'Measuring IT value'

First the good news, according to a survey of 300 general business managers and IT executives within large US-based companies, 84% of respondents indicated that their increased productivity could be attributed to IT. However 47% of business managers and 51% of IT executives said their companies did not know how to make their IT departments accountable for delivering real business value. The survey conducted by Accenture highlights the issue facing CFOs around the world, namely ‘how does one measure the value of IT?’

All leaders will agree that if it can’t be measured it cannot be managed.  Given that IT represents a very serious fraction of the cost base, the lack of visibility from the IT department is extremely vexing for the CFO. This is exacerbated by:

q       The criticality of IT to the business

q       The intrinsically risky nature of IT.

In essence CFOs need to know that X euros of IT spend leads to Y euros of value, and that Y is greater than X. As we will see this is easy to state and hard to practice.

 

Current approaches to measuring value

A popular metric is to compare the cost of delivering specific IT services, year on year. IT departments often talk about TCO (Total Cost of Ownership), which is a very valuable metric. Becoming more efficient is indeed an honorable pursuit.

Cost is one thing, but value is another. Measuring ROI, ROCE or even EVA would appear to make financial sense, but the challenge comes in:

q       What constitutes value

o        Happy users, increased profitability, improved governance

q       Isolating that value

o        Eg. What aspect of increased sales can be attributed to the IT department?

q       When to conclude the measurement

o        When does a server or a new supply chain management system stop delivering value?

Thus such metrics are at best misleading.

This makes cost management more of a comfort zone for CFOs and consequently CIOs are encouraged to think ‘cost’ rather than ‘value’, which puts pay to the IT department being a hot-house of business innovation.

 

Suggested approaches to measuring value

Measuring cost reduction has a part to play. I suggest it is divided into two:

q       Cost savings within the IT department

q       Cost savings within the business.

The second whilst difficult to isolate will encourage the CIO to step outside the IT department to ensure their focus is having a positive impact on the business.

Cost management does have an innovative element. How many boardrooms are aware that an obscure technology called VOIP could slash millions off their telephone bills?

Real competitor advantage value does not come without risk. So the CIO should be able to demonstrate that they have a handle on the risks and that these are in keeping with the associated business case.

Another measure is to benchmark your IT spend against competitors, peers and role models. This will not provide you with any absolute indicator of value, but it will demonstrate how far off-piste you are in respect of your market.

I subscribe to the fact that happy users are more productive users. Most organizations fail to leverage best value from the IT investment because the IT and user communities have a very poor relationship. In part this is because the users have no empathy for the IT department and in fact regard IT as something that IT people do. Thus ruling out the idea of working with the IT department to achieve business objectives. A general ignorance of IT, the IT industry and the potential impact of IT on business is the main cause of this. The IT department does itself no favours by developing a siege mentality, where a good day’s work is determined by that fact that there were no complaints from the users. So measuring user satisfaction will be key to establishing whether the IT department is actually supporting the business or spending all day ‘tacking sand bags’ Similarly measuring customer satisfaction in respect of your e-channels will be informative.

A way to bind the IT department to the business is to make operating profit divided by IT budget a key metric. The CIO may protest that they cannot take responsibility for this. The counter argument is that they need to take more responsibility for it, by getting out there and working with department heads. This will encourage better business-IT alignment.

 

Unleashing further value

Have you considered encouraging the CIO to unleash the value lying dormant in the IT department? Assuming that your IT department is both efficient and effective you could possibly turn this cost centre into a profit center by ‘white labeling’ its capability and selling this to organizations further down the ‘food chain’. Your business then treats your IT department as a strategic supplier and conversely the IT department treats you as a valued, though not sole, customer. This could lead to better economies of scale and consequently widen the risk-tolerance window, thus enabling your IT department to become more experimental.

A less radical move would be to document your key IT processes and license them to other organizations. Your IT people will enhance their business (and in some cases social) skills because now they have to visit ‘real’ clients to deliver the associated consultancy and training, which in turn raises their game and thus ultimately the service to your business.

 

Conclusion

Making a direct link between IT investment and business value is not possible. Attempts to achieve these are in my opinion pseudo scientific. Ultimately the IT department cannot be held responsible for the value that the business derives any more than your telecoms supplier can be held responsible for the quality of your customer service. The responsibility needs to be shared across the boardroom. The ultimate measure in my mind is user and customer satisfaction. If both these parties are happy in their dealings with your IT infrastructure then, assuming you are profitable, you can consider your IT investment suitably leveraged.

 

This article appeared in Finance Director Europe, December 2004.

 

Ade McCormack is MD and founder of Auridian (www.auridian.com) and author of 'IT Demystified - The IT handbook for business professionals' (available from the Auridian website and good business bookshops). As well as consulting on business-IT matters, he is editor of IT Leadership and has a regular column in the Financial Times IT Review supplement.