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Credit Where Credit Is Due

Credit Where Credit Is Due

CIOs can assist their CEOs and CFOs to educate investors about the shareholder value of the enterprise's IT investments.

Every $1 invested in computers yields between $5 and $17 in stock market value. Whereas, $1 invested in property, plant and equipment (book value) only yields $1 in stock market value. And $1 investment in other assets (inventory, liquid assets and accounts receivables) yields only 70 cents. So say a distinguished group of researchers - Erik Brynjolfsson (MIT Sloan School of Management), Lorin Hitt (University of Pennsylvania Wharton School) and Shinkyu Yang (New York University Stern School). They set out to see whether a company's stock market valuation correlated with the size of its computer investments and its organisational practices. It does!

What's the explanation and how should CIOs use these stunning figures?

My Gartner Executive Programs (ExP) colleague, Andrew Rowsell-Jones, has worked on the answers. It helps to have an economist on your team!

It seems that investors value $1 spent on computers more than other investments because computing dollars lead to organisational changes that create $16 worth of"intangible assets": know-how, skills, organisational structures and such. These less tangible assets are foundation capabilities to compete in a connected economy.

The demise of poorly conceived dotcoms and the collapse of high-profile companies are leading to a return to fundamentals and the expectation that all executives will be able to demonstrate how their area contributes to shareholder value. As businesses become more IT-based, the challenge for CIOs is to help educate investors, external board members and their colleagues on how IT assets create shareholder value.

If you want shareholders to acknowledge the value of your IT investments, you have to make it easier for them to understand IT's contribution to your enterprise's performance and reduce the"cost of knowing".

A number of analysts and commentators claim that they don't think IT matters, so they've never bothered to find out how to penetrate the technospeak. They find the technical language in IT announcements bewildering. If it's hard to understand, or thickly wrapped in marketing hype, then it probably has no substance. To investors, a hard-to-understand message is cause for indifference or, worse, suspicion.

There's no doubt that explaining the link between IT investment and shareholder value is difficult to make. Investors rely on financial numbers, public statements and industry analysis to assess the current health and future performance of enterprises. They rarely look deeper because they don't have access to that information, or don't want to spend the time and effort to understand it.

The key to demonstrating the contribution of IT investments to shareholder value is to link the IT business-case benefits to the drivers of shareholder value. Analysts boil down the myriad of shareholder-value drivers to four key ones: top line growth (revenue), bottom-line growth (earnings), return on invested capital (ROIC) and reputation.

Shareholder value driver one: top-line growth. What are the prospects for the enterprise's revenue stream? Is the business growing? IT helps deliver revenue when it supports agility or quality business initiatives. For instance, IT affects the top line (revenue) when an enterprise taps new markets and customers, using systems that allow it to adapt to market changes more swiftly than competitors. IT improves customer retention, which also affects the top line, through implementing IT tracking systems to better ensure consistent quality, institute premium pricing and even reduce the risk of product litigation.

Shareholder value driver two: bottom-line growth. How fast are earnings growing? Are competitive pressures squeezing margins? Are costs under control? Are any big write-offs coming? IT helps deliver earnings growth when it supports quality and cost-reduction initiatives. An enterprise both increases quality and decreases cost by using IT to reduce product recall rates to the lowest in its industry. It reduces its costs of handling returns and eliminates the need for invoice corrections - both of which save money and contribute to a larger bottom line. IT can reduce costs for the customer and the efficiency gains can be shared by both customer and supplier.

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