IT's value is based solely on its direct contribution to profitability and shareholder value, accomplished by supporting a company's strategies and improving its operations. By extension, the underlying management principle is simple: a company should only spend money on IT that directly supports its business strategies and its operational effectiveness, and should not spend money on IT that doesn't. The difficulty lies in measuring and predicting IT's impact on strategies and operations and in connecting IT activities to the profit drivers that management measures.
The management team can control IT costs while improving IT's bottom-line impact. By consistently selecting the best IT investments, firms can eliminate underperforming IT activities.
Any dollar invested in IT should create a positive return to the company. Additionally, management needs to take an asset and portfolio management view of IT activities. New projects create new IT assets; existing IT activities-or assets-need to be managed for maximum benefit to the company. Both classes of assets need to be managed for value and risk as portfolios, not as individual assets.
Companies spend as little as two percent and as much as 10 percent to 15 percent of revenue on IT, including the ongoing cost of maintaining IT operational activities-the so-called "lights-on" budget-as well as new investment in development and enhancement projects-the so-called "projects" budget. To focus IT on the bottom line, management needs to examine this entire IT budget, and look at every dollar in terms of its return to the bottom line. The exercise is simple: Find the underperforming IT assets, and either improve their performance or eliminate them and spend the money elsewhere, either within or outside of IT.
Historically, this bottom-line yardstick applies only to new IT activities, usually about 20 percent of the IT budget. The remaining 80 percent, the lights-on budget, goes largely unexamined for its continuing contribution to profitability and business results. Considering that there is very little post-implementation review of the ROI and business impact of new projects, and no review of lights-on expenses, almost all the IT dollars have an unknown contribution to the bottom line.
In fact, rarely does a company know what it's spending on IT that is useful for assessing bottom-line impact. Most companies simply do not have the data available that allows them to determine cost and impact for IT. The CEO of a large bank remarked that even though IT was a huge component of each division's total expenses, he and his managers had no idea how much those costs contributed to the overall expense of producing each product and service. "How can we manage our business if we don't know IT costs to that level of granularity?" he asked.
Increasingly, the CFO is responsible for IT plans and budgets and being asked to ensure that IT investments improve shareholder value. The CFO, in turn, is asking IT people hard questions, such as: How do we justify new IT investments? Are we balancing our resources between requests for new investment and existing IT activities? How do we measure and report the business return on IT investments?
Unfortunately, many companies lack IT and business planning processes to produce IT plans and budgets that consistently support business strategies. For companies to effectively answer the difficult questions posed above, the CFO and the rest of the senior management team need to implement process and culture changes to link IT investments directly to business strategy.
In this context, the CFO plays a critical role in understanding and communicating IT value. By insisting on a consistent, business-based yardstick for measuring all IT investments-both new and existing activities-the CFO can bring rigor to an historically political, informal process of making corporate decisions about IT. By making operational and strategic effectiveness the basis for this yardstick, the CFO can also inject a business-results rationale for assessing all IT investments. Finally, by enforcing this philosophy through budgeting, the CFO can ensure that IT investments are fully assessed for business impact and ROI.
To connect IT and profit, executives can adopt three principles for planning IT investments and assessing their business values:
In practical terms, these principles focus on three planning activities that connect business and IT and produce bottom-line impact: strategic business and IT planning; new project prioritization; and lights-on business impact assessment. The management team needs to articulate the strategies, select the best new investments for implementing and supporting those strategies, and monitor how well all IT existing assets perform for the business.
Creating a profit-oriented IT blueprint requires less emphasis on strategies that strategic intentions. For example, a company's strategy may be to be the lowest-cost supplier; its strategic intention is to reduce operating costs by focusing on commonly-used best practices throughout the company. The strategy sets direction, while the strategic intention sets up actions.
The phrase "strategic intentions" encompasses what management will do in the future to improve strategic or operational effectiveness, which should then impact the bottom line. By agreeing on what those intentions are, and by using performance measurement to track them,IT's cause-and-effect impact on the bottom line can be established.
The first component of the IT blueprint, is a clear and widely-understood statement of management's strategic intentions. New projects and lights-on assets can be evaluated for their impact on profit by assessing how well they support the company's strategic intentions. Management's job is to pick the best projects, defined not only as those with the highest financial return, but those with the highest overall impact on the company's strategic intentions.
In a classic case of the way prioritization can impact resource decisions and ultimately the bottom line, the president of a large financial services company did a prioritization exercise with his senior managers, including the CIO, to look at all projects planned or under way. The assessment showed there were a number of projects, representing a third of the IT capital budget, which would produce little strategic or operational impact on the business. The president ordered halted them all, returning $25 million to the capital budget.
In its simplest form, new project prioritization helps business managers assess the bottom-line impact of proposed IT initiatives using the same yardsticks for every project, including project risk assessment-the likelihood a project will be completed on time, within budget, and produce the projected business impact. The result is a prioritized ranking that can be used to rationally allocate resources to the highest-value initiatives. A typical process includes the following activities:
Most companies have some type of steering-committee process that evaluates individual projects and sets IT priorities based on a combination of political, fiscal and business factors. The emphasis in a profit-oriented process is on managing a project portfolio to achieve the highest business impact with acceptable risk levels.
The task facing business managers assessing the lights-on budget is simple: Find the lowest-performing IT assets and either improve their performance or get rid of them.
The lights-on portfolio consists of every application and service supplied by IT to the business organization. Lights-on portfolio assessment engages business and IT management in identifying several key attributes for each application and service:
Cost: The annual cost to deliver the application to the business, including computing, networks, and support.
Alignment: How well the application is aligned to the company's strategic intentions.
Dependency: How much the firm depends on the application.
Breadth: How widely the application is used throughout the business.
Quality: How functional is the application?
Service level: How well does the application perform for the business user, in terms of accuracy and functionality?
To contribute to profit, IT needs to be managed as a set of assets and asset portfolios, which are expected to provide business impact and ROI. This is the job of business management in partnership with IT management, requiring formal planning and assessment processes and clear communication between business and IT.
Tom Bugnitz and Bob Benson are president and principal of The Beta Group.
