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Part - IV

In a study conducted by The Mckinsey Global Institute, it has been found that IT most effectively stimulates the growth of productivity by helping companies innovate - creating new products (faster microprocessors), services (mobile telephony) or processes (online securities trading). In addition it involves upgrading existing business processes to achieve unmatched benefits. For example, when Wal-Mart linked IT with its efficient distribution network, it not only advanced its supply chain management but also boosted productivity in the sector (Diana, Terra & Allen, 2002).

There are, however, a few critical things that undermine the effect of IT Investments at the three levels mentioned above. IT Investments in themselves cannot contribute to productivity unless they are backed up by a set of other factors.

Infrastructure is an essential complement for IT Investments to be potentially productive. In developed countries, the presence of a robust infrastructure justifies investments in IT thereby ensuring that the maximum potential of such investments is realized. Factors like a strong telecommunications backbone help. Also important is the cost at which the support infrastructure is accessible. In developed countries where bandwidth is available cheap, IT Investments carry little variable cost components and are therefore cheaper.

As a result, it has been observed that while there is a correlation between IT Investment and growth in developed countries, the same is not true about developing countries (Craemer and Dedrick, 2000). Studies indicate that developing countries lack the IT complementing infrastructure and therefore firms in such countries are less likely to get the maximum out of their IT investments (Pohjola, 2000).

While many such studies have failed to come out with a clear picture, management over the years has been left wondering whether IT spending is justified or not? There is also the issue of measuring something like an RoI for an IT project. Three major reasons can be identified as to why IT spending has to be carefully watched over and justified.

• IT is expensive. It involves a large amount of capital investments.

• Usually, IT investments are related to non revenue generating activities in an organization. IT Infrastructure is typically used for back-end work like data analysis or automating internal transactions.

• The risk associated with such investments is very high. Take a case of an ERP or CRM project. There are more instances where ERP or CRM has failed as compared to instances of success. And we are not talking of thousands of rupees. An ERP project typically runs into millions.

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* Contributed by -
Mrugendra Shintre,
Manoj Kumar Gaddam,
II Year,
IIM Lucknow.