Generating Premium Returns on Your IT Investments

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.”

When 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 foodstuffs — 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 coincidence 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 showing recent sales, weather conditions and product range information, so they always know just how many bento boxes to order.

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 financial returns. The convenience-store giant blends its IT investments 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 infrastructure that links 70,000 computers in stores, at headquarters and at supplier sites.

A primary objective of this article is to show that IT investments 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 premium for every IT dollar invested is achieved by companies with a mutually reinforcing set of practices and capabilities that we call IT savvy.<

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References

1. For more information, see K. Nagayama and P. Weill, “7-Eleven Japan Co. Ltd.: Reinventing the Retail Business Model,” working paper 4485-04, MIT Sloan School of Management, CISR, Cam-bridge, Massachusetts, January 2004.

2. S. Aral and P. Weill, “IT Assets, Organizational Capabilities and Firm Performance: Do Resource Allocations and Organizational Differences Explain Performance Variation?” working paper, MIT Sloan School of Management, CISR, Cambridge, Massachusetts, 2005.

3. See M. Jeffery and I. Leliveld, “Best Practices in IT Portfolio Management,” MIT Sloan Management Review 45, no. 3 (spring 2004): 41–49, who report 24% of companies had effectively implemented IT portfolios and 78% expected implementation by the end of 2004; P. Weill and M. Broadbent, “Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology” (Boston: Harvard Business School Press, 1998); P. Weill and S. Aral, “Managing the IT Portfolio,” (update circa 2003), MIT Sloan School of Management CISR Research Briefing, vol. III, no. 1C, March 2003, available in “CISR Research Briefings 2003,” CISR working paper 340; and P. Weill and S. Aral, “Managing the IT Portfolio: Returns From the Different IT Asset Classes,” MIT Sloan School of Management CISR Research Briefing, vol. IV, no. 1A, March 2004, available in “CISR Research Briefings 2004,” CISR working paper 351.

4. See P. Weill and J. Ross, chap. 3 in “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results” (Boston: Harvard Business School Press, 2004).

5. Adapted from T. Datz, “Portfolio Management: How to Do It Right,” CIO Magazine, May 1, 2003.

6. See J. Ross, “United Parcel Service: Delivering Packages and E-Commerce Solutions,” working paper, MIT Sloan School of Management, CISR, Cambridge, Massachusetts, August 2001.

7. Drawn from N. Fonstad and J. Ross, “Case Vignette of Carlson,” MIT Sloan School of Management, CISR, Cambridge, Massachu-setts, January 2003.

8. For example, the practice — digital transactions — was measured as the percentage of orders and total sales conducted electronically, which averaged 22%. Each company’s IT savvy was calculated by a linear combination of the five characteristics shown. (See “The Five Characteristics of IT Savvy,” p. 44.)

9. R. Rhoads, “RTN on Governance” (presented at the MIT CISR summer session, Cambridge, Massachusetts, June 2005).

10. To estimate your portfolio using the MIT CISR IT portfolio framework, go to http://web.mit.edu/cisr/MITCISR-ITPortfolio.doc to obtain a brief questionnaire.

11. See P. Weill and J. Ross, “A Matrixed Approach to Designing IT Governance,” MIT Sloan Management Review 46, no. 2 (winter 2005): 26–34.

Acknowledgments

The authors gratefully acknowledge the support for this research from MIT CISR patrons and sponsors (http://mitsloan.mit.edu/cisr/) and the National Science Foundation, grant number IIS-0085725. In particular, we would like to acknowledge the input of Jeanne Ross of MIT Sloan CISR, Shafeen Charania of Microsoft Corp. and John Sviokla of DiamondCluster International.