Why So Many Big IT Investments Do So Little for Shareholder ValuePublished: July 27, 2005 in Knowledge@Wharton
At the start of his talk on "Management Challenges of Technology," James Blyth, chairman of Diageo -- the world's leading premium drinks company -- asked members of the audience to raise their hands if they were carrying a cell phone. All hands went up. "Now keep your hands up if the phone is more than five years old," he said. All hands went down.
His own cell phone, which was bought in 2000, "does the same job as yours," Blyth said. "It makes and receives calls. It does text messaging and it works on all continents." (It does not take photographs.) His point: Mobile technology has not "substantially changed in the last five years yet most people will have upgraded their phones two or three times during this period. So why are we obsessed with chasing the latest technology when it doesn't always make our lives easier and doesn't offer much better [capability]? How often do you switch on your phone when you get off an airplane or check your blackberry even when it means interrupting a train of useful thoughts?"
His goal, he said, is not to dump on technology, but rather to look at how IT helps -- or doesn't help -- companies create shareholder value. Relentless pursuit of the latest upgrades is one example of what he calls "the tyranny of technology." Think of the modern car, he said. "It's full of gadgets we don't use ... and we spend more time reading the instructions on how to use them than using them." In the workplace, "we rely on complex technology solutions for simple administrative tasks, like making appointments or setting up meetings. We have replaced human interaction with emails and call center procedures. We think that when we send an email, we have taken action, and when we delete an email that we have resolved an issue."
Technology has also changed the way we communicate, he noted. "Instead of articulating ideas, we talk in bullet points. We waste a huge amount of time designing, training and then redesigning and retraining staff on each new technology program." Such behavior has led to increases in technology expenditures across industries and geographies, with overall IT spending estimated worldwide at about $2.5 trillion -- 50% of total corporate capital spending. Yet instead of getting "profitable differences" for all this spending, Blyth said, the outcome is usually just "expensive similarities" -- i.e., companies invest huge amounts of capital without gaining points of differentiation. Meanwhile failure rates in IT are high.
He cited figures from Gartner Research showing that "on average, 20% of the corporate IT budget is spent on initiatives that don't achieve their objectives. That means $500 billion of bad investments." In the U.S. alone, he said, total spending on Customer Relationship Management has reached $10 billion, "but analysts estimate that more than half of CRM projects fail." In addition, more than 90% of companies are dissatisfied with the results of their Enterprise Resource Planning implementation.
IT's Poor Returns
So why are businesses "wasting enormous amounts of money and effort" on IT investments and why do most companies "fail to derive value from them?" For two reasons, according to Blyth: "One, it's difficult to sustain a technology-based competitive advantage; two, companies often lack the management discipline they need when evaluating technology proposals."
On the first point, Blyth noted that IT is easily replicated and "any advantage gained quickly erodes over time as competitors catch up." Even knowing this, companies still put as much as 85% of their IT investments into infrastructure and only 15% into innovation. It took competitors six weeks to imitate Intel's latest chip technology, he said, and yet one hears CIOs evaluating IT proposals based on 10-year paybacks.
He also cited the example of the British pharmaceutical company Boots, which was the first U.K. retailer to introduce a chip-based loyalty card. (Blyth served as chairman and chief executive of Boots before moving to Diageo.) Nowadays, however, "most large retailers offer similar information-capturing devices, either in the form of loyalty cards or in-store credit cards." Another example: When some banks started offering online banking free of charge, it was a competitive advantage; now all banks offer this service. Having said that, he acknowledged that companies' failure to invest in IT processes can also lead to competitive disadvantage. So managers need to weigh what it is they want to achieve. "IT is in part about keeping up" and "investing modestly and often, in core systems." It is also about making IT investments "not for their own sake but to bring about real business change."
Another reason companies fail to get adequate return on their IT investments is they don't know how to measure them, Blyth said. According to McKinsey research on Fortune 500 companies, 64% of the CIOS interviewed did not undertake any follow-up to determine whether IT projects failed or succeeded. At Diageo, "approval of IT spending is subject to enormous evaluation and scrutiny. Investments are phased in, performance milestones are set at each stage, and funding has to be defended at each step." Yet even in this culture, he added, "our IT investments have not been as successfully monitored as they should be. We are trying to correct that."
Technology alone "will not provide companies with a competitive advantage," Blyth noted. "Too many companies out there are prepared to sell you innovative technology that they sold to somebody else. Real competitive advantage is provided by managerial innovations, either to increase productivity or to build on operational strength. Fundamental business changes are much more difficult to replicate. When technological innovations are fused with fundamental change in business process, real competitive advantage can be achieved."
Blyth brought with him the results of research conducted last year by McKinsey and the London Business School. The study examined the impact of management practices and technology on the financial performance of 100 companies in the U.K., Germany, France and the U.S. Results show that companies with the top-quartile IT departments increased productivity by 2%; companies with the top-quartile management practices increased productivity by four times as much, or 8%; and companies that successfully combined good management practices with good IT increased productivity by 20%. "These conclusions are intuitive," he said. "It's obvious that companies should focus on their strategic direction and on enhancing management practices. Technology is one of the tools that can help deliver the strategy."
Good, and Bad, Outcomes
He offered three examples of companies trying to create value from their IT investments. The first came from Diageo, which pioneered the consolidation of the premium drinks industry with a number of key acquisitions and divestments (it merged Grand Metropolitan and Guinness in 1997 and acquired Seagram in 2001; it sold off Pillsbury and Burger King). By 2002, Diageo was the world's leading premium drinks company "but we could not operate efficiently as a single global business because our systems and processes" were different and fragmented. So Diageo invested in IT (in this case, SAP) which not only allowed it to become a single business, but also led to deeper change within the company.
For example, Diageo is in the process of removing the "back office" supporting activities from its in-market companies and setting up a technologically advanced Shared Service Center to provide centralized transaction processing. "It's an example of creating value from a broader business change," Blyth said.
In the second case, Wal-Mart, Blyth told how the giant retailer -- which belongs to an industry characterized by low margins, large numbers of stock-keeping units and high inventory turnover -- invested in 1990 in customized supply chain systems that allowed tracking of inventory, using customized applications with the help of smaller vendors. "This allowed the company to tailor the systems to its business needs rather than change its business processes to fit the software."
Wal-Mart also leveraged it scale to lock in suppliers, and is pushing them to adopt the satellite-tracked Radio Frequency Identification Device (RFID). This technology allows Wal-Mart to know the exact location of each product as it moves from its starting location to the store shelf -- "something its competitors have not yet been able to replicate," Blyth said.
The third example he presented was Boots, which pioneered Electronic-Point-of-Sale in the 1980s -- an innovation that gave it access to "Direct Product Profitability" data across all products. "The product range could therefore be tailored to the more profitable products," giving Boots a "head start on British retailing for most of the 1990s," Blyth said. The company also pioneered the chip-based customer loyalty card that same decade.
But Boots then ran into trouble. It experienced "substantial problems with the implementation of new store processing systems. Due to a complex patchwork of legacy platforms and hardware failures, these systems did not deliver on the basic requirement, available stock on the shelves." In 2001 Boots outsourced its data center, which saved money but led to problems with service providers. "To make matters worse, Boots also outsourced its sophisticated distribution systems. In fact, it did the exact opposite of Wal-Mart," Blyth said. The company "lost control over two key pillars of its retail strategy -- the ability to generate customer insights and the ability to manage stock in store."
The lesson here, according to Blyth, is that when companies undergo IT-led change, "it is important to fully understand the risks of new technology and [adopt] plans to manage those risks."
Technology is an "important tool in increasing productivity and opening new business opportunities," Blyth added, but the wrong approach to technology can mean that "companies waste millions of dollars and huge organizational effort simply chasing the latest IT trends." Use technology as "an enabler for change," he suggested, "but make sure that you rigorously evaluate the outcome of IT investments."