North American IT Performance Shines

European companies getting less bang for their information technology bucks than New World peers, ROI study concludes

Orlando, FL — March 12, 2003 — North American companies are delivering better overall information technology performance than their European competitors and peers, according to a recent study that found most Old World companies realizing lower returns on their IT investments than New World enterprises.

The study comparing financial performance of 10,000 organizations in Europe and North America, conducted by Alinean, a return on investment consulting and analytical tools firm, found that the 1,500 European Union (EU) public companies analyzed are spending almost twice as much as U.S. companies on their IT operations as a percentage of revenue. However, on a per-employee basis, EU companies are spending 33 percent below their U.S. counterparts.

Even more importantly, the return on the Europeans' investment is falling flat, as most EU companies are under-performing their U.S. peers in profitability gains and cost savings.

"U.S. companies have made a major shift that puts them far out ahead: They're using U.S. corporate culture and IT to enable strategic sourcing, outsourcing labor and cutting labor costs by more than 95 percent over the past decade," said Tom Pisello, Alinean's president and CEO. "At the same time, they're keeping crucial R&D work in-house — concentrating the bulk of information management investments on knowledge capital growth and retention — focusing IT spending on the resources that matter."

The top-performing companies in Europe and the United States are noticeably more frugal than their peers. Europe's best performers spend just 2.1 percent of revenue on IT, about 70 percent less than the average EU IT spending of 7.3 percent of revenue. By comparison, high-performing peers in the United States spend just 0.8 percent of revenue on IT, about one-third of what their top-performing EU counterparts budget, the survey found.

Interestingly, Europe's two top-performing nations are the United Kingdom and Belgium, which are leading the charge on strategic sourcing. By contrast, French and German companies cannot right-source operations to achieve global competitiveness because of local labor laws, as well as cultural and political constraints.

Alinean's survey also draws a clear connection between IT spending and overall company financial performance for companies, including Bayer AG, BMW, BP, Ericcson, Euro Disney S.C.A., GlaxoSmithKline, Groupe Bull and Unilever. "It's clear that U.S. companies are outperforming European firms in spending the same or less to achieve higher results in just about every industry," said Pisello.

Pisello warned, however, that the averages can be misleading and that companies need to take a close look at their top competitors' individual performance rather than strictly at averages for either North America or Europe. "Many European companies are performing well, despite the averages and economic climate," he said.

Another key finding of the study is that companies using strategic sourcing can apply IT investments to significantly change how they run their businesses, including headcount reductions, which can drive bottom-line performance.

In the past decade, U.S. companies have moved significant physical operations overseas, where the financial costs of labor, the social and financial costs of environmental laws, may be less burdensome. European companies operate with more restrictive labor laws that require them to preserve employment, and this may limit whether companies can take full advantage of the productivity gains offered by a major new technology.

This requirement for European companies to absorb higher employment and operational costs than their U.S. counterparts may affect the bottom-line value they extract from future IT investments, especially when compared with competitors worldwide.

Alinean's study was performed using its ValueIT software, an ROI and value analysis tool kit for chief information officers (CIOs) and IT consultants, using the PeerComparison component to rank companies' IT spending and resultant financial performance. The software can be used to compare specific company performance and IT spending against named peers for competitive benchmarking and strategy development.

Company performance was determined with the software using "information productivity," a proprietary measure of the value of IT, comparing a company's economic value-add (EVA) with information management investments, both of which can indicate the macroeconomic success of information technology investments on the corporate competitive position and financial success. This metric was first introduced in the book Information Productivity by Paul Strassmann, the CIO of NASA and a former CIO of Xerox and Kraft Foods. IT spending was assessed using surveys on a subset of the companies and proprietary statistical modeling.

The Alinean ValueIT database sample includes companies from North America, and all 13 European Union countries, in all industries, and companies of varying sizes. Companies that report their U.S. and European operations separately may be included in both studies.