Noodling Numbers

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Wondering how to best assess the value of IT? This fictitious case study covers:

* Value assessment in an environment of urgency* Selling investment leaps of faith* Allocating costs to achieve maximum business accountability* Partnering with the new CFOLast October, when AusMed (not a real company) CIO David Shepard was feeling particularly paranoid about his new job, he might have viewed this new CFO as some minion of hell, loosed upon the streets of Melbourne's CBD with the singular purpose of hunting him down to torment his living soul. But today a more relaxed, more mature Shepard can see that Scott Brunt is no demon posing as a bespectacled MBA and CPA with a penchant for startling Bill Cosby-style jumpers. In reality Brunt is simply another challenge, a tough-as-nails chief financial officer that AusMed brought in last month to apply more fiscal discipline to the in-progress turnaround.

AusMed CEO Maureen Carleton, who had promoted Shepard nine months ago when she took over the floundering company, was an aggressive proponent of IT as a competitive weapon. At first she'd insisted on keeping spending level, but increasingly ambitious initiatives had blown the budget. Now the company's board was concerned that the promised turnaround payoff had yet to materialise, and it wouldn't be long before stockholders got impatient as well. Enter Mr Brunt, former CFO of a midsize engineering company, on a mission to determine the "value of IT to this business" and to "project, evaluate and audit the return to the bottom line and the shareholders' pockets".

Knowing that value could mean something different to everyone, Shepard probed Brunt for his own definition during their first meaningful one-on-one encounter: a lunch at a Thai restaurant at Shepard's invitation. As he made what seemed to Shepard a showy display of his facility with chopsticks, Brunt explained that he viewed value as a broad pay-off and the ultimate outcome of all the turnaround measures now under way. He saw the value coming from the business initiatives and processes that IT was enabling; he seemed to recognise that technology alone wasn't the creator of value. But at the same time he contended that IT was the most costly component of these initiatives, and therefore there was a special obligation to measure its costs and payback - its ROI and efficiency. What measures did Shepard already have in place? What was AusMed's total cost of ownership? Where were the savings from bringing IT to bear? What business growth was IT delivering for its continually expanding dollar?

All good questions, but Shepard had few good answers. And he couldn't use chopsticks for nuts.

In the past nine months Shepard and everyone else had moved at breakneck speed, planning and implementing initiatives as fast as possible - a worldwide knowledge-sharing intranet, a Web site for consumer sales of homeopathic remedies and the integration of a number of acquisitions. AusMed already had project management guidelines - time and budgetary checkpoints (many of the latter having been missed lately). But there hadn't been time or patience for establishing baseline measures and implementing complex valuation methodologies. There was barely enough time and energy for planning, let alone metrics.

Shepard's appetite deserted him; he'd pushed and poked at his vegetarian Pad Thai, reducing it to an unappealing mush. He was tempted to tell Brunt that if the stockholders were getting anxious about profits, it didn't make a lot of sense to slow down to measure the cents when dollars were more important. He was also tempted to say that since the business units were primarily responsible for value creation, then their leaders should be the ones to measure and audit that value.

But instead of saying these things, Shepard launched into an explanation of the measurement-confounding complexity of any given system. Take the worldwide intranet. It would be tricky to allocate the costs of the intranet's infrastructure, very difficult to factor all the costs of changing the way knowledge workers worked and even harder to quantify the benefits of knowledge sharing to the company. Brunt nodded sympathetically but didn't give a centimetre. He wanted an accounting of AusMed's major existing initiatives and a valuation plan to apply to future endeavours.

In the days that followed, Shepard studied what could be done, talking with his senior IT people and his closest executive peers.

It was clear that all measures of value, and all expressions of that value, had to be in terms of business benefits, either savings or contributions to the bottom line. A proper before-and-after calculation would require Shepard to tediously reconstruct baseline measures of productivity, time to market, expenses for employee travel, and so on, associated with the older processes that had been or were still to be replaced.

AusMed's newest project was a business-to-business e-commerce system to enable just-in-time inventory replenishment with all of its distributors. The system, which had just entered development, would replace the EDI arrangements AusMed had made individually with its largest customers. And it would be scalable to the smaller outlets that had baulked at adopting costly EDI. The new system had seemed like such an obvious strategic win for logistics that no thought of value assessment had been considered. What method could be applied to measure the value of this initiative?

AusMed's CTO, Greg Devlin, raised the idea of the balanced scorecard. Devlin thought the measurement tool could be applied to this and most other IT projects. Still, the effort would take time and resources that were scarce on Shepard's staff. His biggest fear was that he and the IT organisation would be burdened with the whole valuation effort, though the realisation of value would be in the hands of the business unit leaders. How could he make sure they would take accountability and not leave him holding the bag?

Making things worse, the IT budgeting system was hardly conducive to accountability. Shepard was in charge of a central pool for funding, which all the business functions had grudgingly contributed to a year ago. Back then, the IT budget was a sort of emergency fund to get things rolling quickly. A year later, it was clearly time to create a more mature way of financing initiatives. Shepard had discussed chargeback schemes with his external network of CIOs and was drafting a plan for this. But would that ensure a fair accountability for costs and value across the enterprise?

Shepard decided to turn to three outside experts in his worldwide network for some quick coaching - measurement and value guru Howard Rubin, Steve Sheinheit, executive vice president of enterprise systems solutions at The Chase Manhattan Bank, and for that unique CFO perspective, Raghavan (Raj) Rajaji, chief financial officer of Manugistics. Shepard gathered them on a conference call and outlined his precarious situation.

Do the Next Right Thing

Raj Rajaji: David, the first thing you need to do is align yourself with the CFO. Realise that your goals are very similar to his. You should get closer to Brunt and convince him that your contribution to the company is in line with the business's strategic initiatives. Try creating an early win by finding a pet project of his and getting it done quickly. That will show him you understand the issues of the company.

Steve Sheinheit: That's good advice. I'd add that there's a business dialogue that needs to be created. We live in a very complex world, with increased pressures of timing, investment costs and risks. Too often, we want to describe all that complexity to the CEO or CFO. What we're saying is, "Commiserate with me, let me show you how complex and risky this is, and how you really need me". But that's exactly what they don't want to hear. They want simpler messages that they can translate into business terms: One, what's the investment in dollars; and two, what's it going to do for me - not how hard this is for you to do.

Shepard: Oops. I think I've already fallen for that temptation. But wouldn't the pressure of Internet time be one of those simple messages: Can we spare time on valuation exercises when the rest of the world is rushing past us?

Howard Rubin: It's true you can't hold up a project you need next week with three months of analysis. But you can make the measurement fit the time. On the development side you've got to prep your organisation to have new, fast development processes, to put out small chunks of a project quickly. On the valuation side, you've got to impose more of a venture management approach, where you build a continuous value case and keep refining and managing it as you go along.

Shepard: So I'd define and measure value in a project piece-by-piece rather than holding things up getting it all worked out at the start?

Sheinheit: I think that will work for some things, where you define these chunks along the way that will return business value. But some of your major strategic investments will need to be valued holistically because they can't be chunked out. For these, I like to make management an offer they can't refuse. I would say at worst it's a break-even proposition. We think it will be much better, but we won't be able to prove it until later.

Again, Alignment, Again

Shepard: That sounds like our worldwide knowledge-sharing intranet. We launched it about a year ago on a leap of faith that there would be payoff when people started using it in volume. I don't think Brunt is a "leap of faith" type of guy, though. He wants dollars and cents.

Rajaji: It could be that because Brunt is new to the company, he is testing to make sure his CIO is aligned with the business. Once he is comfortable with that, then I think Brunt will start looking more at qualitative measures rather than financial ones. But until he's convinced that you are in step with the business, he's throwing these financial measurement demands at you.

Rubin: The CIO always needs to show that resources are aligned with corporate priorities.

Sheinheit: Absolutely. What are the things that are really important? The CFO is not interested in every project. He wants to know if the IT agenda matches the business agenda. Projects have to move the company into the future, allow it to compete better. The key is to have the IT agenda articulated in a way that the business can understand.

Shepard: I assume that if the CFO perceives that alignment, we can better convince him of the value of these "leap of faith" projects, right?

Rajaji: Yes, but a leap of faith doesn't mean you jump in with no limits, no understanding. You must have measured checkpoints, budget constraints, and so on. A leap of faith just means it's hard to pin down a financial measure of the benefits. But you need to know when it's working or when to pull the plug. Otherwise, it's just a sinkhole.

Sheinheit: Frame the project in the context of what the competition is doing. Sometimes these initiatives are not leaps of faith but defensive manoeuvres. The role of management is to make some bets - some defensive, some offensive.

Rubin: An organisation must view what it's doing as a risk portfolio. The risks could be technology, size, timing or, in cases like we're talking about, the fuzziness of the benefits. If you have a strategic initiative that intuitively makes sense but it's hard to quantify the benefits, put that into the fuzzy-benefits category of risk. That's your framework for it, and the organisation can compare it with the other projects in the portfolio and decide whether it has tolerance for it.

Try Benefits Management

Shepard: Regardless of what kind of project we undertake, Brunt has asked me for a disciplined methodology to apply. Right now we have budget and development milestones and checkpoints. What more benefits-oriented measurement tool can I adopt across the portfolio?

Rubin: There is a concept called benefits management; it's a step-by-step plan for making sure the benefits are realised. Take something like your Internet-based inventory replenishment system, which has external distributor customers. Or maybe your intranet, where the customers are internal. You have to make your CFO and the rest of the executive team realise that there's always some kind of adoption curve for systems that try to change the way people work. You will have to convince customers to switch, so there will be an initial period where they are learning the system but are dubious. Then there is a crossover period where they start using the system. The third phase is where you'll get the financial benefits.

The measures are different at each stage. When people are learning, you're watching how many are going to the training. When you are in the crossover stage, you are tracking use of the system and movement away from redundant systems. And finally, you measure from the benefits perspective. So you have to make the organisation aware of the transitional stages and the different measures of uptake, penetration, proper usage and, finally, the benefits.

Shepard: Even when we get to the benefits stage, for something like knowledge sharing, it's got to be a real challenge to quantify the return to the bottom line.

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