In this newsletter, I will discuss defining and measuring the value of new IT investments, which is critical to the transformation of IT from the traditional view as a cost center to a business enabler.
New projects and initiatives included in the IT budget should include specific business cases to prioritize should there be consideration to reduce funding for new projects. A good business case will communicate the value to the business, in terms of business outcomes, such as increases in revenue or a reduction of operations costs. I will discuss an approach to develop a business case that provides management with the right information to optimize IT portfolio decisions.
As important as the initial business case, is measuring benefit realization to assure the business received the expected return from the IT investment. This is an opportunity for many companies. Generally, administration costs measuring benefits realization will be more than offset by higher yields on IT investments. I will discuss an approach to develop such a process.
The problem for CIOs in situations where value is not defined and measured is the perception by the business that technology costs too much and is not bringing clear value to the enterprise. The CIO is not creating budgets that appropriately link value to the business strategy, goals and objectives. The CIO is not defending why funds are needed, only how much.
Even in situations where a good business case is established, few companies carry out follow-up assessments of the value achieved against what was expected. This gap needs to be addressed as benefit realization is a top priority for CFOs. A 2011 Gartner CFO study found that “Achieving the expected benefits from IT investments” as their top priority. (1)
This dilemma is often caused by limited transparency on IT spending. It is not meaningful to business leadership when IT explains project benefits in technology terms. An example is when project justifications are made based on technology advancements to address capacity requirements stated in terms of number of servers and storage devices. Does any of that matter if there is no direct linkage to an increase in sales or reduction to business costs?
With the size and growth in technology spending, projected at $3.7 trillion for 2014 as reported by the IDG News Service (2) , and the limited funding many companies face today for new projects and initiatives, there is a high risk that companies are deploying technologies that are not maximizing value to the business. Key stakeholders, like the Board of Directors and investors, want assurances that management is making the right investment decisions. Business functions like marketing, sales and facilities often are required to have a clear business case for new initiatives. Why is technology not subjected to the same level of scrutiny?
Following are key points to measuring the value of investments in technology:
The initial justification should be in business terms and about business impacts and outcomes that link to business strategy, goals and objectives. If not, then the project should not be approved. “The business case is about business. Business is about money- making more than we spend and spending effectively so that we either make more money or spend much less money.” (3)
From a financial perspective, both Return on Investment (ROI) and Total Cost of Ownership (TCO) should be measured. TCO captures all costs throughout the life of the technology, including one-time and ongoing run costs. A shortfall of many business cases is that run costs are not reflected. This can lead to unplanned maintenance costs once deployed and turn what initially appeared to be a good investment into a bad one. ROI is a calculation of costs against the benefits, usually presented as a cash flow statement with a single measure to determine the value of the project against internal hurdle rates and other projects in the IT portfolio, like Internal Rate of Return (IRR), Net Present Value (NPV) and payback.
Project requests should go through a formal intake process with final approval made by a Technology Steering Committee, ideally made up of CIO representatives and business executives. A good model is to have a CFO or COO chair the committee. An IT PMO generally manages the intake process. No project request should be forwarded for approval without approval of the business case by all key stakeholders. Periodic updates can be provided to the committee regarding expected spending versus actual spending, and expected benefits versus actual benefits.
Measuring the value of a technology investment should not end once the project is deployed. A follow-up assessment is required to measure the actual benefit realization. Few companies do this. It is best to perform assessments at least a year or more from the time of deployment. Benefits often are not realized until the technology is fully deployed and running for some period of time.
Quantifying soft benefits can be a challenge (e.g., improving customer satisfaction). Yet soft benefits are not intangibles. They are real in terms of impact to the business. Look for ways to correlate a measurable trend shift in soft benefits, like customer satisfaction surveys, compared to an associated hard benefit, like retained and new business revenue. Assumptions may be required to compare trends such an increase in customer satisfaction as a contributing factor in a measurable increase in sales. The key is to measure!
There may be soft benefits that just can’t be quantified with much accuracy however have a significant impact on the business, like increased brand awareness. These should be noted in the business case as sometimes they could sway an approval if the financial factors are not significant.
There are two parts to the solution implementation. First, development of the business case at project initiation with updates throughout the project. Second, completion of a benefits realization assessment, which as noted above, will come after project completion, in many cases after a year. This requires a governance role, like a PMO, that constantly tracks business value. The following links take you to the specific steps for doing both.
1. Van Decker, J. and Gomolski, B., “The CFO’s Perspective of IT Shows Opportunity forImprovement: 2011 Gartner FEI Technology Study,” June 2, 2011
2. Kanaracus, Chris, “IT spending growth to be slower than expected in 2014 due to pricing pressure”, CIO Online, June 30, 2014
3. Maholic, Jim, “Business Cases that Mean Business- A practical guide to identifying, calculating and communicating the value of large scale IT projects”, 2013, pg. 34
4. Schmidt, Marty J., “The Business Case Guide, 2nd Edition”, 2002, pg. 32
5. Maholic, Jim, “Business Cases that Mean Business- A practical guide to identifying, calculating and communicating the value of large scale IT projects”, 2013, pg. 38
SaVard Solutions, LLC
Results that make a difference
23 sergeant street
Princeton, NJ 08540
Savard Solutions LLC © ALL RIGHTS RESERVED.