Why Discerning a Solution’s Strategic Value is Key

Aug 2, 2018

What defines a strategic solution?

You might say it is whatever your business says it is, but this is untrue as the business can have its own biases. Take enterprise resource planning (ERP) systems for instance. They are rarely justifiable by the competitive advantages they provide (arguments for cost savings or administrative agility notwithstanding), but they do often get greenlighted merely because they serve the interests of the person holding the purse strings, the CFO.

This is not to say that ERP systems have no place in the company. Instead, we need to be clear about what a strategic solution is or is not. For the uninitiated, there are generally two types of information systems—those that support the running of the business, and those that are core to your product or service. ERP applications such as accounting and payroll would fall into the former category. The confusion between the two types has made justifying core technology projects—those that bolster a business’s core competency—difficult.

This lack of distinction has also led to significantly different approaches to technology. Some companies see technology as a strategic enabler (“This sports car is sure to get me more dates”), while others see it as nothing more than a tool (“I just want something to get me from point A to point B”).

Still, the best indicator of how much a company values technology is the proportion of its investment in technology versus revenues. If a company’s IT spending is in line with the industry average, then it is more likely to label a project strategic. In the following diagram, you’ll find an example of how various well-known companies might value technology.

Starting from the upper right section of the chart, you’ll find companies whose lifeblood depends on maintaining a leading edge in technology—IBM, Google, and Apple—all firmly in the technology business. Moving down to the bottom right, we have the underinvestment zone, populated by companies who sell technology products and services but are inadequately investing in technology.

On the upper-left, we see the opposite—overinvestment. Here we see GM who has traditionally been a substantial investor in technology despite being in the manufacturing sector. In the middle lies the “twilight zone” of technology funding. Here, you will find companies that have typically leveraged the power of technology to their competitive advantage. Case in point: airlines with sophisticated revenue-management systems, banks, and financial institutions.

The $64,000-non-inflation-adjusted question is this: if you were to position your own company’s logo on the diagram, where would it go?

Keep in mind that, typically, low-tech industries invest less than 1% of revenue on technology, while technology-driven companies invest over 15%. True tech giants (Google, Apple, HP, IBM) can, and do, invest far more. Another key differentiator is the type of investment: Low-tech companies tend to spend as much as 90% of their budget keeping the lights on, while forward-looking companies focus more on growing the business. Middle-of-the-road companies, however, tend to be split 65–35 on operations and growth.

These metrics should give you a good idea of how best to make a case for the investment in an IT solution and whether or not it makes sense to pursue a disruptive solution.

If your company relies on technology as a competitive advantage but invests fewer than 1.5% of revenues, you know something needs fixing. You will need to make a case for added investment, or your only choice would be to approach the project in a more tactical manner rather than strategic. Alternatively, if your company is investing the right amount, but most of it goes to operations, your priority would be to reduce costs and shift spending. For instance, you could migrate a data center to a cloud service or eliminate tedious business processes with robotic process automation.

In today’s fast-changing business environment, your ability to make sense of new functionality requirements, markets, channels, competitors—and allocate resources appropriately based on strategic value—will make all the difference.  

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