Traditional indices such as the Dow Jones Industrial Average (DJIA) or the Fortune 500 focus on top performers without any considerations other than their market capitalization, share price, revenue or other 20th-century measures of business performance. But in a Technology Economy, technology is a strategic lever, a tool to drive new business growth, protect revenue, reduce business costs and manage risk.
So let's do an experiment and look at a "new age" Dow Jones Industrial Average -- a market index of firms that have been identified as technology leaders. Let's call it the Technology Leaders Index, or TLI. By building and observing the behavior of the TLI, we can test the hypothesis that has gone unspoken and unexplored: Firms that make the best strategic investments in and use of information technology should demonstrate superior market performance.
It is an interesting time to conduct such an experiment. Between 2008 and 2009, IT investment suffered a global slowdown. The recession led many CEOs to believe IT was one of the main cost pools that could safely be reduced without impacting a firm's overall performance. As a result, IT spending decreased by 2.6 percent between 2008 and 2009 in the United States, according to Gartner's 2010 IT spending report. The Technology Leadership Index, however, demonstrates that the firms that adopted a different approach seem to have fared better than their peers.
So what is a technology leader? Tech leaders are not limited to companies that produce and commercialize technology products and services; they also include companies that position technology as a strategic asset and rely on technology to improve business efficiency. The TLI tracks the indexed market capitalization of more than 300 leading technology firms in 21 sectors (here's a complete list of the "Rubin 300.") as well as the Dow Jones Industrial Average, the Standard & Poor's 500 (S&P 500) and the Fortune 500.
Grand Experiment With Grand Results
From January 2006 to Dec. 31, 2010, the TLI has consistently outperformed the S&P 500 and, since the beginning of 2010, has begun to surpass the DJIA. Since the beginning of the study, the TLI has outperformed the S&P 500 by 6.7 percent and the DJIA by 1.2 percent; it has lagged the Fortune 500 by 2.3 percent. These results highlight the importance of strategic technology investment in business performance and imply that technology leaders have overcome the hardships of the economic crisis more quickly than their competitors.
These results can be explained by two trends that are closely correlated to the impact IT investment has had on the performances of technology leaders. First, technology leaders seem to have shown a greater resistance to the economic crisis than the S&P 500, with a drop in market capitalization of 22.2 percent compared to a 27 percent drop for the S&P 500.
Second, the TLI seems to be overcoming the crisis faster, showing 5.6 percent growth in 2010, while the DJIA achieved 2.4 percent growth and the S&P 500 fell by 8.6 percent. The Fortune 500 is the only index that outperformed the TLI, with 7 percent growth. This demonstrates that in times of economic downturn, the competitive advantage obtained by technology leaders enables them to be more agile than their peers. Firms that have maintained a constant level of IT investment are rebounding faster than their peers, and are thus better positioned to grab the opportunities of the recovery.
While the Fortune 500 has generally outpaced the TLI, in some sectors the TLI has managed to steadily outperform or remain on par with the Fortune 500. Predictably, between 2006 and 2010, the TLI generated, on average, more value than the Fortune 500 in technical sectors, such as information technology (+6.7 percent) and construction and engineering (+36 percent). In addition, the TLI and Fortune 500 have been on par in the manufacturing sector (with an overall difference of 0.3 percent in favor of the TLI) as well as in energy and utilities (-2 percent).
The TLI has been particularly strong in the financial domain, outperforming the Fortune 500 by 5.2 percent in the insurance sector and by 4.1 percent in consulting. The TLI also has shown equivalent performance in the banking and financial sector (-0.4 percent difference). This indicates that IT investment provides an enhanced competitive advantage in sectors that are particularly data intensive and require tailored, customer-centered services.
Even more interesting is the fact that in the heart of the economic recession this sector was under considerable pressure to reduce IT spending. The TLI demonstrates, however, that firms that maintained a greater level of IT investment not only have remained competitive, they also have outperformed -- and continue to outperform -- their more conservative peers.
All of this helps demonstrate that IT is more than a cost to be cut down during difficult times. IT is a key driver of business success, even when the economy has slowed. Sustained IT investment generates competitive strengths such as an enhanced customer relationship via effective database management, which can be critical both when times require caution regarding costs and when new opportunities arise.
The Technology Leadership Index's findings provide significant evidence of a relationship between technology investment and business results, but the true dynamics of this relationship are unclear. To fully understand and communicate IT's role in creating change within businesses, the field of technology economics must continue to develop.
To date, technology economics have relied largely on data sets created with traditional technology performance and financial measures in mind. To clearly understand and communicate the value that technology creates for businesses, organizations and nations alike, however, four elements must be improved:
1. Awareness of the potential of such information. Measures such as the Technology Leadership Index clearly demonstrate that there is a relationship between technology and business results. But much more analysis is required to provide better insight into that relationship.
2. Tools and methodologies to analyze the information. While many organizations are awash with data, they often do not have the tools or methodologies to use the information to make informed decisions. Firms should identify what kinds of information they have to assist them in determining their own technology economics.
3. Measures and processes. Organizations should develop business cases with quantitative goals to establish the value of each project -- their potential to reduce costs, grow revenues, manage risk, avoid costs and protect revenue. All significant projects should be measured against these goals to determine their effectiveness.
4. Communication of performance. Transparent communication of ongoing performance and results will likely provide clear evidence of the strong impact of technology, but most certainly will provide the ability to make effective business decisions.
Beyond these improvements, it does seem clear (and obvious) from this experiment that it is time for markets to recognize and reward those firms that best leverage information technology. Evidence of the ever elusive "Value of IT" is right there in the TLI behavior versus the markets for all to observe.
It is time for a new view of the value of IT. It is time to toss out industrial-age market relics and introduce new market indices. Perhaps this experiment is the right start.