Atlanta — November 28, 2006 — World-class information technology (IT) organizations spend 7 percent more than their counterparts at typical companies, but this increased spending more than pays for itself by enabling improved efficiency and effectiveness in procurement, finance, human resources (HR) and other areas of back office operations, according to new research from The Hackett Group.
With the help of improved technology usage, world-class procurement organizations spend 25 percent less than typical companies on procurement operations, Hackett reported in its 2006 Enterprise Book of Numbers. World-class finance organizations also spend 45 percent less, and world-class HR organizations spend 13 percent less, the research revealed.
In each case, these functions operate with fewer staff and also show improved performance across a range of metrics tracking effectiveness and strategic alignment. For example, Hackett found a direct correlation between improved IT effectiveness and key value metrics in finance and procurement.
World-class IT a Prerequisite
In fact, Hackett found that in most cases, achieving world-class status in IT is a prerequisite to achieving superior performance in other back office functions. Hackett's research found that 86 percent of all companies that achieve world-class performance in two or more business functions within selling, general and administrative (SG&A) areas are world-class in IT.
Hackett's research found that world-class IT organizations now spend $9,024 per end user, while typical companies spend 7 percent less, or $8,485. This is a continuation of a trend that was first identified in 2005 and makes IT the only area studied by Hackett where world-class performers outspend typical companies. World-class IT organizations are investing 17 percent more on technology-enabled solutions than typical companies.
"Our research clearly shows how IT is the foundation for world-class performance across SG&A functions," said Hackett Senior Business Advisor Scott Holland. "While many companies continue to slash IT budgets, companies with world-class IT organizations understand that by selectively investing in IT they can drive down overall SG&A spending. At the same time, IT serves as an enabler of improved effectiveness in finance, procurement and HR."
Strategically Supporting the Business
Hackett Senior Research Advisor Eric Dorr added: "By focusing on IT, world-class companies generate benefits well beyond cost, driving improvement to the bottom line and a back office that is better aligned strategically to support the needs of the business. Technology plays a role in how the best companies do everything from close their books faster each month to achieve higher customer satisfaction and hire and train their staff more effectively."
In procurement, Hackett found a direct correlation between IT effectiveness and procurement efficiency. As a result of their technology usage, staff at world-class procurement organizations process 36 percent more purchase orders per staff member than typical companies, and they cut the cost per purchase order by nearly half.
In finance, Hackett's research shows a direct correlation between IT effectiveness and improved access to finance information. World-class finance organizations also deliver 57 percent more invoices to customers electronically and, in part as a result of this move to e-invoicing, reduce billing errors by half and significantly lower days sales outstanding, thereby increasing cash flow.
World-class HR organizations clearly benefit from their increased focus on technology, with 13 percent lower HR costs per employee and 15 percent fewer HR staff. They fill manager positions 10 percent faster, and are more than three times as likely as typical companies to offer employees online access to health and welfare systems.
Best Practices for World-class
In its 2006 Enterprise Book of Numbers research, Hackett also identified five major best practice areas where world-class performers excel: strategic alignment, complexity reduction, technology enablement, business process sourcing and cross-functional partnering. Key findings in select best practices areas include:
- Strategic Alignment — To ensure IT strategic alignment and elevate the role of IT as an enabling strategic asset, world-class IT organizations are twice as likely as typical companies to have a chief information officer (CIO) who reports to the CEO or chairman rather than reporting to the chief financial officer (CFO) or another functional executive. World-class CIOs are also 48 percent more likely to be a member of their company's primary management committee.
- Complexity Reduction —The human and financial costs of maintaining multiple data centers, packaged applications, customizations, operating systems, programming languages, hardware/telecom standards, etc., contribute to a marked increase in total IT cost. Reduction of unnecessary IT system complexity — hardware, software and networks — directly reduces complexity, liberating time and money for investment in value-adding activities. For example, world-class procurement organizations are more likely to have a single master database for suppliers and items, providing executives with a more accurate picture of where things stand. In finance, world-class companies are 28 percent more likely to generate management reports from a centralized data repository, improving information access and offering an enterprise view of performance while reducing time spent searching for and cross-checking data from multiple sources.
- Cross-functional Partnering —IT organizations (and their external service providers) need to work as business partners to make sure that applications delivered are capable of achieving business goals. A key part of this is maintaining high user adoption and internal client satisfaction rates. World-class IT organizations use a project management office (PMO) to manage 90 percent of all projects, making them 130 percent more likely to do this than typical companies. Using a PMO provides better visibility, coordination, and planning on projects, which is why the level of PMO adoption is a key predictive metric of world-class performance.