Annual growth in IT spending dropped to 5.4% in the last quarter of 2006, compared with 6.1% in the previous quarter, according to the latest research from Kew Associates, in partnership with Computer Weekly.
But in the face of this decline in spending growth, CIOs and IT chiefs have been told that the productivity benefits from IT spending could help bolster the case for increasing IT spend, rather than cutting back on investment.
The Kew research shows that IT managers feel IT investment helps improve productivity more than any other business objective such as improving quality, increasing market share or increasing profit margin.
And the view is backed by academic research. John Van Reenen, director of the London School of Economics' Centre for Economic Performance, said, "There is a lot of evidence that IT spending does increase productivity. But the main message is that it is not just IT alone. It is about spending smarter and making changes to the rest of the business."
Roger Ellis, chairman of the IT Directors' Network and a former IT director, said productivity was the easiest business measure when looking for the benefits of IT investment. "If you look at headcount it is very straightforward. If you are getting though the same work with fewer people, or if you measure the output per individual, then IT investment can influence these things."
However, Ellis cautioned that measuring productivity outside of manufacturing industries was far from straightforward, as quality of output had to be considered alongside volume.
In the past five years, IT expenditure growth has lagged productivity growth by one quarter. If a similar trend continues, UK firms that have cut back on their IT investment might expect to register a similar drop in productivity growth in the next couple of months.
Although productivity, or output per worker, has improved in the UK in recent years, there is still a 27% gap between the UK and the US.
"To distinguish the effects of IT investment from factors such as local culture and skills, the LSE has studied how US-owned firms in the UK performed against their rivals," said Van Reenen. "Not only did US-owned firms spend more on IT, they also got more productivity gains per dollar spent on IT."
US-owned firms also changed the way they do business in order to take advantage of IT investment more rapidly than European-owned companies, he said.
The Kew research found that the only sectors of the British economy with improving growth in IT spend are in the production industries, including manufacturing. While growth in IT spending in the public sector and the services sectors dipped, IT spending growth in the production industries climbed to 6% in the last quarter of 2006, compared with 4.7% in the previous quarter.
Read the LSE research: http://cep.lse.ac.uk/textonly/people/vanreenen/papers/ITaintwhatyoudo.pdfLink to Kew Associates
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