CFOs to tech: 'I'll spend for the right technology'.

• Author: Cohan, Peter S.
• Position: Roi of technology

Since at least the 1970s, businesses have invested ever-higher sums in once-a-decade waves of information technology. That is, until the 2000s, when they have all but closed their pocketbooks. Since the dot-com crash, companies have hoarded cash--currently estimated by the Federal Reserve Board at $1.3 trillion--that could be invested in the right opportunity or the "next big thing." Indeed, this sum equals almost 10 percent of the U.S. gross domestic product (GDP), and is just lying idle. In the past, companies have spent enormous sums--IT spending has grown 166 percent per decade since the 1970s (see chart)--as companies looked to technology as the "silver bullet" to spur their business growth. Yet, with all the billions spent, the returns on those investments are hard, if not impossible, to fully gauge.

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In the 1970s, they spent big on minicomputers that freed companies from the tyranny of a centralized data-processing department. In the '80s, PCs led the way by unleashing a torrent of investment to increase knowledge-worker productivity. And, in the '90s, the Internet connected those PCs into a global network that contributed to trillions of dollars of investment and millions of new jobs

Each of these then new technologies spurred business--and more recently, consumers--to invest, due to the boost to their productivity. But this decade-long rhythm of IT innovation has been interrupted. These days, companies haven't found a new wave, and analyze rigorously before investing in technology. But once the money is spent, they don't rigorously track actual returns to see if those matched projections.

Dewey Norton, director of finance at San Diego, Calif.-based Instant Information Systems (IIS), suggests that instead of tracking its investment, IIS asks whether a system lets it make better decisions. According to Norton, "A system may not have a quantitative impact. We'll ask the business people, 'What did you accomplish with this afterward? Did you have the information you needed? Was the information right? Was it timely?'"

Quantifying an IT investment payoff is not so clear-cut. Meta Group's 1,700-company database calculates that revenue per employee and income per employee have increased 48 percent (from $324,000 to $478,000) and 14 percent (from $22,000 to $25,000), respectively, since 1997. Meta Group's Executive Vice President Howard Rubin and Battery Venture's General Partner Dave Tabors suggest that IT accounts for most of this productivity improvement. But neither can prove it. (Rubin's estimates, in the chart on the next page, suggest that companies will spend enormous sums on IT this decade, whether or not some profound technologies emerge.)

Curiously, companies do spend on technology that promises to cut their IT budgets! For example, Kavin Moody, director of Babson College's Center for Information Management Studies (CIMS), suggests that companies have recently reduced some of their IT costs by a factor of 10 by replacing expensive servers running proprietary software with cheaper blade servers running on Linux.

Also, Rubin suggests that since 2001, cost-conscious companies have gone through the following waves of IT cost-cutting:

1. They...