Firms' failure to make better use of technology adds to a sense it is not a good investment, writes Eamon McGrane

THE IT sector is no stranger to booms, busts and bubbles. From the freewheeling, cash-flowing days of the mid- to late-1990s to the dotcom disaster at the early part of this century to incremental growth, and back to a so-called recession, the IT sector has swung high to the peaks and crashed low into the troughs.

With almost every economist now ringing the warning bell on the "R" word, what sort of impact will the current economic turbulence have on a sector vital to Ireland's growth?

Recently American IT company EMC puffed its chest out with the announcement of an investment of €20 million in research and development initiatives over five years in its facility in Ovens, Co Cork.

The curious thing was that at a time when big corporations were sucking in financially, EMC decided to invest for the future.

While €20 million is a drop in the ocean to a company that generates billions of dollars in revenue per year, it was still an interesting example of investing when times are bad to get a head start on your competition when the upswing comes round.

So can Irish companies that depend on IT for mission-critical applications continue to spend, or will organisations in the public and private sector rein in the spend on adding to or upgrading their IT assets.

Perhaps we are asking the wrong question. Maybe it is more pertinent to be asking how IT spend contributes to the bottom line. If a business does invest in its IT infrastructure will it help them cut costs?

Consultancy firm PricewaterhouseCoopers (PwC) has investigated these questions.

Recent research from the company revealed that IT spend was increasing, but the value of that investment was decreasing.

PwC said its research predicted that IT spending would grow at an annual rate of 17 per cent from 2010 to 2015, reaching 10 per cent of US GDP by 2015.

If current resource patterns persist, there is a very real possibility that business will become saddled with overly complex technology environments and costs that are very difficult to manage.

This is echoed in PwC 2008 global CEO survey, which revealed that CEOs throughout the world are struggling to understand why total IT costs keep increasing and consuming more of the corporate budget.

PwC believes that as consumption of IT increases and as technologies change and advance, businesses have been left to cobble together disparate software and hardware systems and tools.

This has resulted, the report claims, in unchecked IT spending, unneeded complexity, redundant systems, underutilised hardware, the need for expensive security and, inevitably, diminishing returns from the IT investment.

The report also said if not dealt with, these low levels of IT productivity would create conditions for an IT cost crisis.

Furthermore, the lack of focus on innovation is illustrated in recent Gartner research which showed that most industries spend less than 15 per cent of their IT budget on innovation, meaning the lion's share goes to maintenance and upkeep of IT operations.

Pat Kelleher, a director at PwC performance improvement division, said there was general uncertainty about the value companies were getting for their IT investment.

"I think we have found locally that value for money for IT is a big issue.

"We conducted another survey, recently, of CFOs and their views of IT and value, and the overwhelming view expressed was they were not feeling that real value for money and where and how IT was reducing costs and increasing revenues. Some 44 per cent of CFOs felt that in the previous 12 months, IT had not contributed to decreasing the costs of the organisation, and 68 per cent felt that IT had not contributed to increasing revenues."

Reflecting on the recession, Kelleher said it was an imponderable and no one knew how it would turn out. He suggested there was a lag in terms of any perceived downturn and an impact in a global way on IT.

"I still haven't seen concrete evidence yet in this market in relation to IT spend . . . though it may come. But there is a delay because contracts are already in place and projects have been committed to and started.

"The public sector, however, is making some noise about reducing spend on external resources in general."

Jim Friars, chief executive of the Irish Computer Society (ICS), said his organisation conducted a survey of its membership last year on anticipated budgetary spend. The results, he said, suggested companies would be spending.

"On a macro level I'd say IT spending will be impacted by a downturn in the economy, because everything will be impacted by a downturn in the economy.

"What will matter then is how effectively IT is being used within the organisation. And the evidence suggests that it's not being used efficiently."

According to Friars a lot of issues are tied up around project skills and the ability to implement plans.

"Information technology is like electricity. You can't sit in a boardroom and say 'let's forget that IT piece' - that's not an option for organisations."

So the question is can companies make more effective use of IT?

"The answer is absolutely, but I think part of the problem has been the lack of understanding at board level of the role that IT plays within their organisation. And it has tended to be seen as a panacea in some cases. So rather than having real knowledge at the board level it's not seen as a strategic deployment, it's seen as something that they're having to do."

Kathryn Raleigh, director of ICT Ireland, believes one of the key issues concerning investment in IT is the requirements of the customer. In other words, if the customer is unclear about what they want the IT to do, then there will be a lack of return on investment and productivity.

Raleigh does believe the IT purse strings will be tightened but says now is not a bad time to be investing in IT. Her caveat is that it has to be required by the organisation. "ICT is one of the key elements to increase productivity but it'll only work side by side with management skills and a team that knows what they want."

Raleigh said in any downturn spending could be cut across the board - public infrastructure, education, innovation and IT.

"I think that evidence and history would show us that it isn't always the right thing to do, but I'd think that both the private and public sector need to look at the large projects, whether they are educational or IT infrastructure, and see where they believe they will add value and productivity in the long term. The fear is that short-term decisions will be made, which in the long run will be a disaster.

"We'd be calling for the critical IT infrastructure projects to go ahead. We were disappointed in the Government's decision to roll back the IT in the classrooms project - we think that is critical. If you don't invest in IT in the classroom you're not investing in the future."