Looking to slash your IT investments? Consider the possibility
that targeted ones might generate savings and revenues exceeding
what you could save through cost cutting.
Economies around the world are slowing down, and companies are
looking for ways to trim spending and improve the bottom line.
Although information technology often represents a small fraction
of the corporate cost base, senior executives inevitably turn their
attention to IT budgets for substantial contributions. Yet in some
instances, IT investments deliver more value to a company's top and
bottom lines by making a business more efficient and increasing
revenues than any savings gained from traditional IT cost
cutting.
IT has come a long way over the past decade. Budgets grew
rapidly during the dotcom boom and the run-up to Y2K, then declined
drastically when the bubble burst. Over the following years, CIOs,
working with business unit leaders, improved the performance of IT
departments by streamlining application portfolios, reducing
infrastructure costs, improving governance, consolidating
suppliers, and outsourcing many activities.
Much has changed across the business landscape as well.
Technology now meshes tightly with operations in ways that were not
possible a decade ago the apparel maker Li & Fung, for
instance, uses IT to manage supply chains with a network of more
than 7,500 different suppliers. At the same time, e-business, once
a buzzword, now forms a part of the corporate status quo. IT
capabilities have fostered new sales channels, defined new customer
segments, and even helped create new business models.
These factors make reductions in IT spending more complicated
than ever. Simplistic cuts, applied across the board, may endanger
critical business priorities from sales support to customer
service. That potent message should resonate even among corporate
officers anxious to find quick savings.
CIOs, of course, should continue to make their operations more
efficient and to reduce costs, especially in areas that show signs
of bloat. Discipline tends to slip during a lengthy upturn in
spending such as the one that has occurred in recent years.
Reducing pockets of unproductive expenditure will bring savings
that help meet corporate cost targets.
Still, except in the most dire circumstances, turning off
technology investments during a downturn is counterproductive. When
business picks up, you may lack critical capabilities. Besides,
many technology investments can improve profitability in the short
to medium term.
When business and IT executives jointly take an end-to-end look
at business processes, the resulting investments can have up to ten
times the impact of traditional IT cost reduction efforts.
The trick is to scan for opportunities such as improving the
customer experience, reducing revenue leakage, and improving
operating leverage.
Creating impact with technology
Such an effort begins with a survey of operations for areas
likely to produce near-term revenue and efficiency gains. In our
work across a variety of industries, we have identified a number of
ways technology investments can have a substantial impact (Exhibit
2).
- Manage sales and pricing. Develop insights into customer
segments and improve pricing discipline to increase revenues
without increasing prices.
- Optimize sourcing and production. Rethink supply chains and
logistics to improve the scheduling of deliveries and inventory
management.
- Enhance support processes. Improve the management and use of
field forces (such as installers and field technicians) and of
customer support centres.
- Optimize overhead and performance management. Sharpen awareness
of risk exposure and improve decision-making and
performance-management processes.
To extract value from these opportunities, our experience shows,
companies must make managerial improvements in two areas.
Developing new insights
Few companies have succesfully capitalized on the explosion of
data in recent years. Often this information, residing in separate
IT systems or spread across different business units, has never
been mined for insights that could add value. Small teams of
business and IT staffers can find opportunities by combining a
detailed understanding of business processes with straightforward
analyses of consolidated data sets. When such teams use the data to
compare best practices across regions or to identify under- and
over-served customers, for example, they can identify hotspots of
revenue leakage.
Optimizing processes
As IT becomes tightly integrated with processes, breaks in
workflows often get built into systems and diminish productivity.
Shining a light on these areas with an integrated view of
operations and technology may well surface problems, which often
involve outdated processes, manual steps, redundancies, and
bottlenecks. An 80/20 approach can highlight a modest number of
activities that, when corrected, deliver a disproportionate amount
of value. Companies can usually apply these fixes in short order.
At times, new systems may be needed, but modest enhancements or
targeted work-arounds often suffice: an additional error check in a
credit application, for instance, can reduce the need to rework
incorrectly entered data. Adjustments to workflow processes may
also promote greater adherence to corporate sales-discounting and
bidding policies.
Applying these methods
Applied in high-opportunity areas, these two levers can not only
make a short-term contribution to earnings but also build a
foundation for future performance.
Two cases illustrate this approach...
About the Authors
James Kaplan, a principal in McKinsey's New York office, leads
the technology infrastructure practice for McKinsey's global IT
group. Johnson Sikes is a consultant in the New York office. Roger
Roberts, a principal in the Silicon Valley office, leads the firm's
IT strategy practice.
This article was originally published inThe McKinsey
Quarterly.