InformationWeek
Defining The Business Value Of Technology
September 14, 1998
IT Dollars and Sense
continued...page 2 of 3
With all these factors contributing to the widening budget gap as a backdrop, let's look at where today's IT dollar is going. The benchmark study shows the following breakdown:
| Software development | ...25 cents |
| Software maintenance | ...24 cents |
| Networking | ...14 cents
|
| Data center operations | ...10 cents |
| Software acquisition | ...9 cents |
| Platform migration | ...8 cents |
| Hardware acquisition | ...7 cents |
| Other | ...3 cents |
A CEO or CFO might ask, "How much of this money really is channeled into producing value for my company?"
Let's look at software maintenance. The benchmark study shows that roughly 30% of maintenance costs (or 7.2 cents) is associated with fixing bugs and errors in design and logic. Most CEOs would not consider this value-added work.
What about software development? The benchmark study indicates that up to 60% of development work in many companies provides no business value, 90% of project work is rework, and 35% of software running in production is dead code. Again, money not well spent.
Based on the analysis of the benchmark study, in fact, an amazing 30 cents of every IT dollar adds no value to the enterprise. What this means is that companies are used to a performance pattern for which each dollar of IT spending has the potential yield of only 70 cents.
Now throw in the fact that many companies expect to spend 25 cents of each IT dollar fixing the year 2000 problem-essential but nevertheless nonvalue work-and you've got further dilution of the IT dollar. So when the year 2000 arrives, only 45 cents of each IT dollar will produce business value. Add to this the decrease in productivity, and potentially half of the 45 cents is eaten up by productivity losses. Carry this one step further into the realm of the labor shortage and increased salaries (about a 20% rise based on the Software Productivity and Quality Task Force Report of the National IT Labor Shortage Convocation) and you have 18 cents left for producing value.
This may sound extreme or like an economic shell game in which you start with $1 and end up with 18 cents, but the phenomenon is real and has started to show up in IT's ability to support business growth.
The aforementioned figure of $50 of revenue support per IT dollar is no longer true. Data from the benchmark surveys over the past three years show that with the influences of the year 2000, labor shortage, and productivity decline, about $38 in revenue is now supported per IT dollar spent.
In short, each dollar invested in IT supports less growth in revenue and income, and supports less system development and maintenance. "Less" for the same amount translates into inflation and this must be factored into all IT plans and spending.
Managing Within New Economics
Companies must do a better job of managing their IT investments. The investments must be
targeted, managed to maximize benefits, and be cognizant of continual marketplace change.
A key to making wiser investments is active benefits management. IT benefits management
deals with the link between IT and business performance. This is not a passive happening, but
rather a system of interactions between business and technology at many levels. To understand
this, think about how your company measures business success. In most organizations, revenue,
profitability, return on equity, and shareholder value are key.
continued...page 3
return to...page 1
Back to InformationWeek 500 menu page
Back to This Week's Issue
Send Us Your Feedback
Top of the Page
BP seeking Regional Desktop Coordinator in Houston, TX
Agilent Technologies seeking Marketing Manager in Melbourne, AU
Advancement Project seeking Junior Web Developer in Los Angeles, CA
Johns Hopkins Univ Carey Business School seeking Asst Dean for IS in Baltimore, MD
City of Westland seeking MIS Director in Westland, MI
For more great jobs, career-related news, features and services, please visit our Career Center.
Today's Top News
- Xbox 360 Outsells PlayStation 3 On Black Friday
- Server Revenues Down In Tough Economy
- Amazon Opens SimpleDB To Unlimited Public Beta
- Google Chrome Browser To Support Customization
- Cell Phone Users Increasingly Satisfied With Their Service
- Cell Phones More Distracting Than Chatty Passengers
