With the intricate financial ecosystem of a company, it’s no surprise to have the notion that by restricting your IT budget, you’re fostering the growth of your company’s value. While you can see this approach as a convenient way to tighten budgets and boost the company’s value creation, it is a fallacy that undermines the potential of IT in driving business growth and erodes the company’s value in the long run.
This article aims to help CFOs and IT decision-makers see the cost of underinvesting in their IT tools and processes, even with the excuse of budget tightening or value creation. We’ll explore the following topics:
- Understanding the fallacy of IT underspending
- The link between IT investments and M&A transactions
- Investing in IT for long-term company value creation
Understanding the Fallacy of IT Underspending
The belief that reducing IT expenditure is a straightforward route to enhancing company value can be a dangerous oversimplification. Underinvesting in IT has several implications, from poor management benchmarks to the inability to scale your resources according to business demands.
The Misguided Approach to Budget Tightening
A frequent pitfall in the financial decision-making process is the inclination to curtail IT budgets during cost-saving initiatives. This tendency is often influenced by a focus on short-term metrics and an underappreciation for the role of IT in business growth. By prioritizing the immediate cash flows and tangible reductions in capital expenditure in decision-making, it’s not hard to see IT budgets slashed or reduced.
The issue with this approach is its basis on a misconception about the relationship between value creation and IT spending. This misconception fails to consider the potential repercussions on the firm’s operations, efficiency and ability to innovate — all of which are critical determinants of your company’s long-term success.
The depreciation of your company’s IT infrastructure due to underspending can lead to a range of detrimental outcomes, including inefficiency of processes, heightened IT risks, and data breaches. A lack of investment in the necessary systems, apps, and software can also impede the company’s ability to respond to market changes in real time, leaving it at a disadvantage compared to competitors with more agile IT capabilities.
The True Definition of Value Creation
IT value creation goes beyond simple cost-saving measures. It involves leveraging IT tools, hardware, software and licensing to improve business processes, drive innovation and ultimately facilitate organic growth. For both short and long terms, it fosters company value creation with elements like automation for better results.
Effective IT investment decisions are not merely about the capital invested but also about ensuring the right resources are in place. This capital investment includes the right technology and the people who can extract value from it.
A robust IT infrastructure, supported by appropriate licensing agreements, can help your company:
- Reduce inefficiencies
- Streamline its operations
- Improve customer experience
With efficient IT spending, you can enhance the company’s valuation in the eyes of stakeholders, positioning the business more favorably for potential mergers and acquisitions (M&A). This long-term view of value creation acknowledges that the benefits of IT investment often reveal themselves over a period of time rather than in immediate cost reductions.
Company value creation through IT investment is an essential aspect of a company’s growth strategy and a significant factor in its long-term success. While budget tightening might offer temporary relief, a sustained underspend in IT can stunt the company’s growth and undermine its prospects.
The Link Between IT Investments and M&A Transactions
Modern business landscapes are consistently evolving, with M&A transactions becoming a common path to expedite growth and consolidation. Efficient IT infrastructure is integral to this strategic maneuvering as businesses with robust IT investments are well-poised for organic growth and present a more appealing proposition during M&A discussions.
Companies that overlook the importance of IT integration in M&A transactions risk encountering issues such as data loss, incompatible systems and inefficient processes, which can eventually impact the overall success of the merger or acquisition.
Poor IT Investment’s Influence on M&A Success
A well-equipped IT department is a beacon of organizational efficiency and future readiness when stakeholders evaluate potential acquisition targets. When two companies merge or acquire each other, assessing and integrating their IT systems is crucial. The due diligence involves examining the target company’s IT infrastructure to determine its compatibility with the acquiring company’s systems and identify potential risks or inefficiencies.
Mismatched software, hardware or operating systems can lead to operational inefficiencies and increased costs. Integrating IT systems can support post-merger integration efforts, such as implementing new business processes, improving data collection and enhancing employee collaboration. This integration can result in cost savings, increased efficiency and better decision-making.
IT investments are essential in M&A transactions, ensuring the smooth integration of IT systems, driving synergies and supporting post-merger integration efforts. Prioritizing IT investments during the due diligence process and throughout the integration phase can help your company to achieve a successful outcome.
The Value of IT Preparedness for Carve-Out Scenarios
Carve-out scenarios, wherein a company sells or divests a business unit, are another instance where IT preparedness is critical. These processes are usually complex, requiring meticulous planning, implementation, and execution.
A history of underspending on IT often becomes glaringly apparent during such scenarios. Essential tools might be lacking, data migration could become a monumental task and the subsequent operational hiccups could lead to value leakage. On the other hand, a robust IT infrastructure is well-poised to handle these challenges, ensuring the smooth continuity of services, secure and efficient data handling, and minimal operational disruption.
IT preparedness involves several critical factors, including having a clear understanding of the infrastructure, hardware software, and data architecture of both the parent and the carve-out company. It also includes having an accurate inventory of all IT systems and services, including data centers, servers, applications, and networks. The IT team should also know all interdependencies among systems, data, and processes.
Recognizing the detrimental effects of IT underspending is crucial to reap the benefits of a carve-out and retain stakeholder confidence. When you prioritize IT budget allocation, you can ensure smooth transitions during M&A transactions and carve-outs, plus lay the foundation for long-term growth and company value creation.
Investing in IT for Long-Term Company Value Creation
We can see empirical evidence of how adequate IT investment can improve company value creation in the National Bureau of Economic Research’s working paper series. This series is a collection of academic research papers with economists as authors and co-authors.
Working paper 29841, titled Presidential Address: Corporate Finance and Reality, involves surveys that examine CFO perspectives on various aspects of corporate finance. From this aggregate data set, several CFO respondents attributed the actions taken for which their actual revenues exceeded the expected revenues to an increase in tech spending. These respondents included the increased tech spending in line with improved efficiency.
When economists asked an open-ended question about why their firm’s actual sales
revenue exceeded forecasted revenue, respondents mentioned several elements, including the following:
- Improved management and processes
- Better marketing, better word of mouth
- New clients, new customers
Including strategic IT investments in forecasting, decisions can significantly contribute to long-term company value creation. The suitable investments help you minimize IT risk factors, enhance efficiency, and foster resilience, particularly in the face of cybersecurity threats.
The Cost of IT Risks and Inefficiencies
IT failures or breaches can disrupt business continuity, compromise sensitive data, tarnish a reputation and result in hefty regulatory fines — a high-risk gamble for short-term savings. Recent years have seen an upsurge in high-profile breaches, with the average cost of a data breach in the USA escalating to $9.44 million in 2022 and the global average at $4.35 million.
Investment in system redundancies, regular data backup, and robust network security infrastructure helps minimize exposure to such risks. You can use the expertise of IT consulting firms to get valuable insights into potential vulnerabilities and the most effective mitigation strategies.
IT Service Management and Operational Efficiency
Beyond IT risk reduction, investing in a managed IT services provider (MSP) is a crucial determinant of operational efficiency. An MSP helps optimize processes, improve productivity, and drive substantial efficiency gains — all integral factors for sustained company value creation.
IT consulting firms provide expertise in identifying the most effective IT tools and processes and delivering revisions to avoid IT underspending or overspending. For example, consulting firms often use regression analysis when helping clients budget their IT spending. Regression analysis can help identify critical variables like gross domestic profit (GDP), stock price, and industry growth to see how they impact your IT budget.
Well-managed IT services with expert methodology streamline operations, automate repetitive tasks, and free up resources. They help organizations tailor their IT strategy to align with business goals and market trends, ensuring long-term sustainability and growth.
Leverage Managed Services Providers for the Best IT Value Creation
Strategic decision-making in a firm often involves a delicate trade-off between various allocation choices. Leveraging MSPs for IT value creation is a pivotal decision that helps you optimize your IT resources to drive business growth.
ne Digital advocates for strategic IT investment, highlighting the benefits of a balanced approach to IT budget allocation. Our portfolio of services includes IT integrations for M&A and carve-outs, showcasing our commitment to helping businesses avoid the pitfall of IT underspending and make data-driven investment decisions.
Take the first step towards effective IT value creation. Contact us today for a consultation on how you can make the most of your IT budget while creating lasting value for your business.