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05:10 PM

IT Isn't Where It's At

The big growth in tech spending is happening outside of the IT organization. That creates a challenge for companies trying to leverage technology well.

Data Point 1: Since 2006, while IT spending per employee grew from $10,669 per employee to $12,051 in 2012, total technology expense per employee grew from $53,354 to $93,463. In short, IT expense grew 12% while the total technology expense grew 70%.

Data Point 2: In 2000, major companies across all sectors spent $3.20 on non-IT "technology" for every $1.00 spent on IT. By 2006 that number was $5.10; in 2012 it is $8.60.

Data Point 3: In 2000, in these same companies, technology spending outside of IT control was 34.6% of spend; by 2006 it was 69%; and today in 2012 it is 79%.

This data comes from our research at Rubin Worldwide: data from 498 companies in 21 sectors worldwide, much of it mined from annual reports and other sources. Since it's from companies across many industries, it doesn't represent the pattern of total technology expense (TTE) in banking and financial services today. In banks and financials services, IT controls much more of total technology. But it may portend a very similar future.

First, let's start by explaining what TTE is, and what technology that's not IT is.

In the latest work from the MIT Center for Information Systems Research, the team describes the phenomenon of digitization in companies today: "The business world is digitizing rapidly with investments across the enterprise in business processes, operations, labs, products, collaboration, sensors, CAD, sensors and more." (See the CISR briefing "Customer Facing Digitization Creates the Most Value," by Woerner, McDonald, Weill.) All those technologies mentioned under the umbrella of digitization are likely non-IT ones. Here are some areas in different industries where the related technologies likely fall outside of IT's control:

• Banking and financial services: ATMs, process automation, smart cards, mobile banking, quants' analytics and high-frequency trading platforms.

• Consumer products and retail: Process control, marketing, supply chain management mobility, logistics and RFID.

• Healthcare: Electronic health record systems, learning health systems for tracking and sharing outcomes, remote monitoring and medical instruments.

Industrial equipment and manufacturing: Process control, marketing, supply chain, embedded products and robotics.

• Media and entertainment: Broadcasting, streaming, marketing and content.

Telecommunications: Embedded processing, marketing, supply chain, field service and network technology.

• Utilities, energy and natural resources: Process control, marketing, supply chain, mobility, smart grid, field technology, remote sensing and satellite.

Some sectors have seen their non-IT technology spending grow faster than others (see chart, next page). The leading sectors are energy, manufacturing, pharmaceuticals and electronics--with media and healthcare following with a slight lag.

The banking and financial services industry lags much farther behind, and even farther back is insurance. However, the rising pattern of non-IT technology intensity is clear, and TTE overall is on the rise. For banking and financial services, TTE per employee has risen from $33,338 in 2006 to $56,166 in 2012. During the same period IT spending per employee has gone from $20,836 to $25,520--just about nowhere, in comparison! At the same time the percent of TTE not under IT control has risen from 28% to 55%.

Anecdotally, you can see how the insurance industry, which lags others today, could move very quickly. Notice that recently, automotive insurers have offered devices that plug into your car's onboard diagnostics port and provide data that can affect premiums. They typically monitor how much people drive, at what times, and sometimes the number of hard stops and starts.

The CISR study concludes that it appears that digitization and consumerization is putting pressure on IT resources, even as larger percentages of spending go elsewhere. That's because this front-line technology--whether it's ATMs or customer-facing mobile websites--drives the need for back-office IT in the form of process support and shared services such as data center infrastructure. Rising total technology expense drives conventional IT expense, CISR finds, it doesn't replace it.

The rising tide of total technology expense is clear across sectors. TTE is rising faster than IT expense, relative to operating expense. In banking and financial services, IT expense relative to operating expense is going down while TTE is rising. To me, this indicates that IT isn't being leveraged well to drive operational efficiency; IT expense should be rising against operating expense, as the IT expense numerator lowers the operating expense denominator, by making processes more efficient and less costly.

The important decision isn't who lords over which tech budget fiefdom. It's how companies effectively leverage technology when it's bought and managed in so many places. Just 53% of companies in InformationWeek's 2012 IT Budget Survey say that 80% of IT services are budgeted in a central IT organization, as opposed to in business units. Most of the rest (26%) say it's 60% to 79% centralized.

[Bloomberg's Vault Cloud Service Goes Local]

Companies face a new challenge in the technology economy. As the bounds between IT and "technology" continue to become blurred, companies need to effectively manage their entire technology portfolio with a cohesive view toward creating value through product leadership, customer interaction and intimacy, operational efficiency and risk management.

Gartner sees the rise of the chief digitization officer to manage this challenge. Or perhaps this is what the role will be for the next-generation CIO. But in reality companies need to throw a whole lot more at this challenge than a C-level title. Companies must develop mechanisms and models that enable them to leverage their entire technology portfolio in order to create value. That's truly what becoming a master of your company's technology economy is all about.

Howard A. Rubin is founder of Rubin Worldwide, a research and advisory firm focused on the economics of business technology. [email protected]

Dr. Howard A. Rubin is a Professor Emeritus of Computer Science at Hunter College of the City University of New York, a MIT CISR Research Affiliate, a Gartner Senior Advisor, and a former Nolan Norton Research Fellow. He is the founder and CEO of Rubin Worldwide. Dr. Rubin is ... View Full Bio
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