Beyond EA

Contributor: Alton Gibbs

One of the most interesting things I have observed throughout my career is the mysterious question of “What is the Business Value of IT?”. This question really became main stream towards the tail end of Y2K. After businesses were forced to spend tens or even hundreds of millions of dollars on the Y2K issue they started to realize how large the IT monster had become. Now after having gone through the inventory process to determine the Y2K impacts, the business had had new found visibility not only to the fact that IT was costing them a ton of money but also how little they knew about the vast technology infrastructure the company created over the years. So, the business reacted with an obvious question to the IT department they should have been asking themselves all along, “What is the real business value of all this technology we invested in?” The remarkable thing is the inability of most IT organizations to answer that very question.

In most IT organizations, an investment in new technology is primarily in reaction to requests from the business. There are very few IT organizations that are mature enough or have the business clout to truly lead the business through proactive technology innovation. In my experience the companies where IT has a leadership role with the business represents less than 10% of corporate America. This is an IT organization that has access to the Board Room table as a peer to other Chief Executives in the firm and has respect as a leader. More importantly this is an IT organization that has a direct impact to business enablement by recommending justified technology investments before being asked by the business for a solution to a problem.

So, if the business makes most of the requests for new technology investments, the big question is why is IT responsible for the Business Value of IT?

Let me tell a little story to make my point clear and I will make the IT inference along the way. I know for those deep intellectuals I will leave out a few steps, so lend me a little literary license. You will get the point…

The basic argument is, why is tracking the value of investments in IT any different than tracking investments in the development and sale of a new product or service from your company. Better yet, why is tracking the “business value” of your existing IT infrastructure any different than tracking the revenue achieved through your company’s existing products and services?

Let’s say for example, I was in the business side of an automotive company and was looking for a competitive advantage to take market share from our competition. So I got this great idea to capture the market with a new three-wheeled car. Before I can go get the money to build this new three-wheeled car, I have to present my case to the Board (IT Steering Committee). In order to make the case, I need to accomplish many things. I need Marketing Research (Business Technology Liaisons/Business Analysts) to determine the demographics of who and how many people would buy the car (user community). I would also want them to price the market to see what price point the market would bear. Once I know the market size and price point I would grab some financial experts (IT/Business Finance) to determine an estimate of the expected cost of goods to build this three wheeled car and then calculate the expected revenue during the car’s manufacturing period. If that financial process passes the revenue/profitability test, I would then go out and grab some design engineers (application architects, software developers) to work on the design, hire some folks from sourcing (Procurement, enterprise architecture, and software development) to determine the parts that are needed along and the cost. I would hire some folks from manufacturing (business architecture, enterprise architecture) to determine the impact to the existing manufacturing floor and the cost of manufacturing. I would hire out Marketing and PR firms (Business Technology Liaisons, training) to determine the go to market strategy. Now in the end of this exhausting process I should have a complete business plan (IT business case).

In this business plan, I state what I am building (technical design), what it looks like (end user acceptance), how much it will cost to build (project cost estimate), what impact if any to existing manufacturing (systems integration and architecture), who will be the ideal customer demographic, and last but not least what is the expected revenue out over several years. I would then take the expected revenues subtract the cost of building the car which brings me to the Return on Investment or profitability (business value of IT). Provided that these numbers check out to show a nice profit is possible, I would present this spectacular business plan to board for approval. Now as a responsible business person, in the end, I am responsible for the Return on Investment/Profit Targets that I stated in my detailed business case. If this three-wheeled car project fails to deliver the expected results over a determined timeline, you can bet that the Board would yank the budget very quickly to stop the revenue losses. In the end, I would be held responsible for its failure.

You see in IT today, we do a reasonably good job tracking the cost of delivering a project. But we do a lousy job measuring the business value after go live. Why?? Because it isn’t the Information Technology department’s J-O-B! In the example above, would the guy in charge of manufacturing be responsible for the Revenue, Return on Investment, or Profitability of this new three-wheeled car experiment!? I certainly hope not. Unless his estimates were way off the mark and it was the underestimated cost of manufacturing that killed profitability. Holding manufacturing responsible just wouldn’t make any sense! So why in the world is IT responsible for the Business Value of IT when the Business is the one making the request to build the solution in the first place?

There are several reasons for this, most of them due to the lack of visibility to what it truly cost to run IT (such as time tracking of supporting individual applications tied to burdened rate) and because we have let some systems\applications have an infinite life span. We all know the older our systems the higher the cost to support yet in many cases we have let the failing three wheeled car experiments stay in manufacturing when it should have been discontinued long ago.

The Solution
Okay, so what the solution to this problem?? In a nutshell, the Business needs to hold themselves accountable for the investments they make in technology systems by tracking the achievement of the business cases they present for IT Systems funding. The IT organization is only responsible for tracking the cost of maintaining the system and performance of these systems. It is completely the business’ responsibility to determine and track whether the benefits stated in the business case are realized. Below is an example of a process that can be followed and is fairly straightforward. The first thing to understand is if you are going to do this correctly it is not enough to just track projects and business cases moving forward. You should also go back and document the business cases from previous projects where the technology is still in place. All of this has bearing on the Business Value of IT.

The following is an example of a process that is simple and can be easy to implement provided you have the backing of the CEO, CFO, and/or COO. As the organization matures over time, this simple measure may need to evolve to a much more granular level. However, for most organization this is an excellent place to start and is easy to enforce.

The process starts with a very simple rule. All IT investments, even existing systems, must be placed into one of three categories; Revenue Generation, Cost Reduction, or Compliance. This categorization should also be added to all business case documents and yes if you are to measure existing systems, someone will have dust off the old business cases as to why you invested in those projects as well. Moving forward the requester is now required to explain and sign off on these business value metrics. Not just picking on the business, this also means that if IT is requesting an application to support IT, they are directly responsible for the metrics as well. It is important to stay clear of more than these three buckets as one will just end up being a catch all for projects without a meaningful business value metric. Not one time have I been unable to place an IT investment into one of these three buckets. I could even argue that the Compliance bucket could be axed and put in the save money category but let’s keep it to make it easier in the beginning.

You then must require that the requester, whether from the business or IT, state the value of that investment in measurable terms. For most people this seems an impossible task but once you understand what is the business requestor’s responsibility and what is IT’s responsibilities it isn’t difficult at all. Remember one important fact, the Information Technology department is not responsible for tracking the business value metrics that are defined by the business. Let me say that again in another way. If the business states that through the deployment of a new CRM system they are going to generate an additional $20M in revenue per quarter by cross selling to existing customers, this is their metric to track not IT’s. So as an example, after go-live, the business would be polled on a quarterly basis to state what actual revenue they are going to attribute to the new CRM system. In every case this should be an escalating number because of adoption and it will peak once it reaches full user maturity. IT should help the business determine the scaling benefit factors through their experience and discussions with the CRM vendor.

Now if this is an IT driven project then IT owns the metrics. So let’s take an example that I received at a speaking engagement. How would I calculate the value of the existing email system? This is an easy one. Just imagine the cost of not having email (for those of us tethered to work via PDA, this seems like a dream come true). This could be calculated by taking the total number of emails per day sent in your organization, and attaching the cost of a US Postage stamp to each one. You can use the received number as well if you can calculate the spam count out of the calculations. Surely some of you will say you could walk to the next cube, pick up the phone instead, the CYA emails would stop, etc. But that is not the point, this calculation is based on the current environment which has this many emails per day. In either case the principle is just the same, walking has a cost which is the person’s burdened rate times the time it took to walk there and back, phone calls have a cost including and both would have extra “water cooler” talk time that could be gone with an email.

The bottom line, IT is responsible for its own tools and tracking the cost of deployment, application quality, application performance, maintaining and supporting the applications. If you can’t measure this, you had better start because the crystal ball does not show a promising future. IT is also responsible for providing a means (i.e. a system or systems) to track both the business metrics and IT metrics so that the Business Value of IT or Return on Investment can be tracked. This system would be used to notify the business that it is time for them to update the “stated” business value of the application. I say stated in quotes because in some cases this is a precise number but other times due to the complexity of the situation there are so many variables to factor the business chooses not to use a finite number. This is okay because once again, unless it is your tool it is not IT’s number to measure or defend it is the requester’s responsibility. Let me also close one loophole. Compliance tagged initiatives must have proven compliance related ties; otherwise the business will try and throw everything into compliance to avoid the metrics. You can stop this by stating for anything that goes into the Compliance bucket the measurement is, “Does this make us compliant”. Your organization can decide how tight to make the requirement.

If you do this right, when the CFO asks for the Business Value of IT you can show the metrics you have gathered from the business combined with the performance and cost metrics you track. If the CFO has doubts on the benefits the business states, guess what, it is now back in the hands of the business to defend those numbers. You should not question their numbers; let the CFO do that. Keep in mind however, your own metrics must be defendable so invest in the technologies that can help you measure the things you are responsible for and as always if a vendor says they can help you do this, make them prove it. Project Portfolio Management solutions, Help Desk applications, IT Governance Suites, Enterprise Architecture Suites, and Application Performance Monitoring solutions all contribute to your success in tracking Business Value metrics. All that is needed is the proper set up. I promise if you present this idea to any C-level executive they will embrace it and help you corral the business to follow the new game plan.

The Outcome:
The people in the business that keep slamming in pet projects that never seem to achieve the expected results will now be fully exposed, ahem, sales… So expect to see a significant reduction in junk projects. One organization I worked with said they achieved almost a 20% reduction in new projects once they started holding the business accountable. That certainly tells you something. You want the business to stop throwing junk over the wall to IT, help the CFO hold them accountable for these junk projects.

Systems can no longer have an infinite life span. With any application, if you are capturing the cost and performance metrics combined with the stated business benefits, at some point in time the application will begin to show poor performance and higher costs. If the performance and costs outweigh the stated business benefits you have a defendable business case for retiring an aging system. Now you can begin to lead the business towards a newer application that will better meet their needs with lower costs and higher performance. This also holds true if the business changes it objectives and systems no longer serve a purpose (Business/IT Alignment), the lack of business benefit tells you it is okay to retire the system therefore saving the company money. The best part is you now have evidence that IT is running like a business and not wasting money unnecessarily.

This measurement program will also show your IT organization where it might want to engage in a strategic sourcing arrangement, thus reducing the threat of outsourcing. After all, if you know your costs and quality and the outsourcer can do it cheaper for the same level of quality, you should explore this option. That’s running IT like a business. On the other hand, it also shows and proves the value of the in-house IT department in concrete terms. One of the main reasons companies outsource their IT organization is predictability and better financial management of IT. These outsourcers are paid based on their ability to track even the lowest level of IT spending. If you can hold the requester accountable for what they ask the IT organization to do, the business value of the in-house IT department is clear and predictable.

In closing, it is all about respect. If your IT organization hasn’t been able to penetrate the Board Room discussions, this is your ticket to the show. Once your IT organization can measure its impact to the business the board will respect your opinion. After all, the business has been measuring their own results for years especially if you are a publicly traded company. It is about time IT organizations do the same.