The IT spend: big gain or big drain?
- 20 November, 2000 12:01
You survived Y2K so well that it's now a faded memory. Your enterprise resource planning implementation is finally done or at least on track and your CRM (customer relationship management) work is well under way.
Now, with time and technology marching on you're energetically tackling the challenge of turning your business into an e-business, knowing that to compete successfully in today's high-velocity business environment, you'll have to constantly accelerate your time to market for products and services.
With the days whizzing by and the pressures ever accelerating, you'd be mad to devote so much as a minute to anything so airy fairy as attempts to assess the value of IT, right?
Wrong. As IT executives get increasingly involved in strategy development, and boards and CEOs get increasingly turned on to the strategic potential of IT, assessing the value contribution of the organisational IT investment is moving right up the corporate agenda.
There are several reasons. For one, the need to prioritise the backlog of projects built up during the Y2K panic is forcing companies to be more particular than ever in selecting their IT investments. For another, CEOs disillusioned with the payoff from ERP (enterprise resource planning) implementations are focusing greater scrutiny on IT spending than ever before. Their scepticism has only been compounded by the way the ongoing costs of some hastily built e-commerce systems are mounting faster than the payoff.
And finally there's the very real determination of now switched-on CEOs and boards to leverage competitive advantage from their IT investments as they finally accept what IT execs have been saying for years: IT is arguably the most strategic investment the organisation can make.
Small wonder that IT execs are under mounting pressure to measure, manage and communicate the value of IT.
In an era where companies and marketplaces are being transformed and redefined on an almost daily basis, most CIOs are hustling for tools to help them quickly align and mobilise IS around constantly shifting strategies and imperatives.
And they urgently need ways to communicate the business value of IT in order to sell those strategies and imperatives to others.
The meaningless method
For years, organisations have typically measured the business value of IT by the number of projects completed on time and on budget. Superficially it would appear to be a reasonable approach. But in fact when Oscar Wilde defined a cynic as "A man who knows the price of everything and the value of nothing", he might have been talking about the IT shop of yore.
And analysts say continuing to measure IT's contribution by project plan will only result in continued misunderstandings and business losses.
According to Gartner analyst Thomas Berg: "The ease of using project completion as a measurement has often caused misunderstanding, precisely because it is relatively easy to measure when a project is on time and within budget."
At the onset of a project, Berg says, a time line and a budget are developed, providing a yardstick for the IT professionals involved. Unfortunately, that yardstick measures only the level of activity involved and the costs associated with completing the prescribed task.
"...unless - and until - the business organisation co-opts, incorporates, and institutionalises the capabilities delivered through the use of IT, no measurable value is realised," he says.
Berg's point is that even the value of the most successful project can only be realised once that new application or service has effected a material change in the way the business unit conducts its business or operation. In other words, the unit has to use the new functionality to reach its goals before any meaningful measure of value can be applied.
"Measuring this value to the business is a matter of first documenting the expected return on investment, documenting all costs associated in the development and ongoing operations (such as business unit and IS costs), and comparing the outcomes," he says.
"Many financial models have been designed to accomplish this measurement and several consulting firms specialise in this discipline. CIOs and senior IT managers must provide answers to the questions from business mangers regarding the value of IT, and using the IT value curve facilitates a better understanding of where and when to measure IT's contribution."
It's everyone's problem
But if IT valuation is to work, pundits say, other departments have to embrace the principle, not just IT.
"Sixty per cent of tech spending is outside the tech department, so putting this [valuation] mind-set only on the CIO is not enough," says Howard Rubin, CEO of Rubin Systems and a Meta Group research fellow based in New York.
Rubin says a critical success factor for the IT organisation is its ability to communicate its performance to business management in a manner that provides a focus on key business concerns in a concise and reliable manner.
Performance measurement in this context performs two valuable management functions. First, it demonstrates to business management that the IT function is being managed with a fact-based approach. Second, it enables both business and IT to visualise and view IT performance trends. When coupled with a content-focused review process, the trends can be put into context, and organisational learning is a key result.
And Rubin notes other advantages. For one, judicious choice of generally accepted and well-defined measures - with a clear understanding of any shortcoming or anomalies associated with them - makes benchmarking within and between industry groups possible.
And the very process of selecting the measures themselves provides a vehicle for highlighting what is important to the organisation by making these things visible through measurement.
The dimensions of measurement
IT organisational measures can be divided into horizontal and vertical. Vertical sets of measures go from the level of business performance measurement (typically in financial terms) to tactical measures that focus on process or product internals.
Horizontal measures cut across the dimensionality of a function from the vantage point of attributes such as productivity, quality, and delivery.
Rubin says the best way to introduce and use measurement in an organisation is to minimise the number of measures in the core set by tackling the vertical levels, where performance is visible to the business across the key functional areas (like development, support, data centre, call centre and help desk).
The basic generic areas of concern and reporting are:
* Productivity and efficiency
* Quality and effectiveness
* Delivery process
* Asset management
* Human resources
There are now a host of valuation methodologies available aimed at making real and quantifiable the link between technology and strategy, and making it possible to define and quantify risk in a meaningful way.
Some have been adapted from the world of finance and business strategy, but some are tailor-made for IT.
The scorecard approach
One particularly popular method is the balanced scorecard, increasingly being used to drive new strategic goals - from prioritising budgets to building new customer service models - more rapidly through the enterprise.
The scorecards are proving a potent means to conveying corporate goals to the frontline workers responsible for delivering them, as well as for balancing traditional financial measures like ROI against operational measures including customer satisfaction, internal business processes and an organisation's ability to innovate and learn.
As a basis for codifying the business vision and understanding the company's value chain it rates highly. And from a paper-based system the balanced scorecard approach has evolved to see a plethora of desktop and Web software vendors offering tools to help in the collection and analysis of measurement data.
But scorecards are not for every organisation - implementation costs can be prohibitive. And analysts say to be effective the balanced scorecard must be used for all the company's activities, not just IT. Without consensus within the company about how the scorecard is used and the assumptions behind it, it can be all too easy to cast the spotlight on IT only to leap to entirely wrong conclusions.
Value information instead
Meanwhile, in Australia another means of looking at the problem is under assessment by some of Australian's leading organisations.
According to two Australian specialists with a seminal proposition to put to the world there's a very good reason why study after study either fails to reveal any positive relationship between IT investment and overall financial performance, or else finds IT investment impacting badly on performance.
They can even explain why a 1993 study of four Australian banks found, after several years spent developing systems to support their core business, only the one that had spent the least had gained competitive advantage.
Daniel Moody (from the Department of Information Systems at the University of Melbourne) and Pete Walsh (from Simsion Bowles & Associates, a Melbourne-based IT consultancy) say the first thing to note is that the successful bank got its edge by integrating its customer information. In other words, technology was no more than the means to the end of information delivery, with information the underlying asset used to win strategic advantage.
They reason that if organisations that succeed in using IT for competitive advantage achieve so much more than their competitors while spending less because they focus on the information itself, information must clearly be one of the company's most valuable assets. And if information is a valuable asset, it's high time someone found a way to quantify that asset.
Certainly they concede there are solid reasons why information has so far tended not to appear as a balance-sheet item. For one thing the nature of information, as an economic good, is poorly understood. For another, current taxation laws conspire against recognition of information as an asset - it's far better for organisations to write off information costs as an expense in the current accounting period than to capitalise them over their lifetime.
But Moody and Walsh contend information assets should at least be included as an off-balance-sheet item and used for internal management purposes.
Now they are taking the concept further, valuing some of the information in a number of large Australian organisations, and getting people to use those valuations.
Measuring the value of information could bring several advantages, Walsh says. For a start information has been historically undervalued compared to other assets, partly because it's never appeared on the balance sheet. Change all that and you can raise awareness of the value of information as an organisational asset: organisations inevitably value most highly those resources whose value they've quantified.
The theory goes that putting a dollar value on information should also improve accountability, giving the organisation a more accurate take on how much information is costing it, and letting it know whether it is getting value from the investment.
"While lots of people are extremely interested in our approach, to be perfectly honest, we don't really know at this stage if it is useful or even possible to value information as an asset," Moody says.
"Over the next couple of years, we aim to find the answer to both of these questions. We plan to apply the method in a variety of organisations, evaluate its usefulness in making decisions about information and use the experience to improve the method."
Most organisations never quantify the enormous hidden costs involved in collecting, storing, analysing and maintaining information. Moody and Walsh's approach calls for management to analyse all the hidden costs as a way of making sure resources are being used in the most cost-effective manner. The results should be increased accountability and reduced waste.
Valuing information should make it far easier to measure IT effectiveness because it measures the value of the product (information) rather than the production equipment (systems and technology). Direct measures of the information 'bottom line' - the value created by IT in terms of information delivered to users - should be the primary basis for developing IT strategies and evaluating proposed IT initiatives.
And there's another advantage. Valuing information should make it far easier to cost-justify implementation of executive information systems (EIS), decision support systems (DSS), management information systems (MIS) and data warehouses, none of which conform to the traditional cost displacement model of systems development.
Information bottom line
Think about it. As Walsh points out, the information stored, not the hardware and software used to store it, is the most expensive part of any information system. Simply entering and maintaining customer information in a customer information system requiring $500,000 worth of hardware and a $2 million in-house software system to operate, costs one organisation more than $10 million dollars a year. And those costs, far from being up front, are usually hidden in the salary budgets of user departments.
"To be most effective, IT strategies should be focused on enhancing and sustaining the value of information (the product) rather than on systems and technology (the production equipment)," he says.
"Business strategies are generally evaluated in terms of how they contribute to the value or profitability of the business - the 'bottom line'. Similarly, IT strategies should be evaluated in terms of how they contribute to the information 'bottom line' - value of information delivered to users. To do this, we need some way of measuring the value of information."
But can information be truly valued as an asset? Moody and Walsh give a definitive "Yes". They say information fits all the definitions of an asset and can be expected to provide future services or economic benefits, as long as it is controlled by the organisation, and is the result of past transactions.
In fact, they say, information satisfies the definition of an asset much better than employees or customers do. After all, when employees resign and customers change suppliers, the company loses their benefits without compensation.
"True, information is a nonphysical, or intangible, asset," Moody says, "but it is the service potential and economic benefits, not the physical form of an object, which is relevant in assessing whether an asset exists," he says.