Mark McDonald

A member of the Gartner Blog Network

Mark P. McDonald
GVP EXP
8 years at Gartner
24 years IT industry

Mark McDonald, Ph.D., is a former group vice president and head of research in Gartner Executive Programs. He is the co-author of The Social Organization with Anthony Bradley. Read Full Bio

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Is there one metric that best demonstrates the business value of IT?

by Mark P. McDonald  |  June 18, 2010  |  8 Comments

The issue of demonstrating the business value of IT is at the top of mind for both CIO’s and other executives as they look to allocate cash and other resources across the enterprise.  The short answer is that right now there is no one metric and the most prevalent one IT budget as a percent of revenue is logically and financially bankrupt.

So let propose a potential metric that can address the question for most but not all organizations.  That metric is:

EBITDA / IT Headcount

The first thing you will notice is that this metric is not IT based it’s a measure of overall enterprise productivity.  That is because productivity is the central source of the business value of IT.

The measure – a measure of core productivity

The numerator of Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) is a common measure of the health of your operations.  It is also the metric most frequently used for measuring senior executive performance from an earnings perspective.  It defines your core earnings potential and IT is an essential part of the processes, work, collaboration etc that drives core earnings.  It is the financial measure of productivity value that counts.

The denominator, IT Headcount, is the full time equivalents who are employed in IT. This is a measure of the efficiency and leverage the enterprise gets from IT.  By concentrating on headcount, and not budget, the CIO can show that they are managing the cost structure of IT and that investments are made with an eye to creating a disproportionate impact on the enterprise.

This metric is similar to others that look at revenue per employee, or profit per employee, but they recognize the unique role that IT plays in creating leverage across the enterprise.  Like that metric, it is a measure of productivity and one that smart executives use to realize the need to get more value out of the workforce (increase the numerator) rather than cut costs and productive capacity (decrease the denominator)

Do not count contractors

A suggestion is to leave out headcount that is outsourced or contract labor in the IT headcount number.  Its true that this can artificially inflate the number and hid the fact that IT service levels may be requiring more people, but the more people they require are not people you control.  They are people your outsource provider controls and you want that provider focused on quality of service and contracted price rather than participating in gaming the IT FTE number.

CFO’s will want to see that number, they will say that you are hiding productivity in it.  Point out that these people are counted, in terms of the cost of their services in the EBITDA number, so its not like we are hiding them.  Then simply ask that, then the company should also count all of its contract services, all of the people in their supplier organization that provide value to customers in their headcount when calculating EBITDA/Employee.  After all that would only be fair.  That should lead to an interesting discussion and support for a measure of the IT FTE’s you control and manage.  You should measure productivity the same way, everywhere.

Why single out IT Employees?

Why this measure?  Few will argue that IT people are different than other employees.  They are, but not because they are technical or introverted, or like things more than people.  Rather because they and the technologies they support are a fundamental source of core productivity in your organization.  That is what this metric is trying to capture — that relationship between core productivity and IT resources.

How to manage to this measure?

CIOs and IT executives need to show this metric and its progression over time, rather than at a point in time.  Just staying that your EBITDA/IT employee is $300,000 means nothing, because, in any one year, you can ‘game’ the number in terms of outsourcing, etc.

An external benchmark is also not particularly meaningful.  Saying that you are at $300,000/person where others in the industry are at $200,000/person does not say much and may only say that you are more outsourced than others.

What 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 the enterprise.

Getting started

A suggestion, go back over the past five years and calculate the number.  Make adjustments as needed for contracts and outsourcing, but get an idea where you stand.

Add that metric to your metrics pack; make sure to show it over time in a control chart.

Share it with your people, so they get an idea of their value to the company and its bottom line

Consider it in your planning for 2011 – recognize that if there is going to be growth and you need IT people to support that growth.

Good Luck, and please let me know if there are other measures that you use.  IT is difficult to measure, so we will all benefit from each other’s experience.

8 Comments »

Category: budgets CFO CIO Leadership     Tags: , , , , , ,

8 responses so far ↓

  • 1 Tweets that mention Is there one metric that best demonstrates the business value of IT? -- Topsy.com   June 18, 2010 at 5:02 am

    [...] This post was mentioned on Twitter by Mark P. McDonald, Outsourcing-Eqentia. Outsourcing-Eqentia said: Is there one metric that best demonstrates the business value of IT?: Source: Gartner Blog NetworkThe … http://bit.ly/djW532 #outsourcing [...]

  • 2 Tahir Tanveer   June 25, 2010 at 7:47 am

    We use IT spend as % of total business operating cost. Others are IT employee % of total employees and IT spend per employee. Again as you mentioned capturing and presenting data over the last few years can show IT contributions and efficiency to the business.

  • 3 Ankur Kumar   June 29, 2010 at 10:38 pm

    Definitely interesting but the challenge, like the article mentions, the funds are pooled from the business at different lengths between different organizations and thus diffuse the sanctity of the metric.
    What’s your view?

  • 4 Business Value – Current Thinking for IT Leaders — CIOpedia   August 17, 2010 at 10:19 am

    [...] Mark McDonald: Is there one metric that best demonstrates the business value of IT? [...]

  • 5 Yvon Decelles   June 26, 2011 at 5:54 am

    At first I was in disagreement with you over leaving out contractors, but as I continued reading you made an interesting argument. Good things to ponder.

  • 6 Mark P. McDonald   June 26, 2011 at 4:58 pm

    Thanks Yvon as you can see contractors, or more exactly their fees are incorporated in to the model as they influence EBITDA. There are many metrics to prove that IT is not wasting the company’s money. This is one that has helped CIOs demonstrate the leverage and operational value that IT creates, particularly over time.

  • 7 Valor de IT: Primera aproximación « train2manage   July 10, 2011 at 11:47 pm

    [...] b) Valor de IT = EBITDA / Personal de IT (propuesta de Mark McDonald) [...]

  • 8 Amit Sarwal   May 24, 2012 at 10:48 am

    I agree that the metric changes the full thought process of IT being a cost center to a profitability driver. This also seems to be more appropriate for manufacturing and other similar organizations where profits = revenue – cost of good sold. Here the efficiency or productivity is a big driver for the profitability. But for organizations where revenue is less related to costs, the typical high margin business, where the profitability is also linked to expertise, skill, or intellectual abilities this might not be a good measure. Think of a movie production house, specialized consulting, a sports team, or even a path breaking technical research company. Another example is say productivity of IT systems in Microsoft or Apple might bring down the cost of making a new operating system, but the revenues and profitability are much more reflection of the strenght of the product itself.