Measuring Business Value from IT Investments

by Pamela Hollington

How do you measure IT value? Number of help desk calls answered? Percentage uptime during the week/month/year? Number of hits to the Web site? Number of desktops implemented this year? Number of service packs installed? Lines of code developed/promoted?

Each of these metrics can be easily systemized, tracked, and reported on to promote the "performance of IT" as an organization, but do they demonstrate the value that IT contributes to the business? I don't think so. Therefore, we need to make a clear distinction between "performance measures" and "value measures." You wouldn't judge the value the senior marketing executive contributes based on the number of ads he places or the number of people who read the ads -- you judge him on how much sells! Placing ads and making them compelling enough for people to read (and act on) are just tactics he uses to achieve the goal of selling things.

Likewise, executives responsible for IT must have business measures against which their value can be assessed and against which performance measures can be developed to ensure that they achieve that value. This is not to say that the types of measures identified above are meaningless or not relevant to IT performance. Rather, the CIO dashboard must include a blend of measures that reflects the mix of activities IT must accomplish to contribute value to the business. This mix includes ensuring access to the technical environment, maintaining the environment to ensure ongoing operation and access, and achieving delivery of projects aimed at meeting the organization's objectives.

The traditional "IT performance measures" are well suited to gauging how the CIO and the IT organization are delivering on the first two sets of activities -- providing access to and maintaining the IT environment. But "keeping the environment running" isn't enough for most organizations. New business initiatives require new technology solutions, and thus an additional set of measures is required to reflect the CIO's contribution to these projects.

This is the part of the CIO dashboard that is often missing and that is, perhaps, the most difficult to define. The business value measures must be fluid, not only to reflect changing business needs, but also to reflect the suite of projects for which the CIO is responsible.

THE CIO'S CONTRIBUTION TO BUSINESS VALUE

Most organizations today recognize the need for project portfolio selection and management processes. These processes use a mix of evaluation criteria to determine which projects the organization should commit resources to in order to gain the best business results. These evaluation criteria often include such measures as: increase in revenue or market share, expected cost savings and quantifiable productivity improvements, improved customer service, and financial requirements (both the initial outlay and the ongoing cost of ownership and maintenance of the solution). Potential projects are vetted and scored against the portfolio selection criteria, and selected projects are managed against those criteria to ensure the original business case is being fulfilled.

As projects are selected through the corporate portfolio selection process, the CIO's contribution to business results must also be defined. This is the portion of the CIO dashboard that will change year over year as the project portfolio changes, and it is also the portion that is most related to business results.

For example, if a manufacturer is planning to move into a retail market setting, it may need the IT organization to deliver a point-of-sale (POS) solution. Clearly one of the key measures for the CIO's dashboard will be the on-time delivery of the solution -- it is no good if the store is opening in June and the system is delivered in October! Other measures of project success will include managing the project to cost, ensuring a solution whose total cost of ownership is in line with the business case, and choosing a technology solution that can be managed within the retail environment (one that doesn't, say, require an onsite IT department to keep running).

In one organization I worked with, the management team wanted to reduce their sales support cost. They had previously measured this cost based on the total salaries and overhead related to the order management department, as well as support costs from other departments, including IT. To get the sales support cost down, management initiated a project to implement a new order and inventory management system. How would they gauge whether the project had achieved its goal?

One of the IT manager's measures was a reduction in the "cost per order." The new system costs, as well as annual maintenance of the system and infrastructure to support it (staff, equipment, support agreements, etc.), were factored in, along with the previously used measures of total salaries, overhead, and support costs. This "total cost" was divided by the number of orders per year to determine the cost per order. Within the first year of the new system's implementation, the cost per order had been dramatically reduced. This was not only borne out in the direct costs of taking and processing orders, but also in the reduced training costs that arose from a more integrated, user-friendly system and the ability to provide more timely customer service and order status information.

The Search for Business Measures

Coming up with the business value measures for the IT portion of a business project is not always as easy as it sounds. I can't tell you how many times I've tried to get a business area to explain the business need for a project idea or system improvement request. I start with a simple question: "What is the business problem you are trying to solve?" I'll get answers like, "We want to be able to export the data to Excel." Failing to see the business value of taking data out of one system and dumping it into another, I then need to ask, "Well, what are you going to do with it once it is in Excel?" If the business case for the project does not already define the measurable outcomes of the project, the CIO must work closely with the business area to identify what these measures will be, so that she can put in place measures for herself that will reflect her contribution to the project's success.

However, one of the challenges is defining a measure over which the CIO has some control. In the example above, if the marketing executive decides to open a retail store and needs the CIO's assistance on the POS implementation, would it be relevant to use store revenue as a measure of the CIO's success? Probably not, since the CIO does not significantly influence revenue generation (other than by getting the POS system ready in time). There is no benefit to having dashboard measures that are not in the CIO's control. There is a tricky balance, therefore, between identifying business value measures and making sure that they are representative of the CIO's contribution to the project and the organization's success.

THE END OF BLISSFUL IGNORANCE

Ken Meidell is CIO for Cascade Designs, a Washington State–based outdoor equipment manufacturer. When I asked him how his organization manages to business value, he explained:

We try and make sure that any large, noninfrastructure IT project has a sponsor from the business side. Where things get a bit tricky are those projects where we know we should lead -- these can be a new technology or approach that the business hasn't asked us for yet. In those cases, I work with my peers on the executive team to help get to a common understanding of whether or not a project is worth doing based on the business value of the problem we're trying to solve.

In fact, demystifying IT -- by explaining the need for and impacts of technology solutions -- is one of the key roles of the IT executive. As Catherine Aczel Boivie, senior vice president of IT at Pacific Blue Cross, explains:

The products and services delivered by IT … need to be presented in business terms, demonstrating how IT supports the various initiatives.

The CIO must be able to explain what IT is doing, why it's doing it, the department's value to the company, and why that value should be maintained. Part of promoting IT involves making executives aware of how technology can support their business. In today's business world, technology knowledge is as important as financial knowledge. You don't hear executives going around saying, "Those financial terms are meaningless to me; I won't ever be able to understand them." Yet that's just what they say about technology. [1]

The organization, including the senior executive responsible for IT, must not condone this attitude of a blissful ignorance toward IT. In fact, the CIO must make it his goal to educate the other senior executives so that they are not inclined to use this excuse.

This doesn't mean that the director of marketing needs to know what third-normalized form means, or that the vice president of manufacturing needs to be able to install a network card in the server. But it does mean they need to take a more responsible approach to understanding technology concepts so they can better manage the IT investment for the organization.

For senior executives, this requires acknowledging that all (or at least almost all) business initiatives have some technology implications. They must recognize their own level of technology awareness and ask the CIO for guidance and assistance when necessary. They must give the CIO "heads-up time" on the planning of new initiatives so that the CIO can advise on and prepare the environment to deliver the best solution for the organization.

For the CIO, this means specifically dedicating time to educating the other senior executives and the business managers on IT concepts, capabilities, and impacts. This may involve:

• Discussing a specific technology concept at each management meeting
• Holding internal seminars or "brown bag" lunches
• Conducting product demonstrations that illustrate the application of new technologies and/or systems
• Distributing articles about new technologies and how they are being used in other companies and within the industry the organization operates in
• Organizing field trips to actually see a technology solution in action

Whatever approach the CIO takes, the effort must be active and ongoing. The non-IT executive is not going to learn "everything there is to know about IT" over a two-hour lunch session. The knowledge sharing must take place on a level that is understandable and palatable and not become bogged down in techno-jargon and complicated details.

CIO DASHBOARD MEASURES THAT MATTER

I once worked with a client that decided they needed a Web site to enhance their field reps' performance and access to information. They also wanted the reps to take more of a hands-on role in terms of entering customer orders, providing customer feedback and follow-up, and troubleshooting product and sale information for customers. In their existing environment, the reps had to call or e-mail the "inside sales rep," who was located in the company's head office. This often meant crossing time zones, language barriers, and working-hour delays (different statutory holidays, vacation schedules, etc.).

If a European rep had a request at the end of a business day, she couldn't get a response until the next day at the earliest. Similarly, if she wanted to place or modify an order for one of her customers, she had to relay the details to the inside sales rep and wait for confirmation of the transaction. This resulted in customer service delays. Orders placed toward the end of the day would take one or more days to be entered into the corporate system. Even though the goods were physically available in Europe, and could have been delivered in the time it took to get the order entered, reps encountered two- and three-day waits just for order entry. If there were any issues regarding the order (products out of stock, missing information about sizing or color selection, etc.), the delay would be increased.

The sales team completed an analysis that showed that by providing the reps with direct access to inventory availability and order management functions, company revenue -- and specifically European sales -- could be increased dramatically. Based on this business case, IT initiated a project to address the reps' needs.

The IT group invested just under $30,000 Cdn on a Web-based system that fully integrates, in real time, to the company's enterprise resource planning (ERP) system. The solution has exceeded all expectations. The number of inhouse support staff has been reduced as the reps now have direct access to their customer's information, and rep-based orders are in the millions since the site's launch last year.

Note that the measure of success was not how many hits the Web site received or how many orders were entered. Success was measured in terms of additional revenue, which was based on improved rep access to information and systems and increased customer satisfaction due to quicker order confirmation and delivery.

The IT executive worked closely with the management team to help them determine their requirements and then led the project development team in the delivery of the business solution. He closely monitored the project status and scope and made sure that the project could deliver quick and visible benefits to both the sales reps in the field (in terms of access to information and order management functions) and the organization as a whole (in terms of increased revenues and lower costs associated with entering, tracking, and supporting the order management process). Now there's an IT executive who earned his keep!

THE BUSINESS SIDE OF THE CIO DASHBOARD

Over my years of work as both an IT manager and consultant, I have seen IT organizations attempt to develop and implement metrics to prove their value. These include the types of measures described in the introduction to this article, as well as things such as wait time on the help desk, turnaround time for bug fixes, and so on.

But these measures don't really reflect the business value IT is delivering. The measures of a CIO's value contribution must be based on business results, not IT performance results. One of the key challenges in developing the CIO dashboard is that these measures of business results will change as the project portfolio the CIO is responsible for changes. For some projects, on-time delivery may be the most important aspect of delivering business value. In other projects, quantifiable cost savings or an increase in revenue may be appropriate. For each project, relevant business measures must be defined.

So, just as we often say that there is no such thing as an IT project, perhaps we also need to acknowledge that there is no such thing as an IT executive -- just a business executive with IT responsibilities. Therefore, the CIO dashboard must include measures of success that are both performance-based (like the traditional measures) and business-focused. Yes, there will be tactical measures put in place to ensure that the business measures can and are being achieved, but the tactical measures are the means to the end, not the end in themselves.

REFERENCE

1. Boivie, Catherine Aczel. "The Four Ps of Marketing IT." CIO Canada, August 2005.

ABOUT THE AUTHOR

Pamela Hollington is a Director for Rebound Consulting Ltd. in North Vancouver, British Columbia, Canada. She has more than 20 years of industry experience, including work in the financial, manufacturing, distribution, and retail industries and successful consulting assignments in the public and private sectors. She can be reached at pamela@reboundltd.com.