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Avoid the trap of false precision

by Mark P. McDonald  |  November 30, 2011  |  2 Comments

Precision is the enemy of IT value and a root cause of why it is so hard to measure IT’s.  About the only thing that you can prove with precision is that is not wasting money.

Precision requires that specific investments that produce pre-defined and specific results.  You want to produce more widgets, then you need to buy another machine.  You can precisely say that new machine produced X widgets at a price of Y and therefore has a value of X * Y.  That is the kind of precision people think about when they think about value.

Precision can be achieved when the relationship between the parts of the business are simple and clear cut.

Simple and clear connections come from decomposing business value into constituent parts and measuring the performance of the parts with the assumption that all other parts function properly.

In the example below, the machine produces more widgets but those widgets have no value until they are sold.  So a more accurate measure of the value of the machine would be the revenue generated from the widgets which requires you to bring in elements such as sales volumes and discounts.  The figure below illustrates the difference.

Now this is a very simple example, but suddenly the realized value of a new machine is not what it can produce, but the portion of its production that is actually sold.

This begs the question – what is the cause of excess inventory?  Is it over production or less effective selling, or both?  How you assign causality in this simple system creates false precision that is captured by the spoken or unspoken assumptions of your business model.

Causality for IT Value is even more complicated as IT solutions bring together multiple parties, players and situations.  If IT is horizontal in an organization, then it can easily be the cause of every problem and the basis for every success to none.

Leaders recognize that modern business is too complex to be able to assign specific and reliable causality between investments and changes in business performance.  Rather than seeking causality, they look to prove the following:

Where IT works, good things happen

Those good things are changes in business performance that can be measured using existing business metrics and critical success factors.   Rather than precision, leaders want to demonstrate that IT does participate and contribute to the creation of business value by raising performance.   They do this by recognizing that IT creates value over time. They also look to measure IT’s production of future value. In both cases, the CIOs are trying to show the impact IT has on business performance and future potential.

Demonstrating that association is one thing, getting business leaders to agree to think in this way is another.

Start by talking with the CFO about how you are going to start including these other metrics in your reporting pack.

  • Point out that you are not looking for precision or for causality, but rather to enhance the information the executive team uses in making IT decisions.
  • Describe how these measures are important to creating a value-based culture in IT.  If all you report and manage are cost and schedule, then that is all you are going to get, people concerned about spending money on time.
  • Admit that these metrics are descriptive, directional and will improve over time. Do not take credit for specific IT investments, yes IT did this, but we all worked together to get that, the result.
  • Finally, discuss how these measures begin to establish an executive conversation around what really matters – realizing business benefits from operational and technical change.  The name of the game is business performance, no matter how it happens.  Without a way to looking at performance changes in conjunction with performance results there is simply no way to have an informed business conversation about benefits realization.

These actions are a start for IT to measure its impact, albeit a little one.  Greater precision comes over time as the business becomes more comfortable with measurement and more precise in its own measures.   Right now that ability to grow, refine, improve and extend measurement does not happen for the simple reason that many organizations are not ready for these measures, they do not know how to manage to them.  They create false precision that leads to less powerful decisions and misdirected strategies.

Better to start with measures that recognize the reality of business complexity and seek to explore associated connections and then grow into a more prescriptive model.

Otherwise managers are faced with muddling through the same way a High School Student muddles through when trying to learn postgraduate mathematics.  Sure some get them, and you kind of know what is going on, but its decisions based on intuition rather than information.

Category: cfo  cio  management  

Tags: finance  it-value  metrics  value-of-it  

Mark P. McDonald
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

Thoughts on Avoid the trap of false precision

  1. […] full article……via Avoid the trap of false precision. From Gartner Share OptionsPrintTwitterEmailMoreFacebookLinkedInStumbleUponRedditDiggLike […]

  2. False precision occurs when numerical data are presented in a manner that implies better precision than is actually the case; since precision is a limit to accuracy, this often leads to overconfidence in the accuracy as well. This is very well written post, everything is explained so nicely with the help of example. Great points and takeaway for business.

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