Mark P. McDonaldFor years the relationship between revenue growth and IT transaction growth have been similar. Increased revenues generated increased IT transaction volumes and the need to fund additional investments in infrastructure capacity and operations. The connection between the two made funding for these investments relatively straightforward as CIOs sought additional capacity to support additional revenue.
CIOs are reporting a change in this relationship that will challenge conventional practice. In the last quarter of 2008 and the first quarter of 2009, CIOs reported that their companies are working harder for each additional unit of revenue. They have to submit more proposals to win work, have to make more sales calls, handle more customer questions, etc. This observation comes from looking at IT transaction growth, which continues to grow while revenue growth slows or actually declines.
This is creating a situation where CIOs need to provide additional IT capacity and service to support additional business activity without the offsetting additional revenue. The figure below illustrates this as the yellow area separating IT transactions from revenues. The difference represents a potential capacity gap between the work the business needs to do and the revenues that work generates.
CIOs have experience with such a gap in terms of storage demands that grow at a rate independent of business activity or revenues. CIOs report that attempts to control or reduce storage demands meet with mixed success. That growth coupled with business transaction growth will challenge CIOs to find ways to raise IT capacity without the support of additional revenues.
While factors such as layoffs, product rationalization and closing sites will help abate this issue. The fundamentals present a requirement for CIOs to modernize their IT infrastructure (reducing the average IT transaction cost) as well as look to establish a new rational for funding IT capacity based on the work required rather than the revenue generated.
What is the relationship between IT transactions and revenue in your organization?
Is it changing as economic conditions change?
At what point does this become an issue, or is this a red herring?
Category: Strategy Uncategorized Tags: Business
8 responses so far ↓
1 The context for 2010 planning will be challenging June 22, 2009 at 7:29 am
[...] This will be a unique challenge in 2010 because unlike past recessions, CIOs report that transaction and storage volumes continue to grow. This means that enterprises have to work smarter by working in new ways than working harder by doing more with less. Here is a link to a blog entry on this subject http://blogs.gartner.com/mark_mcdonald/2009/02/02/do-you-have-an-emerging-capacity-gap [...]
2 IT as % of revenues will send the wrong signal to the business July 1, 2009 at 8:43 am
[...] explanation in the following Blog entry http://blogs.gartner.com/mark_mcdonald/2009/02/02/do-you-have-an-emerging-capacity-gap/ Share and [...]
3 Ian Rowlands July 1, 2009 at 8:52 am
Indeed, there is a significant issue. As you might know better than most the quest for a linear relationship between IT investment and business success has been largely fruitless. But doesn’t the issue have to go beyond operational measures like cost per transaction, and include management’s ability (or lack of ability) to exploit information in planning, decision making and governance? It might be argued that as information and information technology become commoditized, enterprise success depends on the ability to exploit digital capital to create value more rapidly than it can be consumed by knowledge workers, exported to lower cost providers and eroded by cost of government (taxation and regulation).
4 Mark McDonald July 1, 2009 at 7:14 pm
Ian
Thanks for your commenys and yes there are broader issues here.
But the capacity gap is clear and challenging CIOs as they face the need to apply more resources to support current infrastructure while revenues are declining. This has not happened before on a large scale and it is very tangible. Hence the focus on this issue.
5 Customer and Markets: business decisions that drive IT cost structures February 17, 2010 at 6:49 am
[...] come to light as the connection between changes in revenue and transaction volumes is creating a capacity gapthat is unaccounted for in the IT budget. Open your systems to customers, suppliers and prospects [...]
6 IT spend as a percent of revenue – a dubious metric at best. April 6, 2010 at 7:04 am
[...] the widespread use of customer and supplier Internet portals in 2003. I talked about this in an early post about a capacity gap. But the point is clear, there is little to say that IT resource demand increases at the same [...]
7 Ehtisham Rao July 28, 2010 at 4:42 pm
well, cost per transaction should be thought of as a parity from the days storage was expensive and fixed costs structures un-rationalized. I tend to think of the cost of IT per dollar earned as a strong metric to determine value. if it took a legacy application and an army to maintain a transaction volume then over a value generating app with fewer people and lower support costs now, the per transaction metric skews the value equation. Clearly the value would be derived not from per volume transaction but the cost as a function of dollar contribution to margin. the third dimension of value which comes from marginal cost to enable the proposed business models should also offset the costs per transaction. in a way, we are moving to new paradigms with scales playing an important role, both in terms of volumes as well as ability to enable new business and support the dollars earned.
8 IIT Infrastructure has been among your most productive assets August 10, 2010 at 8:57 am
[...] 30% per year for the last few years – despite the recession and decreased sales. This is the capacity gap discussed in on of the early blog postings explains how this can [...]
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