the business value of it: can it be measured? presentation for sim chicago april 20, 2005 dawn...

The Business Value of IT: The Business Value of IT: Can IT Be Measured?Can IT Be Measured?

Presentation for SIM ChicagoPresentation for SIM ChicagoApril 20, 2005April 20, 2005

Dawn Harris, Loyola University ChicagoDawn Harris, Loyola University ChicagoLinda Salchenberger, Northwestern Linda Salchenberger, Northwestern

UniversityUniversity

Why Is This Important?Why Is This Important?

Obtaining business value from IT Obtaining business value from IT investments remains a top concern investments remains a top concern

IT business value creation not well IT business value creation not well understoodunderstood

Failed IT projects amount to up to Failed IT projects amount to up to $200 billion in the US$200 billion in the US

Not Much Has ChangedNot Much Has Changed

86% of IT professionals surveyed by 86% of IT professionals surveyed by CIO magazine feel that measuring IT CIO magazine feel that measuring IT value is importantvalue is important

Only 30% of these IT professionals Only 30% of these IT professionals believe that IT is perceived as a believe that IT is perceived as a value (versus cost) center in their value (versus cost) center in their organizationsorganizations

Ten percent feel their IT ROI Ten percent feel their IT ROI measurements are reliablemeasurements are reliable

Historical ApproachesHistorical Approaches

Look for correlations between overall Look for correlations between overall US economic productivity and use of US economic productivity and use of ITIT

Assess firm productivity (output) in Assess firm productivity (output) in sectors (service, manufacturing)sectors (service, manufacturing)

Measure overall business Measure overall business performance performance

Historical ApproachesHistorical Approaches

Connect the value of IT to its Connect the value of IT to its contribution to the value chaincontribution to the value chain

Examine CEO perceptions of business Examine CEO perceptions of business value of ITvalue of IT

Case studies of successful companiesCase studies of successful companies

Measuring the Value of ITMeasuring the Value of IT

Financial metrics used such as ROI, NPV, Financial metrics used such as ROI, NPV, TCO, etc.TCO, etc.

Impact on value chainImpact on value chain Case studies – from Sabre to DellCase studies – from Sabre to Dell Asset approaches – Economic value added Asset approaches – Economic value added

(EVA), Tobin’s Q (calculated intangible (EVA), Tobin’s Q (calculated intangible value), balanced scorecardvalue), balanced scorecard

Overall firm performance Overall firm performance

Measuring the Value of ITMeasuring the Value of IT

Projects serve operational, tactical and Projects serve operational, tactical and strategic goals and thus, should be strategic goals and thus, should be measured on these various levels of measured on these various levels of contributioncontribution

Management practices create the greatest Management practices create the greatest impact on valueimpact on value

CEO goals for IT can be focused or CEO goals for IT can be focused or unfocused, IT used for operational unfocused, IT used for operational efficiencies or strategic positioningefficiencies or strategic positioning

Responses of our interviewees – how do Responses of our interviewees – how do they value IT?they value IT?

Starting PointsStarting Points

Alignment between business and IT is the Alignment between business and IT is the necessary first stepnecessary first step

IT value is diffused throughout the IT value is diffused throughout the organization contributing value to business organization contributing value to business processesprocesses

IT has become a strategic necessityIT has become a strategic necessity IT can be viewed as a dynamic capability IT can be viewed as a dynamic capability

resourceresource Leadership perspectives and perceptions Leadership perspectives and perceptions

mattermatter

Purpose of Our ResearchPurpose of Our Research

This research project is designed to: This research project is designed to: identify, analyze, and evaluate the differences identify, analyze, and evaluate the differences

and similarities between perceptions of the and similarities between perceptions of the business value of IT by CEO’s and CIO’s.business value of IT by CEO’s and CIO’s.

The overall objective is to:The overall objective is to: help organizations to better align business and help organizations to better align business and

IT strategiesIT strategies facilitate the sharing of best practices of facilitate the sharing of best practices of

organizations that successfully leverage IT for organizations that successfully leverage IT for strategic advantage.strategic advantage.

Framework for Assessing Framework for Assessing Alignment Between Business Alignment Between Business

and IT Strategyand IT Strategy

Level 1Level 1 Level 2Level 2 Level Level 33

Level Level 44

Level 5Level 5

Business/ Business/ IT IT RelationshiRelationshipp

Spending Spending and and AssessmenAssessmentt

Role in Role in StrategyStrategy

How to Assess Alignment How to Assess Alignment Between Business and IT Between Business and IT

Strategy?Strategy? Business IT RelationshipBusiness IT Relationship

Understanding of Business by ITUnderstanding of Business by IT Understanding of IT by BusinessUnderstanding of IT by Business

Spending and AssessmentSpending and Assessment How IT is budgetedHow IT is budgeted Rationale for IT spendingRationale for IT spending How projects are prioritizedHow projects are prioritized

How to Assess Alignment How to Assess Alignment Between Business and IT Between Business and IT

Strategy?Strategy?

Role in StrategyRole in Strategy Reporting relationshipReporting relationship Senior-level IT Steering CommitteeSenior-level IT Steering Committee Risk sharingRisk sharing

MethodologyMethodology

Start with surveys of CEO’s and CIO’s Start with surveys of CEO’s and CIO’s of business and technology alignment of business and technology alignment issuesissues

Separate interviews of CEO/CIO pairs Separate interviews of CEO/CIO pairs from the same organization from the same organization

Small number of organizations ranging Small number of organizations ranging in size, industry, and technology-in size, industry, and technology-orientationorientation

Issue 1: How do organizations Issue 1: How do organizations measure the value of IT measure the value of IT

beyond financial metrics? beyond financial metrics?

Projects are launched with business Projects are launched with business initiatives and measured by the initiatives and measured by the success of the business initiative success of the business initiative launch of new Web site with marketing launch of new Web site with marketing

campaign to increase number of campaign to increase number of patients to a hospitalpatients to a hospital

Financial services company meets Financial services company meets customer service goalscustomer service goals

How do organizations measure How do organizations measure the value of IT beyond financial the value of IT beyond financial

metrics?metrics? IT adds value by enhancing the core IT adds value by enhancing the core

business with services that business with services that customers value customers value distribution company provides additional distribution company provides additional

services using technology that increases services using technology that increases margins, helps to close salesmargins, helps to close sales

a transportation company achieves a transportation company achieves growth by using technology to become growth by using technology to become customer-focusedcustomer-focused


metrics?metrics? Information is the value-added, Information is the value-added,

customers want reliability, accuracy, customers want reliability, accuracy, security and flexibilitysecurity and flexibility serving customers in the financial serving customers in the financial

services sector requires secure flexible services sector requires secure flexible access to data and interfacing with a access to data and interfacing with a variety of platformsvariety of platforms

Critical to the success of a growing Critical to the success of a growing manufacturing company that offers a manufacturing company that offers a complex array of productscomplex array of products


metrics?metrics?

CIO’s / technology reaches out CIO’s / technology reaches out beyond organizational boundaries to beyond organizational boundaries to create external relationships with create external relationships with vendors / suppliersvendors / suppliers treat vendors like partners and helps the treat vendors like partners and helps the

organization to optimize value from organization to optimize value from vendorsvendors

Gaps: What CEO’s and Gaps: What CEO’s and CIO’s SaidCIO’s Said

Need a clearly articulated business Need a clearly articulated business strategy / direction to go beyond strategy / direction to go beyond financial metrics when assessing the financial metrics when assessing the strategic value of ITstrategic value of IT

Lag effect, investing in technology Lag effect, investing in technology does not result in immediate impactdoes not result in immediate impact

Gaps: What CEO’s and Gaps: What CEO’s and CIO’s SaidCIO’s Said

CEO’s who do not understand CEO’s who do not understand technology try to apply simple metrics technology try to apply simple metrics or ignore it completelyor ignore it completely

Increasing demands for anytime / Increasing demands for anytime / anyplace access to information makes anyplace access to information makes systems more vulnerable and requires systems more vulnerable and requires investment and on-going costs, investment and on-going costs, business needs to understand the risk business needs to understand the risk analysisanalysis

GapsGaps

Projects must be evaluated based on Projects must be evaluated based on the need served (operational vs. the need served (operational vs. strategic)strategic) Many organizations separated Many organizations separated

investment dollars for infrastructure vs. investment dollars for infrastructure vs. more strategic projectsmore strategic projects

IT needs to use this metricIT needs to use this metric CIO’s concerned about infrastructure CIO’s concerned about infrastructure

and staff to support business growthand staff to support business growth

Issue 2: How can the business Issue 2: How can the business value of IT be used as a criterion value of IT be used as a criterion

for investing in technology for investing in technology projects?projects?

Business and IT develop business Business and IT develop business strategy as partners strategy as partners CIO suggests videoconferencing CIO suggests videoconferencing

solution to allow district offices to do solution to allow district offices to do claims processingclaims processing

Map projects to business goals Map projects to business goals IT systems are mapped to improving IT systems are mapped to improving

healthcare quality outcomes, reducing healthcare quality outcomes, reducing errors, bringing in new patientserrors, bringing in new patients

How can the business value of IT How can the business value of IT be used as a criterion for investing be used as a criterion for investing

in technology projects?in technology projects?

IT’s contribution is to enhance the value IT’s contribution is to enhance the value chain and business processeschain and business processes distribution company helps customers with distribution company helps customers with

inventory managementinventory management Use balanced scorecard approach Use balanced scorecard approach

applied in an organization that wants to be applied in an organization that wants to be more proactive, less reactive, focused on more proactive, less reactive, focused on intangible assetsintangible assets



IT welcomes a more financially IT welcomes a more financially disciplined approach to investingdisciplined approach to investing our extra 10% questionour extra 10% question

Choose projects that have a short time Choose projects that have a short time horizon and more immediate impacthorizon and more immediate impact one organization is forced to spend all IT one organization is forced to spend all IT

budget within one year with the exception budget within one year with the exception of a few long term projectsof a few long term projects



In general, shorter timeframes and In general, shorter timeframes and smaller investments, more strategic smaller investments, more strategic in naturein nature

CIO’s want the business to set CIO’s want the business to set priorities with IT at the tablepriorities with IT at the table

Projects should bubble up and also Projects should bubble up and also come from the top downcome from the top down

GapsGaps

What is measurable value for our company?What is measurable value for our company? Companies have little cards, posters on the wall, Companies have little cards, posters on the wall,

but does this get to the entire organization?but does this get to the entire organization? CIO’s concerned with ability to scale or grow CIO’s concerned with ability to scale or grow

with the businesswith the business Insufficient funds allocated to projects Insufficient funds allocated to projects

results in stops and starts and poor resultsresults in stops and starts and poor results Lean staff causes domino effect when some Lean staff causes domino effect when some

projects are delayedprojects are delayed

Issue 3: What new strategies are Issue 3: What new strategies are employed by leadership to make employed by leadership to make

technology-related project investment technology-related project investment

decisions?decisions? Portfolio mgmt still at an early stagePortfolio mgmt still at an early stage

CEO who handed us a formCEO who handed us a form Business vs. IT initiatedBusiness vs. IT initiated

should be 50/50 according to both CEO should be 50/50 according to both CEO and CIO from a government agencyand CIO from a government agency

Steering committees and other Steering committees and other governance structures (all varieties)governance structures (all varieties)

What new strategies are employed What new strategies are employed by leadership to make technology-by leadership to make technology-

related project investment related project investment decisions?decisions?

In general, shorter timeframes and In general, shorter timeframes and smaller investments, more strategic smaller investments, more strategic in naturein nature

CIO’s want the business to set CIO’s want the business to set priorities with IT at the tablepriorities with IT at the table

Projects should bubble up and also Projects should bubble up and also come from the top downcome from the top down

GapsGaps

Lack of on-going project Lack of on-going project assessment, feedback on the assessment, feedback on the success / failure of projects, lack of success / failure of projects, lack of consistent project leadershipconsistent project leadership

Lack of understanding of why Lack of understanding of why projects succeed so they can be projects succeed so they can be replicated (intentional success vs. replicated (intentional success vs. luck)luck)

GapsGaps

Business does not understand the Business does not understand the need to invest in infrastructure, can’t need to invest in infrastructure, can’t differentiate between different kinds differentiate between different kinds of technology investments, is only of technology investments, is only concerned with costsconcerned with costs

Seesaw effect of centralization of IT Seesaw effect of centralization of IT in bad times, decentralization in in bad times, decentralization in good times good times

Issue 4: What processes are Issue 4: What processes are organizations using to better organizations using to better

align business and IT align business and IT strategies? strategies?

Alignment largely dependent upon Alignment largely dependent upon relationships rather than structures, a relationships rather than structures, a seat at the executive table just as seat at the executive table just as important as reporting to the CEOimportant as reporting to the CEO

Clear articulation of business strategies Clear articulation of business strategies by business and IT leadership as the by business and IT leadership as the first step toward alignment (obvious first step toward alignment (obvious where this happened)where this happened)

What processes are organizations What processes are organizations using to better align business and using to better align business and

IT strategies?IT strategies? Strategic hires of CIO’s with Strategic hires of CIO’s with

appropriate business / strategy appropriate business / strategy orientation after the organization orientation after the organization decides IT is strategicdecides IT is strategic

IT as a strategic partner in the IT as a strategic partner in the planning process planning process don’t hand IT a business plan, treat don’t hand IT a business plan, treat

them as partnersthem as partners

What processes are organizations What processes are organizations using to better align business and using to better align business and

IT strategies?IT strategies? Formal role of IT in overall business Formal role of IT in overall business

process improvementprocess improvement Better leverage IT’s cross-Better leverage IT’s cross-

functional perspective and functional perspective and experience with change experience with change managementmanagement

Manufacturing company to do this Manufacturing company to do this as next stepas next step

GapsGaps

IT wants to be an equal partner in IT wants to be an equal partner in planning, wants to spend more time planning, wants to spend more time on planningon planning

IT has a holistic perspective of IT has a holistic perspective of business processes, has always had business processes, has always had to work across functional units / to work across functional units / areasareas

GapsGaps

CIO’s want IT to lead process CIO’s want IT to lead process resdesign, but business is looking for resdesign, but business is looking for software solutionssoftware solutions

CIO’s have to find the right CIO’s have to find the right organizational match (can be organizational match (can be extremely successful at one place extremely successful at one place and struggle at another).and struggle at another).

ConclusionsConclusions

Business and IT strategies should be Business and IT strategies should be developed in partnershipdeveloped in partnership Business provides directionBusiness provides direction IT can supply the innovationIT can supply the innovation Relationships matterRelationships matter

Business value of IT is contingent uponBusiness value of IT is contingent upon Company’s current market positionCompany’s current market position CEO’s perspective of ITCEO’s perspective of IT Need to be strategic vs. operationalNeed to be strategic vs. operational


Still searching for best practices and Still searching for best practices and methodologies for choosing IT methodologies for choosing IT projects that contribute valueprojects that contribute value ““A balanced scorecard” type approach A balanced scorecard” type approach

that factors in multiple dimensions that factors in multiple dimensions beyond the financialbeyond the financial


CIO’s need to take leadership in CIO’s need to take leadership in seeking to formalize institutional seeking to formalize institutional learning regarding successful learning regarding successful projects and how to identify, choose projects and how to identify, choose and manage themand manage them


CEO must understand how to frame CEO must understand how to frame the IT questions to create a the IT questions to create a competitive advantage for the competitive advantage for the companycompany

CIO must explain the value of CIO must explain the value of proposed projects in terms of business proposed projects in terms of business goals and business languagegoals and business language

PredictionsPredictions

The ability to sustain continual The ability to sustain continual transformation and high performance transformation and high performance requires requires extraordinaryextraordinary business and business and technology leadership technology leadership

Because of the perceived need for Because of the perceived need for business transformation, CIO’s will be business transformation, CIO’s will be leaders firstleaders first, business technologists , business technologists second, and everything else lastsecond, and everything else last

the business value of it: can it be measured? presentation for sim chicago april 20, 2005 dawn...

Documents

business value creation

economic value

value of itprojects

stepit value

cios of business

business processesit

business initiatives

value chaincase studies