Blog Host: David Foote - cofounder, president and chief research officer, Foote Partners READ ENTIRE BIO

Will this mean more IT spending? Definitely. Will there be continuing pressure by skeptical senior business executives leaders to limit IT spending? Yes. Everything depends on how effectively IT leaders can correlate their spending to sustainable profitability and communicate it effectively.

Are you familiar with Paul Strassmann? He's the renowned former CIO (Xerox, General Foods, Kraft, Department of Defense, NASA), academician (West Point, George Mason University), White House counselor and author of numerous articles and books arguing with vivid statistics that there is no correlation between IT spending and profitability. However, there is correlation in other areas that are controllable.

He speaks about entropy (chaos, lack of organization) as the nature of the universe and that organizations, whether societies or corporations, tend toward dissipation and disintegration unless they are properly structured to grow and thrive. Part of what inhibits such organizing and structuring in his mind is the generally poor attempts that are continually made by IT executives in trying to demonstrate a positive correlation between money spent on IT and profits. He points out the pitfalls, offers a number of interesting analyses and suggests improvements in a 2004 article entitled Six Rules for Finding IT Value.

Paul created and trademarked the concepts of information value-added and information productivity. This is brilliant work that posits that value is a direct product of aligning IT with business, and failure to make the value argument is why IT lags behind the expectations and, in many cases, the basic requirements of business.

His information value-added concept equates to profit minus the cost of capital invested by shareholders. Think about a few of the components of profit -- labor, inventory and customers. Without critical information about those components, it's unlikely you'll have a profit. Given that fact, information value-added derives from profits after taxes, tossing out preferred dividends, one-time charges and other adjustments. Then, profit is lowered to account for the returns owners expect on the invested net assets. When that expectation is exceeded, you get value-added.

Information productivity is his idea that takes the information value-added figure and divides it by the costs of information transactions. These are the company's selling, administrative and general expenses, of which information-technology spending accounts for 10% to 35%. The message: Managing information is your edge.

And knowledge, too. Paul has written extensively on the value of knowledge, or knowledge capital, which he defines as a company's financial value minus market value. He believes that by failing to show the true value of accumulated knowledge of employees, of software, of databases, of organizational capabilities and of customer relationships, CIOs are letting accountants measure the value many IT-enabled benefits as intangible and intangible benefits, which make up only 20% of the shareholder worth of profitable firms. Consequently, much of the potential of IT is lost when projects that would increase knowledge capital are said to contribute only to "intangible benefits." In order to demonstrate IT value, Strassmann believes project proposals must be allowed to transcend the limits of conventional accounting, as defined by accounting rules, and include gains in knowledge capital.

IT budgets will be under more scrutiny this year as exciting new technologies and tech strategies roar into focus. We'll look at some of these next. But unless the IT value proposition is adroitly made, I don't think many IT leaders stand a chance of getting the dollars they need for human and technical resources necessary to fully capitalize on their promise. Or when they do, it will be too late: Competitors will already be there. That will be a tragedy of lost opportunity.
Posted by David Foote