating products may come up with systems that “are highly differentiated from your competition” said Mithas, “It will be very hard for your competition to replicate that.”

Mithas said the team was unable to pinpoint an optimum level of IT spending.

Some firms are good at managing IT spending consistently, while others may pull back on IT investments after a failed project, and thus become a laggard.

The team, which also included researchers from the University of Illinois, the University of Texas, and the IE Business School in Madrid, Spain, concluded that that IT investments are more likely to enhance profits than advertising or R&D spending.

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Even in R&D and advertising intensive businesses, such as the pharmaceutical industry, strong IT investments can prove fruitful. The paper cited a project Pfizer which “enabled virtual teams from different business units around the world to collaborate in research and develop new drugs.”

The researchers examined IT investment and financial data from 1998 to 2003.

Mithas said there is no reason to believe that anything has changed since then — even with constantly changing technology.

The IT spending data was gleaned from surveys conducted by a consulting firm that the researchers didn’t identify due to a non-disclosure agreement. Mithas could only say that the firm is among the top IT consulting companies in the world.

The absence of a identified source for the IT spending data in this paper drew criticism from Paul Strassmann , a former U.S. Department of Defense CIO and acting CIO of NASA who has written about the correlation of IT and profits.

Strassmann said that “unless the authors disclose the origins of the critical IT numbers, the entire paper must be considered speculation and not verifiable analytic proof.”

Mithas said the paper went through “a blind peer-review process by top academic scholars familiar with this domain of enquiry and such relevant data related details were shared with them.”

The reviewers “appeared satisfied with the data quality and procedures we used for analyses.”

Mithas said the findings are strong and said a characterization of the study’s findings as speculation “is a little extreme.”

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