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Information Technology Drives Growth
Better information technology (IT) makes a quantifiable, positive difference in business performance.
That is the core finding of this multi-country research study sponsored by Microsoft Corporation and conducted under the direction of the Harvard Business School. The study found that:
clear evidence that IT matters and that better IT makes a quantifiable, positive difference on business performance.
- Firms with superior IT grow faster than their peers. Managers in enterprises with better IT enjoy more insight into their business and their workers are more productive.
- Measuring IT as it supports executives, managers, employees, and key business processes (rather than measuring IT investment or other proxies for the impact of IT) results in an unprecedented window into IT's positive impact.
- A stable and robust IT infrastructure with well-implemented software to support operations and excellent IT management practices is important in achieving these superior results.
The research, conducted through interviews with IT executives from 161 large manufacturing companies in the United States, Japan, and Western Europe, reinforces many widely discussed IT best practices:
- Chief information officers (CIO's) must be able to envision business possibilities and initiate them with supporting technology.
- CIO's have to balance their vision for how to transform the business with core IT challenges of consolidation, integration, service levels, and other fundamental operational needs.
- The success of the CIO depends on the steady support of the rest of the management team through establishment of a stable and robust infrastructure that becomes a platform for higher-level applications that can transform the business.
This study sought to go beyond these best-practice tenets and quantitatively demonstrate the impact of IT on business performance. To do so, a new approach to measuring IT capability within a company was used. Previous studies used indicators such as IT spending or PCs per employee and other measures of IT investment as a proxy for the impact of IT and consequently failed to find a positive relationship between business performance and IT. This led to broad pronouncements on the dubious value of IT, most prominently Nicholas Carr's 2003 article titled "IT Doesn't Matter."
In a departure from those studies, the reach and quality of each company's IT-enabled business processes was examined by analyzing how IT systems are used in several key areas: sales and marketing, product and service development, operations and finance, and partner and supplier management. In addition, each company's IT infrastructure and IT management practices were also systematically analyzed to determine which elements had the greatest impact on business performance. The most prominent finding is that higher IT capability directly correlates with superior revenue growth. The top performing companies grew on average 3.5 percent (compounded annually for 2002-2005) faster than the average for all peers in their industry. The companies in the bottom quartile on average grew 3.3 percent slower than their peers. The results were statistically significant with a very high degree of confidence (see Figure 1).
Figure 1. Correlation Between IT Capabilities and Business Performance
The research reinforces the critical need to build IT on top of a robust infrastructure. Firms in the top quartile of IT capability enjoyed a 23 percent advantage in revenue per employee compared with firms in the bottom quartile of IT capability. The analysis shows that the primary driver of this difference is superior IT infrastructure in the form of an optimized combination of access, security, maintenance, backup/recovery, and messaging systems.
confirms that better software provides managers with the tools
they need to have better insight into, and control over,key dimensions of their business
This research also confirms that better software provides managers with the tools they need to have better insight into, and control over, key dimensions of their business. For example, firms with better financial and operations systems, such as systems that support order management, asset and inventory control, forecasting, and reporting, reported significantly better insight into customer and product profitability, as well as better control over product pricing and more influence over their business partners.
Firm performance was measured relative to peer group companies from within the same industry sector. While this research was conducted with manufacturing firms, our previous research with midsized companies in service industries showed a similar positive impact of IT on revenue growth. In both studies, IT capability scoring was based on a business activity-driven measure of IT capability. The studies looked at actual in-use IT and excluded IT capabilities that were present but not used in the normal course of business.
The Enterprise IT Capability Study provides new insights into the impact IT has on business. The study shows that enterprises with better software systems achieve higher productivity and have greater insights into and control over their businesses, resulting in substantially higher revenue growth. This study provides clear evidence that IT matters and that better IT makes a quantifiable, positive difference on business performance.
