IT Value Methodologies: Do They Work?

CIO — For the CIO, it’s the question that never goes away: Can value methodologies really prove IT’s worth to the business? Three experts weigh in on whether this is the impossible dream.

John Boochever
Director, Mercer Oliver Wyman, a consultancy with a focus on financial services and risk management.

Typically, IT value methodologies do not adequately measure, much less prove, technology’s value to the business. There are three explanations for this observation.

First, as a factor of production, any direct correlation between IT spending and bottom-line results is highly elusive. Several academic studies bear this out. One employed competitive economics to speculate that higher returns from IT encourage other firms to enter and drive down profits. Another concluded IT had become a strategic necessity, not a source of competitive advantage and therefore not measurable as such. A third found that higher productivity and consumer value—in fact attributable to IT—did not translate into measurable business profits because they tended to be competed away or passed on to customers.

Our own client work in financial services also suggests that IT spend is not really a distinguishable driver of bank performance today because scale and capability benefits are dwarfed by inefficiencies, cost of complexity and other costs associated with realizing revenue. In other words, looking at relative IT spending does not tell you whether a bank is an advanced or an inefficient consumer of IT.

That’s the economic theory. Then there’s the nature of IT itself. IT is not one thing. It is a complex array of services, some of which are indistinguishable from the business capabilities they enable, such as trading. Others are more like utilities. How do you go about valuing the electricity or water your business consumes?

In the case of business application development, leading practitioners associate the IT portion of their projects with the business portion and do a combined investment case. In the case of IT infrastructure, companies look for cost efficiency, reliability and scale. Very few have a methodology that combines the two, allowing them to value IT investments both in terms of deployment and operations over their lifecycle.

IT valuation techniques have not kept up with the pace of change in technology and management. In IT, strategic planning cycles have sped up and become more iterative. The dotcom era ushered in a place-your-bets and launch-and-learn culture. The “atomization” of technology (many more subcomponents and vendors) also means that no IT department can afford to supply or even be competent in every technology. At the same time, companies don’t want to be locked into a single vendor or approach, with no endgame in sight. They want to avoid creating the legacy environment of the future.

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