Spiralling IT overheads risk wiping out business savings

The high cost of IT has counteracted the savings and efficiencies it's brought to business, a leading American management consultant said at a lecture in London today.

At the talk sponsored by information management firm Kalido, Greg Hackett - the founder of consultancy the Hackett Group and an instructor at Kent State University - told attendees that IT has both helped and hindered corporations.

Technology has clearly reduced costs for companies, by cutting labour costs, outsourcing around the world and improving purchasing powers, he said. But it's also led to a jump in overhead costs, which has counteracted the savings.

According to his own research across over 3,000 companies, Hackett said the cost of goods sold (COGS) has fallen eight percentage points since 1980, but the cost of selling, general and administration expenses (SG&A) - essentially overhead - has risen by six points.

In 1960, only five per cent of companies were unprofitable. Now, nearly a fifth will be unprofitable this year.

"Almost all of it can be traced back to technology," he said. "Some of it is regulatory, but most of it is IT."

Hackett cited other negative influences other than technology, but several - such as globalization, increasing employee expectations and a drop in customer loyalty - were spurred by innovations such as improved communications and ecommerce.

Despite the drag of IT overhead costs, Hackett predicted that software architecture would become increasingly complex. Rather than one program brand, companies will continue to integrate best of breed packages.

As well, companies will be forced to consider external data, rather than just their own internal information, in order to make better decisions.

Because of the increasing complexity and scale of business information management systems, Hackett said more companies will outsource day-to-day number crunching to specialised firms - something he thinks executives need to do now.

The volume and complexity of business intelligence applications in use at most companies cause finance and IT departments to spend too much time digging for information - leaving them little time to think or do the rest of their jobs.

"All these dashboards and controls, people are swamped with information - they can't make decisions," he said.

He cited one example of a chief executive who had a powerful set of business intelligence programs with such detailed data that he could drill down to find out how well a single drink machine in a store in another state was performing. Do executives, asked Hackett, need to be concerning themselves with such detailed business minutiae or should they be focused on the bigger picture?

Hackett said business methods need to change. "You need to spend your time thinking instead of digging," he said.