Frugal spending leads to good financial performance, claim analysts

Organisations with the best-performing IT investments are often the most frugal spenders according to a study of 7,500 companies...

Organisations with the best-performing IT investments are often the most frugal spenders according to a study of 7,500 companies by US IT consulting firm Alinean.

Using data gathered by financial information services firm Standard & Poor's, Alinean applied common calculations, such as economic value-added measurements, to determine the financial performance of the 7,500 companies relative to their IT spending.

The consulting firm said it then conducted individual surveys of more than 200 companies.

Overall, the companies on average spent 3.7% of their revenues on IT last year, said Alinean president and chief executive officer Tom Pisello,. But the top 25 performers analysed invested a scant 0.8% of their revenues on technology, he added.

The companies that spent the most on IT typically underperformed by up to 50% compared with their best-in-class peers, according to the research.

These numbers seem to support findings released last month by Forrester Research. Forrester's figures showed the top-performing companies in terms of revenue, return on assets and cash-flow growth spent less on IT on average than other companies.

However, some IT managers and analysts questioned the validity of trying to draw correlations between the success of technology investments and IT spending as a percentage of a company's revenue

Jon Carrow, director of global IT sourcing at pharmaceuticals maker Wyeth, said IT spending levels are often dependent on a company's business model and whether it is in growth mode or retrenching. "I don't think there is a 'right' number [for IT spending]. It's specific to each company," he said.

"There are too many variables between companies to draw conclusions on IT spending," agreed Chip Gliedman, an analyst at Giga Information Group. For example, one company could spend more during the course of a year on marketing and cut back on its technology investments, while another might spend more on IT, he said.

Pisello noted that technology vendors such as Dell, IBM and Lexmark all tended to be thrifty IT spenders. But Oracle spends considerably more on internal IT as a percentage of its revenue, Pisello said, adding that this approach worked better for its business model.

A company's competitiveness and the financial strength of the industry it is in are the biggest indicators of the kinds of returns that its IT investments will generate, according to Pisello.

For example, technology, telecommunications and steel-making companies that have been hard hit by the sluggish economy are generally the lowest-performing companies in Alinean's index, partly because their revenues have sagged and new spending on IT has been curbed.

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