Business Value of Technology Investments
As technology changes in every industry, companies continue to make significant investments. However, many such investments need to deliver the promised returns. The results show no direct correlation between technology investment and profit growth. The increased technology spending only sometimes leads to improved financial performance. In this article, we’ll review a strong correlation between technology and profit growth if the investment is focused on targeted capabilities complemented by the suitable operating model and implementation skills.
How can companies thrive long-term when the business technology landscape constantly changes underneath them? Recognizing potential disruptions and the opportunities they present for innovation and understanding how to drive innovation through strategic investments in technology can help senior executives learn how to work with their technology divisions to create long-term competitive advantage.
Senior executives looking to disrupt or fight disruption in their industries may want to consider the technology investment practices of technology vanguards, a small group of organizations (11.6%) that, according to Deloitte’s latest study of global technology leadership, outperform their peers in three areas: vision and strategy, market leadership and technology function maturity.
In general, these cutting-edge organizations employ many progressive strategies for budgeting and investing in technology.
Spending habits of technology vanguards
To begin with, technology vanguards spend a higher percentage of revenue on technology than their peers, known as base organizations (4.8% vs. 4.2%). They are more than twice as likely (24% vs. 11%) to project a significant increase in technology budgets compared to the previous fiscal year.
The study found that technology vanguards are more likely than their peers to focus on organizational flexibility and business partnerships. Forty-two percent of technology vanguards said their organizations are shifting to a product-centric operating model and taking an agile approach to both business and technology, compared to 14% of base organizations. This suggests that their approaches to budgeting, investing, and valuing technology are flexible and iterative, allowing them to reallocate investments and quickly rebuild while delivering consistent value.
Overall, technology vanguards are more likely to prioritize innovation, growth, and customers than their base-level counterparts, who are more likely to prioritize cost-cutting and efficiency initiatives. Because of the strategic importance of innovation and development to the enterprise, technology vanguards, on average, allocate a more significant portion of their technology budget to creation (20%) than base organizations (15%). Over the next three years, these leading organizations intend to increase spending on innovation to 30%, compared to 23% for base organizations.
Rethinking technology investment practices
As the business, economic and geopolitical environment changes rapidly, organizations typically need to pivot quickly, reallocate technology funds and reprioritize investments. But function-specific budgets, long-term funding cycles, and traditional procurement and vendor management practices generally do not support prioritizing innovation, growth, and customers. We have found that many advanced technology companies are instead using five methods that support innovation and growth: agile planning and budgeting, shared responsibility and accountability with business partners, better cloud investment management, balanced capital allocation, and more contextualized use of budgeting benchmarks.
Agile planning and budgeting
Many members of the technology vanguard told us that rapid prototyping, design, testing, and iterative development had become the norm. Their development teams strive to minimize the time from idea to implementation, develop the solution in stages, and quickly rebuild based on customer feedback and results. Experienced executives are also changing their investment practices by giving more autonomy to cross-functional teams, allowing them to maximize value from technology investments and holding them accountable for delivering that value. They are often more involved in oversight, course corrections, and budget reallocation among several competing options.
Co-ownership and accountability of technology projects
Historically, the success or failure of technology implementations fell entirely on the shoulders of the CIO and the IT team. However, as organizations move from solo projects with functional responsibility to cross-functional business solutions, project success and failure also become a shared responsibility. At Deloitte’s PowerUp Business Reinvention Forum, a recent series of discussions between CSOs and their fellow CIOs, participants noted that their IT organizations are looking to partner more closely with business leaders, often with the help of corporate strategists.
Better management of cloud investments
Cloud adoption can help companies achieve significant cost savings, but only if businesses are able to track cloud use across the organization and make ongoing oversight and adjustments to manage costs, monitor workloads, and ensure value realization. Otherwise, a cloud-based approach can lead to significantly higher prices, lower value and unmonitored usage, orphaned resources, over-extended infrastructure, excessive software subscriptions, and complex architectures. Accordingly, CIOs and CSOs of many enterprises report that they are focused on implementing a more thoughtful and strategic governance model and are looking for business cases in which cloud investments can provide a significant return on investment.
Balanced capital allocation
A resilient technology environment and security, infrastructure, and collaboration tools-the investments associated with protecting and preserving an organization’s business and assets are critical, but they are an essential business requirement. Research shows that high-performing companies disproportionately spend discretionary budgets on innovation and growth-oriented technology investments that create and deliver new opportunities, business models, and revenue streams. In contrast, other companies focus primarily on protecting the business.
More contextual use of benchmarks
Some organizations rely solely on industry benchmarks to assess overspending or underspending and allocate technology budgets when calibrating technology spending. Companies in the same industry can have completely different business strategies and models, resulting in other investment profiles. As boundaries between industries blur, these benchmarks should be used as guidelines, not gospel. Instead, budgets can be aligned with the organization’s corporate strategy, current and future competitive environment, and technological ambitions.
Shifting budgets to business innovation usually requires changes in how organizations use and manage technology. For example, they may have to develop a structure and environment that supports the creation, eliminate technical debt, invest in automation and process improvement, and outsource technical operations to cloud technology providers and business process outsourcers. And as IT’s investment profile changes accordingly, its mission will become increasingly strategic to the business.
As technology increasingly permeates all industries, investing in IT can be the crucial factor between winning and losing. However, more than writing a big check is required. On the contrary, IT investments must be strategic. By focusing on some specific areas, companies can improve their technology investment suitability index score and make sure they are investing in technology that can have a tangible impact on performance and ROI.