Opportunities for Action in Information Technology. Demonstrating the Value of IT: Mission Impossible?

Transcription

1 Opportunities for Action in Information Technology Demonstrating the Value of IT: Mission Impossible?

2 Demonstrating the Value of IT: Mission Impossible? Over the last several years, many CIOs have worked hard to increase the value of IT to their organizations, raising performance levels and reducing unit costs on a range of services. Yet even after cutting costs 10 percent, 20 percent, or more, they continue to face considerable pressure to justify their budgets. CEOs, CFOs, and business unit managers still suspect that at least some IT spending is unnecessary, and they want to know where the waste is and how to eliminate it. For the CIO, this can be a tough discussion. Although some IT spending lends itself to straightforward costbenefit analysis, most doesn t. New IT investments implementation of supply-chain-management applications, for example are usually made in conjunction with non-it investments, such as new-process design and training. The combined inputs create measurable value, but it can be hard to gauge the contribution of each. Calculating the value of ongoing IT operations spending on hardware, systems software, and the like is even more difficult. Such spending is typically the result of hundreds or even thousands of investments, made over 20 to 30 years. These IT assets become interwoven in the fabric of the business, with its multiple layers of policies, processes, roles, and equipment. This complex environment defies a ready parsing of value. How should the CIO demonstrate the value of IT? A recent study by The Boston Consulting Group of more than 20 global companies, with revenues ranging from $8 billion to more than $160 billion, yielded a pair of key insights. First, the CIO should frame the discussion in a way that removes ambiguity: here s

3 what is measurable, here s what isn t, here s why, and here are the implications for decision making. Second, and perhaps more important, the CIO should continue to drive the effort to maximize IT s value to the business and do so in a highly visible manner. Our study suggests that, recent progress aside, opportunities still exist in most organizations to expand IT s value substantially. But seizing those opportunities will take a coordinated push from both the IT and business sides of the company. The Problem with Measurement Ideally, a company could measure the value its IT assets generate in the same manner that real estate management companies assess their holdings. These companies have a host of metrics at their disposal: occupancy rates, rental income, depreciation, and operating expenses, among others. With such information, they can easily determine whether a given property is providing the right ROI, whether to make capital improvements, and, ultimately, whether to hold or sell the property. If CIOs had analogous data for each IT application, personal computer, mobile phone, or router their companies owned, they might have a better sense of their net contribution. Unfortunately, such data almost never exist. Most companies have only a general idea what IT assets cost individually. And even if a company has a good cost-accounting system for those assets and most don t ascertaining the rental income they generate is almost impossible because many IT assets, unlike buildings, are not physically distinct or are used in multiple IT value chains (for example, a database used by many applications). Several companies in our study have tried to determine IT s net value by going back to the original business justification for a partic-

4 ular asset to see if it delivered the benefits it promised. But measurement problems inevitably arise because what were discrete investments have become part of the broader business environment, where boundaries are blurred. Given the inherent measurement difficulties, it is not surprising that most companies lack a systematic approach to analyzing the value produced by their IT assets. Nor is it surprising that, as a result, IT remains a perennial target for the cost cutters. To escape this fate, companies need to use a new lens for determining where and how IT generates value. Two Separate Processes: The IT and Business Value Chains To understand how IT builds value, it helps to recognize the separate contributions of two distinct processes: the IT value chain and the business value chain. (See the exhibit A New Lens for Assessing IT s Value. ) In the first process, the IT organization buys IT-related inputs (for example, routers and network management software) from external vendors, adds the efforts of IT people, and creates services (such as data network services) that it provides to the rest of the company, often with performance guarantees, service-level options, and charge-back pricing. By contrast, in the business value chain, members of business units, corporate functions, and shared-service centers take a variety of inputs one of which is IT services and build a business architecture that generates value for end customers. Increasing IT s value ultimately requires squeezing more out of both chains. Getting more from the IT value chain is relatively straightforward; indeed, most of IT s recent gains are the result of improvements

5 here. Three basic strategies have worked well for companies in our study: Adopting Professional Procurement Techniques. Study participants used the same tactics that procurement departments use for direct and indirect materials. These include reducing the variety of products purchased, leveraging scale to maximize purchasing power, buying from fewer suppliers, and using automated auction tools. Reengineering IT Operations. Companies consolidated and streamlined data centers, help desks, application development groups, and network administrators. One company, for example, cut the number of data centers from 155 to 11; another reduced its centers from 125 to 5. They also outsourced certain activities, especially when that option provided scale advantages or access to special talent at attractive rates. Redesigning the Product and Service Catalogs. Participants attempted to optimize their IT organizations product and service offerings. Several companies, for example, decided to offer business users more choices in service levels rather than just the highest possible level. They found that many users were paying for platinum service when bronze would have been just fine. Using these techniques, companies lowered the unit cost of IT services and defined service levels in ways that provided more value and flexibility to business users, thereby demonstrating an improvement in the value of IT that no one could debate. But the IT value chain is only half of the equation: an equal or even greater amount of value can be unlocked by maximizing IT s contribution to the business value chain.

6 A New Lens for Assessing IT s Value IT Value Chain Business Value Chain Obtain inputs Convert inputs to services Deploy services Choose business architecture ingredients Build business architecture Execute business processes Circuits Employees Internet access PCs, laptops, PDAs, etc. Routers Servers Services Software Space Storage Switches Application development Database administration Data center Deskside support Help desks Maintenance Network management Security management Applications Data storage End-user devices Network access Phone service Planning Problem solving Videoconferencing Buildings Direct materials Equipment Indirect materials IT services Logistics Other services People Business processes Customer segments Geographic footprint Incentive systems Performance measures Products and services Roles Value propositions Design Procurement Production Marketing Sales Distribution Customer service Measurement Payment SOURCE: BCG analysis. A Largely Untapped Opportunity Even if a company maximizes the output of the IT value chain, IT s value to the company will fall short of its potential if IT services are not combined effectively with other elements of the business architecture, such as buildings, equipment, people, and direct and indirect materials. In the worst-case scenario, business users may take a very efficient IT service and waste it completely. A simple case in point (most cases are far more complex): top management at one company was concerned that the cost of network bandwidth was increasing at an alarming rate. The IT organization demonstrated that the cost, on a per unit basis, was actually dropping sharply. The problem was that bandwidth consumption by business users was rising faster than unit costs were falling, thus driving up total costs. From the IT group s perspective, the surge in overall costs was solely the responsibility of the business users. It felt that its job was to provide as much bandwidth as the users demanded period. Top management, however, believed that the IT organization was at least partly to blame for the cost increase. Prodded to take action, the IT group used network management tools to analyze the nature of network traffic and found that a high percentage was non-business-related Web surfing by employees. The group implemented blocking mechanisms, and bandwidth usage dropped considerably. Too often, the business and IT components of the business architecture are misaligned and therefore fail to create a mutually reinforcing, value-producing business system. Perhaps the right information is pro-

7 vided to a person who is not trained to use it correctly. Or perhaps the business process design does not quite match the functionality of an application system. Regardless, the outcome is the same: IT is underutilized, and its contribution to the company is substantially limited. Fortunately, companies can take the following remedial steps: Don t waste time trying to calculate the return on IT spending across large chunks of the business (for example, an entire enterprise or business unit). The effort required to make such a calculation far exceeds the value of knowing the number. You don t calculate the ROI on enterprise-wide spending for payroll, rent, health care, airfare, copy machines, or other such business ingredients, so why try to do it for IT? Instead, focus on getting the business architecture right in critical areas. In these areas, inspect the role of each ingredient (both IT and non-it) and make sure that together they create as much business value as possible. Develop comprehensive business-process metrics and take measurements periodically. Where possible, benchmark your measurements against those of relevant companies, and use them to evaluate the performance of the business architecture supporting the key processes. Don t focus on the value added by each ingredient focus on whether the whole business system is performing well. If the business metrics show disappointing results in important areas, assign a team to diagnose flaws in the business architecture and suggest improvements. This is the time to look at various ingredients and consider tweaking or even radically overhauling them. A drugstore chain, for example, was losing customers to its competitors. It found that slight changes to its business processes and pharmacy IT applications

8 increased customer retention substantially. The key was to start with the frustrating aspects of the customer experience and identify coordinated, but small, changes to the business architecture that would improve that experience. When optimizing areas of the business architecture, use the same kind of value-engineering mentality that product designers use on automobiles. Automobile designers evaluate each part of a car to determine whether the value perceived by the customer is worth the cost of including it in the vehicle. The same approach can be applied to the IT and non-it aspects of the business architecture. Various designs should be considered. For customer service, for example, a company could employ low-skilled call-center reps but support them with online scripts and suggestion popup screens. Or it could use highly skilled reps and give them quick access to information on more than 20 applications but no automated suggestions. The CIO s Role CIOs, who have a unique vantage point, should take a leadership role in making sure IT s value is maximized in both the IT and business value chains. Specifically, they should adopt the following strategies: Use value-engineering techniques on the IT value chain to lower the unit costs of IT services, pushing for commonality wherever possible. 1 Benchmark IT unit costs against relevant best-practice companies. One of the companies in our study 1. See From IT Complexity to Commonality: Making Your Business More Nimble, BCG Opportunities for Action, May 2004.

9 has been using an external firm to help it benchmark business process and IT costs every three years since Work closely with the company s leaders to refine the IT organization s product and service offerings on an ongoing basis and to determine the right level of flexibility. In one company that started to implement charge-back of IT costs to its business units, the units started negotiating for lower service levels almost immediately. Show senior management how IT creates value as part of a comprehensive business architecture. Help the company develop rigorous cases for new business projects that include IT, without worrying too much about attributing the expected value to each ingredient. Instead, show how coordinated investments and changes to IT and the business ingredients will create value. Make sure that planning teams for all IT-related business projects consider multiple designs for the new business architecture. Teams should look at various combinations of IT, process changes, roles, skills, outsourcing, and the like to arrive at a design that is close to optimal. Ensure that the company takes baseline business measurements before and after changes are implemented. Help the business interpret those measurements to evaluate whether the changes created value. Work with senior managers to apply value-engineering techniques to the business architecture. Don t focus only on new, exciting business requirements; ongoing operations also need attention. As

10 part of this effort, make sure that a group inside the IT organization is assigned to monitor existing IT assets for their value-creation capability. Each application, for example, should have a life cycle plan. * * * Over the last several years, the companies in our study have substantially increased the value IT provides to their businesses, primarily through improvements to the IT value chain. Most of these companies could achieve further increases by focusing now on the business value chain. To make that happen, however, they will need to take a more holistic approach, looking closely at how IT and non-it elements work together to create value. CIOs, who are in a unique position to evaluate how well the business architecture works across functions, business units, and geographies, can and should lead that effort. Stuart Scantlebury Wolfgang Thiel Stuart Scantlebury is a vice president and director in the Boston office of The Boston Consulting Group. Wolfgang Thiel is a senior vice president and director in the firm s Cologne office. You may contact the authors by at: scantlebury.stuart@bcg.com thiel.wolfgang@bcg.com To receive future publications in electronic form about this topic or others, please visit our subscription Web site at The Boston Consulting Group, Inc All rights reserved.

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