Belt tightening and ROI discipline are in… but to thrive CIO's must continue to optimize IT portfolio value, even in tough times.

Dave Vellante
President and CEO, ITCentrix

As seen in ComputerWorld

Most of us will look back on 2002 as another year of tight budgets and doing more with less. Unfortunately, our fine-tuned expense control skills, while key to survival, won't help our companies prosper in the long run. As a CIO, how do you continue delivering real business value in the face of flat or shrinking IT budgets?

Understandably, interest in ROI is increasing and much has been written lately about its good and bad sides. On the one hand, increased financial responsibility is an imperative. On the other, a singular focus on ROI to drive IT costs down, at the expense of business performance is not a sustainable long-term strategy. The good news is ROI and business value are not necessarily in conflict if you're measuring and communicating the right things.

It's also understandable that much of the ROI and value analysis is focused on new projects as they get a lot of scrutiny. But most IT spending is geared to managing ongoing operations. For example, even in the go-go times of early 2000, Charles Popper, former CIO at Merck & Co. wrote, "In reality, however, in most enterprises the budget for IT projects represents only 25 to 35 percent of the total IT budget."* Today, I'd bet this figure is probably more like 10-20%. The message here is to expand the notion of an IT portfolio to include not only new projects, but existing applications, infrastructure and processes. As sensible as this seems, I find it's typically the exception, not the rule.

How to Assess IT Value

The IT value debate has continued for decades. Methods to assess IT value range from developing complex, scientific statistics to "Return on Instinct." Regardless of the method used, it's important to be consistent, comprehensive and coherent. To make it simple, I like to look at IT value in two dimensions, IT benefits and business benefits.

IT benefits are those items that improve IT efficiency, IT staff productivity and generally lower the cost of delivering IT. Business benefits are those items that improve business performance, specifically those that affect IT users. The obvious point of this construct is that low cost IT may not always mean higher business value. Consider the following example:

A company generates $1B in revenue, 4,000 employees and spends 5% of revenue ($50M) on IT. A 1% reduction in its IT budget means a bottom line impact of $500,000. That's nice, but a 1% improvement in employee productivity (e.g. revenue per employee) means $10,000,000 to the business. The point is; making IT decisions considering only the cost dimension may often be misleading and sometimes just bad business.

The challenge becomes how to reasonably measure the business value dimension. I'm fond of saying there are really only four ways to create value with IT:

• Improve productivity (e.g. revenue per employee)
• Increase the top line (e.g. revenue, market value, assets, etc.)
• Lower costs (IT and business costs)
• Reduce exposure to risks (e.g. security breaches and disasters)

Virtually any benefit can be captured and quantified in these categories. For example, cycle time gains can be translated into productivity improvements or cost reductions; increased market share can (and must) be translated to top line gains; competitive advantage should translate into more business. And something as vague as leadership or vision, if real, will translate into a higher valuation for shareholders. Because technology and business are so intertwined, a change in IT should reflect a change in business (e.g. a P&L should accordingly account for the business impact of IT change).

Consider the following framework that combines empirical organizational "facts" with subjective knowledge of IT and other business factors to express IT value.

In this framework, IT value is measured and expressed as follows:

• Internal Value: The proportion of revenue per employee that can be attributed to IT usage. Internal value is a function of the number of users, their actual usage of IT and the impact of that usage on productivity.
• External Value: The revenue generated from external users of IT and the importance of external applications to that revenue creation.
• Strategic Value: The contribution of IT to the strategic objectives of the company and the likelihood that those objectives will yield a significant growth in shareholder value (e.g. 15% per annum).

Implications to the IT Portfolio

Focusing on Internal and External IT Value, the Net Business Contribution of IT can be calculated as follows:

Once monetized, assets in the portfolio can be grouped into logical "chunks" (e.g. by business process) and plotted on a simple quadrant chart. For example, a company evaluates applications in the current inventory for their value contribution and allocates IT and business costs accordingly. These applications are then plotted as follows:

The above quadrant shows the application portfolio and plots return on IT budget against business value created. The approach can be extremely useful in understanding the value of existing systems and communicating strategies for improvement. Each application (or asset) is plotted in a category (e.g. optimized, strategic, tactical) and systems needing remedial action become more evident.

As well, in the example above, the CRM application appears to be optimized for efficiency, but is the value delivery up to par? Perhaps user training is inadequate and adoption is not living up to expectations, or the functionality of the system is lacking and needs investment. On the other hand, the underwriting application while contributing significant business value is not being operated efficiently. Investments such as infrastructure could improve IT efficiencies while enabling new business functionality.

Taking Action on the Portfolio

Considering both the IT and business benefit dimensions of applications, infrastructure, projects and other portfolio assets will result in better IT decision making, more effective communication and increased business value.

Especially in times of tight budgets, extracting a greater return from existing applications is a must. When it comes to getting the most out of your IT portfolio, my advice is the following:

• Set a baseline of IT value contribution before launching major spending initiatives.
• Get more out of what you already have by understanding which applications in the portfolio should be shed, upgraded, consolidated or retired.
• Keep new projects small (e.g. less than $300K) and initiate them in bite-sized chunks.
• Agree with your governance board that projected IT benefits will be reflected in business unit P&L's.
• Pursue a disciplined approach to analyzing your IT portfolio.
• Measure and communicate results in an ongoing fashion.

And the next time someone says that you spend too much on IT…communicate back in the language of business - show them the money.

*Program on Information Resources Policy, Harvard University, Center for Information Policy Research, "Holistic Framework for IT Governance," Charles Popper, January 2000