VideoIf few companies have formal constructs in place to ensure that their IT and corporate strategies are aligned, it is also true that few have developed rigorous systems for measuring the value that IT contributes to the business. Given that IT is typically one of the top five expenditures at most organizations, this represents a significant shortfall in managerial responsibility.
What most companies can boast having is an array of systems and controls aimed at managing and measuring IT spending. Though not all are present at every organization, these tools include annual budgets, five-year IT spending plans, IT steering committees, business-case requirements for new IT initiatives, tightly controlled purchasing systems, activity-based costing, and benchmarking.
Nearly all the companies interviewed for this paper conduct an ROI analysis of proposed new projects before giving them a green light, sometimes incorporating a total cost of ownership calculation into the analysis. However, this undertaking is only one consideration in their decision-making process; a positive ROI is neither an absolute prerequisite for funding a project nor a guarantee that funding will be forthcoming. Some projects that have a modest or even negative ROI are undertaken when the project has a "stay in business" status. Recent examples: systems required to help organizations comply with the provisions of the HIPAA Privacy Regulation or with Section 404 of the Sarbanes-Oxley Act, the latter of which requires that public companies exhaustively document their internal controls and the viability of those controls.
"Like a lot of companies, we're spending a significant amount of money to comply with privacy acts," observes Beth Masegian, senior vice president for financial planning and analysis at Visa U.S.A. "That's a gotta-do. You have no choice if you're going to stay in business." Intel Corp. recently upgraded its human resources software, even though doing so didn't promise the same sort of return an investment in a sales or manufacturing system might yield. "We need to maintain an accurate record of employees and maintain the efficiency of our management team as we move a lot of our HR employee services to the desktop," says Shelagh Glaser, group controller for finance and enterprise services. "This was an example of just a basic, sustaining investment."
On the other hand, companies don't invest in every project with a positive return projection, either. "Just because we can find a positive-value project doesn't mean we get the budget for it," says Glaser. "We think projects need to compete, and we need to hold ourselves to a certain profitability level. We don't invest in every positive NPV project there is, and I doubt that most companies do."
Despite their broad appreciation for subjecting potential IT initiatives to an ROI analysis, relatively few companies resurrect or redo that analysis in support of their ongoing management of IT projects and systems. "We use the preliminary ROI calculation as an indicator — one part of the determination of which projects get priority and which don't," says Ron Domanico, vice president and CFO at Caraustar Industries, a manufacturer of recycled paperboard and converted paperboard products. "We typically do it up front, as opposed to after the project. Because the reality is, once the project is done, it's a sunk cost. From that point forward, it's primarily a manpower issue."
In Caraustar's case, Domanico adds, most of the projects undertaken in recent years have been relatively small, requiring perhaps three or four months and just a handful of people to implement. It's not quite the same thing, he says, as implementing an enterprise resource planning system, which is so massive that it would require testing against periodic milestones. "If our fiber guys say they could save 50 cents a ton on fiber with some new system," he explains, "it's pretty easy to look at the financials afterward to see if they're getting that 50-cent savings."
The argument against devoting significant resources to measuring the hard-dollar value generated by the IT organization, and even individual IT projects, has always been that it is difficult. What does a company really "earn," after all, by making E-mail available to its employees? Yes, employees are likely to be more productive, but quantifying the increase is bound to be a rough estimate at best. And how do you assign a value to meeting customer expectations that employees be reachable by E-mail? "We don't really look at it that way," says Heidi Kunz, executive vice president and CFO of Blue Shield of California, when asked which metrics her company uses to measure the value that IT adds to her organization. "Generally, technology is just part of an investment. What's important for us is to measure total return and to assess what our business capability is against our strategic objectives and against our competitors."
Still, some companies are exploring ways to measure the value their IT organizations create, albeit not always in the hard-dollar format that CFOs are accustomed to seeing. Some are benchmarking themselves against others in their industries to assess their performance in broad categories, such as their average labor rate per hour or the amount of time they devote to maintenance versus development of new systems or applications.
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