Treat IT budgets like VC spend, urges report

25 Aug 2006

Businesses have been urged to take a venture-capital-like approach to certain IT investments where they could help the company’s topline growth and give it a competitive advantage.

That’s the view of management consultants McKinsey, which has advised companies not to apply the business mantra ‘do more with less’ across the board to technology, when it has the potential to help a company to innovate.

The company outlined this thinking in its report, Divide and Conquer: Rethinking IT Strategy. According to McKinsey’s assessment, most companies manage established businesses and new ventures differently, but usually manage IT just one way: “with a broad stroke, to cut costs in rough times and to fund projects in good ones”.

However, this approach is a “limited view” that sees IT as a commodity to be managed at minimal cost, said McKinsey. “By forgoing investments in IT innovation, companies are passing up opportunities to gain a competitive advantage or to change the rules in their industries fundamentally,” the report said.

Instead, the firm recommended taking a portfolio view of IT to manage more forward-thinking IT investments. “A company that differentiates among the types of IT that support different parts of its business can invest in future success while continually paring the costs of routine technologies,” said McKinsey.

The report recommended that companies should treat their IT budgets as they would their financial investments, dividing them into low-, medium- and high-risk categories. Up to 60pc of a company’s IT investments should focus on maintaining and enhancing basic IT services, including core business applications, compliance systems and email.

A further 10-30pc of tech spending investments should be aimed at helping it overcome competitors, by operating at significantly lower cost or higher productivity than rivals. “Such investments yield cost advantages over rivals — at least until they implement similar systems and processes,” said the report.

Another, smaller, category involves high-risk, high-reward investments; innovations that open new markets or make it possible to offer new products or services that are substantially different from and more desirable than those of competitors. McKinsey acknowledged that these tend to be more difficult to manage. “By differentiating the way these categories are managed, companies can run their daily IT operations cost effectively while making limited, targeted investments in new and promising technologies,” the report said.

By Gordon Smith