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.
By triangulating IT spending as a percentage of operating expenses and as a percentage of net revenues, enterprises can calculate where they fall on the IT intensity curve. A position to the left of the apex shows additional IT investments should aid business performance, while a position to the right of the apex indicates spending that is no longer aiding business performance.
SOURCE: Howard Rubin
The Art of IT Investing
While Rubin’s research provides a way for CIOs to calibrate their spending to optimize the chances for business success, it doesn’t guarantee that success. That’s because, Rubin notes, the wise selection of technology initiatives (in other words, IT strategy) and good execution are always critical to gaining positive results. And that’s where the art comes in. CIOs who can do the math but flunk the art will not be able to use any extra money they pry out of their CEOs to improve business performance or create new value.
Even effective, artful CIOs will get different results from similar spending. “Companies will drive to different results based on how they answer the questions the data poses,” says Grande Bucca, managing director for investment banking, research, legal and compliance technology at Merrill Lynch. “We look at our investments against our business goals, and we can change the order of them or their emphasis based on that assessment.” That metrics-driven approach is key, says Accenture CIO Frank Modruson. “The top-performing companies manage by metrics,” he notes, giving them both detailed data to validate their IT decisions and early warning signals when those judgments are off.
At Verizon “we now have a more in-depth viewpoint about our spend that lets us lower the cost of maintenance and infrastructure while at the same time improving the quality of services,” says Comisky. “This lets you spend your dollars on the efforts you think are better for productivity.”
At UBS, Abbey says, “We start with a view of the desired outcomes for each of the businesses, then derive from that an overall technology strategy that we can test with benchmarks to see if we’ve got out of it what we expected and to understand that if that was or wasn’t the case.” Even if Rubin’s research improves a CIO’s ability to understand his spending’s impact on business performance, achieving efficiency should not be ignored, says Gartner’s Howe. “Finding each dollar through increased efficiency is still a worthy cause,” he says. “You can spend those dollars for whatever has the best return, whether that’s in IT or not.”
Separate research at the BTM Institute, an industry think tank, reinforces the idea that smart technology management is essential to getting the desired return on IT investments. Its research shows that companies that treat IT as a driver of business growth get better financial performance and “that doesn’t necessarily mean they’re spending more on technology,” says Faisal Hoque, the institute’s chairman.
Other research shows that companies that have managed the complexity of their IT by building well-conceived systems rather than throwing a lot of technology at the wall to see what sticks get higher value from their IT spend, notes PricewaterhouseCoopers’ Zukis.
At the end of the day, there’s no magic formula to justify IT budgets, no wand to wave that guarantees that real business value will pop out of the technology investment hat. But good CIOs shouldn’t be looking for magic, says Rubin. They should be using their skills in the science and art of IT to manage technology as the critical investment it is.
“The CIO,” concludes Rubin, “is a fund manager who needs to get the right return on his investment for the risk assumed—and who must make sure his portfolio is managed well.”
Galen Gruman is a frequent contributor to CIO. You can reach him at ggruman@zangogroup.com.
