Aligning IT spending with company culture can make businesses more productive
General Motors Corp., fresh from reporting some of the U.S. auto industry's best year-end earnings results, looks forward to a strong 2002. Its stock price has risen by more than a third since Jan. 1, closing last week at $65.35 a share. The credit goes to the growing popularity of its SUVs, sweetheart financing that sparked the car-buying spree at the end of last year, and effective cost-management initiatives. But Vincent Barabba likes to think fortune will continue to smile on the automaker, at least in part because it's figured out that technology projects and business culture are inextricably linked.
As an example, the general manager of the automaker's corporate strategy and development department points to the GM Vehicle Advisor Web service, which recommends cars to online shoppers from any manufacturer, using data from J.D. Power & Associates. GM's culture stresses empowerment and communication; its engineers drove the million-dollar project, designed to help GM better understand what car buyers want. "They've been in the middle of this from day one," Barabba says of the 6-month-old effort. Instead of engineers waiting for long-term studies of consumer needs, they have instant access to that data, and "all of a sudden, we look like a smart company," he says.
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Research presented last week at an MIT conference for CIOs shows that aligning IT spending with corporate culture and practices-as GM does-can result in a highly productive and innovative "digital organization." Companies that use technology to promote open information access, distribute decision making, and continually train employees cultivate intangible assets, such as better communication between managers and staff, and an empowered, knowledgeable, and adaptable workforce that seeks opportunity and drives change, says Erik Brynjolfsson, co-author of the study and professor of management and co-director of the Center for E-business at MIT's Sloan School of Management.
Indeed, intangible assets account for a whopping 50% of the market value of most large industrial and services companies, says Jon Low, senior research fellow at the Cap Gemini Ernst & Young Center for Business Innovation and co-author of Invisible Advantage (Perseus Press), a soon-to-be-published book about valuing intangibles. Companies that invest heavily in IT and organizational capital see an increase in their market value, Low and Brynjolfsson say.
Soft returns on investment are of growing importance to companies. In a new InformationWeek Research survey, a majority of executives say intangible assumptions carry as much weight as, or more than, hard ROI.
Federal Reserve chairman Alan Greenspan told a congressional panel last week that companies "perceive there's unexploited profits in information technology" and that software is one area of buying interest. But technology purchases alone won't help companies make the leap-fewer than one in five C-level executives at public companies surveyed by InformationWeek Research report that technology purchases made in the past two years have been linked to positive changes in the share price of their companies' stocks.
Digital organizations take things a step further, Brynjolfsson says. According to his research, companies that combine higher computer investments with intangible assets have disproportionate increases in their market valuations. "The digital economy is a lot more than computer hardware," Brynjolfsson says. "It's a way of doing business."
Collaboration among colleagues has been the way risk-management and insurance company Marsh Inc. has conducted business since it was founded after the Great Chicago Fire in 1871. But after a rapid international expansion in the late 1990s, the $4.8 billion unit of Marsh & McLennan Cos. found that sustaining that collaborative culture among 40,000 employees in 52 countries was a challenge. It's addressing the issue by implementing a global information portal to let employees and clients collaborate.
One of the most important intangible assets a company has is its employees, Cisco CIO Boston says, especially during difficult economic times.
It makes sense to include such information, says Ray Trotta, founder of iValue, a consulting firm that focuses on the valuation of IT. Intangible assets count for investors, he says. For example, Merrill Lynch, which creates value in the exchange of data, has a trailing price-to-earnings ratio of an enviable 156.4, Trotta says. "This validates what we've seen over time: a premium price being paid for companies that invest in intangibles," he says.
For Cisco Systems, which along with the National Science Foundation helped fund the five-year, $5 million MIT study, rocky times in the networking industry mean it's more important than ever to invest in one particular intangible: human capital. "In an environment where a company isn't expanding as rapidly as it once was, you have to spend more time and energy on developing employees and giving them opportunities," CIO Brad Boston says.
Toll Brothers Inc., a $2.2 billion home-building company in Huntingdon Valley, Pa., extends the idea to current and potential partners. The company is building a database to develop a community of subcontractor resources it can use to quickly get help for its housing-development projects, says MIS director George Fenzil. Plumbers, electricians, masons, and other construction-industry service providers use its portal, Tollbid.com, to register as subcontractors. "A list of subcontractors is definitely an intangible asset that-as we build the database-will become more and more valuable," Fenzil says.
But Marsh's Darviche cautions that companies rearchitecting their operations to more closely align IT with business culture won't fully realize value overnight: "That'll take a year, two years, or even five years. It's a journey."