Tech•Ed 2006: Study Shows IT Fuels Business Growth

BOSTON, Mass., June 11, 2006 — The People-Ready Business vision Microsoft began discussing earlier this year rests on this basic premise: When given the right software, a company’s people become an even more strategic asset in driving business success.

The premise is no mere hypothesis or marketing bromide. It is supported by recent research on the impact of IT on business by consulting firm Keystone Strategy, Inc., under the direction of Professor Marco Iansiti of Harvard Business School, with sponsorship by Microsoft: “Information Technology Drives Growth” (read the summary).

The findings are front and center at the Microsoft Tech•Ed 2006 conference in Boston this week. The conference features much discussion about the investments Microsoft is making to help customers implement the infrastructure that will help enable the People-Ready Business. This is manifested in specific commitments Microsoft is making to IT professionals and developers to deliver the products and services necessary to harness the power of IT to create competitive advantage and fuel business growth within their organizations.

More than 11,000 are expected to attend this year’s Tech•Ed. The conference features over 1,000 sessions that will provide IT professionals, developers and technical decision makers with training, information and resources to build, deploy and manage solutions, using currently shipping and near-term Microsoft technologies.

To learn more about the research, its key findings and how they relate to the People-Ready Business vision, PressPass spoke with Professor Marco Iansiti, director of research at Harvard Business School; George Favaloro, principal at Keystone Strategy; and Andy Lees, corporate vice president of Server and Tools Marketing at Microsoft.

PressPass: What was the impetus for this research?

Iansiti: Part of the impetus was an article in the Harvard Business Review in 2003 by then editor-at-large Nicholas Carr. The article, titled “IT Doesn’t Matter,” asserted that IT has become a commodity like electricity that confers no strategic advantage to the organizations that employ it. A lot of people disagreed with his basic thesis – there are many examples of IT having an impact on organizations – but nobody had really done a study that had the data to refute it. That’s when we began to think about doing something more quantitative.

PressPass: Please describe the study and its goals.

Favaloro: We did two studies, one aimed at mid-market companies and the second one aimed at enterprises. For the mid-market study, we randomly sampled more than 660 companies worldwide with 500 to 1,000 employees. For the enterprise study, we randomly sampled 160 companies worldwide with more than 1,000 employees. Our research goals were threefold: 1) To explore the fundamental link between IT capability and business performance. 2) To test for the impact of IT on key business drivers and show how those drivers relate to business performance. 3) To understand how individual functional IT systems impact business performance drivers. The research is based on the proposition that IT effectiveness depends not on how much a company invests but how effectively managers make use of their IT dollars. The findings were consistent across the world, from the United States and Japan to Western Europe.

PressPass: What are some of the key findings of the research?

Iansiti: The most basic finding is that IT, or the implementation of software in the key business processes, leads to profitable growth. In other words, IT matters because it’s highly correlated with growth and profitability. Specifically, we found that top-performing enterprise companies in IT grew on average 3.5 percent faster than the average of all peers in their industry, and companies in the bottom quartile in use of IT as a strategic asset on average grew 3.3 percent slower than their peers. These are very important business results for the typical organization, and this is an interesting finding because conceptually it hasn’t really been approached before in studies of IT and productivity. It also makes a lot of sense. A small organization that’s doing relatively well may be able to keep going on its path for a good period of time without major issues, but if it really wants to grow, then IT becomes an incredibly important factor in terms of what the organization and its people can do. We see some really good examples of that in the study.

Growth is a big strain on organizations. Most companies tend to have a small number of people that are important in doing key processes around customers and so on. When they grow, those people get stretched out and very often growth can lead to disaster if it outruns what the people can do. The company tends to become much less profitable as it grows in revenue. What we see in the study is that those organizations that are thoughtful about IT implementation and deploy it as they begin to grow can do much more to chase the business opportunities by releasing the talent and the capabilities of the people in the organization. The reason is that growth brings about complexity, which tends to drown the capabilities of people, who can only handle a certain amount of complexity. The ability of IT to manage complexity for a human being helps it manage the strains of growth within the organization.

PressPass: Please recap what is meant by People-Ready Business and put this research into context vis-à-vis the People-Ready Business vision.

Lees: A people-ready business believes that if you empower the people inside an organization, you empower the organization itself. A people-ready business recognizes that and invests in software and tools to really harness the power of its people. Microsoft began formally discussing our people-ready vision for business in March, and we’re fueling this vision with an incredible pipeline of product innovation that will enable businesses to address a broad range of business challenges.

To business decision makers, who sometimes are asked to help fund or resource infrastructure investments, the critical importance of the decisions made in this arena aren’t widely understood. So at a minimum, this study is important because it says pretty clearly that there’s a correlation between a solid, well-managed IT environment and business outcomes.

The research with Keystone Strategy Inc. and Professor Iansiti is part of a broad research effort Microsoft has been involved in that helps us better quantify for customers what we know — intuitively, anecdotally and through years of experience — to be true about the power of enabling people with great software. It augments our own research and yielded very solid data showing the correlation between IT and people: Companies that do take investment in IT seriously across the board, from infrastructure to tools for developers and end-users and companies, have higher performance than those that don’t view IT strategically.

PressPass: Professor Iansiti, please tell us how you came to be involved in this research?

Iansiti: I joined Harvard Business School in 1989 to study the impact of technology on businesses as well as the processes for the development of that same technology, so I’m both a process development person and a technology implementation person. I’ve spent my time since then trying to understand how people in organizations develop technology and how they implement it. In 1991, I did my first research project with Microsoft and I’ve had a good relationship with the organization since then. In the last few years I’ve gotten very interested in the impact of technology on organizations.

PressPass: Why is technology’s impact on organizations an important research topic?

Iansiti: If you look at technology spending as a percentage of capital expenditure, you’ll see a steady rise in the last 50 years. Today, it’s close to 20 percent of all capital expenditures, I think, and possibly even more depending on how you account for it. It’s very important to validate the impact that it has on businesses. But it’s one of those topics that falls between the cracks of academic specialties, so people have historically had a hard time nailing it down. Even a few years ago, your typical study would look at things like capital investment in IT-related spaces or investment in computing equipment, software and so on and try to correlate that with overall business performance. That tends not to work well because one can invest a lot of money in IT and deploy it poorly, or choose one’s own products, and the impact of technology on the organization would not be very strong and possibly even negative.

The idea of doing a systematic study that goes deeper than economists traditionally go but is structured enough to be repeatable across hundreds of organizations is pretty new. It hasn’t been done to a large extent because it’s an unusual academic and technical specialization to have. But we at the Harvard Business School have been developing a lot of methodologies over the last 20 years or so for mapping out various scenarios of impact to businesses and documenting their correlation with things like business performance, productivity and so on, so we were able to focus in on this a little better than some other people did in the past.

Lees: An organization’s most valuable assets are its people. And giving them technology to help them perform better drives up business performance. We believe that technology is software – which is dynamic and flexible to meet individual and organizational needs. We believe our approach to software that helps people impact company performance differentiates us and gives customers a reason to bet on Microsoft when investing in software. Our approach and our software is very different from those of IBM or others — and we believe there are four criteria that software should meet in order to enable the people-ready business: 1) be familiar and easy to use, 2) widely used and supported, 3) easy to integrate and connect, and 4) innovative and continually evolving to meet customer needs. These are really the common attributes across all of Microsoft’s products for developers, IT professionals and information workers, whether it’s Microsoft Office or Windows or Visual Studio Team System or SQL Server.

PressPass: Any other key findings?

Favaloro: We looked at two dimensions of business insight. One was the amount of control you have over your business and the other was actual insight into where your profits are coming from. And what we found was that the better a company’s IT systems, the better insight and control people have — significantly better. Statistically, it’s just absolutely crystal clear. Managers in firms with better IT capability reported 25 percent better insight into customer and product profitability and having better control over product pricing and more influence over their business partners. That very tightly relates to the People-Ready vision whereby if you’re implementing the right technology, you’re giving your people the information they need to understand their business in critical ways, and giving them knobs and dials they can turn to control their business and influence partners and the like.

Iansiti: We also found a solid connection between IT capability and productivity per employee. In the enterprise study, for example, average productivity of the top quartile of firms was US$372,000 per employee, while the average productivity of the firms that scored in the bottom quartile in IT score was US$303,000. This represents a productivity advantage of nearly 23 percent for IT leaders over IT laggards. Also in the enterprise study, the research shows that the key driver of worker productivity is a robust software infrastructure. The firms that achieve high growth and high productivity had a software infrastructure score that was twice that of the IT laggards.

Lees: It’s worth reiterating that our People-Ready vision is not just a vision for information workers, but for people of all kinds. It’s developers inside a company that are building great solutions, be that products they take to market or products they use internally. What makes software people-ready for developers? Software that’s familiar and easy to use – and software that allows developers to create applications that are familiar and easy to use so they’ll be adopted, without a heavy training burden. It’s IT professionals who are managing the infrastructure and don’t want to relearn how to manage a server with every new one they deploy. Everybody inside a company has a role to play in driving the core business outcomes that are important to one company or another. It differs by industry or by vertical but in all cases our software can help them be successful.

PressPass: Can you give more details about the methodology used?

Favaloro: We developed a survey of about 115 questions structured on a framework of scenarios such as improved customer satisfaction, operational visibility and financial controls, and information access and management. We designed questions to expose an objective level of capability along all of these scenarios, and conducted the survey with the company, walking through the whole thing with an IT executive who had a thorough understanding of the company’s systems. We scored that looking at about 90 different indicators and based on how many of these systems companies have in place and are using – not that they have but do not use, or that they might have some day. Then we scored that on a scale of 1 – 100. The average firm scored about 55, the highest score was about 90, and the top quartile average was in the 70s. Then we took their publicly reported financial performance and related them to their survey score.

PressPass: What conclusions should businesses draw from these findings vis-à-vis the value of IT as a strategic, in-house asset versus IT as a commodity to be outsourced?

Iansiti: No. 1, growth tends to be the primary strategic variable in businesses, and what we’ve shown is that IT plays a fundamental role in the ability of organizations to drive profitable growth. So it is certainly false that IT is a commodity. You see a tremendous variance in deployed IT across organizations, across verticals, all the way around the world. Even within a very specified location, you can see two organizations 20 miles away from each other that are very similar but that use IT in fundamentally different ways. IT is strategic, at least for growth. It leads to profitability. Those are fairly important insights.

Underneath that, there are also some interesting insights and tools that provide practical applications of these findings. The questions that we used in the survey can be reframed as a benchmark that organizations can use to see where they stand with their peers and that can lead to a fairly precise roadmap of how they can deploy IT and software to enable the next phases of successful growth.

PressPass: What conclusions should businesses draw from these findings vis-à-vis the value of their people as a strategic in-house asset?

Iansiti: The study shows that IT empowers people, period. You can see it in giving people customer insight, which is an empowerment. You can see it as giving them back control over the business, which is empowerment. You can see it in how IT is giving them better ways to manage their business processes; that’s empowerment. What it does is it really amplifies what a person can do in the organization. That’s a pretty important finding and it’s one that traditionally has not been very well documented. I think we have one of the first studies, if not the first study, that actually does that.

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