CEO: Show Me the Value

THERE’S A GREAT SCENE in the 1983 comedy Trading Places when the main character, a snooty commodities broker played by Dan Aykroyd, gets fired and is forced to pawn his expensive wristwatch.

“This is a Roche Vouceau,” Aykroyd’s character tells the Philadelphia pawnbroker. “The finest water-resistant watch in the world. Singularly unique, sculptured in design, handcrafted in Switzerland and water-resistant to three atmospheres. This is the sports watch of the ’80s. $6,955 retail!”

“You got a receipt?” the pawnbroker asks.

“It tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome and Gstaad,” Aykroyd replies.

“In Philadelphia,” says the pawnbroker, “it’s worth 50 bucks.”

Philadelphia pawnshops aren’t the only places where value is subject to debate. When it comes to business technology these days, companies are asking hard questions about outlays for new initiatives.

Many companies stopped asking tough questions during the tech-spending frenzy of the late 1990s. Having resigned themselves to spending large sums on Y2K compliance, companies soon jumped on the consultant-driven bandwagon for the Internet “revolution.” No one asked, “What’s the return on this project?”?if they did, they were treated as bean counters with no vision.

During the last two years, we’ve seen the pendulum swing again. In an era of tight budgets and slower growth, technology’s hottest toys aren’t worth much today unless they deliver real value to the business.

Value for Whom?

From my perspective as a CEO, the operative question in assessing IT value is, Value from whose point of view? Customers, the folks in the back office and shareholders don’t always have a common view of what constitutes a good technology investment.

Customers. In the eyes of your customers, any technology initiative is worthwhile if it makes your company easier and more convenient to deal with. Take the most visible manifestation of technology in business: the Web channel, where your customers come to learn about your company and buy its products and services. In the investment industry, clients clamored for online account access and got it, even though it might not have been in their best interest. Easy trading can tempt investors to buy and sell excessively, often turning a big nest egg into a small one.

Employees. The people who work with you define technology value differently. To them, the most worthwhile initiatives are those that make their job more interesting or free them up to perform more value-added tasks. In the investment industry, the advent of automated transaction capabilities a decade ago meant that our people no longer had to manually process every purchase, redemption or exchange. Instead, they could process by exception, focusing on transactions that required special attention.

Shareholders. Though it’s important to serve the needs of customers and employees, for most companies it is the shareholder’s definition of value that ultimately matters most. What’s the return on the investment? Will this new initiative provide economic value by improving quality, cutting costs or increasing revenue? To justify their existence, technology initiatives that are designed to meet a perceived customer or employee need must also provide value to the shareholder.

While the shareholder’s definition is the one that must carry the most weight, major technology investments should be examined from all three perspectives. To make sure that this occurs at Vanguard, we typically appoint an advocate for each point of view when we consider the business case for a major investment. Having people sit in those chairs, figuratively speaking, can be a good way to ensure disciplined thinking about value.

The Right Stuff

A fundamental rule about assessing IT value is that spreadsheets don’t tell the whole story. There are multiple valuation approaches for analyzing the expected return on a new initiative (Vanguard happens to favor net present value), but no matter which method you use, you cannot ignore your business judgment and intuition. Basing technology spending decisions on numbers alone can be penny-wise and pound-foolish.

When we first decided to develop an online presence for Vanguard in the early 1990s, it was all based on gut instinct. We believed intuitively that online account access would enable us to reduce the costs of serving our clients?and, indeed, that later proved to be true?but at the time, we had no numbers to back that up because the Internet was so new.

The CIO and the CEO have an intuitive sense of where the shareholder value is in a given technology initiative. It’s the CIO’s role to ensure that the enterprise is harnessing the very best technology capabilities for its broad strategic priorities. One important question to ask when considering any major project is, Can this technology be leveraged across business segments to serve multiple needs?

It’s essential to distinguish fads from substance, and here again, the CIO’s business-technology perspective is invaluable. For example, news reporters not long ago were asking every investment company, When will you offer wireless trading to your clients? At Vanguard, we felt that the capability to make trades while stuck in rush-hour traffic didn’t make much sense for buy-and-hold mutual fund investors. Thus, we offered wireless access to select brokerage clients through an outside vendor as an accommodation, but we put greater R&D focus on the development of analytical tools to help clients become better investors.

One assessment tool that our senior staff has come to rely on to distinguish fads from substance is the devil’s advocacy session. In these gatherings, two teams rigorously debate the pros and cons of a particular course of action from multiple perspectives. Fads tend to lose their allure when subjected to such rigorous examination.

Threats to Value

Having the right value focus isn’t the whole story. Companies still face three stumbling blocks on the path to effective and efficient business technology solutions.

Rushing toward a solution. The biggest pitfall in business technology decision making is probably the rush to embrace a solution without fully understanding the underlying need. Defining the problem accurately should be the first step, and here the CEO looks to the CIO to play an active role. It’s important to recognize that technology isn’t the solution to every problem.

Losing the focus on value. Most companies do a pretty thorough job of assessing the potential value up front, but then they may forget to keep that goal in the forefront as the project moves forward. It’s important to view value in light of the development and ongoing costs associated with the project. And just to be very clear, staying focused and disciplined is just as much on the shoulders of the business sponsor as on the IT group. In fact, it’s our view at Vanguard that the business management team should be taking the lead on business technology projects, looking to IT for facilitation but not leadership.

Forgetting to measure the results. No project is complete without a means for measuring how well it is delivering the value that was intended. At Vanguard, we’ve implemented a version of Six Sigma, and that data-driven methodology is proving to be an invaluable tool for evaluating technology initiatives. Whereas in the past we relied on anecdotal data?client e-mails, for example?to assess new website enhancements, we now look at an array of objective statistical data. For example, after enhancing the area where clients can open new accounts online, we monitor how many attempts to use that feature are abandoned without being completed, and then we make improvements.

It seems unimaginable to pursue business technology solutions without measuring the value provided. How else can you answer the question, What did we get for our money? In those efforts, the CIO has a pivotal role to play as the business technology leader within his company. The CEO can put shareholder value on the top of everyone’s priority list, but it’s the CIO who delivers IT value. Rest assured, the CEO is counting on it.