The hidden dangers of investing in IT

Do managers understand the risks - financial and otherwise - involved in investing in cutting-edge information technology? A study suggests that they do not. Roger Trapp reports.

Two-thirds of senior executives say that information technology risks are not well understood by their companies, according to a study by Arthur Andersen, the accountants and management consultants, and the Economist Intelligence Unit.

The problem is compounded, says the study, "Managing business risks in an information age", by the fact that in most cases management of IT risks is delegated by the board to IT department staff, as companies battle to keep pace with technological developments.

Nick Temple, head of Andersen's risk Assurance services, says: "Increasingly, IT is not only a significant influence on the way in which companies do business by improving strategic and tactical decision making, product design and operating efficiency

"The implications of the study's results, that the associated risks are not properly recognised and addressed, is alarming. Such a high dependence on IT means new forms and new levels of risk, and companies should be treating technology-based risk as a significant business issue."

Another key finding of the study, which was published last week after in-depth interviews with senior executives from more than 150 global companies, was that, although 84 per cent regard IT as critical to their business, only 13 per cent of senior executives believe that IT strategy is well integrated with their company's overall business strategy.

Meanwhile, another study - also published last week - provided more evidence for the view that concentration on such issues as IT is less important for company performance than making sure that the people working for a company are properly managed and developed.

The research for the Institute of Personnel and Development by the Institute of Work Psychology at Sheffield University, and the London School of Economics' Centre for Economic Performance, found that the way people are managed and developed accounted for 19 per cent of the variation in profitability between companies and 18 per cent of the variation in productivity. This is more than double that of investment in R&D, which accounts for only 8 per cent of the variation in profitability and 6 per cent of the variation in productivity. Emphasis on quality, new technology and competitive strategy barely creep above 1 per cent in terms of their contribution to the bottom line, says the report, which is based on seven years of research at more than 100 medium-sized UK manufacturers.