Communicating the value of IT

The old IT metrics like IT investment as a percentage of total firm revenue and total-cost-of-ownership are passé. IT operational excellence is not just cost efficiency (Poniatowski and Wichser, 2006). Business excellence requires focusing on deriving value out of IT initiatives. IT budgets reveal costs, but benefits can be distributed across the organization. Emphasis on single-mindedly cutting IT costs will be ruinous and stymie any efforts at creatively using IT to support business processes. The authors identify three important questions firms should address to achieve excellence at harnessing IT:

1. How can IT function determine what really matters to the company?
2. What is the most effective way to align IT activities and investments with the overall business strategy?
3. How can CIOs track and manage not just IT operating efficiency, but also IT effectiveness?

The authors emphasize that organizations need to create a portfolio of IT investments that are aligned with their business objectives. They classify IT investments into four broad categories of innovation, growth, productivity, and maintenance. Organizations have to be clear about the strategic objectives of each of these four IT investment categories. Innovative IT investments are strategic, unproven, and risky, but can radically change the business environment and bring startling profits. Examples of celebrated innovative IT investments are first implementation of package tracking, the first online auction site, and the introduction of ATMs. The second category of growth IT investments are also strategic but less risky. These initiatives boost firm revenue and bring efficiency in business operations. Examples of this category of IT investments are customer self-service, Web-stores, and in-store kiosks that increase revenue and business size. The last two categories of productivity and maintenance IT initiatives are operational in nature and aim at improving business productivity and operational excellence. Examples of productivity IT investments are POS and properly implemented ERP systems that help in margin and asset utilization improvement. Maintenance IT investments include systems like accounting, control, and payroll that can help in preventing margin erosion and asset deterioration.

Therefore, business technology executives have to become more creative in employing metrics that measure and benchmark benefits from IT that are aligned with company objectives and enhance firm value and competitive advantage. Chabrow (2006) in an interesting article outlined twelve techniques for measuring effectiveness for IT. We discuss them briefly in the following paragraphs.

1) Missed Opportunities: American Power Conversion (APC) is in the business of selling uninterruptible power supplies and understandably, believes in uninterruptible customer satisfaction. APC company has a culture of continuous engagement with customers and has developed an alert system which notifies appropriate employees in case of failure in customer service. This company values IS that helps engage with customers and hence stresses its success measure in terms of minimization of the number of missed opportunities in providing services. Value of IT has to be measured in its effectiveness in creation of new businesses with existing and new customers.

2) Client Impact: Paul Heller, CIO of Vanguard Group, the mutual fund company, believes that each IT project has to be mapped into one of the nine boxes of a 3 by 3 grid, with three levels of client impact on one dimension and three levels of operational impact on the other dimension. The impact levels are categorized as low, medium, and high impact. The value of each IT project has to be assessed in terms of its impact on clients and operations. Also, overall IT spending has to be tracked in terms the proportion spent on high, medium, or low client impact.

3) Self-Help: Pacific Blue Cross in Vancouver, British Columbia, categorizes IT spent in terms of innovative projects versus support function projects. Innovative projects that enhance business value are encouraged. For example, e-claims system is proving to be a success as increasing number of dentists are using it to file claims. Pacific Blue Cross is aligning IT with business processes to enable dentists to file claims electronically, self-help, rather than handling manually.

Therefore, business technology executives have to become more creative in employing metrics that measure and benchmark benefits from IT that are aligned with company objectives and enhance firm value and competitive advantage.

Reference:

Poniatowski, S. and Wichser, J. D. (2006) A Better Metric For IT Efficiency, Optimize, May 1, available at http://www.informationweek.com/story/showArticle.jhtml?articleID=187200790

[Summary by Sanjeev Jha]