In the mid-1980s, a famous TV commercial ran with the punch line “Where’s the beef?” Roughly at the same time, surveys of the nation’s technology leaders found business executives and CIOs both asking, “Where’s the IT value?” Twenty years later, that same question is still being asked?but not for lack of ways to measure it.
You would expect, given the Balanced Scorecard, real options analysis, business case analysis, portfolio management and all the other ways to compute ROI than there are lottery game choices, that IT value would be well understood by now. But that’s simply not the case. There are as many reasons for this as there are options. But one key factor is that most people skip the important step of defining just what it is they’re measuring. Before you can leap to quantifying value, therefore, you must first focus on identifying what kinds of processes are of true business value to the organization. Just what are the business needs you are seeking to support and drive? The precursor to this value quantification is value “categorization.” Once you have your enterprise’s value categories identified, then you have a new and powerful basis for describing where IT investments are going and measuring their true value in terms your business peers can understand.
Today, most CIOs communicate IT value and finances to their internal business customers by reporting spending on applications development, maintenance and infrastructure. Instead, imagine if CIOs reported on what is spent on growing revenue, retaining customers and complying with regulatory demands?that’s what value categorization enables. It increases transparency and provides a sound basis for measurement because it gives CIOs the tools and the terms that the business understands. For instance, what if the CIO reported spending $30 million on operating expenses for maintenance? That sounds bad. But if the CIO were to change the terminology by showing more precisely how these expenses are supporting the development of new products, then they would be using terms that the business side can actually understand. The “beef” in value categorization has to do with finally being able to link IT to where and how the business value of IT shows up. Those that have taken this approach are now experiencing tighter business to IT alignment, more effective IT investment planning and overall IT transparency.
Linking IT to Business Goals
Look at any company’s annual report, and the categories of things that are valuable should be clear. Value to a profit-focused enterprise comes from supporting revenue growth, protecting revenue, cost reduction, cost avoidance, regulatory compliance, generating customer satisfaction and loyalty, and perhaps more.
Once you can list the categories of value, identifying the right measures becomes much easier. However, some things a company does with IT do not likely have a direct impact right to the top line or bottom line. An investment doesn’t have to be directly linked to profits to be valuable or to eventually be important to the health of the company. So how do you make the connection from IT investment to value? Those investments that directly have an impact on a company’s finances, its revenue or profitability are first-order investments. IT systems that support the customer (service quality, satisfaction), which then, in turn, translate into financial performance, have a less direct impact and are therefore second-order effects. Those that affect business processes, which, in turn, may have financial impacts and customer impacts, are third-order effects. And those that affect the organization itself and its ability to grow and learn?thereby influencing the other three areas?are fourth-order effects. By looking at your investments and placing them in one of these value categories, it becomes much easier to explain the value of IT in business terms.
But how exactly can you determine just where an IT system should fall? As I’ve tried to show in this column, the answer depends on the business and strategic planning your company’s business leaders have already laid out. And once again, one of the best ways to start this process is to read your company’s annual report, which contains information on your company’s market strategy and what its future goals are.
Then, while keeping the enterprise’s business strategy in mind, answer the following four questions:
1. What is the vision of financial performance? Typical answers would be something like “revenue growth” or “higher earnings.”
2. What is being done from a customer perspective strategy? Typical answers are “better customer service,” “increased loyalty and retention” or “enhanced customer experience.”
3. What is being done from a process perspective? Typical answers are “reduce cost,” “reduce cycle time” or “to improve quality.”
4. What is being done from an organizational and learning perspective to help drive the goals? Typical answers are “increase information-sharing” or “improve employee satisfaction.”
Once you get through this exercise you have your value categories identified. Now task your organization with lining up its portfolio or operational systems and projects with them. Create a chart showing spending by value category. And in this chart identify how that investment helps to generate value in a way that truly helps to propel the business forward?either with some sort of a direct financial impact, impact on the customer, impact on process or impact on the organization. And finally list the measures that show that the desired goal is being attained.
A CIO at a large multinational company I know took these basic steps five years ago. Today, it does only value-based reporting of IT performance. Every technology expense is related to one category of value?revenue growth, cost reduction, cost avoidance, market growth and regulatory compliance?and a complete portfolio profile of impacts, key performance indicators and risks is maintained. The results are extremely high business alignment of IT with about 30 percent less cost than peer companies, and comparably high IT effectiveness. If a project doesn’t fit into one of the value categories, it doesn’t get done.
Doing value categorization right means getting back to basics from a pure business and non-IT vantage point. But that’s what IT investment should be all about anyway. It’s about business results and business value, and not about the technology by itself at all.