Financial Planning & Analysis

IT Focus Shifts from Revenue to Operating Income

Technology investments are starting to pay off, creating urgency in management and boards to drive even more gains in operating income.
Akhilesh TiwariMarch 9, 2017

I’m not sure exactly when it happened. But suddenly my technology clients are focused— very focused — on operating income, less so on top-line results. It seems technology investments made over the last few years are starting to pay off, creating urgency in management and boards to drive even more gains in operating performance.

OpinionImagine the return on investment a manufacturer gains by not having to shut down operations for days and days during the year to make repairs. Or how more efficient an HR operation can be if the annual performance evaluation cycle is reduced from two months to one — if, in fact, it helped to save 20% on HR manpower efforts. Consider how replacing legacy finance systems can reduce finance closing operations from 10 days to five.

Pressure from technology customers to generate a financial ROI is nothing new, of course. They have every right to expect to receive returns on their very big bets of money and time. What’s different about 2017 is that whether a project is a massive capital expenditure or a smaller change initiative, it must speak to quick returns. If not, it drops down the priority implementation list — or even clatters to the cutting-room floor.

Akhilesh Tiwari

Akhilesh Tiwari Operating income

If operating income is Theme 1A, then shrinking cycle times is Theme 1B. Business operations must speed up to enable innovations to go to market faster and generate profit more quickly. Everything must accelerate decision making, prototyping, iteration, production, and go-to-market.

Why Now?

Why is this focus on operating income happening today? I have several theories.

One is that we technology and business consultants have been telling our clients over the last five years that they have to speed up to succeed. So perhaps these clients listened to what we said and decided to speed up ROI as well. The more income they can generate from the business, the more they can invest in the business.

Second, companies that stress operating income over top-line growth signal to me that they’re throttling back the accelerator a bit from the days of winning market share at all cost. Instead, they are consolidating, cashing in, and redeploying those resources to say, “Let’s see how our investment gains can be put to best use in increasing sustainable operating performance gains.”

Another catalyst for change in this area is the democratization, if you will, of who is participating in IT decisions. We notice the increasing clout of business-side-of-the-enterprise buyers, including CFOs, CMOs, and CHROs in influencing, and in some cases driving,  IT decisions. Many IT groups are managing on zero-based budgets, so perhaps it’s no surprise that a new focus on financials has come to the fore.

Predicting the Future

The message has been heard. For global IT services, consulting and business solutions organizations such as the one I work for, our clients’ thirst for quicker returns is shifting our own perspectives.

Five years ago, when cloud technology was just a puff in the sky, it was easy to argue the theoretical financial benefits of moving capex to opex, of reducing IT management costs, of improving speed to market. Throw in the popularity of Agile methodologies and you completely shift the technology ecosystem to provide faster and better support. But financial ROI was still something we discussed as being two, three, four years out. Now the benefits have to be demonstrable, not theoretical.

Here are examples of real-world, real-results projects we are talking about with our customers:

  • A manufacturing company’s cutting machines were increasingly breaking down, bringing the whole operation to a halt waiting for repairs. As a proof of concept, we designed an Internet of Things solution that helps this customer predict maintenance and repair issues, so fixes can be made before they break.
  • A major television distribution operation was struggling to get massive amounts of information out of a legacy mainframe, pushing sales and finance to manage their business effectively. Via an integrated solution, all groups work with a single version of their data, leading to improved sales decisions across the organization as well as the all-important cash flow — the heart of every business.
  • A leading provider of unit-dose radio-pharmaceuticals managed its highly-sensitive and expensive product with a legacy system that created production and order- tracking inefficiencies and made it hard to monitor and control revenue and vendor payments. A real-time pharmacy system increased operational efficiency, which led to the elimination of the prior day’s setup work and production waste, while it dramatically reduced costs.

Every customer has at least one and likely more such examples of where they can find such problems and work to fix them.

What Happens Now?

 What happens now?

For one thing, you can anticipate your vendors will be very willing to work with you in designing quick-win projects and achieving a balance between short-term and longer-term wins. The low-hanging fruit has never been so important.

Another probability is that CFOs, CMOs, and CHROs will be at the table much earlier in the project process to ensure that financial goals and metrics are baked into the cake. This, of course, will vary by company, by industry, by project. In truth, I’m sure I’ve never seen the words “operating income” on a technology roadmap before, but I expect that may change as business buyers become more involved.

Gartner predicts that shifting of traditional IT spending to cloud projects will almost double by 2020, to $211 billion. That’s a massive spend that almost doubles the amount invested in 2016. Will businesses get their money’s worth? Will they get results more quickly? The trends of 2017 suggest they will.

Akhilesh Tiwari is the global head of Tata Consultancy Service’s SAP Practice.