《电子商务 E-business》阅读文献：Generating Premium Returns on Your IT Investments

WINTER 2006 VOL 47 NO.2 MITSloan Management Review Peter Weill and sinan aral Generating premium Returns on your T Investments Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published REPRINT NUMBER 47211

Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published. Generating Premium Returns on Your IT Investments WINTER 2006 VOL.47 NO.2 REPRINT NUMBER 47211 Peter Weill and Sinan Aral

Generating premium Returns on Your it Investments Although IT portfolio management has been a best practice for some hen the weather is hot. 7-Eleven time now, many Japan's stores companies are still getting returns from it plenty of bento boxes investments that are Japan's cold boxed meals of rice, pickles and other food below their potential. New studies show that there are lots of hot noodles a measurable premium for sale. The stores' operators always seem to have plenty of can be gained by what their customers want: in plementing a set of fact, they order and receive interlocking business fresh food deliveries three times a day. It is no coinci- practices and processes, dence that the company is the collectively called nation's most profitab T retailer. Its 2004 gross margins topped 30%- six times its 1977 Peter weill Eleven Japan Co. Ltd. is and sinan aral to put it simply-very savvy about using IT. At least twice a week, every one of its 10,000-plus mostly franchised stores gets a visit from a 7 Eleven Japan"counselor. The counselor works with the store manager or franchisee to improve the business, often by using data from the store 's information systems to manage and order more local practices and preferences to IT investments, the store ca introduce and succeed with new product lines. The typical store adds 70% new items for sale each year, a higher rate than that of any other retailer in Japan, which helped double its average n 1977 to 2004. The sto ing recent sales, weather conditions and product range information, so they always know just Weill is the director of the ce Management and M/T senior research scientist. Sinan Aral is a Ph. D candidate in the Sloan Schoal's IT INTER 2006 MIT SLOAN MANAGEMENT REVIEW 39

Illustration: © Sara Tyson/theispot.com WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 39 hen the weather is hot, 7-Eleven Japan’s stores in Tokyo have plenty of bento boxes — Japan’s cold boxed meals of rice, pickles and other food￾stuffs — while on cold days there are lots of hot noodles for sale. The stores’ operators always seem to have plenty of what their customers want; in fact, they order and receive fresh food deliveries three times a day. It is no coinci￾dence that the company is the nation’s most profitable retailer. Its 2004 gross margins topped 30% — six times its 1977 gross margins. 7-Eleven Japan Co. Ltd. is — to put it simply — very savvy about using IT. At least twice a week, every one of its 10,000-plus mostly franchised stores gets a visit from a 7- Eleven Japan “counselor.” The counselor works with the store manager or franchisee to improve the business, often by using data from the store’s information systems to manage and order more effectively.1 By matching local practices and preferences to IT investments, the store can continually introduce and succeed with new product lines. The typical store adds 70% new items for sale each year, a higher rate than that of any other retailer in Japan, which helped double its average stores’ daily sales from 1977 to 2004. The store managers regularly receive graphical data show￾ing recent sales, weather conditions and product range information, so they always know just how many bento boxes to order. Generating Premium Returns on Your IT Investments Peter Weill is the director of the Center for Information Systems Research at the MIT Sloan School of Management and MIT senior research scientist. Sinan Aral is a Ph.D. candidate in the Sloan School’s IT Group. Contact them at pweill@mit.edu and sinana@mit.edu. Although IT portfolio management has been a best practice for some time now, many companies are still getting returns from IT investments that are below their potential. New studies show that a measurable premium can be gained by implementing a set of interlocking business practices and processes, collectively called IT savvy. Peter Weill and Sinan Aral W

7-Eleven Japan makes effective IT investments and manages the average company. Those with low IT savvy have, on the other an It portfolio that constantly matches its business strategy. But hand, substantially lower net profits in the following year(con- the company's well-managed IT investments are only part of the trolling for many other factors story behind its 20-year track record of industry-leading finan In colloquial usage, the term IT savvy has been imprecise-a cial returns. The convenience-store giant blends its IT invest- general descriptor at best. But in our work at MIT's Center for ments with a range of assertive IT practices and capabilities- Information Systems Research, we have developed a definition everything from the counselors' visits that increase the store that describes the core attributes while preserving the"street operators'IT skills to the "transparency of an information infra- smarts"sense of the term. To us-and in conversation with the structure that links 70,000 computers in stores, at headquarters business executives with whom we work regularly- IT savvy and at supplier sites refers to the planned, ongoing use of a set of interlocking busi- A primary objective of this article is to show that IT invest- ness practices and competencies that collectively derive superior ments alone, even using the much-heralded IT portfolio value from IT investments. For companies like 7-Eleven Japan,IT approach, cannot by themselves ensure that all key business goals savvy is ingrained, informing almost all of the company's busi are met. Our research shows that a measurable bottom line pre- ness decisions and sharply focusing its IT investments. The goal mium for every iT dollar invested is achieved by companies with of this article is to introduce the concept of IT savvy in order to a mutually reinforcing set of practices and capabilities that we reframe the discussion about the business value of IT. we first call IT savvy. review the different IT assets in which companies invest before 7-Eleven Japan clearly has IT savvy in abundance; so, too, do discussing the gap in IT investment returns that separates those quite a few other exemplary organizations In our study of 147 with IT savvy from those without companies over five years, we found that the impact of IT savvy substantial.2(See"About the Research. ) For example, for each Revisiting the value of IT Assets dollar invested in IT infrastructure, companies with high IT savvy Just as investors address their objectives for risk and return using have higher net profits in the year after the investment than does portfolios of financial investments, some companies use IT port folio management to better enable their management teams About the research match IT investments to strategic objectives. Successful IT port- folio techniques change the conversation from technical to strate- gic considerations by applying a com ial lens to IT This article is based on five years worth of data from lOs and IT managers at 147 U.S. companies and suppl investments; the result is an allocation of IT assets that is appro- priate for the company's circumstances mented by discussions with IT managers in large U.S., European and Asian organizations. The data was col- Our research identified four broad classifications of it invest lected in person and by telephone from 2001 to 2003 by ments: transactional, informational, strategic and infrastructure research company Harte-Hanks Inc and analyzed by MIt Transactional investments are used primarily to cut costs or Center for Information Systems Research staff. To further Increase oughput for the same cost(for example, think of a understand the role and impact of IT savvy, we conducte brokerage firms trade processing system). Informational invest- nterviews and discussions with ClOs and other senior ments provide information for purposes such as accounting, executives from 2003 to 2005. Using MIT CISR frame- reporting, compliance, communication or analysis. Strategic works and questionnaires, the 2005 IT portfolio data was investments are used to gain competitive advantage by support- collected from 640 companies by research firm META ing entry into new markets or by helping to develop new prod Group, now part of Gartner Inc, and analyzed by MIT CISR. ucts, serv business processes(ATMs were a successful Performance data was sourced from the Compustat strategic IT initiative for the first banks that introduced them but database. The total it investment includes all centralized and decentralized IT spend (expenses and depreciated cap- they became transactional over time). And infrastructure invest tal), both in-house and outsourced, plus the full costs of all ments are the shared IT services used by multiple applications employees dedicated to IT services and management. The (such as, servers, networks, laptops, customer databases). services companies, which mirrors the composition of the urvey sample is composed of 58% manufacturing and 42 Depending on the service, infrastructure investments are typi- cally aimed at providing a flexible base for future business initia- Standard Poor's 500 and the Fortune 1000 listings. The tives or reducing long-term IT costs via consolidation. results are all statistically significant, based on regression Each type of investment represents a different IT asset class analysis that controls for size, industry, R&D and advertis- with its own unique risk-return profile. In the same way that any ing expenditure. personal investment portfolio must weigh stocks, bonds, cash and other financial assets against personal goals, an IT portfolio 40 MIT SLOAN MANAGEMENT REVIEW WINTER 2006

40 MIT SLOAN MANAGEMENT REVIEW WINTER 2006 7-Eleven Japan makes effective IT investments and manages an IT portfolio that constantly matches its business strategy. But the company’s well-managed IT investments are only part of the story behind its 20-year track record of industry-leading finan￾cial returns. The convenience-store giant blends its IT invest￾ments with a range of assertive IT practices and capabilities — everything from the counselors’ visits that increase the store operators’ IT skills to the “transparency” of an information infra￾structure that links 70,000 computers in stores, at headquarters and at supplier sites. A primary objective of this article is to show that IT invest￾ments alone, even using the much-heralded IT portfolio approach, cannot by themselves ensure that all key business goals are met. Our research shows that a measurable bottom line pre￾mium for every IT dollar invested is achieved by companies with a mutually reinforcing set of practices and capabilities that we call IT savvy. 7-Eleven Japan clearly has IT savvy in abundance; so, too, do quite a few other exemplary organizations. In our study of 147 companies over five years, we found that the impact of IT savvy is substantial.2 (See “About the Research.”) For example, for each dollar invested in IT infrastructure, companies with high IT savvy have higher net profits in the year after the investment than does the average company. Those with low IT savvy have, on the other hand, substantially lower net profits in the following year (con￾trolling for many other factors). In colloquial usage, the term IT savvy has been imprecise — a general descriptor at best. But in our work at MIT’s Center for Information Systems Research, we have developed a definition that describes the core attributes while preserving the “street smarts” sense of the term. To us — and in conversation with the business executives with whom we work regularly — IT savvy refers to the planned, ongoing use of a set of interlocking busi￾ness practices and competencies that collectively derive superior value from IT investments. For companies like 7-Eleven Japan, IT savvy is ingrained, informing almost all of the company’s busi￾ness decisions and sharply focusing its IT investments. The goal of this article is to introduce the concept of IT savvy in order to reframe the discussion about the business value of IT. We first review the different IT assets in which companies invest before discussing the gap in IT investment returns that separates those with IT savvy from those without. Revisiting the Value of IT Assets Just as investors address their objectives for risk and return using portfolios of financial investments, some companies use IT port￾folio management to better enable their management teams to match IT investments to strategic objectives.3 Successful IT port￾folio techniques change the conversation from technical to strate￾gic considerations by applying a commercial lens to IT investments; the result is an allocation of IT assets that is appro￾priate for the company’s circumstances. Our research identified four broad classifications of IT invest￾ments: transactional, informational, strategic and infrastructure. Transactional investments are used primarily to cut costs or increase throughput for the same cost (for example, think of a brokerage firm’s trade processing system). Informational invest￾ments provide information for purposes such as accounting, reporting, compliance, communication or analysis. Strategic investments are used to gain competitive advantage by support￾ing entry into new markets or by helping to develop new prod￾ucts, services or business processes (ATMs were a successful strategic IT initiative for the first banks that introduced them but they became transactional over time). And infrastructure invest￾ments are the shared IT services used by multiple applications (such as, servers, networks, laptops, customer databases). Depending on the service, infrastructure investments are typi￾cally aimed at providing a flexible base for future business initia￾tives or reducing long-term IT costs via consolidation. Each type of investment represents a different IT asset class with its own unique risk-return profile. In the same way that any personal investment portfolio must weigh stocks, bonds, cash and other financial assets against personal goals, an IT portfolio This article is based on five years’ worth of data from CIOs and IT managers at 147 U.S. companies and supple￾mented by discussions with IT managers in large U.S., European and Asian organizations. The data was col￾lected in person and by telephone from 2001 to 2003 by research company Harte-Hanks Inc. and analyzed by MIT Center for Information Systems Research staff. To further understand the role and impact of IT savvy, we conducted interviews and discussions with CIOs and other senior executives from 2003 to 2005. Using MIT CISR frame￾works and questionnaires, the 2005 IT portfolio data was collected from 640 companies by research firm META Group, now part of Gartner Inc., and analyzed by MIT CISR. Performance data was sourced from the Compustat database. The total IT investment includes all centralized and decentralized IT spend (expenses and depreciated cap￾ital), both in-house and outsourced, plus the full costs of all employees dedicated to IT services and management. The survey sample is composed of 58% manufacturing and 42% services companies, which mirrors the composition of the Standard & Poor’s 500 and the Fortune 1000 listings. The results are all statistically significant, based on regression analysis that controls for size, industry, R&D and advertis￾ing expenditure. About the Research

must be balanced-and regularly rebalanced-so that it is con- Making a sensible asset allocation requires senior managers to be stantly aligned with business strategy and provides the appropri- crystal clear about what they wish to achieve and about who will ate combination of short- and long-term payoff. It is senior be held accountable -hardly the stuff of technical specifications. management's job to balance the IT portfolio, and to integrate Each asset class is linked to different types of business value. these disciplines into the company's It governance processes. (See"Different IT Assets Deliver Different Value,"p42.)For The average company studied in 2005 allocates 46% of its total example, companies that invest more heavily than their competi IT investment to infrastructure. (See "Considering IT Invest- tors in transactional IT have lower costs. Transactional invest ments as a Portfolio )Utilizing the infrastructure are the trans- ments pay off by using It to support or automate repetitive actional systems, accounting for 26% of the average IT spend. business processes. Logistics leader United Parcel Services of Conceptually, informational and strategic systems sit on top of America, Inc offers a good example: The company uses It effe and use the transactional and infrastructure systems, absorbir tively to cut business costs and increase productivity. For instance 17%and 11% of average IT investment, respectively. it provides free package tracking information on its Web site or Investment for any single project can be spread over one or more egrated into its customers' enterprise resource planning sys asset classes. For example, the executives of a multibillion-dollar tems. Before online tracking was offered, customer calls to the U.S. software and IT services company allocated a recent multimil- company's call center cost UPS about $2 each; sometimes there lion-dollar investment in a customer relationship management sys- were two follow-on calls to locate the package, for a total of $6 for tem this way: 60% informational, 5% strategic, 25% transactional one inquiry. Now each tracking request costs UPS only a few and 10% infrastructure. As a relatively late adopter of CrM, the It cents, even during the Christmas rush, when the company gets up services company expected few strategic benefits from the invest- to six million such requests a day. 6 For any company that is eager ment. Also, it already had much of the infrastructure needed for the to use IT to cut costs and improve productivity, it makes sense to CRM implementation. By contrast, a competitor had successfully tilt its IT portfolio toward transactional investments. implemented CRM three years earlier with a higher total project cost and a different allocation of resources more strategic and less informational Considering IT Investments as a Portfolio Pharmaceuticals leader Eli Lilly and Company has used the portfolio approach since 1999 to categorize its IT portfolio management is an increasingly common way to help man- IT investments. " We tend to want to have 5% [of our agement teams match IT investments to strategic objectives. ou projects] in strategic areas, 15% to 20% in the informa- research identified four broad classifications of it investments: transac tional category, and the remaining percentage split onal, informational, strategic and infrastructure. between the infrastructure and transactional Sheldon Ort, Lilly's information officer for business Product innovation Better information Process innovation The technique is also engaging business leaders in IT Better integration Competitive advantage Renewed service delivery investment decisions at Mohegan Sun, the Connecti- Increased sales cut-based casino. CIO Dan Garrow reflects on the expe- Market positioning rience:"Comparing our strategy against our plans for expenditures in each of the four management objec 17% tives for investments, we realized there was a disconnect INFORMATIONAL STRATEGIC between our long-range plans and our resource alloca Cut costs tions, both human and financial. Portfolio thinking Increase throughput TRANSACTionaL ed us bring the day-to-day activities back into alignment with our long-range objectives. Portfoli INFRASTRUCTURE inking helps us determine what type of company we are and the level of risk we re willing to take, particu Business integration larly around our strategic business efforts. Reduced marginal cost of business unit's IT Reduced it costs The Returns from the four it asset classes The portfolio allocation approach works because it nderscores the importance of how organizations use source rmewor tom a w and k. broad bent leveraging the New intrastructure: How Market te technology instead of focusing on the technology itself. Data: Percentages are from an MIT CISR study of 2005 total IT investments from 640 enterprises INTER 2006 MIT SLOAN MANAGEMENT REVIEW 41

WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 41 must be balanced — and regularly rebalanced — so that it is con￾stantly aligned with business strategy and provides the appropri￾ate combination of short- and long-term payoff. It is senior management’s job to balance the IT portfolio, and to integrate these disciplines into the company’s IT governance processes.4 The average company studied in 2005 allocates 46% of its total IT investment to infrastructure. (See “Considering IT Invest￾ments as a Portfolio.”) Utilizing the infrastructure are the trans￾actional systems, accounting for 26% of the average IT spend. Conceptually, informational and strategic systems sit on top of and use the transactional and infrastructure systems, absorbing 17% and 11% of average IT investment, respectively. Investment for any single project can be spread over one or more asset classes. For example, the executives of a multibillion-dollar U.S. software and IT services company allocated a recent multimil￾lion-dollar investment in a customer relationship management sys￾tem this way: 60% informational, 5% strategic, 25% transactional and 10% infrastructure. As a relatively late adopter of CRM, the IT services company expected few strategic benefits from the invest￾ment. Also, it already had much of the infrastructure needed for the CRM implementation. By contrast, a competitor had successfully implemented CRM three years earlier with a higher total project cost and a different allocation of resources — more strategic and less informational. Pharmaceuticals leader Eli Lilly and Company has used the portfolio approach since 1999 to categorize its IT investments. “We tend to want to have 5% [of our projects] in strategic areas, 15% to 20% in the informa￾tional category, and the remaining percentage split between the infrastructure and transactional,” explains Sheldon Ort, Lilly’s information officer for business operations.5 The technique is also engaging business leaders in IT investment decisions at Mohegan Sun, the Connecti￾cut-based casino. CIO Dan Garrow reflects on the expe￾rience: “Comparing our strategy against our plans for expenditures in each of the four management objec￾tives for investments, we realized there was a disconnect between our long-range plans and our resource alloca￾tions, both human and financial. Portfolio thinking helped us bring the day-to-day activities back into alignment with our long-range objectives. Portfolio thinking helps us determine what type of company we are and the level of risk we’re willing to take, particu￾larly around our strategic business efforts.” The Returns From the Four IT Asset Classes The portfolio allocation approach works because it underscores the importance of how organizations use technology instead of focusing on the technology itself. Making a sensible asset allocation requires senior managers to be crystal clear about what they wish to achieve and about who will be held accountable — hardly the stuff of technical specifications. Each asset class is linked to different types of business value. (See “Different IT Assets Deliver Different Value,” p. 42.) For example, companies that invest more heavily than their competi￾tors in transactional IT have lower costs. Transactional invest￾ments pay off by using IT to support or automate repetitive business processes. Logistics leader United Parcel Services of America, Inc. offers a good example: The company uses IT effec￾tively to cut business costs and increase productivity. For instance, it provides free package tracking information on its Web site or integrated into its customers’ enterprise resource planning sys￾tems. Before online tracking was offered, customer calls to the company’s call center cost UPS about $2 each; sometimes there were two follow-on calls to locate the package, for a total of $6 for one inquiry. Now each tracking request costs UPS only a few cents, even during the Christmas rush, when the company gets up to six million such requests a day.6 For any company that is eager to use IT to cut costs and improve productivity, it makes sense to tilt its IT portfolio toward transactional investments. Informational Transactional Infrastructure 17% 11% 46% 26% • Increased control • Better information • Better integration • Improved quality • Faster cycle time • Cut costs • Increase throughput • Product innovation • Process innovation • Competitive advantage • Renewed service delivery • Increased sales • Market positioning • Business integration • Business flexibility • Reduced marginal cost of business unit’s IT • Reduced IT costs • Standardization Strategic IT portfolio management is an increasingly common way to help man￾agement teams match IT investments to strategic objectives. Our research identified four broad classifications of IT investments: transac￾tional, informational, strategic and infrastructure. Considering IT Investments as a Portfolio Source: Framework from P. Weill and M. Broadbent “Leveraging the New Infrastructure: How Market Lead￾ers Capitalize on IT,” Harvard Business School Press, 1998. Data: Percentages are from an MIT CISR study of 2005 total IT investments from 640 enterprises

a leader in the marketing, hospitality and travel businesses; its Different IT Assets deliver Different value most recognized brands include Radisson Hotels Resorts T.G.I. Friday's restaurants, Carlson Marketing Group, Carlson The up and down arrows gauge the average changes in prof- Wagonlit Travel, Radisson Seven Seas Cruises and the Gold bility, innovation and market value the year after an IT Points Reward Network. 7 Although the businesses are run investment is made. For example, companies that invest autonomously, Carlson has captured cost savings and synergies more heavily than their competitors in transactional IT have with a world-class shared services capability, which won the 2004 lower costs International Productivity and Quality Councils award for the best mature shared services organization Carlson Shared Services is set up to operate as a business, offer- ing IT and financial services(with plans to offer more); it is governed by a board comprising the CIOs and CFOs of the business units; and Infrastructure its IT organization provides 89 infrastructure services to Carlsons 合 businesses. The IT unit compares the prices of its services to those of INFRASTRUCTURE external vendors, and outsources whenever a vendor can offer a bet TRANSACTIONAL ter price or quality proposition than what internal IT resources can offer. As a result, Carlsons business units use the shared It services as much as possible, even though use is not mandatory. STRATEGIC Although the top performers( defined as the top third in terms of industry-adjusted return on assets, net margins and revenue growth R&D have IT portfolio allocations similar to the average companys, collec ADVERTISING tively they spend 4% more on IT as a percentage of net sale But the differences within specific industries are striking. For 會号msek5 ense and advertising example, top performers in financial services spend 10%less IT than the average financial firm but have portfolios more heav I Net Margin Income Before Extraordinary Items ily weighted toward IT infrastructure. (In that sector, IT invest Total Sales Sales from Modified products ment is so fundamental to business processes that IT systems are Total sales and sales From New Products Total sales uite mature, with much of the advantage coming from higher The Market to Book value of company stock efficiency in executing basic transactions and providing infra in the same year the investment is made structure to foster innovation. By contrast, the top performers in wholesale, retail and transport sectors spend 11% more on IT Similar evidence applies to the other IT asset classes. Compa- than their average competitors and weight their portfolios more nies such as 7-Eleven Japan that invest more heavily in informa- heavily toward informational assets, indicating that theres st tional IT have higher quality and larger margins(net profits per competitive advantage in the effective use of information. dollar of sales). Strategic IT investments help spur innovation and thus position an organization for growth. For example, Van- The IT Savvy Premium guard. com, the Web site of the mutual funds firm, has a cus- Clearly, companies that link their IT investments to their business tomized, password-protected portfolio analysis tool that offers strategies are well-placed to outrun their competitors along sophisticated calculations, including comparisons of investors' desired performance dimensions But investing the right amount current asset allocations versus long-term goals in the right IT asset classes is only the first step. Above-average nvestments in IT infrastructure serve multiple purposes. management capabilities are also needed to achie Some are designed to cut costs through standardization and con- industry-average returns from those IT investments. solidation- data center consolidation. for instance. Others A subset of companies in our sample obtain performance reduce time to market for new business initiatives or provide a gains that are far greater than those of their competitors. One platform for delivering companywide initiatives such as a shared year after an investment, companies with high IT savvy achieved customer database for a single point of customer contact. ( See higher perfo from each it dollar invested across all four Building IT Infrastructure for Strategic Agility, MIT Sloan IT asset classes. In effect, IT savvy yields a substantial financial Management Review, fall 2002.) premium. Our research assessed each company s relative IT savvy Carlson Companies Inc. offers a good example of the value by cataloging companies' practices, processes and capabilities created by a shared IT infrastructure. The $20 billion company is (See"Companywide IT Savvy Affects Performance, P. 43. )8 42 MIT SLOAN MANAGEMENT REVIEW WINTER 2006

42 MIT SLOAN MANAGEMENT REVIEW WINTER 2006 Similar evidence applies to the other IT asset classes. Compa￾nies such as 7-Eleven Japan that invest more heavily in informa￾tional IT have higher quality and larger margins (net profits per dollar of sales). Strategic IT investments help spur innovation and thus position an organization for growth. For example, Van￾guard.com, the Web site of the mutual funds firm, has a cus￾tomized, password-protected portfolio analysis tool that offers sophisticated calculations, including comparisons of investors’ current asset allocations versus long-term goals. Investments in IT infrastructure serve multiple purposes. Some are designed to cut costs through standardization and con￾solidation — data center consolidation, for instance. Others reduce time to market for new business initiatives or provide a platform for delivering companywide initiatives such as a shared customer database for a single point of customer contact. (See “Building IT Infrastructure for Strategic Agility,” MIT Sloan Management Review, fall 2002.) Carlson Companies Inc. offers a good example of the value created by a shared IT infrastructure. The $20 billion company is a leader in the marketing, hospitality and travel businesses; its most recognized brands include Radisson Hotels & Resorts, T.G.I. Friday’s restaurants, Carlson Marketing Group, Carlson Wagonlit Travel, Radisson Seven Seas Cruises and the Gold Points Reward Network.7 Although the businesses are run autonomously, Carlson has captured cost savings and synergies with a world-class shared services capability, which won the 2004 International Productivity and Quality Council’s award for the “best mature shared services organization.” Carlson Shared Services is set up to operate as a business, offer￾ing IT and financial services (with plans to offer more); it is governed by a board comprising the CIOs and CFOs of the business units; and its IT organization provides 89 infrastructure services to Carlson’s businesses. The IT unit compares the prices of its services to those of external vendors, and outsources whenever a vendor can offer a bet￾ter price or quality proposition than what internal IT resources can offer. As a result, Carlson’s business units use the shared IT services as much as possible, even though use is not mandatory. Although the top performers (defined as the top third in terms of industry-adjusted return on assets, net margins and revenue growth) have IT portfolio allocations similar to the average company’s, collec￾tively they spend 4% more on IT as a percentage of net sales. But the differences within specific industries are striking. For example, top performers in financial services spend 10% less on IT than the average financial firm but have portfolios more heav￾ily weighted toward IT infrastructure. (In that sector, IT invest￾ment is so fundamental to business processes that IT systems are quite mature, with much of the advantage coming from higher efficiency in executing basic transactions and providing infra￾structure to foster innovation.) By contrast, the top performers in wholesale, retail and transport sectors spend 11% more on IT than their average competitors and weight their portfolios more heavily toward informational assets, indicating that there’s still competitive advantage in the effective use of information. The IT Savvy Premium Clearly, companies that link their IT investments to their business strategies are well-placed to outrun their competitors along desired performance dimensions. But investing the right amount in the right IT asset classes is only the first step. Above-average management capabilities are also needed to achieve above￾industry-average returns from those IT investments. A subset of companies in our sample obtain performance gains that are far greater than those of their competitors. One year after an investment, companies with high IT savvy achieved higher performance from each IT dollar invested across all four IT asset classes. In effect, IT savvy yields a substantial financial premium. Our research assessed each company’s relative IT savvy by cataloging companies’ practices, processes and capabilities. (See “Companywide IT Savvy Affects Performance,” p. 43.)8 R & D Strategic Advertising Informational Transactional Infrastructure Statistically significant impacts controlling for industry, firm size, R&D expense and advertising expense Informational Transactional Infrastructure Strategic Lower Cost of Goods Sold Profit 1 Innovation 2 Market Value 3 Income Before Extraordinary Items Total Sales 1 Net Margin = 3 The Market to Book value of company stock in the same year the investment is made. and Sales From New Products Total Sales Sales From Modified Products Total Sales 2 The up and down arrows gauge the average changes in prof￾itability, innovation and market value the year after an IT investment is made. For example, companies that invest more heavily than their competitors in transactional IT have lower costs. Different IT Assets Deliver Different Value

The returns from IT infrastructure-the largest IT asset class acquisition costs, IT-savvy companies put them to work faster, reg- and often the most difficult to cost- justify in advance- strikingly istering improvement on the bottom line in the next year illustrate the impact of IT savvy. For each dollar invested in IT infra- Raytheon Company illustrates how IT infrastructure invest structure, companies with high IT savvy have $247 higher net prof- ments can deliver cost savings and provide a platform for business its in the year following the investment. Their infrastructure agility, and it shows how business processes and decision-making investments are also associated with superior returns for other key practices must change accordingly. Rebecca rhoads is vice president performance measures, including innovation and market capital- and CIO at the $21 billion aerospace and defense corporation, ization. By contrast, companies with low IT savvy have, on average, which has grown significantly through mergers with the defense S909 lower net profits the next year per dollar spent on infrastruc- operations of Texas Instruments, Hughes, General Dynamics and ire-controlling for industry, size and other investments such as E-Systems. She explains that the practices guiding Raytheon to a research and development and advertising expenditures standardized technology infrastructure after the mergers were just a infrastructure is the foundation of all IT investments, includ- first step in generating value from IT: g the communications network, shared customer data, laptops, You will outgrow the governance model that makes you suc data centers and servers; it accounts for close to half of the average cessful. It took me a while to figure that out because we had companys total IT spend. High-IT-sawvy companies turn these developed a governance model that was so effective-everybody enabling investments into value much faster than do low-IT-savvy was so supportive of it. We had buy-in, we had alignment, we companies- in one year compared with three years or longer. were moving forward on it. It was a governance model that They achieve this premium by following particular practices more helped us consolidate and shape up the company. So once we igorously -for example, by ensuring that more of their business reduced a couple of thousand legacy applications, once we went processes are digitized, and by more quickly designing and imple- from 150 payroll systems to one, 28 e-mail systems to one, we menting changes to crucial business processes. Thus, instead of hav- reduced IT spend by over 40%. That's what we needed to do over ing their infrastructure investments hit the bottom line only as the first three to four years of being the new company, because if Companywide IT Savvy Affects Performance ur research assessed each company's relative IT savvy by cataloging its practices, processes and capabilities. As indicated below, across all four IT asset classes, companies with high IT savvy achieved higher performance from each IT dollar invested ormational Strategic Transactional infrastructure LOWER COST OF GOODS SOLD PROFIT MARKET VALUE Sawy of Company Low Average High Low Average High Low Average High Low Average High INFRASTRUCTURE TRANSACTIONAL INFORMATIONAL A合 STRATEGIC 1 Net Margin Income Before Extraordinary Items v"High Impact is 50% or less of the highest positive (negative)incremental impact for that varia 2 Sales From Modified Total sales and Sales From New Proo 食号 ry High Impact is greater than 50%o of the hig Total sales impacts are statistically significant, controlling for company and The Market to Book value of company stock for the companies in the top 5% of IT awwy.“L onal negative impact on return for the compani 5%of IT savvy. INTER 2006 MIT SLOAN MANAGEMENT REVIEW 43

WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 43 The returns from IT infrastructure — the largest IT asset class and often the most difficult to cost-justify in advance — strikingly illustrate the impact of IT savvy. For each dollar invested in IT infra￾structure, companies with high IT savvy have $247 higher net prof￾its in the year following the investment. Their infrastructure investments are also associated with superior returns for other key performance measures, including innovation and market capital￾ization. By contrast, companies with low IT savvy have, on average, $909 lower net profits the next year per dollar spent on infrastruc￾ture — controlling for industry, size and other investments such as research and development and advertising expenditures. IT infrastructure is the foundation of all IT investments, includ￾ing the communications network, shared customer data, laptops, data centers and servers; it accounts for close to half of the average company’s total IT spend. High-IT-savvy companies turn these enabling investments into value much faster than do low-IT-savvy companies — in one year compared with three years or longer. They achieve this premium by following particular practices more rigorously — for example, by ensuring that more of their business processes are digitized, and by more quickly designing and imple￾menting changes to crucial business processes. Thus, instead of hav￾ing their infrastructure investments hit the bottom line only as acquisition costs, IT-savvy companies put them to work faster, reg￾istering improvement on the bottom line in the next year. Raytheon Company illustrates how IT infrastructure invest￾ments can deliver cost savings and provide a platform for business agility, and it shows how business processes and decision-making practices must change accordingly. Rebecca Rhoads is vice president and CIO at the $21 billion aerospace and defense corporation, which has grown significantly through mergers with the defense operations of Texas Instruments, Hughes, General Dynamics and E-Systems. She explains that the practices guiding Raytheon to a standardized technology infrastructure after the mergers were just a first step in generating value from IT: “You will outgrow the governance model that makes you suc￾cessful. It took me a while to figure that out because we had developed a governance model that was so effective — everybody was so supportive of it. We had buy-in, we had alignment, we were moving forward on it. It was a governance model that helped us consolidate and shape up the company. So once we reduced a couple of thousand legacy applications, once we went from 150 payroll systems to one, 28 e-mail systems to one, we reduced IT spend by over 40%. That’s what we needed to do over the first three to four years of being the new company, because if All impacts are statistically significant, controlling for company and industry effects. 4“Average” is the average return for all companies surveyed. “High” implies additional return for the companies in the top 5% of IT savvy. “Low” is the additional negative impact on return for the companies in the bottom 5% of IT savvy. Informational Transactional Infrastructure Strategic Savvy of Company4 Low Average High Low Average High Low Average High Low Average High “High Impact” is 50% or less of the highest positive (negative) incremental impact for that variable. “Very High Impact” is greater than 50% of the highest positive (negative) incremental impact for that variable. Strategic Informational Transactional Infrastructure Lower Cost of Goods Sold Profit 1 Innovation 2 Market Value 3 Income Before Extraordinary Items Total Sales 1 Net Margin = 3 The Market to Book value of company stock in the same year the investment is made and Sales From New Products Total Sales Sales From Modified Products Total Sales 2 Our research assessed each company’s relative IT savvy by cataloging its practices, processes and capabilities. As indicated below, across all four IT asset classes, companies with high IT savvy achieved higher performance from each IT dollar invested. Companywide IT Savvy Affects Performance

don,t get the synergy of the merger, you're not going to come Characteristics That Create IT Savvy for air ever 9 What are the hallmarks of the IT-savvy company? Companies However, Rhoads found that, following Raytheon's cost-cut- with high IT savvy have developed the five mutually reinforcing ting successes, the focus needed to shift to agility, to questions of characteristics described below. The first three characteristics are how the company would grow and how IT enables that growth. practices related to IT use, and the last two are competencies High-IT-savvy companies also see higher performance associ- needed for high IT savvy. The mutual reinforcement of both ated with transactional IT investments used to automate repetitive practices and competencies is necessary for high IT savvy, and transactions,cut costs and increase throughput. Not only does these five characteristics are representative but not exhaustive of Wall Street value such investments in high-IT-savvy companies, companies with stronger overall IT savvy. ( See The Five Charac but also these companies have higher profits. Interestingly, compa- teristics of IT Savvy.") nies with more transactional it investment also have more sales from new and modified products. Paradoxically, in high-IT-sawvy IT for communication-extensive use of electronic channels such companies, process digitization enables innovative new products as e-mail, intranets and wireless devices for internal and external and services by freeing up managers to innovate on the platform of communications and work practices. For example, 7-Eleven Japans these digitized processes. For example, Amazon. com, Inc, the system connects 70,000 computers in stores, at headquarters and at quintessential IT-savvy company, can relatively easily try a new supplier sites, providing transparency across the entire value chain service such as tailored recommendations based on the consumer's A salesman for one of the company's food suppliers put it this way: purchase history and on other customers'reviews The new service "Their] information system is so good that we can instantly find requires only marginal investment on top of Amazons current dig- out which goods of ours are selling to what types of customers and itized processes Better yet, the product can be offered to only a few how much. The collaboration between 7-Eleven Japan and its target customers and the impact can be measured immediately By partners includes shared information, information systems and contrast, low-IT-savvy companies do not convert trans- actional investments into innovation Strategic IT, with its objectives to create new business The Five Characteristics of IT Savvy alue or growth, is historically a high-risk, high-return asset class. But companies with high IT savvy mitigate the Companies with high IT savy have developed five mutually reinforcing risks inherent in strategic IT investments and have higher haracteristics. The first three are practices related to IT use and the than average profits, innovation and market capitalize- last two are competencies needed for high IT savvy. tion for each dollar invested In such companies, business management involvement and a culture of IT use in busi- ness processes are necessary for more successful strategic IT FOR INTERNAL (and in other companies, risky)IT investment. AND EXTERNAL ail. intranets and or internal and external COMMUNICATION Again, IT savvy makes a big difference with informa communic 他贴 nd work practices tional IT investments. Companies with strong IT savvy architectures( i.e., open)fo demonstrate particularly strong profitability because of INTERNET USE key functions like sales force management, employee performance measurement. the disciplines required to use common sets of infor- training and post-sales customer support mation effectively. There is no impact from informa tional IT on innovation, cost or market capitalization in DIGITAL Percent digitization of transactions TRANSACTIONS executed with both suppliers and customers So what's the outlook for companies with low IT savvy? Overall, their IT investments are associated with lower returns from all four asset classes in their IT port- Competencies folios. The situation for these companies is bleak, with hnical and business skills of IT people. value leaking from most of their IT spending. These COMPANYWIDE IT skills of business people and ability to hire skilled IT people companies would do well to reduce their IT investment to essential areas only and to re-weight their portfolios toward lower-risk transactional IT assets until they have MANAGEMENT INVOLVEMENT improved their overall IT savvy. Otherwise, they will continue to leak value, particularly from the lor term and higher-risk asset classes such as strategic It. from 1999 to 2002 44 MIT SLOAN MANAGEMENT REVIEW WINTER 2006

44 MIT SLOAN MANAGEMENT REVIEW WINTER 2006 you don’t get the synergy of the merger, you’re not going to come up for air ever.”9 However, Rhoads found that, following Raytheon’s cost-cut￾ting successes, the focus needed to shift to agility, to questions of how the company would grow and how IT enables that growth. High-IT-savvy companies also see higher performance associ￾ated with transactional IT investments used to automate repetitive transactions, cut costs and increase throughput. Not only does Wall Street value such investments in high-IT-savvy companies, but also these companies have higher profits. Interestingly, compa￾nies with more transactional IT investment also have more sales from new and modified products. Paradoxically, in high-IT-savvy companies, process digitization enables innovative new products and services by freeing up managers to innovate on the platform of these digitized processes. For example, Amazon.com, Inc., the quintessential IT-savvy company, can relatively easily try a new service such as tailored recommendations based on the consumer’s purchase history and on other customers’ reviews. The new service requires only marginal investment on top of Amazon’s current dig￾itized processes. Better yet, the product can be offered to only a few target customers and the impact can be measured immediately. By contrast, low-IT-savvy companies do not convert trans￾actional investments into innovation. Strategic IT, with its objectives to create new business value or growth, is historically a high-risk, high-return asset class. But companies with high IT savvy mitigate the risks inherent in strategic IT investments and have higher than average profits, innovation and market capitaliza￾tion for each dollar invested. In such companies, business management involvement and a culture of IT use in busi￾ness processes are necessary for more successful strategic (and in other companies, risky) IT investment. Again, IT savvy makes a big difference with informa￾tional IT investments. Companies with strong IT savvy demonstrate particularly strong profitability because of the disciplines required to use common sets of infor￾mation effectively. There is no impact from informa￾tional IT on innovation, cost or market capitalization in the average company. So what’s the outlook for companies with low IT savvy? Overall, their IT investments are associated with lower returns from all four asset classes in their IT port￾folios. The situation for these companies is bleak, with value leaking from most of their IT spending. These companies would do well to reduce their IT investments to essential areas only and to re-weight their portfolios toward lower-risk transactional IT assets until they have improved their overall IT savvy. Otherwise, they will continue to leak value, particularly from the longer￾term and higher-risk asset classes such as strategic IT. Characteristics That Create IT Savvy What are the hallmarks of the IT-savvy company? Companies with high IT savvy have developed the five mutually reinforcing characteristics described below. The first three characteristics are practices related to IT use, and the last two are competencies needed for high IT savvy. The mutual reinforcement of both practices and competencies is necessary for high IT savvy, and these five characteristics are representative but not exhaustive of companies with stronger overall IT savvy. (See “The Five Charac￾teristics of IT Savvy.”) IT for communication — extensive use of electronic channels such as e-mail, intranets and wireless devices for internal and external communications and work practices. For example, 7-Eleven Japan’s system connects 70,000 computers in stores, at headquarters and at supplier sites, providing transparency across the entire value chain. A salesman for one of the company’s food suppliers put it this way: “[Their] information system is so good that we can instantly find out which goods of ours are selling to what types of customers and how much.” The collaboration between 7-Eleven Japan and its partners includes shared information, information systems and Companywide IT skills Technical and business skills of IT people, IT skills of business people and ability to hire skilled IT people Practices The degree of senior management commitment to IT projects and the degree of business unit involvement in IT decisions Management involvement Competencies Intensity of electronic communication media such as e-mail, intranets and wireless devices for internal and external communications and work practices IT for internal and external communication Internet use Internet-based architectures (i.e., open) for key functions like sales force management, employee performance measurement, training and post-sales customer support Digital transactions Percent digitization of transactions executed with both suppliers and customers Companies with high IT savvy have developed five mutually reinforcing characteristics.* The first three are practices related to IT use and the last two are competencies needed for high IT savvy. * Derived from a factor analysis of 18 independent practices and competencies in 147 companies from 1999 to 2002. The Five Characteristics of IT Savvy

The underpinning for 7-Eleven japan's digital capability is the network of 70,000 computers that collect data at the point of sale on every customer and every item sold know-how about operations management as well as quality con- The results of IT savvy are clearly observed when measuring trol throughout the value chain. process digitization. On average, the 147 organizations we studied completed 19% of their sales and 23% of their purchases electron Internet use- more use of Internet architectures for key ically, there was little variation across industries. However, the processes such as sales force management, employee perfo third of companies with the most digitized processes completed ance measurement, training and post-sales customer support 50% of their sales and 55% of their purchases electronically Digital transactions-a high degree of digitization of the com- Seven Ways to Extract More Business Value pany's repetitive transactions, particularly sales, customer inter- From Your IT Portfolio action and purchasing. The underpinning for 7-Eleven Japans Our research identifies the returns on different types of IT invest digital capability is the network of 70,000 computers that collect ments for the average company, and demonstrates that even data at the point of sale on every customer and every item sold. higher returns are available by matching IT-savvy practices and Each day's data is analyzed for use the next morning. Other competencies with the IT portfolio. But how can managers work digitized processes allow each store to place orders and receive to match IT savvy with the It asset mix? Here are seven sugges- deliveries three times daily, with deliveries organized by temper- tions based on the experiences of the top performers ature-frozen, refrigerated, ambient, etc. 1. Identify the current and previous years IT portfolios. Using Companywide IT skills-the ability of almost all employees to our portfolio categorization, estimate your company's IT portfo- IT effectively. There are strong technical and business skills lios for the last three years and the proposed IT portfolio for next mong the IT staff, strong IT skills among the business staff and year. At an IT investment committee or governance meeting, an adequate market supply of highly skilled IT staff. 7-Eleven discuss whether these investments are appropriate for the com- Japan trains its 200,000 employees to use available point-of-sale pany s business strategy. A recent discussion with an insurance data along with information on product, local weather forecasts company, looking back over the last four years of If portfolios, and regional demographic and purchasing patterns so they can raised these important questions propose and quickly test hypotheses about the appeal of different types of products in each store. a Why did the company's percentage of strategic IT investments fluctuate so dramatically Constant management involvement--strong commitment of sen- will the low infrastructure investments planned for next year ior managers to effective IT use Business-unit managers are heavily adversely affect strategic agility? involved in IT decisions, strengthening partnerships between IT staff Does the decentralized and departmentalized decision mak and business units to help generate value from IT investments ing about IT investments fritter away IT resources and The mutually reinforcing aspect of IT savvy is critical. Our find- undercut support of the company's overall strategic direc ings show that in the companies that exhibit high IT savvy, IT prac- tion? tices are interlocking and tightly clustered. Putting it another way, Why do some business units with different strategies have the the companies that focus on strengthening IT capabilities have same IT portfolios developed the IT practices and companywide It skills that com plement investments in the four IT asset classes. The strong By answering these questions, the insurer reconsidered its IT commitment of senior management encourages more business- investment process and began increasing the IT savvy of the unit managers to become involved in It decisions. This in turn whole organization -starting at the top. The Cfo put it suc leads to more companywide IT skills via formal and informal edu- cinctly: This is the first IT discussion I have really understood- cation programs, along with more use of IT for communication, investments, asset classes, risk profile, savvy and accountability work practices and transaction digitization. INTER 2006 MIT SLOAN MANAGEMENT REVIEW 45

WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 45 know-how about operations management as well as quality con￾trol throughout the value chain. Internet use — more use of Internet architectures for key processes such as sales force management, employee perform￾ance measurement, training and post-sales customer support. Digital transactions — a high degree of digitization of the com￾pany’s repetitive transactions, particularly sales, customer inter￾action and purchasing. The underpinning for 7-Eleven Japan’s digital capability is the network of 70,000 computers that collect data at the point of sale on every customer and every item sold. Each day’s data is analyzed for use the next morning. Other digitized processes allow each store to place orders and receive deliveries three times daily, with deliveries organized by temper￾ature — frozen, refrigerated, ambient, etc. Companywide IT skills — the ability of almost all employees to use IT effectively. There are strong technical and business skills among the IT staff, strong IT skills among the business staff and an adequate market supply of highly skilled IT staff. 7-Eleven Japan trains its 200,000 employees to use available point-of-sale data along with information on product, local weather forecasts and regional demographic and purchasing patterns so they can propose and quickly test hypotheses about the appeal of different types of products in each store. Constant management involvement — strong commitment of sen￾ior managers to effective IT use. Business-unit managers are heavily involved in IT decisions, strengthening partnerships between IT staff and business units to help generate value from IT investments. The mutually reinforcing aspect of IT savvy is critical. Our find￾ings show that in the companies that exhibit high IT savvy, IT prac￾tices are interlocking and tightly clustered. Putting it another way, the companies that focus on strengthening IT capabilities have developed the IT practices and companywide IT skills that com￾plement investments in the four IT asset classes. The strong commitment of senior management encourages more business￾unit managers to become involved in IT decisions. This in turn leads to more companywide IT skills via formal and informal edu￾cation programs, along with more use of IT for communication, work practices and transaction digitization. The results of IT savvy are clearly observed when measuring process digitization. On average, the 147 organizations we studied completed 19% of their sales and 23% of their purchases electron￾ically; there was little variation across industries. However, the third of companies with the most digitized processes completed 50% of their sales and 55% of their purchases electronically. Seven Ways to Extract More Business Value From Your IT Portfolio Our research identifies the returns on different types of IT invest￾ments for the average company, and demonstrates that even higher returns are available by matching IT-savvy practices and competencies with the IT portfolio. But how can managers work to match IT savvy with the IT asset mix? Here are seven sugges￾tions based on the experiences of the top performers: 1. Identify the current and previous year’s IT portfolios. Using our portfolio categorization, estimate your company’s IT portfo￾lios for the last three years and the proposed IT portfolio for next year.10 At an IT investment committee or governance meeting, discuss whether these investments are appropriate for the com￾pany’s business strategy. A recent discussion with an insurance company, looking back over the last four years of IT portfolios, raised these important questions:
Why did the company’s percentage of strategic IT investments fluctuate so dramatically?
Will the low infrastructure investments planned for next year adversely affect strategic agility?
Does the decentralized and departmentalized decision mak￾ing about IT investments fritter away IT resources and undercut support of the company’s overall strategic direc￾tion?
Why do some business units with different strategies have the same IT portfolios? By answering these questions, the insurer reconsidered its IT investment process and began increasing the IT savvy of the whole organization — starting at the top. The CFO put it suc￾cinctly: “This is the first IT discussion I have really understood — investments, asset classes, risk profile, savvy and accountability for performance.” The underpinning for 7-Eleven Japan’s digital capability is the network of 70,000 computers that collect data at the point of sale on every customer and every item sold

2. Understand IT asset class performance and benchmarks for important for the asset classes in which they invest the most your business. Using the results reported in this article and other (See"Different Performance Goals Call for Different IT Invest benchmarks, assess whether your current IT portfolios are appro- ment/Savvy Profiles. To improve IT savvy, start with character- priate for your companys or business unit's strategic goals, It istics that provide leverage for the most important asset classes pany. Since each business unit has a different strategy and IT savvy, those with less IT sav/ ss unit's IT portfolio. Practices from savvy and appetite for risk. An attractive alternative to using in the company s or business unit's IT portfolio. Practices from benchmarks is to compare multiple business units in your com- strong IT-savvy business units can be codified and transferred to comparisons of the alignment of their objectives, practices, capa- bilities and iT portfolios will help highlight where IT investments 4. Balance the portfolio for alignment and risk-return are applied thoughtfully and what changes should be considered. profile-and ensure that the process is transparent. Using the results from the previous three steps, senior management 3. Understand and track your organizations IT savvy. IT savvy must make judgments about the companys IT portfolio. The should be assessed and actively managed. The five practices and judgments are based on management's intuition concerning ompetencies discussed above provide a good starting point. strategy, appetite for risk, the companys IT savvy, the economy, Again, it's informative to compare IT savvy across multiple busi- available capital, etc. Having an IT portfolio process makes this ness units. Companies or business units with low overall IT savvy judgment explicit and trackable over time instead of hidden should consider re-weighting their IT portfolios toward the less within the budgets of each project or departmen risky transactional and informational investments. At the same time, low-IT-savvy companies can focus on 5. Re-weight portfolios annually and whenever major changes improving the IT practices and competencies that are most occur. Like personal investments, It portfolios need to be re- weighted as business and econom umstances change. For example, as Different Performance Goals Call for Different IT InvestmentSavvy Profiles companies achieve high overall IT-savvy ratings, they can invest more in IT and IT sawy should be assessed and actively managed Companies can focus on improving the assume more risk (such as increase IT practices and competencies that are most important for the asset classes in which they invest the most. Below, the right-hand column identifies the components of iT sawy that strategic or infrastructure investments) add the most leverage to the asset classes in the It portfolio for each performance goal their portfolios relative to competi tors or to previous investments INVESTMENT EMPHASIS RFORMANCE for High-lT-Savvy HIGH-LEVERAGE 6. Incorporate the IT portfolio for All Companie Companies PRACTICES/CAPABILITIES approach into the IT governance PROFITABILITY framework. Effective It governance skills Transactional .Management involvement accountability framework to ensure o Internet use that IT is applied in the right ways. IT investment is one of the key it deci- MARKET VALUE Strategic Companywide IT skills sions that needs to be governed Informational o Management involvement Effective governance institutionalizes Transactional the disciplines of It investment (often incorporating IT portfolio INNOVATION Strateg o Management involvement management)in a repeatable process Informational o Internet use that is understood and followed by all managers and linked to the com Infrastructure pany's incentive and reward systems. LOWER COST O Organizational learning is predicted, GOODS SOLD Companywide IT skills part, by the time between action o Internet use nd feedback. The shorter the time lag, the greater the number of oppor Investment emphasis refers to higher-priority IT investments, where the IT investment tunities to learn. Tracking the impact of IT investment decisions and using 46 MIT SLOAN MANAGEMENT REVIEW WINTER 2006

46 MIT SLOAN MANAGEMENT REVIEW WINTER 2006 2. Understand IT asset class performance and benchmarks for your business. Using the results reported in this article and other benchmarks, assess whether your current IT portfolios are appro￾priate for your company’s or business unit’s strategic goals, IT savvy and appetite for risk. An attractive alternative to using benchmarks is to compare multiple business units in your com￾pany. Since each business unit has a different strategy and IT savvy, comparisons of the alignment of their objectives, practices, capa￾bilities and IT portfolios will help highlight where IT investments are applied thoughtfully and what changes should be considered. 3. Understand and track your organization’s IT savvy. IT savvy should be assessed and actively managed. The five practices and competencies discussed above provide a good starting point. Again, it’s informative to compare IT savvy across multiple busi￾ness units. Companies or business units with low overall IT savvy should consider re-weighting their IT portfolios toward the less risky transactional and informational investments. At the same time, low-IT-savvy companies can focus on improving the IT practices and competencies that are most important for the asset classes in which they invest the most. (See “Different Performance Goals Call for Different IT Invest￾ment/Savvy Profiles.”) To improve IT savvy, start with character￾istics that provide leverage for the most important asset classes in the company’s or business unit’s IT portfolio. Practices from strong IT-savvy business units can be codified and transferred to those with less IT savvy. 4. Balance the portfolio for alignment and risk-return profile — and ensure that the process is transparent. Using the results from the previous three steps, senior management must make judgments about the company’s IT portfolio. The judgments are based on management’s intuition concerning strategy, appetite for risk, the company’s IT savvy, the economy, available capital, etc. Having an IT portfolio process makes this judgment explicit and trackable over time instead of hidden within the budgets of each project or department. 5. Re-weight portfolios annually and whenever major changes occur. Like personal investments, IT portfolios need to be re￾weighted as business and economic cir￾cumstances change. For example, as companies achieve high overall IT-savvy ratings, they can invest more in IT and assume more risk (such as increase strategic or infrastructure investments) in their portfolios relative to competi￾tors or to previous investments. 6. Incorporate the IT portfolio approach into the IT governance framework. Effective IT governance specifies the decision rights and accountability framework to ensure that IT is applied in the right ways. IT investment is one of the key IT deci￾sions that needs to be governed. Effective governance institutionalizes the disciplines of IT investment (often incorporating IT portfolio management) in a repeatable process that is understood and followed by all managers and linked to the com￾pany’s incentive and reward systems. Organizational learning is predicted, in part, by the time between action and feedback. The shorter the time lag, the greater the number of oppor￾tunities to learn. Tracking the impact of IT investment decisions and using Informational Performance Goal Investment Emphasis* High-Leverage for All Companies Practices/Capabilities for High-IT-Savvy Companies •Companywide IT skills • Management involvement • Internet use •Companywide IT skills • Management involvement • Internet use • Management involvement • Internet use •Companywide IT skills • Internet use Lower Cost of Goods Sold Profitability Innovation Market Value Transactional Infrastructure Strategic Strategic Strategic Strategic Informational Informational Transactional Transactional Infrastructure Infrastructure * Investment emphasis refers to higher-priority IT investments, where the IT investment is often larger than the industry average. IT savvy should be assessed and actively managed. Companies can focus on improving the IT practices and competencies that are most important for the asset classes in which they invest the most. Below, the right-hand column identifies the components of IT savvy that add the most leverage to the asset classes in the IT portfolio for each performance goal. Different Performance Goals Call for Different IT Investment/Savvy Profiles

these results to inform the next cycle of IT investment promotes Monday morning Mandate for the Senior Management Team enterprise learning the faster he better lI To gauge your companys degree of IT savvy, each key manager should begin by asking the following questions 7. Learn from post-implement tion reviews and formal training. Who has the responsibility for making our key IT decisions, and how do i hold them Most companies woefully underin- accountable for performance? vest in IT education and training. How is my IT How is my It governance linked to the governance of the companys other key assets, Various sources estimate that such as our people, our know-how, our physical assets and our financial assets? around 2% of the average IT budget What are the three or four key metrics I should oversee to get the most value from IT? is allocated to education and train- How IT savvy are we? How IT sawy am 1? ng. What's worse, training is one of CFO the first areas to be cut when times What are the key IT asset classes within our IT portfolio? get tough. Many companies also What has been our historical risk and return by IT asset class? miss out on the important opportu- How can I help make better IT investments, particularly when they involve complex jus- ity for learning offered by a post tifications (such as, option pricing) as with IT infrastructure? implementation project review Business unit leader Growing numbers of companies now include in their project budgets What percentage of my key business processes are optimized and digitized? How IT savvy are my people? How IT savvy am 1? an allocation for development of How effective are our partnerships with the shared IT group? What's our role in that ner How business savvy are my IT people? reviews(or even in-process imple How do we make the key it decisions in my business unit? mentation reviews). Professional development helps companies gen- erate the expected benefits of IT How IT savvy are our business people? How business sawy are our IT people? investment, and helps motivate and energize staff. Are our incentives designed to increase companywide IT sawy? How effective is our professional development around IT sawy? How is this measured? These suggestions are just start. They are not meant to be step-by-step how-to"fo or over What percentage of our key business processes are digitized? Percentage of sales? Per hauling the IT strategies of large entage of purchases? What degree of cross-business unit linking is needed? complex organizations, nor are What is our IT savvy by business unit? Should our IT investment allocations vary by they meant to provide a new business unit to reflect the differences? organization blueprint for the IT How do I work with my senior management colleagues to increase IT savvy? What is our current IT portfolio allocation by asset class? How did it get that way? savvy company. But they are What have been our historical returns by asset class and by bu intended to provoke the kind of What changes to It governance do I need to make to address the answers to the ques- thinking that can quickly point out tions above? robust initiatives to close those gaps and keep them closed. More fundamentally, though, the story of IT savvy is a story of Clearly, there are myriad pressing issues clamoring for the untapped potential - of money left on the table, and of com- attention of the top management team. Many of those issues call petitors who can grab a lasting advantage. In a time of unrelent for sizable resource commitments in terms of funding and dedi- ing competition from all corners of the globe, managers must cated staff. But IT savvy in and of itself is not a major resource understand the ce nces of not acting to enrich their organ drain In our experience, companies with average or low IT savvy izations'IT savvy. They must find answers to questions about the can significantly increase their returns and reduce their IT risk best utilization of technology in their organizations and give seri- without investing another cent in technology. That should be rea- ous consideration to an increasingly important question: Are we son enough for many business leaders to elevate the issue IT savvy enough for 2010 and beyond? INTER 2006 MIT SLOAN MANAGEMENT REVIEW 47

WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 47 these results to inform the next cycle of IT investment promotes enterprise learning — the faster the better.11 7. Learn from post-implementa￾tion reviews and formal training. Most companies woefully underin￾vest in IT education and training. Various sources estimate that around 2% of the average IT budget is allocated to education and train￾ing. What’s worse, training is one of the first areas to be cut when times get tough. Many companies also miss out on the important opportu￾nity for learning offered by a post￾implementation project review. Growing numbers of companies now include in their project budgets an allocation for development of people that includes education, training and post-implementation reviews (or even in-process imple￾mentation reviews). Professional development helps companies gen￾erate the expected benefits of IT investment, and helps motivate and energize staff. These suggestions are just a start. They are not meant to be a step-by-step “how-to” for over￾hauling the IT strategies of large, complex organizations, nor are they meant to provide a new organization blueprint for the IT￾savvy company. But they are intended to provoke the kind of thinking that can quickly point out performance gaps and inspire robust initiatives to close those gaps and keep them closed. Clearly, there are myriad pressing issues clamoring for the attention of the top management team. Many of those issues call for sizable resource commitments in terms of funding and dedi￾cated staff. But IT savvy in and of itself is not a major resource drain. In our experience, companies with average or low IT savvy can significantly increase their returns and reduce their IT risk without investing another cent in technology. That should be rea￾son enough for many business leaders to elevate the issue. More fundamentally, though, the story of IT savvy is a story of untapped potential — of money left on the table, and of com￾petitors who can grab a lasting advantage. In a time of unrelent￾ing competition from all corners of the globe, managers must understand the consequences of not acting to enrich their organ￾izations’ IT savvy. They must find answers to questions about the best utilization of technology in their organizations and give seri￾ous consideration to an increasingly important question: Are we IT savvy enough for 2010 and beyond? To gauge your company’s degree of IT savvy, each key manager should begin by asking the following questions: CEO • Who has the responsibility for making our key IT decisions, and how do I hold them accountable for performance? • How is my IT governance linked to the governance of the company’s other key assets, such as our people, our know-how, our physical assets and our financial assets? • What are the three or four key metrics I should oversee to get the most value from IT? • How IT savvy are we? How IT savvy am I? CFO • What are the key IT asset classes within our IT portfolio? • What has been our historical risk and return by IT asset class? • How can I help make better IT investments, particularly when they involve complex jus￾tifications (such as, option pricing) as with IT infrastructure? Business Unit Leader • What percentage of my key business processes are optimized and digitized? • How IT savvy are my people? How IT savvy am I? • How effective are our partnerships with the shared IT group? What’s our role in that partnership? • How business savvy are my IT people? • How do we make the key IT decisions in my business unit? HR Director • How IT savvy are our business people? • How business savvy are our IT people? • Are our incentives designed to increase companywide IT savvy? • How effective is our professional development around IT savvy? How is this measured? CIO • What percentage of our key business processes are digitized? Percentage of sales? Per￾centage of purchases? What degree of cross-business unit linking is needed? • What is our IT savvy by business unit? Should our IT investment allocations vary by business unit to reflect the differences? • How do I work with my senior management colleagues to increase IT savvy? • What is our current IT portfolio allocation by asset class? How did it get that way? • What have been our historical returns by asset class and by business unit? • What changes to IT governance do I need to make to address the answers to the ques￾tions above? Monday Morning Mandate for the Senior Management Team