3 steps IT can take to prove and manage value

keithmacbeath.jpgBy Keith Macbeath, senior principal consultant with HP Software Professional Services

 

The IT function brings value to the business, right? Most, if not all, of us in IT would say yes. Can you measure it? There’s the problem. The value that IT brings has always been assumed. And since historically that value hasn’t been talked about in a structured or quantified way, IT has gotten labeled as a cost center. Today, with external services chipping away at internal IT’s role, the issue of demonstrating value has never been more critical.

 

Of course, if IT was truly just a cost, then enterprises would try over time to get rid of it, or do the absolute minimum. Yet there are very few industries today in which IT does not play a very significant role in the operation of the business. So IT is there for a reason. But the reason that value management hasn’t been done is that it requires a certain number of things that IT either has been uncomfortable with or hasn’t gotten around to.

 

IT needs to tackle these issues however if it wants to be a strategic partner to the business. Here are three steps that IT can take to turn this around.

 

1. Report results in business terms

This is something I often tell clients: nearly all business functions can report their targets for the year and how they’re performing against them in business terms. Sales can do that, marketing can do that, finance, supply chain, manufacturing, store operations and so on. Every function does it except IT. Generally IT can talk about its goals for the business only in terms of inputs: how much we’re going to spend, how many projects we’re going to do. But these are still not business outcome-related since they’re not business measurements.

 

So one of the first things IT has to do is to be able to report what it’s doing in business terms. And the reason that’s difficult is that IT historically is fragmented in silos; everything is organized by cost centers which represent how IT is produced, not how IT is consumed by the business . In IT terms, you can say, this is a skill I have, this is what I do. But that doesn’t really tell you why you do it or what you’re doing it for. So you have to create model that can tie back IT effort to specific business activities such as an application or a business service – for example, the CRM system or the policy administration system or the delivery fulfillment website. These need to be something that the business actually uses and understands.

 

What does this look like?

  • Before reporting in business terms: IT might say: We completed 150 application development projects and we can tell you what each project cost. And by the way, in operations, we have 16 data centers, 55,000 servers and we decreased the number of staff in operations by 5%.
  • After reporting in business terms: IT might say: The cost of the 100 services we provided to the business was such-and-such by service. So the store operations payment systems cost us $35 million to run in May, which was a X% increase over April, but this tracks against a throughput volume in the store increase of Y%, so our per-transaction cost went down by Z%.

If you do this, you now know the cost by service to the business. And that gives you a baseline from which you can start to look at IT value.

 

2. Relate costs to a revenue stream

This brings us to the second challenge for IT. To get to business value, you have to relate IT costs to a revenue stream. And you probably need to track it against other costs – not just IT costs – to get a total view of how the business is performing and what contribution IT has played in that business performance.

 

That requires you to think about a lot of things that IT is not responsible for. But some organizations do this. For example, one major hardware company has created a structured model of benefits that looks at the things that have a positive impact on the business: revenue increase, margin improvement, cost avoidance and so on.

 

If you drill down into revenue increase, they’ve come up with different ways to categorize that. So, for example, under revenue increase IT might say “increased sales force productivity by X%.” And under that it might say, for example, “increased sales force productivity by X% by moving to Salesforce.com.”

 

3. Look at business benefit assumptions on a portfolio basis

In tandem with the two above steps, you should do a business benefit analysis across all your IT investments. It is already true that whenever you make an investment you create a business case that compares assumed benefits against projected costs. Start looking at those business benefit assumptions as a portfolio, not just project by project. When you do this you’ll see what you’re really seeking to do as a whole and whether you’re double counting.  

 

We are working with a customer – a large insurance firm – that has recently gone through this exercise. They’ve looked at all their current projects and looked at the business cases for them and found, for example, they had 15 different projects that all had among their assumptions an increase in customer loyalty. Now, customer loyalty is one of the biggest drivers of profitability in insurance. On a per-project basis, the assumed increase in customer loyalty that was very reasonable – maybe half a percent. But when you added them all together, and the result turned out to be 7% – that was not reasonable. So almost by definition they were over investing.

 

The second part of this is to test for whether those assumptions were achieved. As IT becomes more and more mission critical to business competiveness, it’s more and more important to make good predictions about the value of IT investment. And you’ll never know unless you start to measure the success and failure of your predictions. It should be standard operating procedure to find out how good your assumptions are. After all, that’s one of the things that distinguishes a successful business from a failed business.

 

For more information about managing IT value, see HP’s IT Financial Management Services.

 

Related links:

Comments
Nadhan | ‎07-24-2012 02:20 PM

Great post, Keith.  I would extend your points to value the applications to balance the overall portfolio.  http://bit.ly/NTwqXe 

Guest Blogger (HPSW-Guest) | ‎07-25-2012 02:22 PM

Nadhan, I agree; as you point out in your blog, keeping track of the net present value of applications is a good way to think of this as it forces a forward-looking dialogue with the business.

- Keith

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