It’s a view that dates back to the industrial age-but CEOs, business executives and CIOs alike still perceive IT value primarily in terms of a simple ROI measurement. This stems from basing the value of enterprises on their financial assets-such things as revenue, real estate or equipment.
But this is the shortsighted view. And it’s time for CIOs to battle this misperception. The reality is that business valuation changed a decade or more ago in the shift from an industrial to an information and service economy.
Your CEO and board are well aware that it is commonplace for the company itself to be valued at many times over the value of just its financial and physical assets. There is value in such things as a company’s trademarks, business processes, customer lists, knowledge, skills and relationships. But there isn’t any way for a business to simply plug such value information into an ROI computation when building a business case to do something new because it’s hard to quantify these in financial terms. So, more often than not, these types of value are not dealt with directly and are basically hidden.
Similarly, there are many types of value created by an IT organization that remain hidden and are therefore difficult to quantify. But an effective CIO shouldn’t let the opportunity to prove this value fall by the wayside just because it is a challenge. For example, best-practice IT organizations invest in portfolio management processes and continuously review performance of their application systems and infrastructure platforms. This process is used as a mechanism to replace, refresh and retire systems. Managing and maintaining this process has a cost that is typically 5 percent to 8 percent of the total IT spending. That cost is very visible. But the value of the process has to do with keeping the organization current and keeping the applications running at an optimum level. This sort of approach is extremely valuable to the enterprise, but it is also hard to quantify.
In addition, IT organizations are very focused on supporting business processes and providing the tools and platforms that effectively enable an enterprise to share customer information and knowledge. While such IT support to a business is essential, computing its value in financial terms is difficult because it’s a challenge to place a dollar amount on the worth of sharing information across a business. It’s certainly a hurdle, but not an insurmountable one.
Proving the hidden value of IT spending and support takes some effort and extra research but it can be done. If you want to tackle this problem and make all the value provided by IT to the business visible and “real” (and therefore useful for planning and business case analysis), here are some ways to accomplish this. The first step to bringing hidden value into the light is to break the problem into pieces.
Different Ways to Look at IT Value
There are many ways to look at IT value. The first is the visible one-financial value. The financial value of IT has to do with both the cost and benefits sides. It can be measured in terms of how much IT contributes to company profit, and how much it contributes to revenue growth and protection.
The other forms of value are the hidden ones (not as obvious but no less important): factors such as customer value, process value, people value and portfolio management value.
Customer value: This form can best be shown by making visible the size of the customer base that IT supports both inside the company, including users, as well as the true business customer base. Using metrics such as the number of internal customers, number of external customers, and the ratio of the IT staff size to each of these illustrates the scope of the world that IT supports. Best-practice companies combine this with customer satisfaction measures to put a focus on how effective their support is.
Process value: This measure allows the business to get a view of what is going on inside the IT “plant”-the MIPS, desktops, storage, servers-and the quality and maturity of IT’s own business procedures. This is where external ratings and certifications such as the International Organization for Standardization and Capability Maturity Model play a role.
People value: This one focuses on the IT staff, their experience and performance. Companies that have done the best job of making this critical resource visible provide measures of basic demographics, satisfaction and years of experience.
Portfolio management value: This measurement is created through the activities an IT organization does to renew, refresh and replace all of its resources from systems to people. This is the kind of value that comes from IT R&D and the use of technology to look for new opportunities to get business benefit from technology. It is the kind of value created by constantly looking at business application systems and optimizing their performance, removing obsolete ones and introducing new ones. Measures in this area are often ignored but can include: the ratio of IT training expense to total IT expense; the ratio of IT R&D expense to total IT expense; the ratio of the number of IT systems replaced or retired to the total number of IT systems, and the number of IT-based patents or patent applications.
For your next round of IT reports to business management, you should consider demonstrating the complete IT value picture by using these categories. It makes your hidden value more visible-putting it side by side with financial performance.
By making a list of these categories and exploring them in depth, you can check off what you have available today, collect the data and see what it shows. It’s very likely that your IT hidden value has not been visible to IT either, so this exercise is not just about ensuring that business understands the full IT contribution to business strategy. But once you’ve made the picture complete by adding in all the hidden IT value, you’ll be in a position to communicate it and make it evident to the business leadership.
With the current emphasis on getting better business value from IT while keeping costs down, businesses need to understand the full value picture of their IT investments and plans. Express the full value of IT-financial, customer, process, people and portfolio-and you’ll be well on your way to providing the complete picture and ensuring that the business side understands everything IT contributes to the enterprise.