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Put Your Money Where Your Network Is

September 07, 2016

Regardless of size or sector, companies increasingly see a return on their IT investment.

Sometimes to gain a true sense of the value of something, it’s worth looking at what you’re willing to put up with to get it. For example, businesses today must leverage their networks to maximize growth potential in a connected world. Getting the most out of your network is becoming simpler, more cost-efficient and more flexible by the day—but it can be fraught with uncertainty, too. A report last year from the Atlantic Council claimed that in developed economies such as the U.S., we have reached the point where the annual costs of being connected outweigh the annual benefits in GDP.

With the costs of acquiring new technologies and services, and mounting losses due to cyber crime, continued investment in improving the connectivity of a network might seem like a sucker’s game. Fortunately, the math isn’t that cut and dried. When a business falls prey to hackers, the heavy hits in cost are typically one-offs. Technology costs are recurring, but the overall benefits of connectivity deliver compounding returns year after year. In short, the accumulated GDP benefits far outstrip the downside, even when annual costs occasionally spike at the individual business level. It’s those long-term returns that financial decision-makers are confidently betting on.

The benefits writ large at the enterprise level

One noticeable change at many businesses in the aftermath of the 2008 global financial crisis is that CFOs have emerged from the turmoil with a wider remit that incorporates their views into the overall business strategy. The path of their strategic vision is well-defined: In the 2015 CFO Outlook, a survey published by Bank of America Merrill Lynch, 61 percent of CFOs said investing in technological advances was their top strategic activity.

More than their compatriots in the C-suite, CFOs are by nature more likely to see the potential for networks in terms of hard numbers and return on investment. The numbers tell a revenue story that goes beyond the typical storylines of “efficiencies” and “cost savings”:

  • According to a study by MIT Sloan Management Review, a $1 increase in IT expenditures per employee was associated to a $12.22 increase in sales per employee; the study also indicated that investments in IT increase profitability more than investments in advertising or R&D. The kicker in this report, however, is the finding that as industries become more competitive, the effects of IT on profitability increase.
  • Two-thirds of respondents to a survey by Teradata of senior data and IT decision-makers at companies with an average revenue of $500 million reported solid results from their IT investments. Twenty-seven percent saw revenue increases of 3 percent or greater; an additional 38 percent saw growth of 1–3 percent.
  • In the Industrial Internet Insights Report for 2015, conducted by GE and Accenture, 84 percent of survey respondents said Big Data analytics will shift the competitive landscape in their industry within a year; 89 percent believe a lack of Big Data adoption will create a risk of losing market share; and 75 percent cite growth as the key value of analytics.
  • Some noteworthy ROI to consider: The grocery store chain Kroger says Big Data and analytics have driven $12 billion in incremental revenue since 2005, and helped it stay profitable during and after the 2008 financial crisis; data-fueled telematics have saved UPS 39 million gallons of gas, and helped its drivers avoid driving 364 million unnecessary miles; the IRS recovered more than $2 billion from tax fraudsters over three years, thanks to its use of Big Data.

The numbers are especially eye-catching when you consider what has transpired to date with data networks and connectivity is only the beginning. “Cloud technologies are now generating massive revenues and high growth rates that will continue long into the future,” says John Dinsdale, chief analyst, Synergy Research Group.  

Of course, all of the storylines you see about “efficiencies” and “costs savings” are true, too.  

The markets’ viewpoint

The belief that Big Data and mass migration to the cloud is the modern cornerstone for business growth is reflected in the performance of the Bloomberg Intelligence (BI) IT services peer group, which outperformed the S&P 500 by 5.4 percent in 2015 and is holding steady in that position so far in 2016. The BI IT services peer group has maintained share gains in a volatile global market because demand continues to grow for cloud, digital and analytics, according to BI analysis.  

Further analysis by BI suggests that public-cloud spending will reach $128 billion in 2018, up from an estimated $86 billion this year. This underscores a huge shift of information infrastructure to the cloud that can only be said to be in its infancy. Analytics growth in the IT services sector is expected to blossom due to new methodologies that can analyze structured and unstructured data (audio, video, photos, text) and reveal more about customer behavior as a result. For the foreseeable future, at least, it seems the potential for new revenue streams related to network innovation holds tremendous promise, and should remain a strategic priority for businesses of every stripe.

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