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The Business Value of IT: Can IT Be Measured? Presentation for SIM Chicago April 20, 2005 Dawn Harris, Loyola University Chicago Linda Salchenberger, Northwestern University Why Is This Important? Obtaining business value from IT investments remains a top concern IT business value creation not well understood Failed IT projects amount to up to $200 billion in the US Not Much Has Changed 86% of IT professionals surveyed by CIO magazine feel that measuring IT value is important Only 30% of these IT professionals believe that IT is perceived as a value (versus cost) center in their organizations Ten percent feel their IT ROI measurements are reliable Historical Approaches Look for correlations between overall US economic productivity and use of IT Assess firm productivity (output) in sectors (service, manufacturing) Measure overall business performance Historical Approaches Connect the value of IT to its contribution to the value chain Examine CEO perceptions of business value of IT Case studies of successful companies Measuring the Value of IT Financial metrics used such as ROI, NPV, TCO, etc. Impact on value chain Case studies – from Sabre to Dell Asset approaches – Economic value added (EVA), Tobin’s Q (calculated intangible value), balanced scorecard Overall firm performance Measuring the Value of IT Projects serve operational, tactical and strategic goals and thus, should be measured on these various levels of contribution Management practices create the greatest impact on value CEO goals for IT can be focused or unfocused, IT used for operational efficiencies or strategic positioning Responses of our interviewees – how do they value IT? Starting Points Alignment between business and IT is the necessary first step IT value is diffused throughout the organization contributing value to business processes IT has become a strategic necessity IT can be viewed as a dynamic capability resource Leadership perspectives and perceptions matter Purpose of Our Research This research project is designed to: identify, analyze, and evaluate the differences and similarities between perceptions of the business value of IT by CEO’s and CIO’s. The overall objective is to: help organizations to better align business and IT strategies facilitate the sharing of best practices of organizations that successfully leverage IT for strategic advantage. Framework for Assessing Alignment Between Business and IT Strategy Level 1 Business/ IT Relationship Spending and Assessment Role in Strategy Level 2 Level 3 Level 4 Level 5 How to Assess Alignment Between Business and IT Strategy? Business IT Relationship Understanding of Business by IT Understanding of IT by Business Spending and Assessment How IT is budgeted Rationale for IT spending How projects are prioritized How to Assess Alignment Between Business and IT Strategy? Role in Strategy Reporting relationship Senior-level IT Steering Committee Risk sharing Methodology Start with surveys of CEO’s and CIO’s of business and technology alignment issues Separate interviews of CEO/CIO pairs from the same organization Small number of organizations ranging in size, industry, and technology-orientation Issue 1: How do organizations measure the value of IT beyond financial metrics? Projects are launched with business initiatives and measured by the success of the business initiative launch of new Web site with marketing campaign to increase number of patients to a hospital Financial services company meets customer service goals How do organizations measure the value of IT beyond financial metrics? IT adds value by enhancing the core business with services that customers value distribution company provides additional services using technology that increases margins, helps to close sales a transportation company achieves growth by using technology to become customerfocused How do organizations measure the value of IT beyond financial metrics? Information is the value-added, customers want reliability, accuracy, security and flexibility serving customers in the financial services sector requires secure flexible access to data and interfacing with a variety of platforms Critical to the success of a growing manufacturing company that offers a complex array of products How do organizations measure the value of IT beyond financial metrics? CIO’s / technology reaches out beyond organizational boundaries to create external relationships with vendors / suppliers treat vendors like partners and helps the organization to optimize value from vendors Gaps: What CEO’s and CIO’s Said Need a clearly articulated business strategy / direction to go beyond financial metrics when assessing the strategic value of IT Lag effect, investing in technology does not result in immediate impact Gaps: What CEO’s and CIO’s Said CEO’s who do not understand technology try to apply simple metrics or ignore it completely Increasing demands for anytime / anyplace access to information makes systems more vulnerable and requires investment and on-going costs, business needs to understand the risk analysis Gaps Projects must be evaluated based on the need served (operational vs. strategic) Many organizations separated investment dollars for infrastructure vs. more strategic projects IT needs to use this metric CIO’s concerned about infrastructure and staff to support business growth Issue 2: How can the business value of IT be used as a criterion for investing in technology projects? Business and IT develop business strategy as partners CIO suggests videoconferencing solution to allow district offices to do claims processing Map projects to business goals IT systems are mapped to improving healthcare quality outcomes, reducing errors, bringing in new patients How can the business value of IT be used as a criterion for investing in technology projects? IT’s contribution is to enhance the value chain and business processes distribution company helps customers with inventory management Use balanced scorecard approach applied in an organization that wants to be more proactive, less reactive, focused on intangible assets How can the business value of IT be used as a criterion for investing in technology projects? IT welcomes a more financially disciplined approach to investing our extra 10% question Choose projects that have a short time horizon and more immediate impact one organization is forced to spend all IT budget within one year with the exception of a few long term projects How can the business value of IT be used as a criterion for investing in technology projects? In general, shorter timeframes and smaller investments, more strategic in nature CIO’s want the business to set priorities with IT at the table Projects should bubble up and also come from the top down Gaps What is measurable value for our company? Companies have little cards, posters on the wall, but does this get to the entire organization? CIO’s concerned with ability to scale or grow with the business Insufficient funds allocated to projects results in stops and starts and poor results Lean staff causes domino effect when some projects are delayed Issue 3: What new strategies are employed by leadership to make technology-related project investment decisions? Portfolio mgmt still at an early stage Business vs. IT initiated CEO who handed us a form should be 50/50 according to both CEO and CIO from a government agency Steering committees and other governance structures (all varieties) What new strategies are employed by leadership to make technology-related project investment decisions? In general, shorter timeframes and smaller investments, more strategic in nature CIO’s want the business to set priorities with IT at the table Projects should bubble up and also come from the top down Gaps Lack of on-going project assessment, feedback on the success / failure of projects, lack of consistent project leadership Lack of understanding of why projects succeed so they can be replicated (intentional success vs. luck) Gaps Business does not understand the need to invest in infrastructure, can’t differentiate between different kinds of technology investments, is only concerned with costs Seesaw effect of centralization of IT in bad times, decentralization in good times Issue 4: What processes are organizations using to better align business and IT strategies? Alignment largely dependent upon relationships rather than structures, a seat at the executive table just as important as reporting to the CEO Clear articulation of business strategies by business and IT leadership as the first step toward alignment (obvious where this happened) What processes are organizations using to better align business and IT strategies? Strategic hires of CIO’s with appropriate business / strategy orientation after the organization decides IT is strategic IT as a strategic partner in the planning process don’t hand IT a business plan, treat them as partners What processes are organizations using to better align business and IT strategies? Formal role of IT in overall business process improvement Better leverage IT’s cross-functional perspective and experience with change management Manufacturing company to do this as next step Gaps IT wants to be an equal partner in planning, wants to spend more time on planning IT has a holistic perspective of business processes, has always had to work across functional units / areas Gaps CIO’s want IT to lead process resdesign, but business is looking for software solutions CIO’s have to find the right organizational match (can be extremely successful at one place and struggle at another). Conclusions Business and IT strategies should be developed in partnership Business provides direction IT can supply the innovation Relationships matter Business value of IT is contingent upon Company’s current market position CEO’s perspective of IT Need to be strategic vs. operational Conclusions Still searching for best practices and methodologies for choosing IT projects that contribute value “A balanced scorecard” type approach that factors in multiple dimensions beyond the financial Conclusions CIO’s need to take leadership in seeking to formalize institutional learning regarding successful projects and how to identify, choose and manage them Conclusions CEO must understand how to frame the IT questions to create a competitive advantage for the company CIO must explain the value of proposed projects in terms of business goals and business language Predictions The ability to sustain continual transformation and high performance requires extraordinary business and technology leadership Because of the perceived need for business transformation, CIO’s will be leaders first, business technologists second, and everything else last