This article first appeared in the All About IT column of Vermont Business People in July 2018.
It has never been more important for Vermont businesses to make the right technology investment decisions. They currently spend an estimated 2 to 5% of their revenue on technology purchases, which amounts to hundreds of millions of dollars each year. Studies show that there is a strong correlation between profitable growth and well-aligned technology especially when the investments are focused on differentiating the business in the marketplace. Unfortunately, technology spending can sometimes be derailed by competing agendas, poor communications, and long wish lists. How can these important business investments move beyond the technical necessities needed to just “keep the lights on” and tackle improvements that solve the bigger problems businesses face today?
The Global CIO Survey reports that 57% of technology budgets are used to support fundamental business operations, while only 26% of the spending focuses on needed business changes. A mere 16% supports innovations that will power the business into a successful future. In a world where IT has become a critical component of business operations, technology is a key differentiator and an enabler of success. So how should a small business determine where to direct their scarce resources to get the greatest “bang for the buck”?
Successful businesses optimize value by adopting a portfolio approach to technology investments by using a strategy similar to a stock portfolio. Some high risk investments may deliver outstanding but risky results, while other more conservative investments are likely to lag behind but give consistent results. Smart executives measure the performance of technology investments in terms of value, risk, and reward. Taking a venture capital mind-set on some of the investments will boost value and produce a bigger impact.
Focus investments on specific business goals such as revenue growth such as investing in improving customer market share. Another goal may be to better serve existing customers to increase their spend. The former strategy lends itself to investment in better marketing and customer targeting technology while the latter requires customer relationship management and service support systems. Always verify that technology investments are closely aligned so they support the strategic goals.
Prioritizing technology investments is a bit like making sausage…it is not a simple process. There can be conflicting opportunities and constraints to balance. If too much is allocated to maintenance of existing systems, new projects and innovations may languish. This can ultimately impact competitiveness and long-term revenue. A spending balance across innovation, growth, productivity and maintenance coupled with a mix of targeted investments based on business objectives, time constraints and risks will yield an excellent outcome.
Smart leaders follow a multi-year strategic technology investment plan that allows for growth, change, and improvement. It is easier to identify technologies that help specific initiatives when there is an overarching vision to provide clarity.
Some key questions to consider:
Are there opportunities for growth or significant improvements in certain functional areas?
How do the leaders in your industry use new technologies to create a competitive advantage?
Does it make sense to invest time, money, and staff on a single large project vs. several small but less impactful changes?
Are there any new business risks requiring technology investments that can’t be ignored?
Which investments will either grow revenue, improve profits, or reduce risks the most?
As technology becomes even more pervasive, long-term investments make the difference between being a thriving vs. static business. The key is to reach management consensus with a realistic view of the benefits, costs and impacts for each technology decision. Yet just writing a big check is not enough. Technology investments must also be strategic–and at the same time focused on the most important competitive initiatives–so they deliver the expected impact on the bottom line.