Measuring the Business Benefit of IT

Finance teams have made great strides in measuring IT spending. Now companies are seeking new ways to measure and manage the business benefit of IT...
Randy MyersOctober 20, 2004

If 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.

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“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.

Others do it at the project level. Even Blue Shield, which makes no broad attempt to
quantify IT’s contribution to that organization and doesn’t pursue ROI analyses of
projects after an investment, does assess its individual projects after they’ve been
completed to determine whether the company is getting the benefits that were
promised in the original business case. The same goes for the IT organization at
diversified financial services firm The Principal Financial Group. “Suppose we have
a server consolidation project,” says senior vice president and chief information officer Gary Scholten. “We follow up to make sure the
old servers went away. We ask if there is still staff associated with them, and whether
we still need that staff. We ask if there are any software savings. All of that would
have been in the business case, and we track it to find out if it actually happened.”

To be sure, some leading companies have introduced highly formalized programs
aimed at measuring the contribution that IT makes to their organization. One
example: Intel, which has developed what it calls “value dials” for both
efficiency and revenue-enhancing activities. (See “Inside Intel: Measuring the
Value IT Creates,” below.) Others have embraced the concept of portfolio
management for their IT organizations.
Much like a portfolio manager overseeing a collection of financial investments,
these organizations track all of their IT systems on an ongoing basis to determine
which continue to fit well with their strategic objectives and which need to be
upgraded or replaced. (See “On the Road to IT Investment/Spending Portfolio
Management,” at the end of this article.) According to Marc Probst, vice president of information technology for Intermountain Health Care, it is “a way to maintain
much better control over your information services environment.”

Inside Intel: Measuring the Value IT Creates

The way Intel Corp. sees it, there are two ways to measure its annual investment in technology. One is by
the amount of money it spends, the other by the value that spending delivers. “We get an annual budget
that we’re held to, and obviously we try to conserve costs,” says Shelagh Glaser, Intel’s group controller for
finance and enterprise services. “But we also look at whether we are optimizing the amount of value we
can deliver back to the customer. We ask ourselves whether we are picking the highest value projects for
our internal customers, and if we have prioritized properly against the business needs of the company.”

On the cost side of the equation, Intel, like many companies, benchmarks its IT spending against
comparable organizations. “While quality is certainly important,” Glaser says, “we always try to be
best-in-class on cost.” The company also utilizes a product cost methodology to calculate the cost
of the products and services it delivers on a functional basis. “Before, we would say here are all the
server costs or here are all the network costs,” says Glaser. “Now we look at what, say, Email costs
us, and ask whether it is affordable or not affordable, and what we might need to do to improve it.”

One of the ways Intel’s IT organization monitors its effectiveness is by creating service-level
agreements with the business units about how it will support them, which it can then track to see
whether it is living up to expectations. But the company also has developed what it calls “value dials”
to measure the return on its IT spending. It defines them as financial measurements of business value;
they represent increases in revenues or decreases in cost of sales, expenses, or capital expenditures.
They are based on standard return on investment models, coupled with net present value models in
which cash outflows represent the company’s investment in its IT systems. Typically, no more than
four or five value dials are associated with the ROI calculation for any one IT system.

Intel has developed 17 value dials that fall into two categories: bottom-line savings dials and top-line
growth dials. The former seek to measure what Glaser calls “real, hard things you can touch, see, or
feel,” such as scrap reduction or material discounts — things that can be quantified rather easily. The
top-line growth dials, more difficult to estimate, include things like shortening time-to-market or
improving access to markets. “These are things you can’t necessarily quantify on the bottom line,
but which really do deliver value to the company,” Glaser says.

Glaser says her team tracks each IT project to see whether it delivers or doesn’t deliver the values
outlined in the business case developed for it, then reviews its findings annually with the chief
operating officers of the company and with all the significant stakeholders of the applications.
“If we’re falling short,” she says, “we try to figure out how we can recapture that value.”

Most of the 17 value dials Intel developed were based on metrics already used by Intel’s business groups
to measure business performance. Previously, however, the metrics were not designed to relate to the
contributions of IT programs. Also, they were not used or defined consistently across the organization. In
creating the value dials, Intel standardized and defined the metrics being used by the various parts of its
business, which it credits with helping it drive apples-to-apples comparisons between different programs,
allowing it to allocate its budget across different business groups more effectively.

“What I really like about this approach,” Glaser continues, “is that it’s really given a whole new language
to the organization. Some people may have never had experiences talking about an ROI, for example,
because of their position in the organization. This gives everybody a way to talk to each other to
improve the organization’s financial performance.”

On the Road to IT Investment/Spending Portfolio Management

Do you want to wring maximum performance out of your IT
investments? Consider managing them the same way you would
manage a portfolio of financial investments: by tracking all IT systems
on an ongoing basis to monitor how they are being used, how they are
performing, and whether they feature overlapping or redundant
capabilities. Use this analysis to decide which systems need to
remain in operation, which need to be upgraded, and which need to
be replaced — given your company’s business strategy. As part of the
process, make an ongoing evaluation of the company’s mix of IT projects
to determine whether they are aligned with the business strategy.

Ron Domanico, vice president and chief financial officer for Caraustar
Industries, says his firm adopted this “portfolio management” approach
to IT two years ago, when it formed an IT steering committee and
centralized its back office functions. One consequence: the company
significantly streamlined the systems it was supporting internally,
forcing all divisions to adopt “standard” applications even if they
had a custom application with better functionality.

Gary Scholten, chief information officer at The Principal Financial
Group, says his firm employs this approach in three different areas:
projects, services, and applications. Project portfolio management is
targeted at doing just what its name implies: evaluating a company’s
full spectrum of IT projects. Service portfolio management consists
of an ongoing review of the IT services provided by the company,
aimed at determining whether each service should be centralized or
decentralized, whether it should be organized to offer tiers of service,
whether the company needs to invest more in that service, and, finally,
how costs should be distributed for centralized services. Application
portfolio management is the ongoing process through which The
Principal Financial Group reviews applications, or systems, across the
enterprise. The purpose is to evaluate them for redundancies and
compliance with current architecture directions, as well as deciding
when to retire or redesign them.

Visa U.S.A.’s approach to portfolio management is designed to help the
company evaluate potential new IT investments, says Beth Masegian,
senior vice president for financial planning and analysis. “We look at it
three ways — what must we do to stay in business, what could generate
an ROI, and what creates future options. In all cases, new investments
must be linked to our corporate strategy.”

While many companies take a portfolio approach to evaluating
prospective IT investments — forcing projects across the enterprise to
compete against one another for funding, rather than allowing projects
to be approved or rejected in isolation, depending upon their anticipated
return or value to the organization — it is not clear that many firms
practice true portfolio management enterprise-wide for all IT activities,
including existing systems. “We are not fully there yet, and I don’t believe
many other companies are either,” says Bette Walker, chief information
officer at auto parts manufacturer Delphi Corp. “We are on that journey. But
l believe that most ‘portfolio management’ per se today simply involves IT
organizations prioritizing applications. To get to a true portfolio management
process, I believe we’ve got a way to go.”

That said, Walker adds that Delphi does a good job of practicing what
she calls functional portfolio management, which involves analyzing IT’s
activities within each functional division of the Delphi organization.
“We’ll use finance as an example,” Walker explains. “We have a task
team that connects the key leaders in finance at an enterprise, regional,
and divisional level. They come together on a monthly basis and make
key decisions about how they’re going to manage finance across the
enterprise. They also have a point of view about the IT portfolio. In
turn, we have someone in the information technology organization
whose purpose for living is to worry about how to support the
finance organization and make sure the requests they’re receiving
get entered and viewed by the key players within that enterprise-wide
finance organization.”

As more companies embrace portfolio management on a broad
scale, they should be able to do a better job not only of steering
new investment dollars into the IT projects that can deliver the
most value for the business, but also in leveraging the full value of
existing systems.

This article is excerpted and adapted from IT Moves from Cost Center to Business Contributor, a report that summarizes the findings of interviews with executives at 11 companies. CFO Research Services and PricewaterhouseCoopers developed the hypotheses for the research jointly. PricewaterhouseCoopers funded the research and the publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.