There has been a lot of talk about technology companies facing a squeeze. But a more worrying international trend has emerged. US companies, once viewed as early adopters in corporate computing and the internet, are now falling behind global competitors in driving productivity and earnings growth because of technology shortfalls.
The reason behind this surprising shift is that US companies dedicate the majority of their fresh capital to fortifying older systems while companies in Europe and Asia invest in more up-to-date systems. Newer systems, during this second wave of web-based innovations, outperform older technology. These technologies have improved substantially in the past five years, making them easier to implement. As a result, more business processes will be online, driving higher levels of productivity.
Although US productivity has been strong, a closer examination reveals a disturbing trend. Employee growth has outpaced both revenue and profit growth in the S&P 500 between 2001 and 2005. Average revenue gain per employee lagged behind total revenue growth by 58 per cent. Similarly, profits per employee achieved only 75 per cent of total profit growth.
In contrast, the companies in the S&P European 350 have kept revenue and profit growth above employee growth. Average revenues per employee for the European S&P 350 grew at 117 per cent of the rate of average revenue growth. Profits per employee similarly gained 118 per cent of profit growth. In China, productivity growth is more than three times the rate of that in the US and Europe.
Accenture's global technology research of more than 500 chief information officers, High Performance IT 2008, shows stark differences in the stance executives are taking towards technology adoption in the US, Europe and China. When asked whether they want to lead or follow, only 32 per cent of US executives said they wanted to be an early adopter, compared with 70 per cent in China and 41 per cent in Europe.
Why have US companies changed so dramatically? Some executives are still awaiting the returns promised from the first spending wave. Others remember the damage that failed projects can have on a career. A project write-off is more likely to trigger a sacking than a steady erosion of profits per employee.
Companies are reluctant to build fresh new systems for the same reason patients avoided heart surgery 30 years ago. Taking no action, with a 100 per cent chance of gradual death, is more palatable than having a procedure that has a 66 per cent chance of sudden death.
That is what corporate CIOs face as, on average, they deliver only 34 per cent of their projects without complications. Today, heart transplant procedures occur without complications 95 per cent of the time. If systems projects were as predictable, far more capital would pour into technology.
Meanwhile the Chinese are aggressively investing in web services in a "leap-frogging" event similar to the Korean and Japanese adoption of mobile technologies. In our research, 70 per cent of Chinese companies are committing a major part of their business to web services, compared with 48 per cent and 42 per cent for European and US companies respectively.
As companies use these new standards for communicating with other systems, people and companies, they cut manual business process costs to one-10th of current levels and can flexibly change features and services in less time for substantially less money.
US companies may be spending more but they are not spending better. Spending on the Sarbanes-Oxley compliance law and mergers and acquisitions integration is consuming most discretionary capital. This has delayed crucial new projects and left old systems to support ageing processes. The first automated processes are seldom the best.
The best productivity gains come when companies replace, rather than window-dress, current applications. As information technology has become the dominant form of capital expenditure in the US, we fail to recognise one big difference between a computer system and a tractor. A tractor can predictably age and depreciate over five years, yet a computer system can become obsolete overnight with one download of a rival's latest feature.
Executives should be more aggressive in upgrading technology portfolios. As with stock portfolios, cutting losses and redeploying capital to fresh investments is often a better strategy than thinking the stock owes you a return.
The writer is Accenture's chief technology strategist
