Global tech is world’s third-largest economy, but is it a healthy one?

SUMMARY:

Dismantling a new report for IT leaders to see if its value matches its claims – and finding some things don’t add up.

Dollars flying into digital globe © fgnopporn - Fotolia.comWere it an independent nation, the global technology sector would be the third largest economy on Earth, claims a new report. Technology spending worldwide hit more than $6.3 trillion in 2016, making it the “third largest economic ‘force’ in GDP terms, surpassed only by the United States at $18.57 trillion and China at $11.20 trillion”, according to the claims of ‘2018: The State of the Global Technology Economy’, a report published this week, driven by software company Apptio. IT spending is 28% bigger than the GDP of Japan and almost two times that of Germany, it adds.

That 2016 technology spending globally – or across the 100 countries sampled for the report – might exceed the GDP of most individual nations is no surprise. The key point is that total tech expenditure is growing at nearly two and a half times the rate of global GDP, according to the report, from $609 per capita (of the global population) in 2010 to $848 in 2016, and by 2020 will pass $1,100 per capita.

And as total technology outlay rises – including spending on management, applications, cybersecurity, and infrastructure – “so does the responsibility for ensuring it delivers the intended business benefits”. Fair comment. Who would disagree?

So is it delivering those business benefits? The picture that emerges from the report is more interesting than it first appears, because some of the conclusions challenge accepted wisdom – or at least, call into question the marketing spiels of some tech behemoths, which promise that digitisation will deliver faster revenue growth and improved operating efficiencies.

The report says:

In a healthy, growing company, we would expect IT spend as a percentage of revenue to fall, because IT can drive higher business growth through better leverage of existing resources, new digital ways of selling and servicing products, and even new digital products and services.

OpEx should grow slower than IT spend, [and yet] IT spend as a percentage of OpEx is heading in the wrong direction. At the same time, we also expect IT spend as a percentage of operating expenses to climb, because digital automation can drive improved business efficiency, leading OpEx growth to slow relative to revenue, and IT to consume more and more OpEx as automation becomes more prevalent.

When interacting correctly, these two dynamics (IT spend as percentage of revenue and OpEx) should contribute to rising revenue and declining OpEx that [together] yield higher profitability. However, that’s not what the research shows. Instead, gross margins have declined over the study period.

In short, says Apptio, higher IT spending isn’t yielding better business results when measured at the macro level – even if one ignores a potential problem with the metrics, which is that cloud services are booming and (as all C-level executives know) cloud shifts the IT burden from CapEx to OpEx.

But let’s accept the underlying point: IT doesn’t appear to be delivering better results for the many organisations that – presumably – have yet to download a management tool from Apptio to help manage the problem. The issue isn’t that spending is rising, therefore, it’s that the promised business benefits aren’t appearing in many cases, perhaps because the global economy is more complex than Apptio’s rather binary report might suggest.

So what types of organization are bucking the trend of spending more for few of the promised benefits? In other words, which companies are maximising the payback from their IT investments and digital programmes? The report says it is those that spend wisely, rather than too well – again, hardly a revelation:

Understanding the spending patterns (and outcomes) of top performers is the first step in getting to better business outcomes. But, it’s not enough to just understand spending patterns. We must also examine how top performing companies decide where and how to invest their technology dollars.

Top performers spend more on ‘grow and transform’. As the top performers increase their technology spending levels, they also changed the portfolio mix of run, grow, and transform. Compared to average performers, the top performers invest 25% more of their technology dollars on growing and transforming their business, 55% more on technology relative to their operating expenses, and 46%  more on technology per employee.

So how to be a top performer, then, in Apptio’s terms? The report suggests a 10-point action plan:

Position for value

Define what you deliver in terms of business capabilities that are understood and valued by business unit partners, so you can work together to improve business outcomes.

Continuously improve

Execute a strategic roadmap for technology business management (TBM) maturity by integrating TBM into day-to-day processes and thinking, so TBM empowers fact-based value conversations with your peers. 

• Create transparency
Translate your spending, consumption, and capacity into meaningful perspectives for technology decision makers.

• Deliver value for money 
Maximize value and demonstrate industry-comparable cost-effectiveness for the services and innovation you provide.

Shape business demand

Communicate costs and consumption to business units to drive informed trade-off decisions and better consumption behaviour.

Plan and govern

Collaborate to align your annual budget and resource plans to strategic business priorities and manage to that plan.

Cost for performance

Deliver technology, services, and projects efficiently to the business. 

• Create a business-aligned portfolio 
Optimise portfolios to deliver the most value for the level of spending.

Invest in innovation

Allocate adequate resources to new and enhanced services and to business innovation.

Be an agile enterprise

Help the business respond quickly to market opportunities or threats.

My take

Despite its flaws, the Apptio report presents a useful checklist for any organisation that is spending big money on technology and digitisation programmes while achieving uncertain results. For that, the authors should be commended.

The top ten percent of companies by operating margin exhibit different patterns from average performers, says Apptio. They have technology spending growth rates that are three times that of the average performer, and operating margins two to three greater. So: spend more for success, perhaps: a confused message if ever there was one.

But there is another flaw in the report. By appearing to zero in on operating margin as the key measure of success, Apptio is – arguably – always likely to favour highly automated, technology-heavy sectors over other, more traditional ones. For example, US retailer Macy’s (not quoted in the report) had an operating margin of 5.1 per cent in the 2016-17 financial year (operating income of $1.3 billion on net sales of $25.7 billion), while Verizon (ditto) reported an operating margin of nearly 21.5 per cent (an operating income of over $27 billion on net sales of nearly $126 billion). And yet both are successful businesses.

But as automation sweeps across every sector in the years ahead, the traditional supply chain will be transformed too,  perhaps helping even the most traditional businesses to improve their operating margins.

Image credit - Dollars flying into digital globe © fgnopporn - Fotolia.com

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