Words a CIO doesn't want to hear at a budget committee meeting: "Why are we considering another big IT investment?"
This question is commonly asked by senior business executives who believe that technology investments do not improve business productivity, an argument that is known as the productivity problem. The executives believe that IT investments don't make a measurable contribution to their businesses because IT investments don't show up in the productivity numbers. If enough executives on the budget committee agree, it can be difficult for IS departments to get funding for projects with high potential for delivering business results.
Supporters of the productivity argument back their position with data from US aggregate economic statistics. The two most common business productivity ratios are growth in economic output divided by growth in IT spending and growth in economic productivity divided by growth in IT spending. The historical trend lines of each of the two ratios typically do not indicate positive correlations. Economic analysts sometimes assert this fact at seminars attended by finance officers, strategic planners and other executives. These executives then bring the argument to their budget committee meetings: "The latest figures show once again that IT investment is not positively correlated with business results, so we don't need to fund the requested budget increase for IS."
Why Doubts Persist
In recent years, even though the IT trade press has documented case after case of companies that have enjoyed great success through the incisive use of technology, the productivity argument is still raised in corporate boardrooms. There are three common reasons it doesn't go away: political dynamics (executives don't feel adequately supported by IT), the alignment challenge (they can't see the IT value in business initiatives) and the measurement challenge (they can't compare IT value with alternative investments).
The political dynamics issue typically comes up when internal IS service levels are low. If the finance department is not being supported to its satisfaction or the strategic planning committee members are not happy with IS service levels, they will often bring the productivity argument up in order to force the CIO to either improve those levels or, in extreme cases, leave. Alignment (or lack of it) contributes to the productivity argument when IS acts only as a service bureau that provides basic back-office production functions instead of focusing on how IT can be used as a competitive weapon. In companies that are using IT to create new markets, capture new customers and develop new products, executives can see the value IT adds to the business. The measurement challenge comes up when the budget committee is wrestling with investment choices. In trying to decide between funding an IT spending increase or a business unit initiative, the committee must be able to make some kind of ROI comparison between the two. If there are no commonly accepted metrics for IT value in the organisation, executives will fall back to these high-level aggregate ratios, since they are available. When that happens, IS will lose in most of the comparisons.
This argument might have been valid in some instances back in the days when business success could still be measured in units shipped per unit of time, but it is hopelessly outdated today. Success is now measured by consumer-based patterns instead of producer-based patterns.
What do I mean by that? Essentially, producer-based patterns are measured in terms of units shipped and revenues collected. Under that measurement scheme, one dollar (collected from a new customer) is as good as another dollar collected from a repeat customer), and one unit (a VCR with three features) is as good as another unit (a VCR with 24 features).
But consumer-based patterns are measured in market structure, breadth of product offerings and customer satisfaction. For example, let's assume a company had two VCR models five years ago and sold 100 of them that year. Today that company sells 20 models of VCRs but still sells only 100 units. Assuming that the revenue amounts were equal, there would be no gain in productivity (100 units equals 100 units) but an immense gain in fit between the customer and the product (two types of customer versus 20 types of customer). In other words, as a company widens its product line -- often by heavy IT investment -- those products better meet the desires of its customers. The general rule is that the greater the product selection, the greater the customer satisfaction. And customer satisfaction leads to customer retention, then to customer loyalty and eventually to lower costs of sales.
Closely related to a growth in product line are IT-facilitated market structure changes. When I shift my sales of 100 units from retail floor selling to Web-based selling, the units are still the same, but the business repercussions of that shift are staggering -- lower costs of selling, lower retail real estate costs, wider geographic reach, to name a few. New markets are created almost daily on the Internet, and standard aggregate productivity ratios are grossly inadequate to capture the essence of the changes in consumer behaviour and market dynamics.
Beating Back the Productivity Argument
There are three tactics that a CIO or other executive championing IT investment can use to fight the productivity argument.
This tactic attempts to make sure the argument never comes up. To do this, the IT champion needs to address those three basic reasons the productivity argument still rears its ugly head. To deal with political dynamics, the CIO must have service level agreements in place, must be meeting those SLAs and above all must make sure peer executives are aware of IS's performance. She needs an active communication program that gets end-user input from all functions, especially the finance and strategic planning groups, and needs to have an intelligence network that alerts her to customer dissatisfaction issues. For the alignment challenge, the CIO needs to achieve at least one major front-office IT success per year with an influential business unit -- and publicise it widely. For the measurement challenge, the CIO needs to have a dossier of ROI estimates from business-unit executives that are based on actual projects. Each joint project between IS and a business unit needs to conclude with an official estimate by the business-unit executive of what the IT value contribution was (by percentages of the overall business ROI, for example). These estimates will provide a range of gains attributable to IT.
2. Defensive Tactics
These fall into two categories: demonstrating gains and defusing/confusing the opposition. Demonstrating gains involves preparing customer-focused measurements and building consensus about the importance of those metrics. By creating systems and processes that measure (and publicise internally) growth in SKUs, product line, market base, customer retention rates, customer development and customer satisfaction, the CIO will be influencing the culture to value the most useful measurements.
Defusing/confusing the opposition involves casting doubt on the relevance of aggregate data ratios. One way to do this is by finding an academic study that demonstrates a productivity gain due to IT for a smaller sample than the US. A second approach is to point out that the aggregate data is an average of all industries and therefore not specific enough to be useful when discussing IT investments.
3. Root-Cause Analysis
This tactic tries to discover the root of an executive's belief that IT investments are unproductive. If her anti-IT convictions spring from any of the reasons discussed above, address those issues first. Debating the adequacy of aggregate measures for IT investment decisions won't do a bit of good if the CFO cannot get her management reports in a timely fashion.
The earliest human writings discovered so far date back to 4000 BC -- and they are accounting documents. Accounting measurement systems have a head start on IT value measurement, but by measuring the factors that really drive business today and paying attention to political and alignment issues, smart companies can develop a culture in which the productivity argument is totally unproductive.
Glenn M. Miller is a former CIO and currently produces executive development video courses for CIOs that focus on business and political skills. He can be reached through www.BizSkills-for-IT.com.
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