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IT Value Metrics: How to Communicate ROI to the Business

CIOs are always faced with pressure to justify their IT expenditures. Now, new research can help correlate those IT dollars spent with business value accrued.

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New Math: The Theory
Rubin’s research reveals two key concepts that can enable CIOs to see whether their IT investments are returning real business value:

Measuring IT spend against two factors—operating expense and net revenue—is a more accurate gauge of IT effectiveness than the traditional metric of measuring solely against net revenue.
Enterprises that spend slightly more than their peers tend to have better business results. But after a certain point, that extra spending does no good. Rubin calls the sweet spot of extra but not exorbitant spending “optimal IT intensity.” He calculates IT intensity by comparing the IT spend to both the operating expense and net revenue, and has developed IT intensity curves that help CIOs see if they are underinvesting, investing an optimal amount or overinvesting. (Rubin compares the IT intensity number to profit to determine what the optimal amount is for a given industry. See “The IT Intensity Curve.”)

Although Rubin’s research is based on more than two decades of work, his key conclusions have crystallized only in the last year. But he is now working with several CIOs to put his theory to the test. Intuitively, his findings make sense, they say.

“Now we can understand in an actionable way where we are underinvesting and [where we’re] perhaps overinvesting,” says Merrill Lynch’s Noble.

“We realized we needed a better comparison to be able to evaluate [IT spending] on a more holistic basis,” says John Comisky, vice president of services operations at Verizon.

“The discipline of going through something like this provides a great deal of credibility with the senior management and at the board level,” notes Rob Leeming, chief administrative officer for IT infrastructure at financial services provider UBS.

These IT leaders note, however, that it will be a few years before they know how well Rubin’s theories play out in practice. And the numbers don’t provide insight on how to get the most bang for your IT buck, just that slightly higher spending correlates to better business results. (For the difficulty of assessing spending on applications, see “The Cloudy World of App Spending” below) “It’s not clear if [IT intensity] is a cause or an effect,” says Scott Abbey, CTO of UBS. There is, it seems, still an art to IT investment, not just math.

The Cloudy World of App Spending

When IT’s investments are calibrated against business value, what’s usually being measured is infrastructure. But what about the apps?

Much of Howard Rubin’s research into IT intensity has focused on infrastructure spending. That’s mostly because that’s what companies have benchmarked over the years. But infrastructure spending is also easy to monitor over time because of its ongoing, lasting effect on operations. Application deployments, on the other hand, are typically managed as projects and are not tracked as rigorously or consistently, says Scott Holland, senior business adviser at the Hackett Group. So it’s easier for CIOs to apply Rubin’s IT intensity research to how they invest in technology infrastructure or IT as a whole, rather than apply it directly to their application portfolio.

“The infrastructure view is how effectively and efficiently you can provision standard technologies,” says Scott Abbey, CTO of the financial services giant UBS. “Applications are about how well you’re supporting a specific business with a specific technology.”

Rubin admits that much of IT’s business value comes from applications, not infrastructure. Infrastructure is important, but it’s about making sure those value-adding apps can run. “Applications have a huge ripple effect on the organization,” concurs Holland, even though calculating that effect is hard. “It may be difficult to have benchmarks on specific functions to help guide your strategy,” concurs UBS’s Abbey.

Compounding the difficulty is the issue of assessing the impact of project management on application deployments, as that typically involves both IT and business efforts, says one IT finance manger. “We tried Balanced Scorecards, with mixed results,” he notes.

Because there’s less data on how application spending (as opposed to infrastructure spending) contributes to business performance, CIOs need to rely more on their judgment than on their metrics, Rubin acknowledges. But CIOs should at least understand that the two will need separate spending and management strategiesâ¬and perhaps even have separate lieutenants better skilled in each area. “That’s why some organizations separate their application costs from their infrastructure costs,” says Bernard “Bud” Mathaisel, CIO of Achievo. “Still, it takes a deep understanding of causality to understand what’s going on,” he adds.

– Galen Gruman