Mark P. McDonaldDemonstrating the business value of IT is challenging CIO’s, CEO’s, CFO’s and other managers. The problem is not that IT creates no value; it is just how do I measure and communicate that value. Current practices in IT measurement and metrics do not help as they concentrate on reporting how IT spends money (projects on time on budget) rather than the value created from those expenditures.
IT metrics concentrate on reporting IT value in a point in time. This is a fundamental weakness in current IT metrics approaches. Point in time reporting concentrates IT on financial and status measures that fail to capture the changes in performance and productivity created by information technology.
The value of IT at any one point in time is essentially zero at best and often negative. Take the IT assets on you balance sheet and mark them to the market to see their value. Turn your attention to the IT investment portfolio and you get a similar story as expenditures on active projects that have not completed outweigh the value of completed projects in a given year.
IT creates little value at any one particular point in time. IT metrics that concentrate on point in time measures naturally have trouble communicating value. Instead they focus on demonstrating that IT is not wasting money and not disrupting the business. That is the essence behind reporting project status, systems availability and budget based statistics in IT scorecards.
Enterprises see the value of IT over time.
IT value comes from a sustained change in business performance rather than a single transformation. You cannot see this performance via point in time measures. You only see this impact by comparing performance in the current period with past performance. This enables you to see the impact of new business capabilities on business performance.
A control chart provides a way to see the changes in business performance over time. Highlighting the release of new capabilities on a control chart gives executives the ability to see the impact of IT and other changes on performance over time. The figure below illustrates this type of control chart.
A control chart illustrates the relationship between business performance and new IT based capabilities. Ideally new capabilities would establish a new process performance profile, shown as the new upper/lower limits in the figure above. The point here is that I can see the value of IT because I can see the change in performance only over time.
A caution when using this approach.
There is a fallacy of “false precision” where business and finance leaders will say that IT cannot take all the credit for these improvements. They are right. No one person can take credit for performance improvement because it’s the result of coordinated and collaborative changes not any singe change. The same goes for when performance deteriorates and falls outside the lower control limit. The point here is that you want to demonstrate that business performance improves when IT creates new capability over time.
You may want consider a collection of other comments about management pitfalls in this other post Signs of Weak Management
There is more to showing the value of IT than we can discuss in this single post. Demonstrating the business value of IT starts with recognizing and reporting on the source of IT value which is changes in business performance over time not IT performance at any one particular point in time.
Category: budgets CFO CIO Strategy Tools Tags: Finance, IT and Business
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3 Mark Brewer November 7, 2009 at 9:12 pm
I really like the point of this article, but the practical side of it is very difficult to put into practice. In a sense, you are saying that a discussion about IT value is really a discussion about business results as a whole. If they are improving, then IT somehow gets some credit for this (along with others). If they are not improving, then the blame (along with others). The problem is when the business is spending $1XX M on IT it becomes a big spend bucket and it is almost inevitable that finance and others want to start breaking it down. Once you start breaking it down, then the ‘value as a whole’ approach starts to break down.
4 Links for November 8 2009 | Eric D. Brown - Technology, Strategy, People, Projects November 8, 2009 at 9:44 am
[...] The value of IT exists over time not at a point in time by Mark McDonald on the Gartner Blog Network [...]
5 Gartner Blog Network — Gartner Blog Network November 8, 2009 at 3:56 pm
[...] The value of IT exists over time not at a point in time November 6th, 2009 · by Mark McDonald · 4 commentsDemonstrating the business value of IT is challenging CIO’s, CEO’s, CFO’s and other managers. The problem is not that IT creates no value; it is just how do I measure and communicate that value. Current practices in IT measurement and metrics do not help as they concentrate on reporting how… Read more… [...]
6 Gartner Blog Network — Gartner Blog Network November 8, 2009 at 3:56 pm
[...] The value of IT exists over time not at a point in time November 6th, 2009 · by Mark McDonald · 5 commentsDemonstrating the business value of IT is challenging CIO’s, CEO’s, CFO’s and other managers. The problem is not that IT creates no value; it is just how do I measure and communicate that value. Current practices in IT measurement and metrics do not help as they concentrate on reporting how… Read more… [...]
7 Mark McDonald November 8, 2009 at 5:44 pm
Mark
Thanks for your comments and yes I am saying that IT value is in terms of business performance as a whole. It may sound hard to implement, but if we do not start, then the IT value conversation only revolves around what IT spends — a losing proposition for IT and the business.
You are right that companies spend a lot on IT, but in reality its often a pittance compared to what they spend on the other part of their operations. Assume a company spends 5% of revenues on IT and has a 20% margin. That means that is spends another 75% of revenues on cost of goods, operating expenses etc. That is a 15x leverage comparing the IT budget to the operating budget.
You are right that IT looks like a big line item, in large part because the budget for IT is consolidated under the CIO. This makes it a target for financial engineering, but CFO’s and the like are managing the pennies despite the dollars. Leaders are concentrating on what IT can do to change the performance profile of the other 75% of their expenses, rather than skinning down 5% of their total budget. They are doing that through connecting IT spend, not to IT budget but to business performance — hence the reason for the post.
Keeping IT separate form business performance means that executives will continue this practice and micro-manage IT because its easier to see and change than the entire enterprise. Without a way to show the relationship, both positive and negative, of IT to business performance, then we only have ourselves to blame when IT budgets get cut without consideration of their business impact today and in the future.
It is difficult to prove that connection at a point in time. However, you can see IT’s impact on business performance over time.
So here is a thought, just start making this connection, include it in your metrics, share it with your teams. You are not trying to get all the credit but you are trying to show “where we work good things happen.”
See what this does to the conversation about IT, benefits realization and the like. We have to change that conversation, else we will become a back office, commodity cost.
8 Are you providing the CEO with the best script for IT? January 6, 2010 at 9:47 am
[...] related posts: ITs value exists over time [...]
9 Technically oriented IT metrics one of the CIOs and IT executives make it easier to separate business from IT January 21, 2010 at 6:56 am
[...] is necessary to capture IT’s actual contribution to changing bsuienss performance. Here is a link that describes this point in greater [...]
10 IT Zero or IT Hero « The Death of Business Intelligence April 26, 2010 at 4:56 am
[...] department back into the corridors with the rest of the workplace. As Mark McDonald said, “the value of IT exists through time, so any measure of IT should be shown across time”, while, it may be the case that you are no [...]
11 Is there one metric that best demonstrates the business value of IT? June 18, 2010 at 1:06 am
[...] says everything is the progression of that metric over time. See my prior post: The value of IT exists over time not at a point in time for more details. That shows that IT is well managed, has a business impact and has meaning to [...]
12 IT Infrastructure has been among your most productive assets August 10, 2010 at 8:58 am
[...] sure to measure this scale over time, as that is how IT creates value. Besides at any one point in time, all you tend to focus on is [...]
13 What is the single best metric for demonstrating IT business impact? July 11, 2012 at 7:19 am
[...] says everything is the progression of that metric over time. See my prior post: The value of IT exists over time not at a point in time for more details. That shows that IT is well managed, has a business impact and has meaning to [...]
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