How do you know that your investment in a new business application has returned value—and how much value?
By John Stoiber
Your company has just spent eight months and millions of dollars implementing a new business application, when suddenly the chairman of the board asks if the application has delivered any quantifiable benefits. What do you say? Perhaps the value will not begin to accrue for months or even years. If value is realized, how will you know? Without a disciplined approach toward valuation of IT projects and a process for measuring progress toward specific, quantifiable goals, most IT and business executives will not be able to answer these questions with confidence. To increase the odds that IT projects will yield the desired results, both IT executives and their business colleagues should give “value capture”—the process of recognizing and acting upon opportunities to increase a company’s value—the same level of attention as other top IT concerns.
Companies that get the most out of their IT investments generally follow the five basic steps of value capture (see diagram at right). The steps are simple and logical, but too often IT and business executives skip one or more steps and therefore fail to realize value from IT implementations.
The process of capturing value begins with identifying and understanding the dynamic market forces that represent opportunities for a company to increase (or maintain) its corporate value by reducing costs, increasing revenue or improving capital management (Step 1). These market forces might include the evolution of the Internet, a competitor going bankrupt, the emergence of an upstart competitor or the passage of new industry regulations. In the second step, enterprise leaders devise strategies to focus the organization on capitalizing on those market opportunities. Step 3 involves weighing and choosing among tactical initiatives, such as implementing an enterprise resource planning (ERP) system or delving into electronic commerce, to execute the chosen strategies.
Assuming value is defined in terms of business performance, investments can then be tracked—and managed—over time to ensure that the expected value is truly realized. This fourth step, managing investments, encompasses the hard work of actually implementing the project, which might include designing and building the systems, streamlining processes and training end users. Step 4 is especially critical because no value can be accrued until those things happen. But companies that attempt to skip the earlier steps and leap right into implementation may find that they’ve built an IT system that delivers no value at all. Companies therefore need to track results carefully to be sure the investment is paying off—that the value captured in Step 4 links back to the original market opportunities (see lower loop in diagram). If it doesn’t deliver value, then the project should be modified or scrapped and the strategy and investment decisions reconsidered.
In Step 5, communicating to the enterprise, organizations that manage their investments effectively should have a powerful message to convey to employees, the board of directors and outside stock analysts about what’s been achieved by investing in the project. This value feedback, as shown by the top loop in the diagram, also becomes an essential tool for refining the decision process for future investments.
Set performance goals
Although the five steps are straightforward, many companies don’t see them to fruition because they lack the resources—or the resolve—to develop measurable goals and track progress toward them. Performance measurement is the linchpin of the value capture process. Once executives have identified a value opportunity and strategies (Steps 1 and 2), measurement becomes critical as they evaluate tactical options—including investing in new technology—before deciding which to pursue. If value is to be captured from IT, it must have a measurable impact on the performance of the business.
Before making any decisions about whether to fund a proposed IT project, you first must examine the scope of the project and break it into logical subcomponents. Then describe qualitatively (in words) how each part of the project will affect the business. If you can’t articulate the desired results, the value will be difficult to quantify.
Next, think about the quantifiable performance measures that further describe the impact. For example, suppose a software package will increase the number of orders an order-fulfillment specialist can process each day. Qualitatively, the software allows the specialist to streamline a conversation with a customer, asking fewer questions and entering the information faster than before. The software’s effect could be quantified in terms of orders per day per specialist, average time per order or perhaps time spent with the customer per order. Measures can address such things as productivity, quality, customer satisfaction, revenue and cycle-time reductions. Identify measures that most closely represent the specific impact of the particular IT application being evaluated and avoid measures that could be influenced heavily by other concurrent projects. This will help to isolate the impact of the application.
Quantify performance, not dollars
To quantify the results of an IT project, resist the temptation to jump immediately to dollars and cents. Dollars are too general and can’t readily be traced to individual investments. Although many companies are driven by bottom-line concerns, it is, in fact, hard for most people to think only in terms of dollars. It’s much easier to manage to other measures such as orders processed per day or orders handled correctly the first time. So consider the IT application in terms of its effect on such measures, keeping in mind that people may not use the technology as intended and that changes in process steps may be required.
For each measure selected, collect the necessary data (such as average time it took to process orders over the past year) and calculate the baseline performance. Much of the data can be tapped from existing systems or reports. Other data may require more work to collect.
Next, making logical assumptions where appropriate, estimate how the new technology will affect performance. To estimate the potential decrease in average time per order in the orderfulfillment software example, you could interview several order specialists to identify the activities that can be streamlined or eliminated. Don’t assume you know what order specialists will do with the new technology. These folks will ultimately use the application, and their opinions on how it might help them to be more productive can provide critical insight into value estimates. Once you have collected data from a reasonable number of users (say, 20 percent), calculate an average expected decrease in time per order. Then figure the potential increase in order-taking capacity, since each specialist would be able to take more orders per day.
The final, crucial step in quantifying expected performance impact is for IT executives and business unit leaders to review the value projections together. Since business leaders typically have established performance goals for their departments, performance estimates for a new system should be compared with business goals to make sure the new application will meet business needs. Both business leaders and IT executives must commit to measuring progress against performance goals to ensure that the new technology is delivering value.
For many IT projects, the resulting value does not always occur immediately. Although some benefits of IT begin when the system is turned on, others are dependent upon the productive use of the tools in practice. Success hinges on effective user training programs and on overcoming human resistance and may require modification of existing processes. Weigh all of these delay factors in determining when achievement of the performance targets can be expected. Be as realistic as possible to develop a believable and achievable timetable. A monthly grid outlining the 12- to 18-month period following implementation will help everyone understand when the benefits of the technology will be captured. Since performance gains will ultimately rest on the shoulders of business area leaders, business and IT executives must agree not only on the goals that the technology will help them attain but also on the timetable for achieving them.
By developing performance measures and estimates that define the value of the new technology, you’ve assembled the elements of a project scorecard—a vehicle for tracking results. Organized by the processes or areas affected by the new application, the various measures that constitute a scorecard should indicate both the baseline performance for each measure as well as the performance targets. Results can be tracked either numerically or graphically and are typically expressed as either a percentage of the goal or an absolute number (see “Sample Scorecard” at right). The scorecard should also reflect whether goals are achieved on schedule and can employ the grid developed to show the expected timing of performance changes to do so. Multiple scorecards can help illustrate progress in different areas, such as order fulfillment, billing and customer service, and will also enable business unit leaders to track performance in relation to their own performance goals.
Project scorecards do not have to be complex; they can be created easily using spreadsheet software with graphing capability. Even a crude measuring system is better than none at all since tracking the value of an IT project is the only way to know what you did right and what needs more work. This information is not only critical to demonstrating the success of the project but also serves as extremely valuable input into the investment decision process.
Pay for it
It’s important to build value analysis and measurement resources into the project budget. Too often the project team does not spend sufficient time developing a detailed value analysis, and therefore the benefits are not well understood and cannot be measured. Even when benefits are measurable, the entire project team is typically deployed immediately to the next project, and achieving results is left to the user community. However, some dedicated resource, even part time, should focus on making sure that progress is made and that results are measured. A good rule of thumb is to dedicate 5 percent to 10 percent of the project budget to quantifying expected value and measuring progress against value targets.
Speak their language
Because you have defined value in terms of business performance measures, you will be able to state ROI in terms most relevant to each group of stakeholders. The order-fulfillment team, for example, will identify best with productivity expressed as orders processed rather than dollars saved. However, the CEO will often be more concerned with the dollar impacts. Fortunately, translating the performance measures into dollars is relatively simple. For example, suppose the new order-fulfillment software is projected to yield a 30 percent productivity gain. If there are 20 order specialists, then a quick calculation would show a capacity gain (or savings) of approximately 6 order specialists (20 x 0.30). This means that if the department currently processes 2,000 orders per day, the same department could process 2,600 orders using the new software. Assuming each order specialist earns roughly $40,000 annually in compensation and benefits, that translates to an annual cost savings of $240,000—not including the money saved by not having to hire and train six new order specialists. A similar process can be used for revenue gains and capital management.
It’s important to define value in both performance measures and dollars, since all stakeholders will be able to understand the impact of the new technology in terms they deal with most often. Order specialists who know that they should be able to handle 30 percent more calls each day are more likely to hit that target than if they’re told the new software will help them save the company $1,000 a month. And ultimately, the people who use the technology determine its effectiveness. Value can be expressed in many ways, but it cannot be expressed at all unless it is captured. With clearly defined qualitative and quantitative goals and the dedicated resources to measure whether they’ve been met, companies will be well positioned to reap the benefits of IT.