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
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
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.
All of this puts a big premium on the options value of IT,
meaning that many IT investments today are made on the basis of
business or technical flexibility (customization value), or
better quality decisions (information value), or to preserve
future options and hedge bets (portfolio value). Traditional IT
valuation is focused on cost, service quality, and enabling
productivity and revenue, and it does a poor job reflecting
this increasingly critical aspect of IT investment. There have
been considerable advances in real options value as applied to
IT. However, these valuation techniques are not developed to
the point where they are readily adopted by businesses.
IT practice leader, The Hackett Group, a strategic advisory
firm that provides best-practice research, benchmarking and
business transformation services to improve performance
across SG&A and supply chain activities.
It is possible for IT to drive significant value.
But this value comes in places where CIOs don’t generally
look for it.
The best place for IT to look when developing a value
methodology is in other parts of the business. Top performing
companies use IT to improve both efficiency and effectiveness
in key back-office areas such as corporate finance, procurement
operations and human resources. IT helps these areas reduce
overall costs, redeploy resources and provide greater strategic
value to their organizations.
For example, our research shows that world-class IT
organizations now spend $9,024 per end user, 7 percent more
than typical companies. But with the help of improved
technology, world-class finance organizations spend 45 percent
less than those at typical companies; world-class procurement
organizations spend 25 percent less; and world-class HR
organizations spend 13 percent less. The net result? By
achieving world-class performance in these four key areas,
companies can reduce SG&A costs by $60 million per billion
of revenue. This is a powerful value proposition. And
optimizing the performance of IT is critical to realizing these
benefits in other SG&A functions.
One powerful starting point we’ve seen for companies
looking to generate IT value is a comprehensive back-office
benchmark that captures detailed data across the enterprise on
spending, staffing and other key metrics on a
function-by-function level in IT and in finance, procurement,
HR and other areas.
One global Fortune 100 company we work with did precisely
this, with the goal of reducing SG&A costs. What they
discovered was that transactional costs and staffing levels
were exceptionally high in several areas, including finance and
HR. The level of automation in these areas was also unusually
low. So they embarked on a multimillion-dollar project designed
to consolidate their worldwide operations on a single ERP
system, and use this system to automate transactional
The completed system helped them reduce their transactional
costs in finance and HR. Savings in these areas paid for the
ERP project in about three years. After that, the annual
SG&A savings went directly to improving the company’s
There are also direct correlations between IT effectiveness
and improved effectiveness in finance, procurement and HR. This
is enabled in part by the automation of basic transactional
activities, which drives down headcount, reduces error rates
and improves cycle times. Staff can spend less time on
transactional activities and more time on analysis and other
value-added activities. For instance, at the Fortune 100
company, the new system enabled finance staff to spend less
time “racking and stacking” data, and it became
easier for them to do forecasting, planning and other analysis
activities. As a result, finance staff could provide much
greater strategic value to their organization.
But IT doesn’t just help staff in the back office find
time to do more strategic analysis. It actually improves the
accuracy of the analysis process. The best IT organizations
focus heavily on designing systems that offer “one
version of the truth” and then make these systems easily
accessible. This dramatically simplifies activities such as
enterprise performance management, supply chain optimization
and financial simulations.
To drive the maximum value from IT, companies should focus
on five best-practice areas. Do careful reward-risk analysis to
identify where technology investment can reap the greatest
rewards. Consolidate and standardize, reducing IT complexity
wherever possible. Rather than focus on minimizing cost, seek
to maximize value at the lowest achievable cost. Outsource
selectively and use outsourcing as a tool to improve
effectiveness rather than efficiency. Finally, the best IT
organizations work with functional leaders to ensure that
technology is implemented in conjunction with best practices
and process redesign.
Senior vice president and director, Boston Consulting Group which
specializes in general management and international
It is easy for CIOs to focus on critical projects to
deliver value. The real challenge, however, is to step back and
ask, “How are we adding value to the
Effective CIOs first focus on where and how they are
creating business value and making the key decisions
transparent to both the business and the IT organization. Then
they execute the plan to deliver the results in partnership
with the business.
For example, I work with a CIO who produces an annual report
that shares what the business has accomplished with IT’s
support. It also talks about where they will jointly focus
their effort and dollars for next year. As with any good annual
report, it discusses the financials: spend versus budget,
benefits of previous projects versus plan, cost-saving
initiatives versus plan, etc. It also discusses what
they’re doing to prepare for the future from an
architecture and technology standpoint. It has been extremely
well-received, and this is in a non-high-tech company.
Another challenge CIOs face as they strive to prove
IT’s value is what to count as the benefits of a project
and how to ensure these benefits are achieved. Everyone focuses
on the hard benefits, which is important. However, articulating
the softer benefits that support key business strategies (which
many times cross-functional silos) is also critical. This is
especially challenging for CIOs who report to the CFO. But
making transparent the hard and soft benefits to the senior
team is the best way to make good business decisions.
Many CIOs also now group projects into
“programs,” a simple concept that can have powerful
benefits. Focusing your development and business resources on a
small number of programs makes it easier to communicate and
more effective to measure benefits across business units.
Associate Staff Writer C.G. Lynch can be reached at