IT Is a Profit-Making Machine

IT Is a Profit-Making Machine

It doesn’t take long after getting a management information systems degree and working in the field to see that many companies consider IT nothing more than a cost of doing business. As a result, executives will often constrain the resources that the department needs because, after all, lower costs mean higher profits. What technical personnel must learn to articulate is a view that a recent study shows: IT can drive profits. According to a study in MIS quarterly, archived data from 1998 to 2003 from more than 400 global firms “suggests that IT has a positive impact on profitability,” according to study authors Sunil Mithas, Ali Tafti, Indranil Bardhan, and Jie Mein Goh. Furthermore, they found that, as common sense might indicate, the best investments were in IT projects that created revenue rather than reduce costs. As the researchers summarized in MIT’s Sloan Management Review:

Although several earlier studies by other researchers had not detected a significant effect of IT investments on profitability, we found that more recent information technologies — those deployed since 1995 — have a significant positive impact on profitability.

Even more surprising was a second finding. IT investment had more positive effect on profits than “comparable spending on either advertising or R&D.” But perhaps that shouldn’t have raised eyebrows. Typically, IT projects require a solid business case to get funded. Clearly, executives see both data and analysis that indicate a strong possibility of the desired results. On the other hand, R&D, while absolutely necessarily in a company, is far more speculative in nature. Projects may provide a new product or technology, but they also may not, as is true for any sort of research. As for ads, 19th century pioneer marketer John Wanamaker famously said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” (Ironically, IT is required to do the tracking and analysis that can deliver better marketing results.) Some types of IT investments have a stronger correlation to improved profits than others. As the researchers wrote:

We found that in general, IT investments were more effective in improving profitability by increasing revenue than by decreasing operating expenses. In fact, IT investments had a marked positive effect on revenue growth; for example, a $1 increase in IT expenditures per employee was associated in our study with a $12.22 increase in sales per employee. However, the effect of an increase in IT expenditures on reducing overall operating expenses was negligible in our sample of companies.

As competition sharpens in an industry, IT becomes a more critical asset because its impact on profitability increases. Furthermore, service industries seem to experience more positive IT impact on profit than manufacturing, possibly because the former “allow greater IT-enabled customization and personalization.” Such information might come in handy the next time you’re looking for resources and executive support for a project.