Smarter IT investments

Many companies design their approach to IT around what they do—not what they could be doing. McKinsey assessed the IT strategies of ten leading global corporations to understand how they invest in innovation while running their core IT operations efficiently. We found that they treat IT investments like financial ones—as low risk (“stay in the race” projects to improve basic services), medium risk (“win the race” efforts to raise the efficiency and cut the cost of current business activities), and high risk (“change the rules” innovations to enter new or transform existing markets).

 
Some companies devote a far greater proportion of their IT budgets to high-risk investments than others do. To avoid missing out on top-line growth opportunities, more should take that approach. What stands in the way is a tendency to apply a single criterion—usually net present value—to all IT investment decisions. Instead, the criteria should suit each specific type of project. A venture capital approach that places calculated bets on promising technologies and evaluates them regularly is appropriate for high-risk ideas. To find out how companies can manage IT to achieve short-term efficiency, medium-term competitive advantage, and long-term transformation, read “Divide and conquer: Rethinking IT strategy” (Web exclusive, August 2006).