Technology

IT Spending a Dud, Says Study

New book shows no correlation between tech spending and corporate performance. Plus: software for FAS 133.
CFO StaffJune 15, 2003

If information technology has lost some allure, at least it has plenty of company. A new book, What (Really) Works, tosses “IT investment” onto a vast scrap heap of 200 management practices that fail to drive value.

In studying 160 companies over five years, the authors, William Joyce, Nitin Nohria, and Bruce Roberson, attempted to bring statistical rigor to the task of figuring out how winners win.

In their view, total return to shareholders, which served as their benchmark for corporate performance, depended on four primary management practices (strategy, execution, culture, and organization) plus the manifestation of two from a list of four secondary practices (talent, leadership, innovation, and M&A).

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Companies with high scores in the four primary areas and any two of the four secondary areas consistently outpaced their competitors. “Our results have such a back-to-basics quality that people have told me, ‘It took you five years to come up with that?’” says Nohria. “But often managers don’t have a clear idea of what they’re doing, or they think success hinges on one area when in fact they’ve had to do several things right.”

As for the book’s failure to champion IT, Nohria says, “I’ve been a fan of IT — I even helped develop a business-school course on it — but we found no correlation between IT spending and corporate performance.”

Nohria says that too often, companies lose sight of the ends that IT is meant to serve and instead make sucessful deployment an end in itself. Other practices not found to underpin success: Six Sigma quality initiatives, change management programs, and improved corporate governance.

IT Strategy: Levers For Success

IT heads: don’t get overly discouraged by the previous item. Why? There are plenty of surveys that would seem to dispute some of What Really Works. For instance, a team of McKinsey consultants spent two years studying tech investments and found that IT spending can still separate the leaders from the pack — if companies know which levers to pull.

The key to substantial boosts in productivity, they say, is to direct IT investments toward projects that enhance innovation. And the keys to enhanced innovation are focus and timing.

Instead of looking to improve operations across the board, McKinsey consultants Diana Farrell, Terra Ter-williger, and Allen P. Webb say companies should target those areas where IT spending dovetails with a commitment to improved business processes and existing operational strengths. They should also avoid copying other firms, even those within their own industries that are often held up as best practices.

As one example, they point to Wal-Mart, the current gold standard within the retailer industry. Despite its IT-driven success, its focus on low-cost commodities makes it a poor model to follow for, say, Saks Fifth Avenue, which must cope with the seasonality of the fashion business and the need to avoid unloading inventory at end-of-season discounts.

Timing is also key. When an IT investment complements business goals and leads to innovation, or provides an ongoing benefit even if imitated, it makes sense to be out front. Leaders need to be able to implement IT quickly and have a track record of effecting change. Failing that, restraint is best.

FAS 133: Time To Mobilize

The dust may finally be settling regarding FAS 133. True, as recently as April 30 the Financial Accounting Standards Board was issuing a statement that, once again, “amends and clarifies” the 700-plus-page accounting standard for hedging and derivatives. And nearly half of the 175 respondents to a survey conducted last September by the Association of Financial Professionals say that the standard imposes “an excessive” reporting burden on their companies.

But that number was down sharply from a similar survey in 2001. Moreover, evidence suggests companies are beginning to look to various software packages to help them with hedging and reporting — a lagging indicator that perhaps they’ve come to terms with the voluminous accounting standard.

“As always, you have the hype before the reality,” says Thomas Bergqvist of treasury software provider Trema. “We had the hedge accounting software out several years ago, but now we see the actual use of it. Companies are starting to mobilize.”

“We are looking at some new systems,” agrees Frank Kimick, treasurer of Swiss watchmaker Movado Group. Movado’s homegrown systems manage currency exchange well, he says, “but off-the-shelf software is now priced more efficiently.”

Movado already uses SuperDerivatives, a Web-based product that allows companies to price options based on Bloomberg and Reuters data. That, says Kimick, is a boon when it comes time to mark options to market. With software now softening FAS 133’s infamous complexity, Kimick says the standard actually benefits Movado by documenting hedge efficiencies. “It makes people better traders and better hedgers,” he says.