High-risk IT investment can boost top-line growth

Businesses need to rethink their IT strategy and spend up to 40 per cent of their IT budget on high-risk investments in order to deliver top-line growth as well as bottom-line savings, according to management consultancy McKinsey.

The McKinsey report Divide and Conquer: Rethinking IT strategy says while companies differentiate between how they manage general investments, they usually manage the whole of their IT investment as one big pot - simply cutting costs when times are tough and funding new projects when times are better.

But in a study of 10 leading-edge global businesses McKinsey found investment in IT is managed the same way other financial investments are managed, and split into low, medium and high risk categories.

McKinsey differentiates between these risks by labelling them "stay-in-the-race", "win-the-race" or "change-the-rules" investments. A more venture-capital like approach needs to be taken to the high-risk investments, which can help not only deliver competitive advantage but change the rules of the industry.

Companies that focus on short-term performance with only "stay-in-the-race" or "win-the-race" investments are missing out on IT investments that could help deliver strategic competitive advantage.

In terms of how the money is best split, most of a company's IT investments - between 30 and 60 per cent - should focus on maintaining and enhancing basic IT services and core business applications, with another 10 to 30 per cent of the IT spend aimed at significantly cutting costs or improving productivity over and above its competitors.

A similar amount - 10 to 40 per cent - should be aimed at high-risk, high-reward IT investments and innovations that will either open up new markets or enable the company to offer new products and services substantially different to those of competitors.

The McKinsey report said: "Change-the-rules investments deliver a competitive advantage by creating new and unique products or services or by generating a hard-to-replicate cost or performance advantage."

But companies that focus on short-term performance with only "stay-in-the-race" or "win-the-race" investments are missing out on IT investments that could help deliver strategic competitive advantage.

The report said: "By distinguishing among different IT investments, companies can use technology for more than simply attaining competitive parity; this approach can help deliver significant top-line growth and market advantages."