Is it smart for companies to invest heavily in information technology (IT)? Numerous studies indicate that excessive IT spending will usually reduce company profits and slow productivity. According to an article in the MIT Sloan Management Review, “Avoiding the Alignment Trap in Information Technology,” IT can become a huge bottleneck to growth in companies if they focus on the wrong remedies for their IT problems (Shpilberg, Berez, Puryear, & Shah, 2007). The article first focuses on Charles Schwab and its IT struggles during the early 2000’s. Then, it presents a study on 504 companies, and IT’s effect on their revenue growth. Lastly, it covers the steps to ensure success in IT’s effectiveness.
Charles Schwab is a Fortune 500 Company that manages nearly $2 trillion in assets for a wide range of clients (Hoovers, Inc., 2014). The mega-broker has obviously done something right. However, as Charles Schwab grew, it’s not surprising that its IT problems grew as well. Charles Schwab approached the situation by spending loads of money on new IT projects rather than fixing the existing systems or starting fresh altogether. Eventually, the company found itself smothered in an over-complicated system that was eating 18% of revenue annually (Shpilberg et al., 2007). “IT’s effort to satisfy its various (and sometimes conflicting) business constituencies created a set of Byzantine, overlapping systems that might satisfy individual units for a while but did not advance the company’s business as a whole (Shpilberg et al., 2007, p. 52).”
The article refers to Charles Schwab’s problem as the “Alignment Trap,” and 11% of the 504 surveyed companies were struggling with it. Despite the group spending 13% above average on IT, their revenue growth was 14% below average over a 3-year period (Shpilberg et al., 2007). The idea is that aligning a poorly performing IT system to business objectives won’t provide any benefit because the system is poorly performing. In addition, aligning each department to a different system or standard doesn’t work because a company needs all departments functioning at the same pace and every department must rely on each other.
The largest group (about 75% of surveyed companies) spent the average amount on IT, but growth was slightly below average (Shpilberg et al., 2007). Companies in the “The Maintenance Zone” have IT systems that are less aligned to business objectives and are, as a result, less effective as a whole. The authors state that the group treats IT more like plumbing, “bumping along” until something bad happens. However, since the group’s deviation of IT spending and revenue growth from the average is minimal, the article doesn’t put much focus on the “The Maintenance Zone.”
The next group, experiencing “Well-Oiled IT,” were more focused on execution and effectiveness at getting IT projects up and running (on a budget). They spent 15% below average on IT, yet revenue growth was 11% above average (Shpilberg et al.,...