by Stephanie Overby

IT Value Is Dead. Long Live Business Value.

May 12, 201117 mins
Business IT Alignment

Business outcomes from technology investments are all that really matter. The CIO’s challenge is finding new ways to prove IT’s worth.

The end of IT-business alignment is nigh. And no one is happier about it than the business-focused CIO.

“If you stand in front of an audience of CIOs and start talking about IT-business alignment, at best you get eye rolls, and at worst you get people walking out of the room,” says Shawn Banerji, a New York-based CIO recruiter with Russell Reynolds Associates. “Alignment has been a big trend for quite some time and—as with most trends—it has gotten a lot of lip service. But the ability to move beyond that into the practical manifestation of IT and the business being one is a progressive reality for a lot of organizations today.”

The strategies IT leaders have employed to more closely connect the technology organization to the larger enterprise—embedding IT staff within business units, understanding business processes, communicating with end users—have been all well and good. But alignment, it turns out, is not the ultimate end for corporate IT. In fact, says Dave Aron, vice president and fellow in Gartner’s CIO Research group, the language of IT-business alignment—encouraged and endorsed for more than a decade by industry analysts, consultants and, for a time, this magazine—is now dangerously counterproductive, setting IT apart from the enterprise even as technology itself becomes more inextricably entrenched in it.

CIOs must change the conversation. IT value is dead. Business outcomes are the real and only measure of IT worth.

“Today it’s less about, ‘I don’t understand your cost structure. I don’t understand what you’re delivering,’ and more about, ‘How can I leverage technology to deliver new products and services?’” says Dave Codack, vice president of employee technology and network services for TD Bank. “That’s forced us to look at the ways in which we measure technology. We’ve been inadequate in our ability to define technology value in concert with the values of the business. It’s difficult.”

But IT leaders who want to remain relevant—and employed—have no choice. “The next step on the journey is to move from alignment to engagement,” says Aron, “treating the rest of the business as partners, creating business value together.” According to Gartner, by 2015, the primary factor determining incentive compensation for the CIO will be the amount of new revenue generated from IT initiatives.

“IT began in the back office of business, it moved to the front office, and now it has deeply penetrated all aspects of the business,” says Louie Ehrlich, CIO of $204 billion oil company Chevron and president of its information technology unit. “Everything is connected to everything. You have to be integrated.”

Yet shifting the focus from technology outcomes to business performance isn’t easy. IT has decades of traditional operational metrics, methods and best practices to rely on. Calculating technology value using business terms is an evolving art. CIOs who attempt it readily admit that it involves some guesswork.

So where to begin? Anywhere. Just get started.

“Our profession has such an engineering mind-set: define, test, try, retest, try again. But you will never find a perfect way of doing this,” says Ehrlich. “There’s value in just trying to articulate IT value in business terms. There’s value in just getting in the game.”

There Are No IT Projects (Really!)

For years, the goal for CIOs has been a seat at the executive table. “Then half of them got there and said, ‘Oh my God, what am I doing here? I’m a functional operating person. I’m not equipped to take this on,’” says Russell Reynolds’ Banerji. The other half, however, were better at business strategy than most of their C-suite peers, thanks to their broad view of business information.

In the past eighteen months, says Banerji, organizations have been moving to a more data- and analytics-driven approach to internal decision making and interacting with customers. His clients are asking him to find CIOs who share this vision for IT. “The ability to aggregate data and information assets and convert [them] into actionable knowledge—whether it’s for financial forecasting, sales forecasting, more precise understanding of markets, how they manage risk—is central to the business.”

That’s highlighted “the importance of IT leaders really being leaders in the company, not just leaders in IT,” says Richard Boocock, vice president and CIO of $9 billion Air Products and Chemicals. Boocock has spent 28 years at Air Products doing everything from selling hydrocarbon-processing facilities to rolling out SAP. “We live or die on creating customer value and shareholder value. There is only business value.”

Of course, if you had a dime for every time a CIO talked about how there are no IT projects, there are only business projects, you’d be retired by now. The difference is “people really mean it now,” says Edward Hansen, a partner in the law firm Baker and McKenzie, who helps CIOs structure and negotiate transformational IT and outsourcing deals. Look at something as traditionally tactical as telecom services, says Hansen. The focus during negotiations for telecom services used to be cost per minute; now it’s networking and sales and “all the socioeconomic implications associated with it.” Discussions cover needs as diverse as networking, social media and voice and data convergence, according to Hansen. What used to be a purely technical function has evolved into a strategic service.

That business leaders appreciate the crucial role IT plays makes it easier to gather the momentum necessary to shift from IT to business value, says Ehrlich. It also means everyone wants something from IT, and business value is the easiest way to pick the winners. “How do you decide what to put your energy and dollars into when the opportunity set is just endless?” Ehrlich says. “What better way to do that than to put it in business terms and make decisions that make the most money for your company?” That’s difficult to do in an IT department that is merely aligned with business. “In the world of alignment, the customer is the business, and the business is always right,” says Gartner’s Aron. “[It] doesn’t allow the CIO and IT to influence business strategy by shaping demand for more valuable projects.”

CIOs used to measure their personal value by budget or headcount and their team’s value by delivering on time and on budget. “That’s an arcane approach to measure your relevance,” Banerji says. “Historically, they’ve talked about alignment because that’s all they could possibly hope for.” Today, CIOs are more likely to be rewarded for overall business performance than for some technology project or initiative, Banerji says.

“This goes beyond alignment exercises. You need to understand if there has been an impact on the business,” says Ehrlich, “And the question becomes, How do you measure that?”

It’s Everyone’s Money

Just over a year ago, when Brian Hardee took over as CIO of Oxford Industries, an $800 million holding company that owns such retail brands as Tommy Bahama, Ben Sherman and Lilly Pulitzer, it was clear where IT stood. “IT was just a utility—storage, email, phone,” says Hardee. “And if you don’t talk to the business in the terms of the business, they’re still going to continue to perceive you as a utility.”

Previous IT leaders had reported metrics like applications supported or total headcount, which meant nothing to the business or functional units. “The biggest measure for the previous CIO was the average tenure of his employees,” Hardee says. “That doesn’t drive business value.”

A veteran IT consultant, Hardee gave his CEO the bottom line: Oxford Industries was spending 100 percent of its IT budget on sustaining the business and zero on innovation. “That was a compelling number to the CEO,” he says. “You’re spending all that money, and you’re getting nothing of value.”

Since then, Hardee has been making progress, first re-evaluating telecom expenses (saving hundreds of thousands of dollars) and then developing a list of new projects based on business strategy and value. One that made the cut is a financial supply-chain management system to facilitate centralized credit management. “In these tight times, where vendors and other customers are not as creditworthy as in the past, I don’t have to tell them why [the system] is better than standard general ledger software,” says Hardee. “But I do have to help them understand why if they want this and they want something else, we can’t do both. It’s been an incremental education.”

For every new investment, Hardee creates a business case and manages it using a one-page project overview document. He explains the purpose of the project, the objectives, how it’s aligned to business strategy, and the expected business results—for example, how a new piece of software will not only cut costs but increase sales and reduce risk. Next, he hopes to develop a set of initiatives to extend the customer reach of Oxford Industries’ retail brands by using more analytics and new e-commerce systems.

CIOs further along in their efforts to measure business impact are putting IT-centric measures like uptime and systems availability on the back burner to focus on business goals like customer retention and operating efficiency.

Dee Waddell is group information officer of marketing, sales and customer service with $2.3 billion Amtrak. Waddell meets with his business partners once a year to discuss expectations and develop business-focused service-level agreements (SLAs) for IT to meet. His IT group also publishes an annual report of its business results. Traditional technical metrics like network use and applications supported are still tracked, but Waddell doesn’t use them to elucidate IT’s business contribution.

At TD Bank, call centers are no longer a cost to be contained; they’re now revenue generators. “When you focus on metrics that define value, it’s a very different conversation than the one you would normally have about [doing things] faster and cheaper,” Codack says. “It’s about IT’s contribution to those sales metrics. What has technology done to drive that revenue?”

Business executives have increased expectations for IT, says Codack, driven largely by the value they’ve reaped from technology at home. “There’s been a rapid onslaught of technology that provides real value for them in their personal lives,” Codack says. If IT doesn’t provide similar value at work, they won’t hesitate to look elsewhere for it. “We can’t be naïve and say we’re all one team and don’t have to define and drive our contribution [to the business],” Codack says. “Everyone spends a fair amount of time [working] to improve gross and margin. You have to defend [IT costs], but it’s more about your contribution versus your spend.”

The goal is to move toward an “increasingly common vocabulary,” says Boocock. Take a seemingly technology-centric decision: when to upgrade an operating system. “In the past, that was purely an IT decision,” Boocock says. “But upgrades cost a lot of money and they take resources away from other initiatives. It’s still my decision to make, but it needs to be framed in business terms.” Instead of saying the upgrade needs to happen because the existing version is no longer supported, he explains the increased operating risk that the company will be exposed to and its inability to build new capabilities without the investment.

Or consider the typical infrastructure reliability metric—99.9 percent uptime. “We used to celebrate meeting that,” says Chevron’s Ehrlich. “And while we were celebrating, there was a business leader saying, ‘Oh yeah, where were you that Saturday when we couldn’t collect credit card payments?’” The old operational measures are necessary, but not sufficient. Chevron IT created a business incident index to track the number of IT service issues that affected business and the impact of each in terms of revenue and reputation. Ask Ehrlich if it was hard to figure out a way to quantify that impact and he lets out a “Heck, yeah!” In a decentralized company with a presence in more than 100 countries, thousands of transactions are taking place every minute. “To get that insight isn’t easy, and we’ve tried a bunch of different things,” he says. They ultimately settled on ranges—low, medium and high—defined by financial impact.

The farther away an IT investment is from the front lines, the harder it is to frame in business terms. Network assets, for example, could be used in 101 different ways, says Ehrlich. “How do you quantify the business impact of that?” He doesn’t. “That’s where we’ve landed,” he says. “Some things are just a utility that we run as cost effectively and efficiently as we can.” Those investment decisions are still made strategically. They’re just tied to IT rather than business strategy.

That’s not a bad place to be, says Gartner’s Aron. “Treat run-the-business, regulatory or risk investments as a tax—checking [that] the business is taxed the right amount,” he advises. “Treat value-generating, IT-intensive projects like all investments, and optimize based on outcomes.”

Sometimes, all you need is a little finesse. Consider data center virtualization. Boocock knew that in the absence of virtualization, just 15 percent of a typical server farm is used. Air Products has hundreds of production plants around the world, and the company’s leaders would be irate if only 15 percent of any of them was being used. That industrial production corollary made for the shortest IT sales pitch Boocock has ever made. “The philosophy of business value has to be applied across the whole continuum [of IT services],” he says.

Start Somewhere

Despite IT’s efforts to measure business impact, its universe—including vendors, service providers, and even some business partners and customers—may be slow to adapt. “The world may not be changing at the same pace the CIO is changing—even within organizations,” says Hansen of Baker and McKenzie. “There is an education process that needs to take place.”

For instance, if you’re serious about making decisions based on business value, you also need an IT team that is up to the task. But it takes time to build a staff that knows how to think about revenue and customer engagement in addition to development costs and system performance. Oxford Industries’ Hardee winnowed his already small IT group from 35 people down to 14 who could take IT decision making and communications in a new direction. “We didn’t have the right resources,” he says. Now he’s looking for cross-functional capabilities. “Even if I’m hiring a business analyst, I’m not just hiring a financial business analyst,” Hardee says. “I want a financial supply chain business analyst.”

“It’s critical to build a strong, business-focused set of leaders that have future potential both within and outside of IT,” Waddell says. “The leadership and management of IT must become more attractive for strong leaders that come from the business side, have the aptitude to understand the strategic value of technology, and can relate with technical personnel.”

Business rotations are a requirement for even the newest additions to IT at Air Products. “Future leaders will need to have a broad portfolio of skills and capabilities, not to the level that they’re [business function] experts, but to what I would call having a strong appreciation for it—how we do business, who our customers are, what markets we serve and if and how I bring that into play as a leader.” New hires fresh out of school do a stint outside the technology group in materials or finance, for example.

“In the past, taking a new IT professional and, within a year, moving them outside of IT to gain experience elsewhere would have been considered career suicide” for the new hires, he says. Now it’s the cost of doing business in IT, not to mention critical for technologists’ career survival. Some veteran technology professionals can’t adjust. “There are some people who actually just like to do certain things in the IT space,” Boocock explains. “But if we’re not going to be doing those things [internally] anymore, that’s not going to be an option.”

Hardee says that as a result of prior IT leadership, business leaders within his company haven’t understood the value of IT as a competitive weapon, which ironically confounds his efforts to promote a business-oriented view. “If you’re relying on your brand to carry you to the next level as opposed to innovating and connecting in terms of analytics, you’re fooling yourself. I’m trying to communicate that to them,” he says, by explaining to them how technology can reduce inefficiences and generate revenue.

And so his recent new hire, he says, is a marketing and communications professional. In the meantime, he’s partnering with everyone he can. He recently set up a meeting with the marketing teams at Lilly Pulitzer and Ben Sherman, which Oxford Industries acquired in December, to introduce them to a new social media listening tool. Lilly Pulitzer had its own CIO, but Ben Sherman’s CIO didn’t engage with business or marketing employees. Hardee now serves as the brand’s acting CIO. “They were so happy with the fact that a CIO reached out and was trying to help impact [business] results,” Hardee says.

Fundamentally changing the way IT decisions are made and IT value is measured takes time. Ehrlich, Waddell, and Boocock are over three years in. Codack has been at it for just under two. Hardee is just getting started. And they all agree it’s probably a decade-long process.

“If we’re talking about the CIO as a pure business person, we’re not completely there,” says Banerji of Russell Reynolds, who estimates that about a third of IT organizations are aggressively moving in this direction. “There are a few organizations that do it very well and certain IT leaders do better than others. But it’s not pervasive yet. The first movers are setting the tone and others will scramble to catch up.”

At TD Bank, “the awareness is there. The acceptance is there. We have a lot of testing and trials going on,” says Codack. “It will be a number of years before we settle on what works.” The goal is to create a new value framework, figure out what metrics work best, and use them as benchmarks to figure out how to increase the business impact of IT over time.

Measuring the business value of technology at Amtrak is also a work in progress, based on the understanding that business leaders care more about customers than servers. SLAs for the website include the percentage of time that bookings can be made successfully or that train statuses can be retrieved. “These are availability metrics,” says Waddell, “but much more relevant to our business customers.” They will serve as stepping stones to more advanced measures of business value, such as the number of bookings. “It is absolutely imperative that IT become versant in the business and is an enabler for the business to deliver to external customers,” Waddell says.

At Chevron, the IT group is “nowhere near where we ought to be,” says Ehrlich. There are pockets of excellence, but also pockets of absence when it comes to measuring IT in business terms. Some parts of the organization are great at it; others are struggling. “I’d like to get us all up that maturity curve more so that if you ask them what is the value of IT, they explain it to the business in the terms of the business.”

It’s not perfect, but it’s progress. “How do you measure value? It’s a constant discussion among CIOs, and I think some of us get paralyzed,” says Ehrlich. “But you have to just go for it. Do it wrong. Just do it. What’s the worst thing that could happen?”