Large companies often spend a good deal of money on cultivating their technology, but a new study suggests nearly 70 percent of what they spend may be misallocated.
In a study, Genpact Research Institute recently found that, of nearly $600 billion spent on digital projects, almost $400 billion of it was invested in projects that fall short of expectations and returns on investment (ROI). In fact, much of what companies invest in technology sustains existing, or “legacy” systems, rather than new technology, the report found.
In a global market for technology spending estimated at $4 trillion, an amount that research firm Gartner expects to shrink by nearly 5 percent this year, the wasted money can be significant. It suggests companies will be operating from a smaller pool of money, and will need to invest it wisely.
Out of a host of technology that includes cloud computing, big data and social technology, “at least 67 percent of those efforts are either scrapped, or end up being underwhelming,” Gianni Giacomelli, Genpact’s senior vice president of product innovation, told CNBC in an interview.
In a world where research and development spending is perceived as a hallmark of product innovation, the study’s findings could have competitive implications, Giacomelli added.
“It’s important that [companies] get better … otherwise we’re not going to get the impact of productivity and technology and competitiveness,” he said. “New technologies are not going to get an impact.”
Based on that benchmark, companies that spend a lot on technology — such as Silicon Valley tech titans and big banks — are often seen as leaders of their sector. In some regards, Genpact’s findings were bolstered somewhat by a separate study that suggested tech spending may not be as efficient as some would believe.
Last year, Bernstein Research analyzed historical R&D spending as a percentage of sales, and drew a correlation to the stock performance of 68 large-cap technology companies. In many cases, those that shelled out the most actually saw a decline in their share prices after five years, while those that spent less performed better, suggesting that R&D isn’t an ideal benchmark of stock performance or innovation.
The idea that companies could throw substantial amounts of cash, and get diminishing returns for their efforts, suggests that companies tech priorities are misplaced, Genpact’s Giacomelli. It reinforces the belief that far too much money is spent on existing infrastructure rather than new breakthroughs, he added.
“You spend a lot on technology, now you’re sitting on old things,” Giacomelli said.
“For all the fascination we have with Silicon Valley … they are not finishing the job. They rarely bother with the question of how [new technology] will fit with older stuff, and the solution to that is left to other people,” he added. “To get that done at scale is a big issue.”
Image credit: CC by Steve Watson