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Want profit? Increase IT expenditure

October 23, 2008 10:54 IST

If you're wondering what Nasscom's pitch to tottering US financial services and other firms is going to be, a fresh McKinsey article spells it out in detail -- increase your IT spending and use this to make cost cuts and efficiency gains elsewhere. According to the McKinsey numbers, IT expenditure can give a return of up to around 10 times in the form of being able to rework supply chains and logistics, manage resources better and so on.

According to McKinsey, if a firm reduces IT expenditures by around 15 per cent, this will add around 0.5 per cent to long-run EBIT; but retaining expenditure levels could add 1-2 per cent to EBIT in terms of better merchandising and 3-5 per cent in terms of better pricing by reducing revenue leakages through the elimination of unnecessary discounting.

McKinsey gives an example of a telecom firm that decided to up its IT spend and linked up various information databases it had -- these helped it increase its revenue on new contracts by 3 to 5 per cent which translated into a margin expansion of 15 to 20 per cent or more. In another case, a bank was able to double the number of daily branch-wide sales calls, improve conversion rates of potential customers walking in and significantly raise productivity.

So, the next time a Nasscom representative goes calling on US firms explaining why they need to increase their IT expenditure instead of cutting it, you know the argument s/he'll be making.
Sunil Jain
Source: source