The Real ReTurn On Investment of Information Technology

The Real Return on Investment of Information Technology

The key business issue of information technology can only grow with greater importance over the coming years as a result of the direct correlation between technological advances and the progression of time. These technological advances cause the cost of certain advanced technologies to significantly drop allowing greater accessibility to a wider range of consumers including businesses. As more and more businesses rely on technology to sustain their day to day operations while simultaneously gaining a competitive advantage the need for state of the art levels of information technology has expanded rapidly. The need for this high performing technology has made companies more aware of the danger of overspending. Naturally this has led executives to ask the question of whether information technology offers any real return on investment. We can see that since the introduction of the personal computer into the work place, this topic has gained more and more attention, especially since the beginning of the new millennia. While some have argued in favor that information technology does in fact help create a competitive advantage for a company and thus offer a return on investment, some still believe that there is no real return on investment because it is not quantifiable and does not create a sustainable competitive advantage. Although there are arguments for and against the return on investment of information technology it is undeniable that there are specific examples that serve as key models of how IT has had a huge impact on unquestionable returns from corporate investment in IT. However the only way to get a clear understanding of whether IT offers any return on investment would be to begin with a definition of what return on investment is and to clarify what is meant by information technology.

At times information technology is viewed as a fuzzy term. For the sake of clarity we will maintain it as denoting the technologies used for processing, storing and transporting information in a digital form. According to the “Resource Management Systems” website, the common accounting or finance definition for ROI is a measure of the net income a firm is able to earn with its total assets. Return on investment is calculated by dividing net profits after taxes by total assets. The problem that arises from our understanding of the definition is that it’s an acceptable definition of ROI for a company as a whole but hardly realistic for IT projects or IT solutions under consideration. As IT departments grew in importance IT professionals and executives discussed the ROI of IT in terms of the “financial’ benefits. But over time it has become clearer that the “non-financial” benefits of IT investments also contribute to ROI. Cost reductions and revenue increases are clear cut examples of the financial benefits that contribute to ROI, while improved customer satisfaction, better information and improved cycle-time are examples of the non-financial benefits of IT. With this understanding we can take the position that IT only offers realizable ROI to the extant for which management can create an environment for this goal to be achieved. Ideally the best environment to create this is by creating a technologic infrastructure that functions under the premise that IT is a complex adaptive system and not an unchanging set of rules and laws. Before we examine the integral part that management plays in ensuring that ROI can be achieved by IT we should take a look at the argument for how IT does not create a return on investment.

The basis for the argument against IT creating ROI is rooted in the industry assumption that IT’s effectiveness and ubiquity have increased resulting in decreased strategic value. In economics the question of what makes a resource strategic is its ability to provide the user with a competitive advantage. In other words, having or doing something your competitors can’t. In the Harvard Business Review, Nicholas G. Carr asserts that, “because all of IT’s core functions, data storage, data processing, and data transport are available to and affordable to all there is no competitive advantage” and therefore no return on investments. Mr. Carr further elaborates later in the article that, “when a resource becomes essential to competition but inconsequential to strategy, the risk it creates becomes more important than the advantages it provides”. This is a crucial point because it states that as a particular aspect of IT becomes more diverse to the point that all industries and companies within each industry can use the technology, it no longer provides a company with a competitive advantage.

Nicolas Carr uses a number of examples in which he illustrates this idea of technology becoming so widely available that the diminished benefits of a competitive advantage lead to no real return on investment. If we look at history we can see that over time broadly adopted technologies have forever-changed industries. Mr. Carr uses the example of the steam engine, railroad, telephone, to the generator and internal combustion engine. Mr. Carr states, “For a brief period, as they were being built into the infrastructure of commerce, all these technologies opened opportunities for forward-looking companies to gain real advantages. But as their availability increased and their cost decreased вЂ" as they became ubiquitous вЂ" they became commodity inputs”. Strategically, they no longer mattered and thus implying that no real return on investment could be yielded because no financial benefit could be measured.

Another example Mr. Carr uses later in his article looks at the impact electricity, as a technological innovation, impacted commerce. The author argues, “Today, no company builds its business strategy around its electricity usage, but even a brief lapse in supply can be devastating”. The author parallels electricity to information technology by implying that they are necessary for companies to function but are not factored in as major components of a business strategy. The argument implies that like electricity, information technology is an operating expense that doesn’t help create any competitive advantage; it just allows a company to function. As stated before, because some see competitive advantage as the only way to realize a real return of investment, there is no true benefit. Benefit in the sense that information technology gives a company the edge to gain market share from its competitors and produce profitable margins that can be measured in terms of financial benefits.