Executive Briefing Series (Volume 3, Number 2)

Executive Briefing Series (Volume 3, Number 2) Real Business of IT: How CIOs Create and Communicate Value Quarterly Executive Workshop Series May 2010 Written by Professor Gwanhoo Lee

KEY INSIGHTS ABOUT BUSINESS VALUE OF IT In IT, we talk about the inputs too much, not the outcomes. We must get out of that trend. It is important to figure out what is the outcome that matters for our organization and that stakeholders care about? Organizations go through the following four steps to realize business value of IT: (1) New Thinking, (2) Value for Money, (3) New Business Value, and (4) Extended Value. One of the worst things you can do is to call your business your customers. This makes you the vendor and them the buyer. Measure and communicate IT performance in business terms. Putting a focus on performance such as unit cost/price and the quality side can get IT in control and credibility. Chargeback should be used primarily to change behavior or congratulate effective behavior. Effective organizations made a IT service dashboard to show the reliability of each service area. If ROI can t really be persuasive or applicable, then you can talk about risks to get people s attention and get the conversation going. The IT tasks that are strongly correlated with higher business value from IT include: (1) needs identification, (2) transparent investment and value management, (3) BRP and organization change, and (4) solution delivery. Use the same methodology for IT projects as the one used for business projects. This makes IT part of the internalized process and business units begin to engage in conversations with IT. Increasingly more CIOs become involved in innovation. Other opportunities are out there for effective CIOs include shared services, business processes, strategy, and M&A. As you fix IT, and make the company better, you become a CIO Plus. - 1 -

American University CITGE Quarterly Executive Workshop (4/23/2010) on Real Business of IT: How CIOs Create and Communicate Value Speaker: Dr. George Westerman, MIT Sloan Scribe: Laura Reyes, Graduate Assistant, American University What follows is a summary of the presentation by Dr. Westerman and the discussion with the audience. Strategic Partnership between Business and IT A few in the audience said they have achieved the goal of a strategic partnership at their organizations and many more participants said they were not there yet but aspired to get there. What keeps us from developing strategic partnerships with business? o Different languages used for communications o Lack of motivations o Domain knowledge disconnect o Lack of trust o History between business and IT o Executives perception of the role of IT o Time: Business executives want to see quick return on IT investment and don t have the patience to wait until IT projects begin to create business value How to overcome the barriers o Change the way you communicate with business people o Quick wins o Establish a series of processes to get the business to work with IT What Are We Measuring? How do you measure the value/roi of a treadmill? o Are you measuring only inputs (time, speed, slope, calories burned)? o Shouldn t you measure outputs (looking good, weight loss, being heathy)? Similarly, in IT, we talk about the inputs too much, not the outcomes. We must get out of that trend. It is important to figure out what is the outcome that matters for our organization and that stakeholders care about? Each increment of performance may not necessarily be associated with value. Going up in performance may not matter to stakeholders if value is marginal. Our dilemma is that metrics available may not matter to stakeholders and the metrics stakeholders would care about are not readily available. - 2 -

The Path to Value According to the MIT study of 100s of CIOs and non-it executives, organizations go through the following four steps to fully realize business value of IT. A previous step enables the next one, although they are not necessarily a causality relation. Value for Money New Thinking New Business Value Extended Value Source: R. Hunter and G. Westerman, The Real Business of IT: How CIOs Create and Communicate Value, Harvard Business School Press, October 2009 Step 1: New Thinking Thinking differently about the business and organization. Business units wanted to know what you could do for them and make their business better, not how good you are at your job. One of your worst things can be to call your business your customers. This makes you the vendor and them the buyer. Don t name IT projects ERP projects or SAP projects. Use business terms to call IT projects such as the supply chain transformation project. IT should not be perceived to be a cost of doing business. If it is, the goal will always be to reduce it. IT is the business. Unit Cost/Price vs. Total Cost Attention to the unit cost, as opposed to the annual cost can invite people to believe that reductions will be greater. Lower unit cost does not always mean lower annual cost. The audience says that they are getting into the problem that people ask why annual costs are not lower when unit costs are lower. We need to think about how to change the language so that people don t just focus on the cost. Some people switch from unit cost to unit price. - 3 -

Step 2: Value for Money Measure and communicate IT performance in business terms. In this phase, focus on the idea that your money given to you is spent wisely, so that it gives you the trust of the organization to award you other funding. Look inward first if you want to be a partner and be strategic. CIOs have to manage the noise level by putting enough of the good stuff out there and self-promotion. Structure conversation about how well IT is delivering. According to the MIT study, non-it execs tend to grade their IT performance based on the following two perceptions: (a) Do they see if you run a good IT shop?; and (b) Do they have good oversight of what s happening in IT? Issue of Separating IT Operations from CIO s Responsibility The Department of Human and Health Services (HHS) has intentionally split itself such that IT operations are under Shared Services, not under CIO responsibilities. Pros and cons of completely separating operations from CIO roles o Operations allow for leveraging off, because they can be lower-hanging fruit and lend credibility or trust more easily. o Does one make you good at the other? It s the development vs. maintenance argument; if you re keeping things working, you might have time to develop real business value. o As a CIO you probably want someone else to manage operations so that you could focus on strategy. Benchmarks at Intel IT at Intel wins a quality award was an April Fool s joke at Intel in the 1990s. Intel built great IT systems for other people and organizations, but not for themselves. The IT organization at Intel started to fix the problem by first showing how bad it was, using benchmarking in terms of unit cost and quality vs. services provided. They found it to be terrible. The CIO showed measures of how bad things were to all of the people in Intel. Since then, IT people began to focus on their benchmarks and raising them. By putting a focus on performance, everyone in IT started to focus on performance and had better conversations within management. Once things get better, people feel less of a need for focus on benchmarks and get time on the agenda to focus on strategy and development. Putting a focus on performance such as unit cost/price and quality side can get IT in control. - 4 -

Source: Intel 2003 IT Annual Performance Report www.intel.com/business/bss/infrastructure/managing/2003_apr.htm Funding and Chargeback Issues Demand in a federal government agency is completely outside of IT s control. Outside entities determine the demand so that no matter how much IT delivers, demand tends to be insatiable. In some federal agencies, IT is given assignments without funding. Unfunded mandates may result from strategic planning problems and priorities made without consideration of the implications for IT. Marriott does chargeback, but it s very complicated. Our technical language gets in the way when charging for bits and bytes. When chargeback is working, it allows you to have the service consumption conversation. Charge for services, but not for servers. That allows you to compare your value for money to other services. Since the chargeback process is costly, perhaps we can share the information to change user behaviors without actually charging back. One nonprofit organization does chargeback only if they want to govern user behavior. Chargebacks should be used to change behavior or congratulate effective behavior. They are just levers. Command of resources is tricky, because some units try to maintain resource slack. One drawback of chargeback is that it implies a vendor-client relationship between IT and business units. In JM Family, the largest distributor of Toyota and Lexus, the CEO put IT in the shared services framework. Their goal is to recover cost with IT. They started to try to communicate the outputs and do chargeback for everything with a variability index that shows how much user behavior and consumption affect the cost. - 5 -

IT Service Dashboard at JM Family In JM Family, when they talked about IT budgets, they demonstrated the budget level. They substituted technology for labor, cut their budget in half, and showed how they changed it in terms of what was saved and how demand grew. They made a dashboard to show the reliability of each service area in a hierarchical representation (Systems Services Business Process Line of Business Corporate Roll up). The IT people could see what happened when servers went down and what processes failed. The operation people are in charge and the CIO isn t allowed to step in to fix the problem, which empowers the operation people. Risk as a Lever If ROI can t really be persuasive or applicable, then you can talk about risks to get people s attention and get the conversation going. o How important are each of the different categories of risks in each of these processes I m giving you? Usually, people are interested in risks associated with organizational agility. You can tell them that if you improve your IT architecture, you improve on those risks. That s another way to show value. Step 3: New Business Value - Master the Virtuous Cycle of Business Value from IT The MIT study of 153 non-it executives suggests that the effectiveness of the five tasks shown in the following figure are strongly correlated with higher business value from IT. Source: Adapted from Getting Business Value from IT: The Non-IT Executive View, G. Westerman and P. Weill, MIT Sloan CISR Research Briefing, Vol. VI, No. 3A, - 6 -

Transparency/Oversight Current practices of post-implementation reviews for projects o The number crunching is done in CFO terms. o One organization used to do project reviews in increments, which validated the business side, e.g., if the objective was achieved. o One organization did it through someone who was objective and got the metrics. o Don t think of it as a project review, but as a product review; users use products not projects. Otherwise it takes us nowhere. Needs identification/prioritization How can we make better decisions up front and create the Virtuous Cycle? CXOs say that they prioritize things well but IT does not. That s in part because they only know their own silo and they don t see your side as managing the multiple silos. o If they re doing it together, in a steering committee, then it shouldn t be an issue. o People need to be transparent about what they re doing and what s changing. Intel uses the following method to make IT investment transparent to the organization. That changes the nature of the conversation. They make decisions based on value dials. IT decides how many clicks to do and the Finance department decides what it is worth. You re not telling them what to think, you re giving them data so they can think more clearly. Source: Curley, Managing IT for Business Value, Intel Press 2004 used with permission. In the public sector, you have different value dials. Set strategic goals, so that each of the goals has sub-goals. They align their goals along with those sub-goals and map that way. - 7 -

Execution BPR, Organization Change, and Solution Delivery Many executives see IT as a black hole and/or a black box. They go to steering committee meetings, and they are forced to talk on things they don t understand and make decisions they don t feel informed about. IT does not have much control over BRP and Organization Changes, how do we do handle that? o Raytheon uses the same methodology for IT projects as the one used for their business projects. This makes IT part of the internalized process and business units begin to engage in meaningful conversations with IT because they share the same language. o American Red Cross uses the change management process that is now intermingled with business and IT. It took Red Cross several years for people to be re-trained for that. What happens at the due date if IT is ready, but the business side is not? o GAO balances when things are ready to deploy and when they can change. o IRS found their way of determining changes to business processes and IT s ability to implement them. That warranted a new strategy, with portfolios, with committees attached, so that they could prioritize what could/needed to be done. o People don t like these change management methodologies, and it can become a real uphill battle. Delivering and Receiving Extended Value Increasingly more CIOs become involved in innovation. Intel and others make it seem as though an investment in IT is better than an investment anywhere else. Then, what other opportunities are out there for effective CIOs? o Shared services, business processes, strategy, M&A As you fix IT, and make the company better, you become a CIO Plus. Source: R. Hunter and G. Westerman, The Real Business of IT. Harvard Business School Press, 2009-8 -

Next Generation IT We are the first wave of a value-cost economy. What about the next generation of IT? There is a lack of knowledge in these areas. We are in danger of constantly reacting. How do we mobilize the middle of our own organization? How do we innovate in a changing world? What is the impact of the New Economy and new capital structure on what we do? But we re not making enough progress in closing that gap between how we see our work and how business sees them. And we re not doing enough to do that. Most CXOs would know what their job is supposed to be but CIOs do not. This leads to a mission disconnect. In the public sector, we are operating to provide a consumer surplus. If we provide information to the American public, we are fine. The effective CIOs are mission-driven. Communication has to be focused around the mission and we can t be a part of the strategy until we fix the other problems. Recommended Readings Hunter, R. & Westerman, G. (2009) Real Business of IT: How CIOs Create and Communicate Value, Harvard Business School, Boston, MA. Westerman, G. & Hunter, R. (2007) IT Risk: Turning Business Threats into Competitve Advantage, Harvard Business School, Boston, MA. Broadbent, M. & Kitzis, E. S. (2005) The New CIO Leader: Setting the Agenda and Delivering Results, Harvard Business School Press, Boston, MA. Smith, G. S. (2006) Straight to the Top: Becoming a World-Class CIO, John Wiley & Sons, Inc. - 9 -

Participants in American University Workshop April 23, 2010 (Ordered by Organization) First Name Last Name Organization Title Mark Weischedel American Red Cross Senior VP & CIO Frank Armour American University Research Fellow Erran Carmel American University Professor William DeLone American University Professor and Director, CITGE J. Alberto Espinosa American University Associate Professor Gwanhoo Lee American University Associate Prof. and Director, CITGE Laura Reyes American University Graduate Assistant Nayrobi Rodriguez American University Graduate Assistant Dave Swartz American University Assistant Vice President and CIO, Office of Finance/Treasurer Joseph Malfesi AMTRAK CTOO Ed Anderson Anerian SVP Jim Getter Architect of the Capitol IT Director Ray Wulff British Embassy CIO Larry Fitzparick Computech, Inc President Rita Hadden Computech, Inc Director and Practice Leader Maria Lee Computech, Inc Practice Leader Richard Reba CSC Partner, Technology Services Group Chris Knepper CSC Partner, Federal Management Consulting, Technology Services Practice Michael Ferrara CSC Account Manager, Federal Management Consulting Samuel Wang CSC Partner Mike Carleton Department of Health and Human Services Naomi Marechal Department of Homeland Security Director, Enterprise Portfolio Governance Division John Gulisano FAA NexGen Program Manager CIO Chan Kim FAA IT Manager David Hays Freddie Mac Operations Strategic Consulting Manager Joseph Kraus GAO CIO Vik Balani Inalab Consulting Partner Peter Keen Keen Innovations Chairman Leslie Hansen Scott Marriott VP of Information Resources/ Planning & epmo Chuck Rogers Marriott Senior Director/ Information Resources/ Business Analysis - 10 -

SPEAKER S BIOS Dr. George Westerman George Westerman is a Research Scientist in MIT Sloan's Center for Information Systems Research (CISR) and faculty chair for the course IT for the Non-IT Executive. His research and teaching examine executive-level management challenges at the interface between information technology and business units, such as risk management, innovation, and communicating the value of IT. He is the co-author of Real Business of IT: How CIOs Create and Communicate Value (HBS Press 2009) and IT Risk: Turning Business Threats into Competitive Advantage (HBS Press 2007). A paper from his current research on IT-Led Innovation earned the 2007 Best Paper award from the Society for Information Management. His work on IT capabilities and the role of the CIO (with Peter Weill) examines the drivers of CIO effectiveness and IT value from both the IT and Non-IT executive viewpoint. Prior to earning his doctorate at Harvard Business School, George gained 15 years of experience in engineering and IT management. - 11 -

CITGE Executive Team CITGE Advisory Council Dr. William H. DeLone Executive Director, CITGE Professor, Kogod School of Business, American University Steve Cooper, CIO, Air Traffic Organization, Federal Aviation Administration Dr. Gwanhoo Lee Director, CITGE Associate Professor, Kogod School of Business, American University Dr. Richard J. Schroth Executive-in-Residence, Kogod School of Business, American University CEO, Executive Insights, Ltd. Bill DeLeo, VP of Process Improvement and Controls, Freddie Mac Joe Kraus, CIO, U.S. Government Accountability Office Ed Trainor, CIO, AMTRAK Susan Zankman, SVP of Information Resources Finance and Management Services, Marriott International - 12 -