Where the Money Isn’t

These days, most executives recognize the importance of information technology innovation — but that doesn’t mean their companies’ IT budgets reflect that emphasis. In a 2009 study conducted by our firm, A.T. Kearney, 84% of nearly 150 business executives and board members surveyed agreed that IT innovation had become more important to their company over the past five years. However, their companies’ budgets told a different story.

In the survey, we spoke with 148 executives at 135 companies based in Europe and America that had $500 million or more in revenue. Across industries, our study found that investment in IT innovation does not match stated business priorities. In the past 10 years, innovation has gradually shrunk to just 14% of IT budgets, down from 30% when our first study on this topic was conducted in 1999. Meanwhile, 45% of the typical IT budget at the companies we surveyed goes to improving operations — indicating that IT departments are focused heavily on day-to-day activities and cost reduction. Study respondents said that number should be closer to 35%, with one-quarter of the IT budget going to innovation and 41% going to business process improvement areas such as enterprise resource planning and customer relationship management systems. These findings suggest that while executives agree on the importance of IT innovation, many companies are not securing the appropriate funding for it.

What’s more, our study found that many organizations have a negative perception of their IT departments. Often, executives agree that technology is important — but that their IT departments are not. Many IT departments are relegated to a mere “keeping-the-lights-on” or order-taking function, underwhelming the business with small operational enhancements. Innovative ideas frequently come from elsewhere within the company — leaving IT departments on the sidelines. In fact, we heard from several executives that IT departments are such a barrier that they take their most innovative business technology projects “off the grid” — meaning they run them without the support of the IT department — to complete them in a more timely manner.

What practices facilitate IT innovation? Several of our study respondents said most such innovation stems from identifying where IT can make a difference, investing in a portfolio of IT initiatives (rather than individual projects) and executing effectively. Leadership is also vital. Most executives surveyed believe that CIOs today have to be more than just technology experts; they must also be business leaders who can articulate to top management, business unit leaders and line employees how new technologies can better position the company for competitive advantage.