SMITH BUSINESS Magazine
Volume 11 No. 1 SPRING 2010

IT and Profitability

Investing in IT may have more of an effect on your firm’s profitability
than advertising or even R&D

New research indicates that investing in IT may have more of an effect on a firm’s profitability than advertising or even R&D.

Newer IT systems—those deployed since 1995—seem to help firms improve their bottom line, says Sunil Mithas, assistant professor of decision, operations and information technology.

But some kinds of IT projects will prove more advantageous than others. IT can be used to reduce costs by creating more efficient operations, or it can be used to support sales growth through customer satisfaction and customer retention strategies. Cost reduction had a negligible effect on the profitability of IT investments, Mithas found. But IT had a marked positive effect on revenue growth—especially for companies that are able to take advantage of the power of IT to serve customers, such as creating more customized, personalized offerings to their customers, creating new marketing channels to promote awareness of the company’s product or service, and improving the company’s ability to manage its customer lifecycle, leading to greater customer loyalty. The pathways leading to profitability aren’t always compatible, so knowing the impact of an IT investment can help managers make savvy choices among discretionary expenditures.

Mithas also found something that managers may find surprising: investment in IT has more of an impact on firm profitability than either advertising or research and development efforts.

“Most firms already know how to manage R&D and advertising to their best advantage,” says Mithas. “But there is variation in how firms are handling IT, and the benefits they are able to reap from it.”

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