A new Tech-Tonics Advisors study links user experience to financial returns. Companies that take a unified approach to gain better visibility into user experience outperform their peer group in revenue growth, profitability and market valuation. Our conclusion is that ensuring applications perform to user expectations should be a top priority at every company.
We surveyed senior IT people at S&P 500 companies. Responses from 121 companies (24% of the list) shows that delivering superior end-user experiences – to customers and employees – has become the differentiator between companies that win customer loyalty and market share and those that don’t. This translates into numbers that C-level management – including CIOs – and investors can appreciate.
Of the 121 respondents, 44 (36%) say they have adopted a unified approach to performance management. Tech-Tonics then reviewed the financial performance of these companies relative to their peer group. We chose public companies for the study due to the availability of data disclosed in SEC filings, quarterly earnings conference calls and at investor conferences. We looked at results between 2010 and 2013. These companies outperform their peer group in the following ways:
- Their revenue growth is 15% faster than the peer group average. We believe this is largely attributable to higher customer satisfaction ratings and loyalty (as measured by the percentage of revenues coming from existing customers versus new ones);
- Their operating margin is 17% higher than the peer group average. We attribute this partially to operating efficiencies gained through improved user experience throughout the organization;
- Their higher profitability is rewarded with multiple valuation premiums of up to 29%. If a sector’s price/earnings (P/E) ratio is 17, then the unified approach company’s P/E is 22. On a $10 billion base market capitalization, this equates to an incremental $2.9 billion in market value;
- Their unified approach to user experience led to 41% stock market outperformance. If peer group average appreciation between 2010 and 2013 was 67%, then shares of outperforming companies rose by 95%.
Clearly, a strategic approach to user experience assurance drives superior operating results and stock market outperformance.
The most represented S&P sectors among respondents were financials (banks, brokers, insurance, diversified), consumer discretionary (hard lines, apparel, media, restaurants), industrials (all manufacturing), healthcare (pharma, services and drug chains) and technology (hardware, software, IT services). The breakdown by sector is below:
Among sectors, financials, technology, consumer staples and industrials have the highest number of responses for companies that have implemented a unified performance management strategy. (We excluded sectors with fewer than 10 responses).
Companies with a unified approach to performance management and user experience also deploy a fewer number of tools. The majority of these have consolidated onto a core platform from one vendor, with tactical deployments of other vendor solutions for specific use cases, departments or technologies.
The red bar depicts the average number of vendor tools deployed for all sectors: ten. For companies within the sectors that have a unified approach, the green bar shows that the average number of tools deployed drops to seven.
Among the responding companies, IT is still responsible for most aspects of performance management – from servers to network to applications and websites. However, in 24 companies, functional departments have been deploying tools independent of IT, but which they expect IT to support. We believe that as technology budgets bifurcate to departments such as marketing, this is a trend that will continue.
A clear linkage has emerged with how improvements in customer experiences are driving financial benefits. But in order to realize the benefits of engaged employees and satisfied customers, application performance must been stellar – consistently.
Through a unified approach to performance analytics, IT can help their companies leverage technology investments to discover, interpret and respond to the myriad events that impact their operations, security, compliance and competitiveness. They must recognize that application performance problems are now customer service problems. Understanding key fundamental business drivers and working in concert with application owners – and each other – IT teams can meet end-user performance expectations to enable strategic initiatives and positively impact financial results.
Gabriel Lowy is the Founder of Tech-Tonics Advisors. During the past 16 years, he has been consistently recognized as a leading technology analyst, including Forbes.com Best Analysts in America (#4 in 2010; #1 in 2004) and The Wall Street Journal Best of the Street (#2 in 2003). Gabriel has held senior technology research analyst positions with several Wall Street firms, including Mizuho Securities USA, Noble Financial Group, Inc., Collins Stewart LLC, Credit Lyonnais Securities USA and Oppenheimer & Co. His views can be found here.
(Image credit: Tech-Tonics Advisors)