Invest in technology for innovation, not productivity

By Will Forrest and Kara Sprague

Will Forrest and Kara Sprague, McKinsey partners, spoke recently at the Cloud Connect conference about the need for companies to focus on technology investments that innovate business models, not improve IT productivity.

Will Forrest and Kara Sprague, McKinsey partners, spoke recently at the Cloud Connect conference.

What did you speak about?

Cloud technology has become a big buzz word and it's a new technology that corporations are actively adopting. But companies shouldn't be adopting "cloud" as an end to itself, as too many do. The problem in many cases is that adopting cloud technologies is an IT initiative, which means that cloud solutions are all around improving IT and IT productivity. But that's not where growth is going to come from. Some 25—30 percent of overall revenues are expected to come from new sources of business, and that requires innovation. What that means in practice is that companies need to think about investments in IT and technology in a completely different way.

Incremental investments in productivity don't drive growth. Companies need to manage those costs and get them as low as possible, and then use the saved money for innovation. Investments need to go into innovation and disruptive business models.

What part of your presentation most interested the audience?

Two things. The first was that we showed analysis that provides a compelling case for the connection between innovation and growth. Many people believe in the power of innovation. The problem is that, while companies want to be innovative, it's been unclear about what the value of innovation is. And that has resulted in delays, inefficient innovation investment strategies, and poor leadership alignment. However, we've been able to show that innovation really does correlate to growth, and it's significant. We calculated an "Innovation Sentiment Score" based on public sources and compared that to the top 100 performing companies. And guess what? The top performing companies were also those who had the highest "Innovation Sentiment Scores."

The second item was that we introduced the notion of what we call "greenfield IT," which is the creation of a new technology that lives and is independently managed outside the CIO. The reason for considering this is that so many companies are hampered by legacy technologies that they are unable to be flexible and simply cannot innovate. One large bank, for example, was spending north of $1 billion on IT infrastructure but the setup was so mired in legacy systems and was incapable of delivering innovation. This greenfield approach will allow them to test and learn, adapt, and innovate much more effectively than before.

What is at the top of people's minds?

Everybody is concerned about making major technology decisions: public or private, SaaS or not SaaS or grow or buy. These are good questions, but they're diversions in my opinion. Unless companies are asking themselves how to use the cloud to disrupt their own business models or someone else's, then adopting the cloud is just another IT project.

Amazon is an example of a company that does this well. They have repeatedly used technology to disrupt marketplaces. First, they used technology to monetize the long tail of book sales. They then used advanced analytics to develop a recommendation engine, then innovated with web services, which are different from their initial core business.

What's clear from our analysis is that CEOs are looking to the cloud as a source of innovation, not IT productivity. The problem is that the investment profile in many companies doesn't match that priority. Unless companies make that switch, disruptors that use technology to fuel innovation (i.e., like Amazon and other new entrants) are going to drive them out of business.