The economic transition from recession to recovery is changing business expectations on the role of IT. In the recession, IT was a major force in cutting enterprise and IT costs. As the economy turns from recession to recovery, leaders are changing their view on IT as a source of enterprise productivity. This opens the door for CIOs and IT to redefine IT’s operational and strategic role in the enterprise now and in the future.
The business rational for productivity is clear. During the recession organizations tried to cut costs faster than revenues declined. Many were successful preserving earnings in the downturn following this strategy. This strategy placed IT a heart of reducing unit costs and resource levels to better match revenues.
Cost cutting concentrates on the denominator of the performance eq1uation, see below. Productivity is the opposite focusing on how to create more value by doing new things and increasing the value of existing practices.
However, as the economy turns up executives have demonstrate an ability to lock in those efficiency gains by changing the productivity of the enterprise. If they do not, they face a ‘peak earnings’ quarter where increasing revenues inflate quarterly earnings that cannot be sustained over the long run. The result is an apparent paradox of record earnings followed by apparently disproportionate fall in stock values.
Stock prices fall on the news of a record quarter because investors know that such earnings levels are not sustainable. Investors are right if executives remain focused on cost cutting and control because rising revenues and a strengthening economy will force them to add costs back into their model to support the recovery. They have to because during the recession all they did was dehydrate their operations, they did not change the way they work, so the only thing they can do is add back costs as revenues return.
Adopting a productivity focus that changes the way we work is the only path to being able to lock in productivity gains and earnings that drive stock prices.
Productivity and efficiency sound like the same thing, but the differences are important as summarized in the graphic below.
Productivity is particularly important to CIOs and IT leaders as it creates room for IT to be more than a commodity, cost cutting and consolidation service. Achieving productivity gains requires changing the way people work so they work smarter, achieve more, deliver greater quality and realize the value of their efforts. Those goals are all qualitatively different then cutting costs with IT.
I believe that CIOs will have to answer the following question when reporting their 2010 accomplishments:
How has IT raised enterprise productivity?
IT has the tools, it manages the information, communications and applications that determine the way the enterprise works. Therefore they are critical source of creating and leveraging productivity gains. It is also a critical source of IT’s business impact and value.
Productivity is a universal good that creates value in growth and protects earnings in down markets. Regardless of your situation—making productivity one of your key goals for 2010 reflects a positive transition in your enterprise strategy.