Measuring IT Value

By eweek  |  Posted 2003-11-07 Print this article Print

CIO Insight: But how do you get at the people issues? I just want to make sure I understand what those people issues are and how they relate to ROI.
Gardner: Let me just make a couple of other comments. One is that I dont think that we can escape this question of how we measure the value of IT, because management will always have a problem with IT so long as you cant measure its value. If you cant measure the value of IT, my sense is-[and] this gets back to your point about is there trust between upper management and IT-if you cant measure the value of IT, how can you claim management, and the very top levels of the organization, are held accountable for shareholder value?

Cameron: Is there a value for IT? I would argue there isnt. Theres a value for business execution or delivery or value delivery, with IT as a component.

Gardner: Which is fine. Youve got to look at IT in the context of the company, [at] what IT is doing to contribute to the overall value of the company. Maybe its helping to create various competitive advantages. IT can be costly; that can create a capital barrier. There are skills involved, some of the people issues relate to IT skills, and that can give you can advantage. So, yeah, IT has to look at the broader context that it sits in, and youve got to understand how the company makes money so that the ROI [analysis] that youre performing ties to the way the company is actually making money. But I think there are ways to get at some of these things. I think theres also an issue around precision. [With] ROI, I think, sometimes theres a number that people are looking for [with] several decimal points. I remember seeing a vendor ROI analysis that came up with a number like 3,287 percent for some system, and thats just not the way to think about these things.
Initially, you go in, you might do a back-of-the-envelope type of calculation, and just see if it even makes sense to pursue further. And then over time, as things proceed and get more serious and maybe more money is involved, you make the effort to do the primary market research, to do the careful estimate and adjust for the cost of capital and risk. You know, its amazing to me that [in the] companies that weve served, theres a lot of talk and focus on ROI, the return part of the equation, but you need to look at risk and return together. Risk is completely left out of the equation. For those things that you cant quantify and are very uncertain and ambiguous, one can at least make an estimate of whats the risk. Is it a code red? Is it something that could affect the entire success of the project, or will it have a negligible effect? You can at least do that kind of thing.

Kalafut: I just wanted to get at the question in terms of the human side [of ROI], because the [human side of technology] is one of the things we talked about in [our book] Invisible Advantage and as part of our value creation index. We know there is no magical power in the technology itself. But in terms of the human side of technology, we have the work processes that go into it which are run by the people that actually have the power to create the strategies around it, and [who] motivate others to actually use that [technology] and decide that theyre not going to be replaced by those processes. Also, in terms of work place organization, creating the jobs and responsibilities, the change in how the training comes into play to actually absorb people with new talents within the work place, has been one of our measures. Erik Brynjolfsson and his colleagues at MIT have studied companies investments in IT, and found that theyre almost invariably accompanied by much larger investments in intangibles, such as training in the workplace, and also by empowerment of employees as well. We go through a variety of examples, but all of it actually comes down to how you empower people to use those technologies rather than the technologies themselves.

CIO Insight: I just want to step back now. Weve talked now for close to an hour about what the problems and the issues with ROI. The pressure is there to come up with an ROI, but its still difficult to calculate. It seems to me that this is still something that we need to do, at least as part of the larger issue of value, particularly in the financial community. Does that sound right?
Barkley: Its slightly different. Maybe youre being overly focused on ROI. Heres why. We suddenly realized in looking at our budget process over the last two years [that] we spend 85 percent of our time on 30 percent of the budget. Projects are important, capital investment is important. But 68 percent of our money to is to keep the lights on and the business running. We hadnt done a good job at budgeting and analyzing that. So we had to figure out a way to do a better job at budgeting lights on, and aligning lights on with the strategic intentions of the company. So weve actually changed our budget process where we do the lights-on budget first, and then late in the budget process, after the businesses have done their budget, we get the project budget from the businesses, and we go through a strategic-alignment value analysis where we measure, among other things, internal rate of return, business value risk and dependency. We do that in the last few weeks of the budget [process]. While [the project budget] is important and we need to have it to justify the projects, weve got a large part of the business that we realize we hadnt been paying attention to, and we have to analyze that too.

Riazi: My problem is that I think we have sold technology to the business in isolation. Here it is, you put it in, and its going to be wonderful. I call it the diet pill: you take it, and you lose 50 pounds, and you dont have to worry about anything else. Thats the underlying problem.

Barkley: Do you know where that pill is? (laughter)
Riazi: I think technology has a great deal of ROI, its just our approach to it, our mind-set [that is a problem]. The fact is [technology] enables you to do so many different things. It enables you to streamline your operation, if thats how you approach it. [But] if you approach it that were going to dump this and its going to be great and its going to give us the ROI, its going to fail. So Im not questioning the value of ROI. I believe it is [valuable] and I believe we havent even scratched the surface. But there are other issues.

Next Page: Taking ROI value out of isolation for allocation decisions.


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