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 organizational practices. It does!
What’s the explanation, and how should CIOs use these stunning figures?
My Gartner Executive Programs colleague, Andrew Rowsell-Jones, has worked on the answers – and 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 organizational changes that create $16 worth of intangible assets: know-how, skills, organizational structures and such.
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. 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.
Focus On Four Shareholder-Value Drivers
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, and reputation.
Top-line growth. 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.
Bottom-line growth. 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.
Return on invested capital. IT helps improve return on capital by supporting knowledge-sharing and cost-reduction initiatives. By transferring internal best practices on scheduling and optimization among its factories, an enterprise can improve operations, which translates to higher ROIC. By creating a network of partners and vendors, an enterprise can remove nonproductive assets from the balance sheet and reduce supply-chain costs, both of which increase asset use.
Reputation. IT can help track and control business risk factors by supporting knowledge-management initiatives.
Telling The IT Story
So links exist between the performance of an enterprise and IT-enabled developments. But unless the story of these links is told clearly, they will have little impact.
Use every opportunity to communicate your IT value message clearly. Match what you say to the maturity of your business. Disclose non-financial metrics if it helps you showcase your strategy. New ventures should emphasize things like quality of management and top-line metrics. Mature enterprises need to focus on bottom-line growth and return on invested capital. Position your IT investments in this context.
Disclosures to analysts and investors are regulated in some form in most countries. Be aware of which disclosure rules apply to you, and abide by them. What you say can move your stock price up or down.
The key role for the CIO here is to orient specific messages and to work closely with the CEO and CFO so they are well briefed on how your enterprise IT investments create shareholder value. We are finding more and more CIOs are becoming part of their company’s front line conversations with investment communities and the media. Be prepared!
Dr. Marianne Broadbent is Group Vice President and Global Head of Research for Gartner’s Executive Programs.