When A Company Should (And Should Not) Invest In Technology

Investing in technology for your small business may seem like a good idea.  Many small business owners have laptops, smart phones, color laser all-in-one printers, digital cameras, or any number of other hardware devices.  Their business may also have specialized software and hardware to control inventory in their warehouse, or to share data among their employees.  There are all kinds of uses for technology and it may seem natural to use technology for any business process that can be done with technology, but that may not always be the wisest choice.  This article discusses when a company should invest, and when it should not to invest, in technology.

Justifications for a technology purchase

When starting new technology projects or purchasing new technology, business managers often use the following justifications:

Competitive advantage – Competitive advantage is when one company has an advantage over another.  As an example, company XYZ has competitor ABC, which has a CRM system.  Company XYZ buys a CRM to eliminate company XYZ’s competitive advantage over it.   Competitive advantage would also apply if company XYZ buys new technology company ABC does not yet have; company XYZ would then have competitive advantage (in theory).

Support a strategy – A company CEO may have a vision for the company’s future.  He or she creates a mission statement to detail the vision, and strategies to realize the mission statement.  The company then buys technology to support one or more of the strategies.

Create a product – Many companies in recent years have used technology to create a product: from web sites such as Facebook.com to companies like Oracle that develop software solutions.  Other companies like Cisco, IBM, and HP develop hardware products that they sell.

Be able to share information internally and externally – A company may invest in a customer relationship management (CRM) product or exchange data with a business partner via Electronic Data Interchange (EDI).

Manage and control the organization better – Companies will buy financial packages such as Quickbooks or software solutions as elaborate as Microsoft Dynamics Enterprise Resource Planning (ERP) package to share and control information within a company.

Market products and share information with customers on the internet – A company may develop a website to share information with their customers about a new product offering or information about contacting the company.  These days the internet has become a self-service marketplace, allowing customers to research, buy, and get service after the sale.

When to invest in technology

The following are situations when companies should seriously consider investing in technology:

When there is a need – The technology is a requirement of doing business.  For instance, a customer begins requiring data transmissions about the status of shipments.  Not implementing the technology means losing the customer’s business.

When there is a significant savings to be had – Implementing the technology means not hiring 5 people, saving the company $250,000 in salaries, taxes, and benefits.

When there are significant revenue gains to be had – A new customer will only do business with your company if you accept their orders electronically, and will sign a contingency contract to that effect.  The value of the business is $2 million per year.

A reasonable return on investment is needed to justify the above arguments.  If it costs $50 million to get $2 million more in business yearly, the 4% return may not be worth the investment.  In addition, many companies underestimate the costs of technology investments, often leading to a smaller return on investment than expected.  It is important to make realistic estimates.

While operating on the “bleeding edge” of technology may seem to be a risky endeavor, the competitive advantage it provides may produce an exceptional return on investment.  Again, it is important to make good estimates for cost and analyze the expected return on investment to see if it makes sense to proceed with the new technology.

When not to invest in technology

Here are some situations when a company should not invest in technology:

To get the cool new thing – Investing in cool new toys may not be the best use of company resources.

To keep up with the Jones – While competitive advantage is important, it is also important to make sure that keeping up makes financial sense.  Perhaps the Jones’ new technology purchase was not such a good idea for them.

To sell new, unconfirmed business – One logistics company implemented warehouse automation they did not need, believing they would be able to make new sales because of it.  The company is no longer in business because the new sales did not materialize.

To get technology for technology’s sake – A company wisely declined to invest $500,000 for a machine that would have eliminated one $20,000 per year job.  The machine would have also required regular maintenance and repair.

To develop a new product without marketing research – New technology can be expensive.  Make sure there is a market for your technology idea before you invest a fortune.

Technology can be a wonderful investment with a magnificent return for your company, but you must make sure your investment will produce a good return.  Jumping in is almost never a good idea.  Make sure to do your research to keep your eyes wide open for the best possible result.

Leave a Reply