When CIOs stop thinking like cost centres and start thinking like business partners, IT will begin to earn its keep.
Stop wasting IT resources on projects that don't improve the bottom line. Read this to learn how to: Map the real impact of IT projects Align IT with business objectives Avoid mistakes in selecting IT metrics Organisations hate to admit it, but the ugly truth is that three out of four IT initiatives fail. Why? They were basically developed in a value vacuum.
Translation: They had no real connection to the profit and loss drivers of the business, so no business unit had a vested interest in their success.
For years CIOs provided Pavlovian responses to anyone requesting their services. They didn't ask business units to justify why the technology was necessary; they just charged back the costs. Today's leaner organisations can no longer tolerate such wasteful spending. CIOs need to collaborate with business unit managers to channel IT investments into projects that will contribute value to the organisation and provide a measurable return on investment.
But value has always been an elusive creature. And those soft benefits can't always be quantified. Right? Wrong. If no P&L centre will claim the project will help improve its bottom line, then as CIO you'd better walk away - fast - before you waste any more IT funds that could be better spent elsewhere.
If you understand how your company operates, you'll be able to pinpoint the processes that drive its success and attach an ROI to IT projects that improve it.
Measure Potential Value
"It's surprising how many large companies embark on an IT solution without any concept of its value to the organisation," says Patricia Benson, managing director of DCC Technology Management Group, a business unit of Toledo, Ohio-based Dana Commercial Credit Corp. and a software provider based in San Francisco. Benson suggests that, for an IT project to succeed, you first must decide what key business result you want to achieve: higher customer retention, shorter sales cycles or lower investment in inventory, for example. Next, identify and map all the processes that go into making that happen. For instance, higher customer retention depends on higher customer satisfaction.
Satisfaction is derived from successful interaction with the company. What processes in the company pertain to customer interaction? Ringing up sales at the checkout counter? Processing catalogue orders? Answering the customer support phone lines? Benson tells of a meeting where she gathered a group of executives from a Fortune 500 company to discuss their procurement process. Using a huge wall of Velcro and a handful of placards, she proceeded to map out the company's process for procuring a $US 50 software upgrade. Having quantified the time it took to complete each step, she then assigned costs based on the salaries of the employees involved. The 15-minute exercise left the group stunned. Their procurement process had gotten so convoluted that it took 18 days, countless hours of paperwork and nearly $US 22,000 in people time to get the product ordered, received and up and running on the requestor's desktop.
Mapping processes - benchmarking the cost of processes as they are currently handled - helps a CIO distil which new technology will have a real impact on the bottom line. Moreover, the mapping process gets departments talking to one another, helping to reduce or eliminate redundant processes even before the IT implementation is complete.
For IT to provide real value, the solution has to add measurable improvements to the process. And if you first measure the cost of current processes, it's easy to quantify the value of the improvements you hope to achieve.
At Twentieth Century Fox in Beverly Hills, Calif., the business goal was to improve profit margins on future movie releases. The two primary processes that mapped into that goal involved contracting box office engagements and controlling advertising spending. Fox wanted to improve the process of booking its movies into the theatres - locking in commitments to run its movies earlier than the competition. Fox also wanted more immediate access to current box office information to negotiate holdover engagements with theatre chains for films that were still enjoying a successful run. The company concluded that it needed to totally revamp the marketing and distribution system for its domestic theatrical group. The new IT system offered powerful analytical tools to help decide whether to negotiate extended runs or pull films from the theatres early. But because cinema revenues ultimately depend on the whim of the moviegoer, Fox used a different method for justifying the IT expenditure.
Justin Yaros, senior vice president and CIO, asked the business unit to quantify the value of improving the decision-making process based on this year's crop of films. "If we had the system in place today, with the current movie releases," he asked, "what could we do differently and what would it be worth on our bottom line?" The answer? "We determined that an impact of even a tenth of one percent would result in increases of several million dollars a year. In other words, the resulting ROI would be off the scale," Yaros says.
Align with Business Goals
Everything starts with relationships. To deliver value, IT needs to align itself with the business units - the users of the technology. At VF Corp., an apparel manufacturing company in Greensboro, N.C., the five vice presidents of IT sit in the strategy sessions of their respective operating coalitions - jeanswear, intimate apparel, knitwear, playwear and international - to hammer out a justification for the IT initiatives they want to undertake. "We don't work on anything that doesn't have a business case behind it," says Tom Payne, president of shared services, the division of VF Corp. responsible for allocating IS resources. Payne says the benefits and ROI are based on what would drive value to the shareholder: cost reduction, revenue growth or profit improvement and maintenance of the business.
For Seattle-based Starbucks Coffee Co., the business goal was to increase revenues. "The CIO and the rest of the MIS senior management team worked very closely with the retail business unit to determine how technology could enable us to meet that goal," says Tom McKivor, vice president of strategic architecture for Starbucks. Increasing the speed of service by moving people through the lines faster at the retail coffee shops was one way to achieve that goal. Starbucks decided to pilot what they call "line-busting" technology at several stores. These wireless handheld devices allow a Starbucks employee to walk down the line of waiting patrons, capture their orders and transmit them to the cashier. When the customer reaches the register, the order is waiting.
Starbucks is currently measuring the impact of the technology tool, conducting a before-and-after comparison of store revenues and traffic. If the increased income is sufficient to offset the investment, Starbucks will put line-busting technology in all its retail outlets.
At Green Bay, Wis.-based Schneider National Inc., a $US 2.5 billion transportation and logistics company, senior leaders throughout the business participate in the selection of IT projects. Christopher B. Lofgren, Schneider's chief technology officer, says the IT team developed a value matrix - a way of weighing dollar investments against opportunities for a high rate of return - to stimulate discussion and support that decision-making process. Some of those value measurements include generating additional revenues, producing hard cost savings, providing substantial value to trading partners and supporting the recruitment and retention of drivers and other key personnel.
The goal: to rechannel energies from politicking to creative problem solving.
If the IT project has no real connection to the profit and loss drivers of the business, it's automatically off the table.
As CIO, your job is to partner with the business unit to help build a convincing case for how the IT initiative will help the operation meet its goals. Then keep the P&L involved throughout the project to ensure that what you deliver is really what it needs. But don't get lulled by soft benefits, cautions Susan Cramm, president of San Clemente, Calif.-based Valuedance, an executive coaching firm. She believes that if you dig deep enough, there are always hard benefits. What would result from better customer service? Higher customer retention? What is that customer retention worth? How much does it cost to acquire a new customer versus retaining existing ones? "The process of defining measurements leads to an understanding of what you want to accomplish," says Cramm.
Keep the Project Focused
"Every six weeks technology reality recompiles," says Thornton May, vice president of research and education for Cambridge, Mass.-based consulting and systems integration firm Cambridge Technology Partners Inc. "To think you can have a three-year project plan is frightening." May's suggestion: Set time limits. "You know you're in trouble when you walk into an IT organisation and the project is actually on the organisation chart," he says. In that case, "You've institutionalised nondelivery." Taking that kind of advice to heart, Twentieth Century Fox has adopted a "quick with quality" initiative for any IT project it undertakes. "We believe that to maintain focus every project has to have a maximum six- to nine-month duration - no more," says Yaros. If a project is bigger than that, it's sliced down and viewed as separate projects.
The business people on the project committee are charged with making sure the business unit continues to stand behind the project's objectives. They're told that if they miss meetings, if they don't value the project the way they originally said they would, IT won't be able to get the project done within that time frame. "And if we can't," says Yaros, "we're going to stop it." Hold Business Units AccountableUltimately, building a business case isn't up to the CIO. Technology isn't a driver, it's an enabler. And if the user isn't committed to deriving benefit from the project, even the best written code is useless.
Executives at United Airlines Inc. realised that if the company could analyse detailed information on the 100 million passenger itineraries - instead of the mere 1.4 million that their revenue management system handled - it could fine-tune its daily pricing strategy and increase or decrease the availability of reduced rate seats on any given flight to ensure a fuller plane. And that would translate directly to bottom-line profits. According to Bob Bongiorno, director of research and development at United Airline's Elk Grove Township, Ill., headquarters, IT and the planning division jointly undertook the project to turn a onetime $20 million technology investment into a $US 100 million annual payback.
The key to holding business units accountable for results is making sure you know what it is they hope to accomplish. Be involved in the strategic planning process right from the start. Find out what the P&L centre's goals are and what processes in its operation will drive that activity. Then offer suggestions on how technology can facilitate the contribution of those processes to the bottom line. It's a collaborative effort that puts the onus for justification where it belongs: on the people who will use the technology, not on the technology itself.
The most important step is to make sure that the P&L manager not only commits to hard-dollar results from implementing that IT initiative but incorporates those numbers into next year's fiscal budget. "The key is the general manager making a commitment for a future year's performance and being willing to have his own performance evaluated against that delivery," says Valuedance's Cramm.
Measure Your Successes
How do you know if your IT initiatives are really delivering value? Short of waiting until next year's P&L figures are in, Yaros recommends adding a "show me the money" phase to the end of every IT project. At Fox, the project operating committee continues to meet every month or two after implementation to gauge whether the project is still headed in the right direction.
Cramm recommends that CIOs insist on applying the same capital investment formulas to IT projects that are used for any other investment the company makes. It will help IT focus on those projects that represent the highest return opportunities. And it will ward off the perception of playing favourites. She suggests getting the CFO to facilitate the process to establish the rules for hurdles (ROI or whatever measurement is in common practice throughout the company).
But Yaros advises CIOs not to become fanatical about the link between the IT project and the return to the business. Whether the business made more money because the system contributed directly to that end or whether the business people simply worked harder because their reputations were on the line is really irrelevant. "It becomes ridiculous to try to define exactly how much of the value is directly attributable to IT," insists Yaros. "You just want to create the kind of culture where IT is valued, where [business units] trust you and where you work with them to increase the profitability of the business." Valuable LessonsFive mistakes CIOs make when measuring valueMeasurements focus on tactical rather than strategic goals. Stop thinking like a cost-effective utility. Response time is an excellent internal measurement, but it won't get you a place at the executive table. Broaden your focus to include how IT can contribute to the bottom line.
Measurements focus inward rather than outward. Stop thinking of IT as a technology wunderkind. Making a process 20 per cent faster is immaterial if the business users don't think speed is relevant.
Measurements lack the context of business drivers. Technology is an enabler, not a driver of success. If you don't know what drives a business unit's success, you can't offer a solution to address those processes that make it happen.
Measurements are couched in technojargon. Avoid a tower of Babel. Cast your metrics in a language consistent with the one your audience is comfortable with. If it's ROI, use ROI. If it's net present value, use that.
Measurements overlook the change process that needs to occur. It's not enough to know where you are and where you want to be. You need to measure the change process that has to occur for performance to improve.
Out in Front
When it comes to value, front-line operations promise the biggest bang for the buckSavvy users used to monopolize IT resources because they were the only ones who knew how to build a case for what they wanted. Today, however, a number of successful companies are shifting their cutting-edge IT investments from back office operations to the front lines - where employees directly interact with customers, says Raj Sisodia, a trustee professor of marketing at Bentley College in Waltham, Mass. "In our experience, successful front-line information systems tend to have an extraordinary ROI, with investment payback periods often measured in months or even weeks," says Sisodia.
Sisodia admits that front-line projects tend to have a higher risk. But because they have a demonstrable impact on customer satisfaction and retention, they also tend to have a much greater potential return. Industry pioneers like Federal Express Corp., The Hertz Corp. and Fidelity Investments are using IT at the front lines to gain a competitive advantage. Wireless scanning devices help FedEx improve customer package tracking, handheld computers with printers help attendants at Hertz speed car rental returns and Fidelity recently announced it would give its best customers specialised pagers to notify them of trading opportunities.
These investments are all designed to make customers feel that their business matters. And when that happens, revenues rise because the customer keeps coming back.
Debby Young is the owner of d'scribe, a freelance writing business based in Framingham, Mass. She can be reached at firstname.lastname@example.org.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.