《电子商务 E-business》阅读文献：Generating Premium Returns on Your IT Investments

WINTER 2006 VOL 47 NO.2 MITSloan Management Review Peter Weill and sinan aral Generating premium Returns on your T Investments Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published REPRINT NUMBER 47211

Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published. Generating Premium Returns on Your IT Investments WINTER 2006 VOL.47 NO.2 REPRINT NUMBER 47211 Peter Weill and Sinan Aral

Generating premium Returns on Your it Investments Although IT portfolio management has been a best practice for some hen the weather is hot. 7-Eleven time now, many Japan's stores companies are still getting returns from it plenty of bento boxes investments that are Japan's cold boxed meals of rice, pickles and other food below their potential. New studies show that there are lots of hot noodles a measurable premium for sale. The stores' operators always seem to have plenty of can be gained by what their customers want: in plementing a set of fact, they order and receive interlocking business fresh food deliveries three times a day. It is no coinci- practices and processes, dence that the company is the collectively called nation's most profitab T retailer. Its 2004 gross margins topped 30%- six times its 1977 Peter weill Eleven Japan Co. Ltd. is and sinan aral to put it simply-very savvy about using IT. At least twice a week, every one of its 10,000-plus mostly franchised stores gets a visit from a 7 Eleven Japan"counselor. The counselor works with the store manager or franchisee to improve the business, often by using data from the store 's information systems to manage and order more local practices and preferences to IT investments, the store ca introduce and succeed with new product lines. The typical store adds 70% new items for sale each year, a higher rate than that of any other retailer in Japan, which helped double its average n 1977 to 2004. The sto ing recent sales, weather conditions and product range information, so they always know just Weill is the director of the ce Management and M/T senior research scientist. Sinan Aral is a Ph. D candidate in the Sloan Schoal's IT INTER 2006 MIT SLOAN MANAGEMENT REVIEW 39

Illustration: © Sara Tyson/theispot.com WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 39 hen the weather is hot, 7-Eleven Japan’s stores in Tokyo have plenty of bento boxes — Japan’s cold boxed meals of rice, pickles and other food￾stuffs — while on cold days there are lots of hot noodles for sale. The stores’ operators always seem to have plenty of what their customers want; in fact, they order and receive fresh food deliveries three times a day. It is no coinci￾dence that the company is the nation’s most profitable retailer. Its 2004 gross margins topped 30% — six times its 1977 gross margins. 7-Eleven Japan Co. Ltd. is — to put it simply — very savvy about using IT. At least twice a week, every one of its 10,000-plus mostly franchised stores gets a visit from a 7- Eleven Japan “counselor.” The counselor works with the store manager or franchisee to improve the business, often by using data from the store’s information systems to manage and order more effectively.1 By matching local practices and preferences to IT investments, the store can continually introduce and succeed with new product lines. The typical store adds 70% new items for sale each year, a higher rate than that of any other retailer in Japan, which helped double its average stores’ daily sales from 1977 to 2004. The store managers regularly receive graphical data show￾ing recent sales, weather conditions and product range information, so they always know just how many bento boxes to order. Generating Premium Returns on Your IT Investments Peter Weill is the director of the Center for Information Systems Research at the MIT Sloan School of Management and MIT senior research scientist. Sinan Aral is a Ph.D. candidate in the Sloan School’s IT Group. Contact them at pweill@mit.edu and sinana@mit.edu. Although IT portfolio management has been a best practice for some time now, many companies are still getting returns from IT investments that are below their potential. New studies show that a measurable premium can be gained by implementing a set of interlocking business practices and processes, collectively called IT savvy. Peter Weill and Sinan Aral W

7-Eleven Japan makes effective IT investments and manages the average company. Those with low IT savvy have, on the other an It portfolio that constantly matches its business strategy. But hand, substantially lower net profits in the following year(con- the company's well-managed IT investments are only part of the trolling for many other factors story behind its 20-year track record of industry-leading finan In colloquial usage, the term IT savvy has been imprecise-a cial returns. The convenience-store giant blends its IT invest- general descriptor at best. But in our work at MIT's Center for ments with a range of assertive IT practices and capabilities- Information Systems Research, we have developed a definition everything from the counselors' visits that increase the store that describes the core attributes while preserving the"street operators'IT skills to the "transparency of an information infra- smarts"sense of the term. To us-and in conversation with the structure that links 70,000 computers in stores, at headquarters business executives with whom we work regularly- IT savvy and at supplier sites refers to the planned, ongoing use of a set of interlocking busi- A primary objective of this article is to show that IT invest- ness practices and competencies that collectively derive superior ments alone, even using the much-heralded IT portfolio value from IT investments. For companies like 7-Eleven Japan,IT approach, cannot by themselves ensure that all key business goals savvy is ingrained, informing almost all of the company's busi are met. Our research shows that a measurable bottom line pre- ness decisions and sharply focusing its IT investments. The goal mium for every iT dollar invested is achieved by companies with of this article is to introduce the concept of IT savvy in order to a mutually reinforcing set of practices and capabilities that we reframe the discussion about the business value of IT. we first call IT savvy. review the different IT assets in which companies invest before 7-Eleven Japan clearly has IT savvy in abundance; so, too, do discussing the gap in IT investment returns that separates those quite a few other exemplary organizations In our study of 147 with IT savvy from those without companies over five years, we found that the impact of IT savvy substantial.2(See"About the Research. ) For example, for each Revisiting the value of IT Assets dollar invested in IT infrastructure, companies with high IT savvy Just as investors address their objectives for risk and return using have higher net profits in the year after the investment than does portfolios of financial investments, some companies use IT port folio management to better enable their management teams About the research match IT investments to strategic objectives. Successful IT port- folio techniques change the conversation from technical to strate- gic considerations by applying a com ial lens to IT This article is based on five years worth of data from lOs and IT managers at 147 U.S. companies and suppl investments; the result is an allocation of IT assets that is appro- priate for the company's circumstances mented by discussions with IT managers in large U.S., European and Asian organizations. The data was col- Our research identified four broad classifications of it invest lected in person and by telephone from 2001 to 2003 by ments: transactional, informational, strategic and infrastructure research company Harte-Hanks Inc and analyzed by MIt Transactional investments are used primarily to cut costs or Center for Information Systems Research staff. To further Increase oughput for the same cost(for example, think of a understand the role and impact of IT savvy, we conducte brokerage firms trade processing system). Informational invest- nterviews and discussions with ClOs and other senior ments provide information for purposes such as accounting, executives from 2003 to 2005. Using MIT CISR frame- reporting, compliance, communication or analysis. Strategic works and questionnaires, the 2005 IT portfolio data was investments are used to gain competitive advantage by support- collected from 640 companies by research firm META ing entry into new markets or by helping to develop new prod Group, now part of Gartner Inc, and analyzed by MIT CISR. ucts, serv business processes(ATMs were a successful Performance data was sourced from the Compustat strategic IT initiative for the first banks that introduced them but database. The total it investment includes all centralized and decentralized IT spend (expenses and depreciated cap- they became transactional over time). And infrastructure invest tal), both in-house and outsourced, plus the full costs of all ments are the shared IT services used by multiple applications employees dedicated to IT services and management. The (such as, servers, networks, laptops, customer databases). services companies, which mirrors the composition of the urvey sample is composed of 58% manufacturing and 42 Depending on the service, infrastructure investments are typi- cally aimed at providing a flexible base for future business initia- Standard Poor's 500 and the Fortune 1000 listings. The tives or reducing long-term IT costs via consolidation. results are all statistically significant, based on regression Each type of investment represents a different IT asset class analysis that controls for size, industry, R&D and advertis- with its own unique risk-return profile. In the same way that any ing expenditure. personal investment portfolio must weigh stocks, bonds, cash and other financial assets against personal goals, an IT portfolio 40 MIT SLOAN MANAGEMENT REVIEW WINTER 2006

40 MIT SLOAN MANAGEMENT REVIEW WINTER 2006 7-Eleven Japan makes effective IT investments and manages an IT portfolio that constantly matches its business strategy. But the company’s well-managed IT investments are only part of the story behind its 20-year track record of industry-leading finan￾cial returns. The convenience-store giant blends its IT invest￾ments with a range of assertive IT practices and capabilities — everything from the counselors’ visits that increase the store operators’ IT skills to the “transparency” of an information infra￾structure that links 70,000 computers in stores, at headquarters and at supplier sites. A primary objective of this article is to show that IT invest￾ments alone, even using the much-heralded IT portfolio approach, cannot by themselves ensure that all key business goals are met. Our research shows that a measurable bottom line pre￾mium for every IT dollar invested is achieved by companies with a mutually reinforcing set of practices and capabilities that we call IT savvy. 7-Eleven Japan clearly has IT savvy in abundance; so, too, do quite a few other exemplary organizations. In our study of 147 companies over five years, we found that the impact of IT savvy is substantial.2 (See “About the Research.”) For example, for each dollar invested in IT infrastructure, companies with high IT savvy have higher net profits in the year after the investment than does the average company. Those with low IT savvy have, on the other hand, substantially lower net profits in the following year (con￾trolling for many other factors). In colloquial usage, the term IT savvy has been imprecise — a general descriptor at best. But in our work at MIT’s Center for Information Systems Research, we have developed a definition that describes the core attributes while preserving the “street smarts” sense of the term. To us — and in conversation with the business executives with whom we work regularly — IT savvy refers to the planned, ongoing use of a set of interlocking busi￾ness practices and competencies that collectively derive superior value from IT investments. For companies like 7-Eleven Japan, IT savvy is ingrained, informing almost all of the company’s busi￾ness decisions and sharply focusing its IT investments. The goal of this article is to introduce the concept of IT savvy in order to reframe the discussion about the business value of IT. We first review the different IT assets in which companies invest before discussing the gap in IT investment returns that separates those with IT savvy from those without. Revisiting the Value of IT Assets Just as investors address their objectives for risk and return using portfolios of financial investments, some companies use IT port￾folio management to better enable their management teams to match IT investments to strategic objectives.3 Successful IT port￾folio techniques change the conversation from technical to strate￾gic considerations by applying a commercial lens to IT investments; the result is an allocation of IT assets that is appro￾priate for the company’s circumstances. Our research identified four broad classifications of IT invest￾ments: transactional, informational, strategic and infrastructure. Transactional investments are used primarily to cut costs or increase throughput for the same cost (for example, think of a brokerage firm’s trade processing system). Informational invest￾ments provide information for purposes such as accounting, reporting, compliance, communication or analysis. Strategic investments are used to gain competitive advantage by support￾ing entry into new markets or by helping to develop new prod￾ucts, services or business processes (ATMs were a successful strategic IT initiative for the first banks that introduced them but they became transactional over time). And infrastructure invest￾ments are the shared IT services used by multiple applications (such as, servers, networks, laptops, customer databases). Depending on the service, infrastructure investments are typi￾cally aimed at providing a flexible base for future business initia￾tives or reducing long-term IT costs via consolidation. Each type of investment represents a different IT asset class with its own unique risk-return profile. In the same way that any personal investment portfolio must weigh stocks, bonds, cash and other financial assets against personal goals, an IT portfolio This article is based on five years’ worth of data from CIOs and IT managers at 147 U.S. companies and supple￾mented by discussions with IT managers in large U.S., European and Asian organizations. The data was col￾lected in person and by telephone from 2001 to 2003 by research company Harte-Hanks Inc. and analyzed by MIT Center for Information Systems Research staff. To further understand the role and impact of IT savvy, we conducted interviews and discussions with CIOs and other senior executives from 2003 to 2005. Using MIT CISR frame￾works and questionnaires, the 2005 IT portfolio data was collected from 640 companies by research firm META Group, now part of Gartner Inc., and analyzed by MIT CISR. Performance data was sourced from the Compustat database. The total IT investment includes all centralized and decentralized IT spend (expenses and depreciated cap￾ital), both in-house and outsourced, plus the full costs of all employees dedicated to IT services and management. The survey sample is composed of 58% manufacturing and 42% services companies, which mirrors the composition of the Standard & Poor’s 500 and the Fortune 1000 listings. The results are all statistically significant, based on regression analysis that controls for size, industry, R&D and advertis￾ing expenditure. About the Research

must be balanced-and regularly rebalanced-so that it is con- Making a sensible asset allocation requires senior managers to be stantly aligned with business strategy and provides the appropri- crystal clear about what they wish to achieve and about who will ate combination of short- and long-term payoff. It is senior be held accountable -hardly the stuff of technical specifications. management's job to balance the IT portfolio, and to integrate Each asset class is linked to different types of business value. these disciplines into the company's It governance processes. (See"Different IT Assets Deliver Different Value,"p42.)For The average company studied in 2005 allocates 46% of its total example, companies that invest more heavily than their competi IT investment to infrastructure. (See "Considering IT Invest- tors in transactional IT have lower costs. Transactional invest ments as a Portfolio )Utilizing the infrastructure are the trans- ments pay off by using It to support or automate repetitive actional systems, accounting for 26% of the average IT spend. business processes. Logistics leader United Parcel Services of Conceptually, informational and strategic systems sit on top of America, Inc offers a good example: The company uses It effe and use the transactional and infrastructure systems, absorbir tively to cut business costs and increase productivity. For instance 17%and 11% of average IT investment, respectively. it provides free package tracking information on its Web site or Investment for any single project can be spread over one or more egrated into its customers' enterprise resource planning sys asset classes. For example, the executives of a multibillion-dollar tems. Before online tracking was offered, customer calls to the U.S. software and IT services company allocated a recent multimil- company's call center cost UPS about $2 each; sometimes there lion-dollar investment in a customer relationship management sys- were two follow-on calls to locate the package, for a total of $6 for tem this way: 60% informational, 5% strategic, 25% transactional one inquiry. Now each tracking request costs UPS only a few and 10% infrastructure. As a relatively late adopter of CrM, the It cents, even during the Christmas rush, when the company gets up services company expected few strategic benefits from the invest- to six million such requests a day. 6 For any company that is eager ment. Also, it already had much of the infrastructure needed for the to use IT to cut costs and improve productivity, it makes sense to CRM implementation. By contrast, a competitor had successfully tilt its IT portfolio toward transactional investments. implemented CRM three years earlier with a higher total project cost and a different allocation of resources more strategic and less informational Considering IT Investments as a Portfolio Pharmaceuticals leader Eli Lilly and Company has used the portfolio approach since 1999 to categorize its IT portfolio management is an increasingly common way to help man- IT investments. " We tend to want to have 5% [of our agement teams match IT investments to strategic objectives. ou projects] in strategic areas, 15% to 20% in the informa- research identified four broad classifications of it investments: transac tional category, and the remaining percentage split onal, informational, strategic and infrastructure. between the infrastructure and transactional Sheldon Ort, Lilly's information officer for business Product innovation Better information Process innovation The technique is also engaging business leaders in IT Better integration Competitive advantage Renewed service delivery investment decisions at Mohegan Sun, the Connecti- Increased sales cut-based casino. CIO Dan Garrow reflects on the expe- Market positioning rience:"Comparing our strategy against our plans for expenditures in each of the four management objec 17% tives for investments, we realized there was a disconnect INFORMATIONAL STRATEGIC between our long-range plans and our resource alloca Cut costs tions, both human and financial. Portfolio thinking Increase throughput TRANSACTionaL ed us bring the day-to-day activities back into alignment with our long-range objectives. Portfoli INFRASTRUCTURE inking helps us determine what type of company we are and the level of risk we re willing to take, particu Business integration larly around our strategic business efforts. Reduced marginal cost of business unit's IT Reduced it costs The Returns from the four it asset classes The portfolio allocation approach works because it nderscores the importance of how organizations use source rmewor tom a w and k. broad bent leveraging the New intrastructure: How Market te technology instead of focusing on the technology itself. Data: Percentages are from an MIT CISR study of 2005 total IT investments from 640 enterprises INTER 2006 MIT SLOAN MANAGEMENT REVIEW 41

WINTER 2006 MIT SLOAN MANAGEMENT REVIEW 41 must be balanced — and regularly rebalanced — so that it is con￾stantly aligned with business strategy and provides the appropri￾ate combination of short- and long-term payoff. It is senior management’s job to balance the IT portfolio, and to integrate these disciplines into the company’s IT governance processes.4 The average company studied in 2005 allocates 46% of its total IT investment to infrastructure. (See “Considering IT Invest￾ments as a Portfolio.”) Utilizing the infrastructure are the trans￾actional systems, accounting for 26% of the average IT spend. Conceptually, informational and strategic systems sit on top of and use the transactional and infrastructure systems, absorbing 17% and 11% of average IT investment, respectively. Investment for any single project can be spread over one or more asset classes. For example, the executives of a multibillion-dollar U.S. software and IT services company allocated a recent multimil￾lion-dollar investment in a customer relationship management sys￾tem this way: 60% informational, 5% strategic, 25% transactional and 10% infrastructure. As a relatively late adopter of CRM, the IT services company expected few strategic benefits from the invest￾ment. Also, it already had much of the infrastructure needed for the CRM implementation. By contrast, a competitor had successfully implemented CRM three years earlier with a higher total project cost and a different allocation of resources — more strategic and less informational. Pharmaceuticals leader Eli Lilly and Company has used the portfolio approach since 1999 to categorize its IT investments. “We tend to want to have 5% [of our projects] in strategic areas, 15% to 20% in the informa￾tional category, and the remaining percentage split between the infrastructure and transactional,” explains Sheldon Ort, Lilly’s information officer for business operations.5 The technique is also engaging business leaders in IT investment decisions at Mohegan Sun, the Connecti￾cut-based casino. CIO Dan Garrow reflects on the expe￾rience: “Comparing our strategy against our plans for expenditures in each of the four management objec￾tives for investments, we realized there was a disconnect between our long-range plans and our resource alloca￾tions, both human and financial. Portfolio thinking helped us bring the day-to-day activities back into alignment with our long-range objectives. Portfolio thinking helps us determine what type of company we are and the level of risk we’re willing to take, particu￾larly around our strategic business efforts.” The Returns From the Four IT Asset Classes The portfolio allocation approach works because it underscores the importance of how organizations use technology instead of focusing on the technology itself. Making a sensible asset allocation requires senior managers to be crystal clear about what they wish to achieve and about who will be held accountable — hardly the stuff of technical specifications. Each asset class is linked to different types of business value. (See “Different IT Assets Deliver Different Value,” p. 42.) For example, companies that invest more heavily than their competi￾tors in transactional IT have lower costs. Transactional invest￾ments pay off by using IT to support or automate repetitive business processes. Logistics leader United Parcel Services of America, Inc. offers a good example: The company uses IT effec￾tively to cut business costs and increase productivity. For instance, it provides free package tracking information on its Web site or integrated into its customers’ enterprise resource planning sys￾tems. Before online tracking was offered, customer calls to the company’s call center cost UPS about $2 each; sometimes there were two follow-on calls to locate the package, for a total of $6 for one inquiry. Now each tracking request costs UPS only a few cents, even during the Christmas rush, when the company gets up to six million such requests a day.6 For any company that is eager to use IT to cut costs and improve productivity, it makes sense to tilt its IT portfolio toward transactional investments. Informational Transactional Infrastructure 17% 11% 46% 26% • Increased control • Better information • Better integration • Improved quality • Faster cycle time • Cut costs • Increase throughput • Product innovation • Process innovation • Competitive advantage • Renewed service delivery • Increased sales • Market positioning • Business integration • Business flexibility • Reduced marginal cost of business unit’s IT • Reduced IT costs • Standardization Strategic IT portfolio management is an increasingly common way to help man￾agement teams match IT investments to strategic objectives. Our research identified four broad classifications of IT investments: transac￾tional, informational, strategic and infrastructure. Considering IT Investments as a Portfolio Source: Framework from P. Weill and M. Broadbent “Leveraging the New Infrastructure: How Market Lead￾ers Capitalize on IT,” Harvard Business School Press, 1998. Data: Percentages are from an MIT CISR study of 2005 total IT investments from 640 enterprises

a leader in the marketing, hospitality and travel businesses; its Different IT Assets deliver Different value most recognized brands include Radisson Hotels Resorts T.G.I. Friday's restaurants, Carlson Marketing Group, Carlson The up and down arrows gauge the average changes in prof- Wagonlit Travel, Radisson Seven Seas Cruises and the Gold bility, innovation and market value the year after an IT Points Reward Network. 7 Although the businesses are run investment is made. For example, companies that invest autonomously, Carlson has captured cost savings and synergies more heavily than their competitors in transactional IT have with a world-class shared services capability, which won the 2004 lower costs International Productivity and Quality Councils award for the best mature shared services organization Carlson Shared Services is set up to operate as a business, offer- ing IT and financial services(with plans to offer more); it is governed by a board comprising the CIOs and CFOs of the business units; and Infrastructure its IT organization provides 89 infrastructure services to Carlsons 合 businesses. The IT unit compares the prices of its services to those of INFRASTRUCTURE external vendors, and outsources whenever a vendor can offer a bet TRANSACTIONAL ter price or quality proposition than what internal IT resources can offer. As a result, Carlsons business units use the shared It services as much as possible, even though use is not mandatory. STRATEGIC Although the top performers( defined as the top third in terms of industry-adjusted return on assets, net margins and revenue growth R&D have IT portfolio allocations similar to the average companys, collec ADVERTISING tively they spend 4% more on IT as a percentage of net sale But the differences within specific industries are striking. For 會号msek5 ense and advertising example, top performers in financial services spend 10%less IT than the average financial firm but have portfolios more heav I Net Margin Income Before Extraordinary Items ily weighted toward IT infrastructure. (In that sector, IT invest Total Sales Sales from Modified products ment is so fundamental to business processes that IT systems are Total sales and sales From New Products Total sales uite mature, with much of the advantage coming from higher The Market to Book value of company stock efficiency in executing basic transactions and providing infra in the same year the investment is made structure to foster innovation. By contrast, the top performers in wholesale, retail and transport sectors spend 11% more on IT Similar evidence applies to the other IT asset classes. Compa- than their average competitors and weight their portfolios more nies such as 7-Eleven Japan that invest more heavily in informa- heavily toward informational assets, indicating that theres st tional IT have higher quality and larger margins(net profits per competitive advantage in the effective use of information. dollar of sales). Strategic IT investments help spur innovation and thus position an organization for growth. For example, Van- The IT Savvy Premium guard. com, the Web site of the mutual funds firm, has a cus- Clearly, companies that link their IT investments to their business tomized, password-protected portfolio analysis tool that offers strategies are well-placed to outrun their competitors along sophisticated calculations, including comparisons of investors' desired performance dimensions But investing the right amount current asset allocations versus long-term goals in the right IT asset classes is only the first step. Above-average nvestments in IT infrastructure serve multiple purposes. management capabilities are also needed to achie Some are designed to cut costs through standardization and con- industry-average returns from those IT investments. solidation- data center consolidation. for instance. Others A subset of companies in our sample obtain performance reduce time to market for new business initiatives or provide a gains that are far greater than those of their competitors. One platform for delivering companywide initiatives such as a shared year after an investment, companies with high IT savvy achieved customer database for a single point of customer contact. ( See higher perfo from each it dollar invested across all four Building IT Infrastructure for Strategic Agility, MIT Sloan IT asset classes. In effect, IT savvy yields a substantial financial Management Review, fall 2002.) premium. Our research assessed each company s relative IT savvy Carlson Companies Inc. offers a good example of the value by cataloging companies' practices, processes and capabilities created by a shared IT infrastructure. The $20 billion company is (See"Companywide IT Savvy Affects Performance, P. 43. )8 42 MIT SLOAN MANAGEMENT REVIEW WINTER 2006

42 MIT SLOAN MANAGEMENT REVIEW WINTER 2006 Similar evidence applies to the other IT asset classes. Compa￾nies such as 7-Eleven Japan that invest more heavily in informa￾tional IT have higher quality and larger margins (net profits per dollar of sales). Strategic IT investments help spur innovation and thus position an organization for growth. For example, Van￾guard.com, the Web site of the mutual funds firm, has a cus￾tomized, password-protected portfolio analysis tool that offers sophisticated calculations, including comparisons of investors’ current asset allocations versus long-term goals. Investments in IT infrastructure serve multiple purposes. Some are designed to cut costs through standardization and con￾solidation — data center consolidation, for instance. Others reduce time to market for new business initiatives or provide a platform for delivering companywide initiatives such as a shared customer database for a single point of customer contact. (See “Building IT Infrastructure for Strategic Agility,” MIT Sloan Management Review, fall 2002.) Carlson Companies Inc. offers a good example of the value created by a shared IT infrastructure. The $20 billion company is a leader in the marketing, hospitality and travel businesses; its most recognized brands include Radisson Hotels & Resorts, T.G.I. Friday’s restaurants, Carlson Marketing Group, Carlson Wagonlit Travel, Radisson Seven Seas Cruises and the Gold Points Reward Network.7 Although the businesses are run autonomously, Carlson has captured cost savings and synergies with a world-class shared services capability, which won the 2004 International Productivity and Quality Council’s award for the “best mature shared services organization.” Carlson Shared Services is set up to operate as a business, offer￾ing IT and financial services (with plans to offer more); it is governed by a board comprising the CIOs and CFOs of the business units; and its IT organization provides 89 infrastructure services to Carlson’s businesses. The IT unit compares the prices of its services to those of external vendors, and outsources whenever a vendor can offer a bet￾ter price or quality proposition than what internal IT resources can offer. As a result, Carlson’s business units use the shared IT services as much as possible, even though use is not mandatory. Although the top performers (defined as the top third in terms of industry-adjusted return on assets, net margins and revenue growth) have IT portfolio allocations similar to the average company’s, collec￾tively they spend 4% more on IT as a percentage of net sales. But the differences within specific industries are striking. For example, top performers in financial services spend 10% less on IT than the average financial firm but have portfolios more heav￾ily weighted toward IT infrastructure. (In that sector, IT invest￾ment is so fundamental to business processes that IT systems are quite mature, with much of the advantage coming from higher efficiency in executing basic transactions and providing infra￾structure to foster innovation.) By contrast, the top performers in wholesale, retail and transport sectors spend 11% more on IT than their average competitors and weight their portfolios more heavily toward informational assets, indicating that there’s still competitive advantage in the effective use of information. The IT Savvy Premium Clearly, companies that link their IT investments to their business strategies are well-placed to outrun their competitors along desired performance dimensions. But investing the right amount in the right IT asset classes is only the first step. Above-average management capabilities are also needed to achieve above￾industry-average returns from those IT investments. A subset of companies in our sample obtain performance gains that are far greater than those of their competitors. One year after an investment, companies with high IT savvy achieved higher performance from each IT dollar invested across all four IT asset classes. In effect, IT savvy yields a substantial financial premium. Our research assessed each company’s relative IT savvy by cataloging companies’ practices, processes and capabilities. (See “Companywide IT Savvy Affects Performance,” p. 43.)8 R & D Strategic Advertising Informational Transactional Infrastructure Statistically significant impacts controlling for industry, firm size, R&D expense and advertising expense Informational Transactional Infrastructure Strategic Lower Cost of Goods Sold Profit 1 Innovation 2 Market Value 3 Income Before Extraordinary Items Total Sales 1 Net Margin = 3 The Market to Book value of company stock in the same year the investment is made. and Sales From New Products Total Sales Sales From Modified Products Total Sales 2 The up and down arrows gauge the average changes in prof￾itability, innovation and market value the year after an IT investment is made. For example, companies that invest more heavily than their competitors in transactional IT have lower costs. Different IT Assets Deliver Different Value