Real Value of I.T.
Rather than a cost center, compare information technology to other business investments.
By Gerald J. Lieberman
The historical approach is to view information technology (IT) as a cost center. Organizations feel they need to fund IT projects in order to support their business. They believe that, although the IT investment is valuable, the actual value enabled by IT is too difficult and too controversial to quantify. They therefore ignore value or treat it qualitatively. This approach leaves IT investments as costs and management’s task to minimize costs, leaving IT vulnerable to cost cutting, especially in an economic downturn. With this focus on IT cost savings, management does not attempt to understand or financially assess the real value enabled by IT projects, thus losing sight of IT’s largest value proposition, the benefits to the business gained by leveraging a new capability created by the IT project. These business benefits are typically several orders of magnitude larger than any IT cost savings. Project teams that do not look for this business value proposition may not be looking at the right project objectives.
This article asserts that the IT function can create value for the business that can be compared to and prioritized against other business investments. By partnering with the business and working on filling gaps in business strategy, an IT solution can create value. The purpose of this article is to describe four approaches to achieving and assessing this business value:
1. Partner with the business that IT supports;
2. Focus IT projects on the value that can be enabled for the business, assess that value, and hold people accountable for realizing that value;
3. Make use of decision analysis (or similar decision science) tools such as framing and alternatives to enhance the value proposition;
4. Employ value realization to provide strategic guidance for implementation to ensure that value is both realized and maximized.
The same situation applies for many other business support functions (e.g. other technology areas, facilities management, supply chain management, maintenance and logistics) where projects use resources and promise “good things” without an explicit return on investment. This article will provide IT examples and stories, but the messages apply more generally.
In most large companies the traditional IT support function has been subject to budget reductions. In today’s competitive environment, businesses cannot afford to invest in cost centers without a clear financial return. Cost minimization leads to budget cuts, outsourcing and off-shoring. Businesses need a technology partner that can enhance their bottom line results. The IT function can become such a partner and help to achieve management goals and the enhanced value proposition that comes from this partnership. However, IT itself must learn to act as a partner and not just as technical support; the IT function must understand the business and speak its language.
Under this partnership, the IT function should not be the sole initiator of IT projects. Rather, IT staff must actively participate in business needs assessments and strategy forums, helping their business partners identify how IT initiatives can fill gaps and address unmet needs in the business strategy. As such, IT projects become business projects in which IT enables the business to achieve its goals. Without this IT partnership, companies risk falling behind their competitors.
Business Value Enabled by IT
Given this new perspective of transforming IT projects into business projects, it is clear that IT can enable considerable business value. An IT investment might result in enhanced business cost efficiencies, improved business productivity, greater business flexibility, reductions in time to market, higher value business work-flows, increased revenues, higher value decisions and reduced risk. This increasingly requires IT enablers such as: the ability to locate and manage information; the automation of business processes and workflows; quicker decision-making; cycle time reductions; and reliability of infrastructure to support common enterprise wide business solutions.
A recent case study showcases business benefits enabled by IT. A natural gas company wanted to improve maintenance scheduling for their gas wells and pipelines. They proposed deploying the unused maintenance module in their Enterprise Resource Planning (ERP) system. Their IT partners recognized an opportunity. They already had a human resources (HR)/IT project starting up to provide standardized HR information regarding employees (i.e. pay grades, skills, training, certifications, supervisors, approval authority, etc.) company-wide using the HR module in the ERP system. All business units within the company had some form of people data, but the data was inconsistent, inaccessible and poorly designed so it did not support non-HR needs, such as maintenance. The objective of the HR/IT people data project was two-fold: 1) to develop a common set of standards for people data worldwide and across the company, and 2) to develop an IT information system to store the data and provide easy access. They jointly recognized the opportunity to greatly enhance the value of the business partner’s maintenance project by combining it with the HR/IT project so that maintenance could be fully automated. They slightly redesigned the people data to support the requirements of the maintenance module. With the enhancements, maintenance efforts on critical components out of production or in danger of failing could be scheduled faster, thereby maintaining operations and avoiding damaging spills, with the benefits flowing directly to the bottom line in the form of increased revenue and avoidance of costly and embarrassing incidents. These business benefits increased the “net present value” (NPV) of the original people data project from a routine IT cost savings of $5 million to approximately $85 million of incremental business benefits on the combined project.
The challenge to enabling business value by creating a new IT capability is that the value for the business may be hard to assess, very uncertain and dependent on multiple contributors in addition to IT. Decision analysis provides techniques to assess the value of projects enabled by IT investments with appropriate — sometimes very wide — uncertainty ranges. By looking at the whole project as a business project and not just as an IT project, the benefits are converted from “nice to have” technology improvements into clear business benefits flowing directly to the bottom line. Allocating this value among the contributors (such as IT) then becomes more of a tactical issue. In the case study illustrated above, the only benefit from an IT perspective was enhanced information for maintenance, which only has value if further actions happen. This enhanced information becomes valuable to the business when used by maintenance supervisors with a revised work process to leverage the information. Then, the business is able to address potential problems quicker, maintaining revenue and avoiding costly incidents. From a business project perspective, these are clear, measurable benefits with direct impact to the bottom line.
Once an IT project has a clear value proposition with range assessments for both the costs and the business benefits, it can be treated like any other business investment. Since the value for the business enabled by IT is usually several orders of magnitude larger than any IT cost savings or project costs, the organization can tolerate high uncertainty around softer, controversial benefits. As long as the investment returns are high, then the uncertainty and controversy around the value proposition fades in importance. In short, IT project value can be sufficiently assessed to compare IT investments with other business investments.
Framing and Alternatives
Decision analysis (DA) provides an opportunity to further enhance business value. First, DA explicitly incorporates uncertainty ranges into the analysis, providing an analytical approach to dealing with highly uncertain and fuzzy benefits. DA also provides a means to add considerable value by carefully optimizing the project frame, for example, defining and understanding the project scope, timing, business problem to be solved, business objectives, constraints and risks, as well as the technology choices. Many IT projects start with an assumed business problem to be solved without carefully studying it or communicating with the business leaders about the situation. People with a more technical focus are far more comfortable moving directly to selecting an IT solution, sometimes without fully understanding the real business opportunity. As such, the project focus quickly becomes the selection of the optimal IT vendor or tool, rather than the best possible solution for the business. As a result, the organization may end up solving the “wrong” problem where careful framing would make it more likely that the “right” problem is solved and that value is enhanced.
Decision analysis also encourages the development of rather different and creative alternative approaches to solving the business problem. The DA analysis approach does not simply look at a “business case” for the preferred solution, but rather enables the study under uncertainty of a wide range of feasible alternatives to solve the business problem. The analytical focus of DA is meant to help learn and understand the drivers of business value and risk. This learning guides development for an improved (optimal or hybrid) solution based on one or more of the original alternative approaches. Components of this alternatives analysis typically include:
- comparison of NPVs by alternative;
- quantification of major value drivers by contribution to NPV (waterfall chart);
- cash flow analysis;
- tornado chart-based sensitivity analysis for each uncertainty based on expert assessments of uncertainty ranges;
- overall risk assessment using a risk profile or “S curve” to understand how much higher/lower might project NPV go given the input uncertainties; and
- brainstorming around key uncertainties about actions the company might take to (partially) mitigate downside risks and realize upside opportunities (value of information and control).
A large company with a worldwide footprint trying to improve its IT infrastructure monitoring provides an excellent case study that illustrates the perils of prematurely jumping into solving the IT problem without carefully understanding the business problem. This company was already monitoring the various pieces of its infrastructure, such as network links, servers, storage and applications, but the issue was that these monitors were not correlated. Most incidents generated multiple false alarms since an outage on one component of the infrastructure caused all of the linked components to stop functioning. For complex incidents it was very difficult to diagnose and fix the problem because no single individual understood all of the worldwide architecture, linkages and interdependencies for multiple applications. The project team’s initial approach was to purchase the best vendor tool available for correlating monitoring devices. Since the IT monitoring staff was feeling the most pain, their assumption regarding the business problem was that they needed to mitigate false alarms and “all hands on deck” scrambles to fix outages.
As part of their framing and alternatives effort, they interviewed key technical and business stakeholders. Several of their technical experts were skeptical about the huge effort to build a correlation database and to maintain it for every change in infrastructure across their applications and locations worldwide. This concern regarding feasibility led the team to create a new alternative of a pilot approach to implement a correlation tool on a part of the infrastructure to understand the cost and effort involved, reducing risk of project failure. When they interviewed their business stakeholders, they discovered that the business was more concerned with whether or not the infrastructure was reliable enough for them to do their work than with the cost of alarms and diagnosing incidents. Interviewing business stakeholders to understand the value proposition further uncovered that the highest value did not come from detecting outages (which were generally obvious) but rather from detecting when the infrastructure was at a low performance level. The project team found numerous undetected poor performance situations that persisted for months or years, impairing the business’ ability to work. This was a major revelation around the largest value proposition. This ultimately led to the creation of another new alternative that simulated the user experience, directly measuring what the business cared about. The business interviews produced a new understanding of the true business problem to solve. By proposing a creative new alternative, the team was able to analytically compare alternatives that directly simulated the user experience vs. indirectly addressing it through correlation of monitors.
The simulation approach turned out to be quicker and less costly to implement, doing a far better job of providing infrastructure reliability for the business. Thorough study of the most appropriate frame and learning from the analysis of creative and different alternatives resulted in an NPV increase of hundreds of millions of dollars of business value. The original IT cost savings from fewer alerts and simpler diagnosis of incidents was a round-off in comparison.
These steps in the DA process (developing an appropriate frame, designing creative and different alternatives, and incorporating uncertainty) deal with the fuzzy nature of IT-enabled benefits and greatly enhance the value proposition.
To deploy an IT solution that “works” technically but does not generate business value is not supportive of the business and adds little value. After the strategic phase of a traditional IT project — if it has a strategic phase that attempts to understand the value proposition at all — the project is typically “thrown over the wall” for implementation. The value proposition is frequently not understood and basically ignored by the implementation team. Implementation is driven by the twin criteria of cost and schedule, frequently unwittingly destroying value. Value realization can help the implementation organization realize and maintain the value proposition. It can help the implementation team to strategically focus their efforts around realizing the original value proposition and, in fact, maximizing it.
Value realization involves planning for implementation success. For example, an effective IT implementation usually requires planning to address issues such as: user and support staff training; building organizational capability in the business run organization for maintenance; avoiding deployments that disrupt the business; re-engineering business work processes to leverage the value enabled by the new IT solution; and changing the organizational capability of the run organization to accept and use the new capability (new roles, incentives, etc.). Other key enablers of successful implementation may include provision for new data interfaces, data clean-up and migration and the elimination of legacy systems, to name a few. It also requires a clear, well-communicated understanding of value with value accountability to specific leaders in the run organization to realize their portion of the value proposition, tracked with appropriate metrics.
The biggest factor in value realization usually is simply achieving rapid and effective adoption of the new capability. Until the value proposition is actually realized in the run organization, it does not improve the bottom line. Behavioral change management, reworking incentives, engagement of project champions and staffing with adequate resources are all crucial to rapid adoption. Cutting corners in these areas to save cost and time usually destroys value.
A case study depicting value realization is a project to develop and deploy a new supply chain management system for a major manufacturing company. The project to improve supply chain management had an initial NPV of $50 million. As the project team analyzed their value proposition with an uncertainty analysis using tornado charts and risk profiles, they realized that there was both a significant downside risk of a negative NPV and a large upside opportunity to add hundreds of millions of dollars to the value proposition. The key drivers of this uncertainty range were data and systems reliability, usability and adoption rate. An inadequate job on these key value drivers might destroy the value proposition, while doing a better job could greatly increase it.
Focusing on adoption rate, the team realized that if they could achieve 100 percent adoption with high usability on day one, then the value proposition would grow by many hundreds of millions of dollars. Of course, this was not feasible. But they brainstormed the actions they could take to improve the adoption rate and usability (value of control). One idea from the brainstorming was to place change agents in each business unit. These change agents were power users who were trained first and then sent into the business unit with accountability for effective implementation. There were other actions that the team recommended such as achieving high-level sponsorship, improving the training and assigning value accountability. Collectively, these recommended value realization actions added $50 million and 25 FTEs to the project cost, but increased value by $250 million, for a net gain in NPV of $200 million. While no business executive wants to increase project costs and resources, this was an easy value tradeoff for management. Effective implementation of the project increased its value by $200 million.
IT should not be viewed as a cost center, but rather, it should be compared with other business investments that add value to the bottom line. Four broad conceptual approaches that any IT leader can undertake include the following: Partner with the business that IT supports; focus IT projects on the value that can be enabled for the business, assess that business value and hold people accountable for realizing that value; use framing and alternatives methods to enhance the value proposition; and utilize value realization to provide strategic guidance for implementation to ensure that value is both realized and maximized, not destroyed by a myopic focus on cost and schedule.
This unique approach supports a different perspective for IT leaders, a shift in focus to partnering with the business that you support and focusing on the value that IT can enable for the business. The new perspective moves IT from being merely a cost center to creating real value for the business. Now, IT projects create measurable business value that can be compared to other business investments.
Gerald J. Lieberman (email@example.com) is a principal for the IT and Business Operations Practice at Decision Strategies, Inc. Decision Strategies is a strategic management consulting firm focused on the energy industry, headquartered in Houston, Texas.