A Framework For IT Value Created by Webmaster CioIndex in 12/16/2008 6:36:03 PM In this series, we will discuss IT Value - from its definition to a framework to measure and track it Of late, there is unprecedented pressure on information technology executives to prove the value that IT is creating for the enterprise. After all, IT is the single biggest item on an enterprise budget – call it expenditure or investment. Partly borne out of CEO’s ignorance about IT and their frustration with failed IT projects and partly by the lack of leadership on CIO’s part to understand how to use this strategic weapon, or to explain failed IT projects, or to rein in the thirst of their team for “cool” technology and resulting “technology for technology’s sake” expenditures, this perfect storm has engulfed everybody and everything in sight. Many a productive hour is spent on the justification of IT’s value. This perfect storm is now a vicious cycle of alleged “misalignment” and counter allegations of “they don’t understand IT!” No one has stopped long enough to answer a simple question: if one cannot measure the value of IT then how is one side so sure that there is indeed misalignment? What makes this improvable allegation so powerful? And if they do not really understand IT, then how come they are investing so heavily in it? Interspersed with this debate is the wild thrashing around to measure IT’s value. Anything and everything is being thrown at IT value in the hopes that something will stick. From ROI to TCO to tree maps and, yes, actuarial principles, not a thing has been left out of the mix. The icing on this cake was when a pundit – who has probably never gone near IT – declared that “IT doesn’t matter”! The argument: IT is now a commodity devoid of strategic value. That entire argument was based on – other than the need to sell copies of the journal that printed it – the fact that technology is ubiquitous, everybody has equal access to it and there isn’t real innovation in technology on the horizon. Hate to break it to the pundit, but long after the demise of the horse drawn carriage, logistics is still a strategic differentiator. While the debate rages on we have work to do. In this series, we will examine IT Value, see how it manifests itself and present a framework to measure and track it. What is IT Value? Simply stated, “IT value” is the benefit to stakeholders or shareholders arising out of their expenditure or investment in IT. The quest is to make sure this investment is: 1) Directly toward stakeholders or shareholder interests and nothing else 2) Creating a positive outcome i.e. creating value If either of these conditions is not met, then that organization’s IT investments are not creating value for its stakeholders or shareholders. For example, if P&G is spending money on IT to solve world hunger, this seemingly noble goal is not creating value for its shareholders unless they find some way to convert this into dollars, say through selling more soaps to the satiated world! The semantics of “direct” versus “indirect” are settled by the shareholders who demand share price increase today not 50 years in the future. Eventually the world will buy soaps, therefore, is not an argument that can be used as justification for this expenditure. The second criterion is where most of the focus is: how do we know if this value is “positive”? In other words, measure of the value generated. The undisputed measure of value is currency – dollars and cents. In free markets, the concept of value is driven by the market. One can put the price on something but it is the market – and its efficiencies or lack thereof – that determines what one gets for it. Unfortunately, IT is an internal investment. It’s market is the other business functions in the organization who have no other means of getting these products and services. In this captive market and monopoly, any discussion on the concept of “value” in “dollars” is meaningless. Consequently, there is a need to specific “non dollar denominated” measures of IT value. We will discuss these later in this series. The three imperatives of IT Value IT performance or value is driven by three factors, namely, strategic alignment, process coverage and asset productivity. An IT investment creates value for an organization in three ways: 1) Business Alignment: Supporting a business initiative 2) Process Coverage: Automating a process 3) Asset Productivity: Doing the above effectively and efficiently The first objective is the premise behind IT Alignment – an IT capability designed specifically and only to enable business requirements. Anything that does not meet this criterion causes misalignment and must be eliminated. Business alignment is merely stating that the investment is toward a business objective. The underlying premise is that the business initiative is creating value. If IT can help meet that objective then it is an enabler in creating that value. By definition, then, IT has created value. However, alignment does not address the second objective. We may be “doing the right things” but not “doing them right”! Hence, alignment is necessary, but not sufficient, for value creation. Any investment must also be managed for performance, otherwise, we have a partial solution, or, perhaps, a complete solution but an “expensive” one. In either case, we have not maximized IT’s value. While strategic alignment identifies IT initiatives that support a business need, process coverage determines if actions match this objective. Process coverage reflects the extent, say in percentage, to which those initiatives are being implemented. In other words, investment in IT processes that are focused on enabling strategic business needs provides positive coverage. Asset productivity determines the degree to which IT assets are being utilized to their maximum capability. Any spare capacity on a server, for example, lowers asset productivity and hence IT value. Since IT processes use IT Assets, all three dimensions of IT Capability are interrelated. Next week, we will look at specific examples of IT value and build toward a framework to measure and track it.
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