‘Austerity Trap’ Spurs Spending Cuts, Squeezing Innovation and Productivity
NEW YORK; July 18, 2005 – The quest to contain spending on information technology (IT) frequently backfires, forcing companies and governments to instead increase expenditures on IT maintenance, repairs and other unproductive practices, according to the results of a global study released today by Accenture.
Accenture’s “IT Investing for High Performance” study surveyed CIOs from more than 300 Fortune 1000 companies and similar-sized organizations. The survey is part of Accenture’s ongoing effort to identify the common underlying behaviors and characteristics of high performance businesses. Accenture defines high performance businesses as those that consistently outperform their peers in revenue, profit growth and total return to shareholders.
The study determined that the universal goal of using IT to achieve more with less remains elusive, as survey respondents cited an inability to close the gap between goals and results, despite average IT spending increases of 9 percent last year.
This paradox stems from what Accenture calls an “austerity trap,” which lures companies and governments into believing that they can freeze – or even cut – IT budgets while maintaining the same level of service.
The trap forces behaviors such as retaining outmoded legacy systems instead of deploying new technologies, leading to higher costs – both in maintenance and lost productivity – in the long-term. What’s more, many companies launch labor-cutting initiatives that also contribute to lost productivity, while failing to achieve the intended savings.
A rise in costly government-mandated compliance requirements and, for some companies, increased expenses associated with the post-merger integration of IT systems has combined with the austerity trap to form a “perfect storm” that is diverting IT budgets, often leaving an inadequate amount of capital for investing in controllable earnings growth and productivity.
“Our study indicates that there is a significant difference in the level of investing versus maintaining between high and low-performing IT organizations,” said Bob Suh, Accenture’s chief technology strategist and the executive who headed up the study. “Poor spending quality is characterized by a high percent of time spent on maintaining and fixing systems versus investing in productivity-driving change.”
For example, study respondents reported that 39 percent of time is spent running and fixing applications, while only 14 percent of time is spent building new applications.
“More than half of government respondents told us they’re spending too much time on fixing their existing applications, and too little time on building new ones,” said Marty Cole, Group Chief Executive, Government Operating Group. “They want to do more. But they’re being given about 30% more work with only about 5 to 10 percent more budget. Consequently, innovation is being curbed and productivity is being undermined.”
High-performers don’t necessarily spend more on IT. Instead, they better utilize existing systems for functions such as online interactions. (click for related sidebar)
For example, just 10 percent of customer and supplier interactions are online, while only 20 percent of employee interactions are online yet CIOs believe they can achieve three times this level, according to the study. “With online interactions averaging one-tenth the cost of traditional processes, the forfeited productivity gains contained in these gaps are enormous,” said Suh.
Accenture research results also challenged the widely-held perception that the services industry is more nimble and productive than the older manufacturing sector. Razor thin margins and increasing labor costs, combined with vulnerability to global competition, have forced manufacturers to better harness IT to lift productivity. In the absence of similar pressures, the services industry, despite its dramatic global growth, has lagged manufacturing in productivity growth, automation, strategic sourcing and metrics.
An analysis of study findings determined that this “productivity gap” could be closed if the services sector and internal IT functions “industrialized” by adopting practices used in manufacturing, including performance-based metrics, cooperative global sourcing, and investment in plant automation.
In fact, the study identified a correlation between metrics and high performance. While 46 percent of high-performing IT organizations have access to critical IT performance metrics, only 3 percent of low-performing IT organizations reported having access to the same metrics. Similarly, 72 percent said they need metrics to measure “root causes of execution delays on projects” but only 39 percent said they have access to these metrics. Yet, when asked what they most wanted, 86 percent of respondents cited access to performance-based metric tools. (click for related sidebar)
Some Key Findings:
- Follow, Don’t Lead:
- More than half of CIOs – 55 percent – report that their organizations prefer to “follow, not lead” when it comes to pioneering IT developments, letting others absorb the costs and risks of initial development or category creation. Yet the majority of high-performing IT organizations – 77 percent – said they want to be early adopters.
- High-performing IT organizations have, on average, a higher technology adoption rate than do average or low-performers, and are committing a major part of their business to the adoption of technologies.
- Technology adoption appears strongest in compliance areas, while weakest in business improvement technologies. The Accenture study asked CIOs about their organization’s commitment to 19 technologies, from “doing nothing” to “proof of concept” to “committing a significant part of their business” to the technologies. Three emerging IT categories – RFID, wireless telemetry, Linux desktop -- were among those measured. Security was also measured. The findings:
- RFID – 50 percent indicated “doing nothing” and 35 percent “reading and monitoring.”
- Wireless Telemetry – 50 percent and 22 percent respectively.
- Linux Desktop – 49 percent and 37 percent respectively.
- Security – 70 percent of CIOs reported “committing technology” to security software.
- Technical feasibility is not the primary barrier to technology adoption. Business readiness is clearly the top barrier to adoption (35 percent).
- In a Fix:
- High-performing IT organizations spend 40 percent more of their budget on building and integrating new systems than low performing IT organizations.
- The average IT organization spends about 12 percent of its time fixing preventable problems; high performers in contrast spend only 5 percent of their time fixing, where low performers spend 16 percent.
- High-performers focus 43 percent of their new projects on business productivity, where the average focuses 30 percent of new projects on business productivity. Low-performers spend 24 percent on business productivity.
- 85 percent of high-performing IT organizations place “more effective training and learning programs” as important to their management of people, while an average of 49 percent of low-performing IT organizations place this issue as important.
- High-performing IT organizations drive more interactions online than the average, and nearly double the interactions of low-performers.
- Return on Investment:
- ‘Business value’ remains the standard for return on IT investment.
- The significant exception is security software, where 47 percent said “meeting compliance needs” was the main reason.
About The Study
Launched in January 2005, the Accenture “IT Investing for High Performance” study is part of Accenture’s ongoing effort to identify the common underlying behaviors and characteristics of High Performance Businesses. The study was conducted in the United States, United Kingdom, France, Germany, Italy and Argentina. (click for methodology)
Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 115,000 people in 48 countries, the company generated net revenues of US$13.67 billion for the fiscal year ended Aug. 31, 2004. Its home page is www.accenture.com.