Balanced scorecard, cost-benefit, simple ROI-there are any number of ways to determine whether a company is getting business value from individual IT investments. But how do you evaluate the impact that an IS organisation as a whole has on the enterprise? How can CIOs, their managers and their customers (internal or external) tell if the IS department actually contributes to the bottom line or just drags it down?
It's an essential question: The effectiveness and credibility of IS in general and the CIO in particular depend on the ability to demonstrate their worth. It's the key to successfully marketing IT within the organisation. But how to do it is not so clear.At US CIO's annual Enterprise Value Retreat in Tucson, Arizona, this past January, we gathered a group of current and ex-CIOs and asked them to discuss the relative value of IS-how to see it as well as how to show it. Participants included William Crowell, vice president and CIO of publishing giant Meredith ; William Hickman, vice president and CIO of Anheuser-Busch; Laraine Rodgers, former CIO of Xerox and current vice president of Emerald Solutions, an IT consultancy; William Seltzer, CIO of Office Depot; Harvey Shrednick, former CIO of Corning and current IT-business professor at Arizona State University; and Lani Spund, CIO of Electronic Arts, a computer game manufacturer.
With such a diverse group of participants, this discussion took some curious twists-particularly when the conversation turned to whether IT should be viewed as a cost cutter or a business driver.
CIO: How do you define value with regard to the IS organisation?
LARAINE RODGERS: Having grown up in New York City, I think, "What's it worth?" Traditionally, IS value has been looked at as what's the efficiency or the operational value. To some extent there's been some strategy in there, but basically it's the operational metrics-things like uptime, from a data center standpoint, for example.
HARVEY SHREDNICK: Value is in the eye of the beholder. I used to have a boss who measured value by what he called the "hum factor." He would listen to the hum of the organisation, and if it was the right pitch, if it was exactly what he was listening for, he would give me kudos for doing an excellent job. He would ask people, "Hey, by the way, how's Harvey doing? How has Harvey been a value to you and your organisation?" That 60-second answer would be, in essence, my metric for the year. I could show him all kinds of great customer satisfaction surveys, great service, Six Sigma performance, but if there was a little bit of hesitation from the person who was responding, my value would plummet.
WILLIAM SELTZER: [The definition of value] has varied over time. There was a time throughout the 1970s when there was a strong emphasis on rate of return. I think a lot of that came about when President Kennedy brought in McNamara as Secretary of Defense, and all we heard about were the "whiz kids at Ford." Every controller wanted to come out of that background, or at least act like he came out of that background, so everything was driven toward, "What's the bottom-line impact?"
And then I think we migrated to an era where people like Dick Nolan from Harvard Business School wrote his paper on the stages of data processing, and he talked about getting an ROI not of 10 per cent but of 10 times the investment. And then there was a whole different focus on change and how fast you bring about change. Bottom-line ROI was something that went assumed.
Now we've reached a point where the future of so many companies apparently rides on how well they do in e-commerce; it's a blind faith almost. The value now is like the California Gold Rush-just rush in.
CIO: How are your IS organisations evaluated-and by whom?
SHREDNICK: A lot of people get excited about working on very strategic projects and how much value they have to the organisation. But it's like in Maslow's hierarchy of needs: If you don't take care of the lower needs, then nobody gets to the appreciation/recognition/fulfillment levels.
If response time on online systems is very, very long, or if you can't get into your voice message system, then people say, "IS is not providing that value." In other words [they're saying], "I don't really trust you, and therefore I don't believe-no matter what you show me in terms of a proposal-that you could provide value because I don't have confidence that you could really put it together." So value is relative to how well you've built the base of trust on fundamental blocking and tackling, as they say in football.
RODGERS: To build on what Harvey's saying, everything has changed. IT is everything today. Value is that your handheld computer is downloaded with the correct information, and you have your email so that you can actually read it. It's your laptop working from home. We're a very mobile workforce, and the whole envelope of a company has also changed. In a traditional organisation you sort of own everything, so you have control over it, and you can feel it and touch it. This is a little bit more amorphous today because we're a network of networks. So it's really critical to understand when someone says, "This didn't work." It behooves you [as CIO] to understand that infrastructure, because [customers] don't really care that Sue in the IT department messed up, or that someone at the company you outsourced to messed up. You really need to understand the whole enterprise and understand from a transaction standpoint and a customer standpoint how to put this all together.
WILLIAM CROWELL: I think what's interesting about our profession is that we haven't created a really strong, enduring value proposition in the management community the way, say, that CFOs have [demonstrated] that they are integral to the business decision-making process and provide information and expertise in that area. If you look at marketing, they're talking branding. I think the reason it's so complicated for us is that we make these investments on an incremental basis, but they accrue over the long term, and they require refreshment over the long term.
I've asked a lot of different consulting firms to do a study to see what any theoretical corporation would look like today if there was no information technology. How many people would you need in accounting and marketing? And I think [the notion of how IT streamlines a company] is brand value. You don't create brand in a day. Anheuser-Busch spent hundreds of years. Better Homes and Gardens, Ladies' Home Journal-these are names where you continuously invest in marketing, and you have that brand value. I think one of the things that we have to do is educate executives that there is incredible embedded value of IT in our organisations that we don't appreciate, that they don't understand.
CIO: What do you do to educate business executives in your own company?
CROWELL: I preach [brand value] all the time, but it's one voice in the choir. I think it's something as a profession that others have to get on and say, "What's our branded value? What's our long-term, enduring valuation to the corporation?" I think it's immense, but I don't know that we know how to articulate it very well.
WILLIAM HICKMAN: The one thing we haven't done is educate the clientele with respect to what's going on in the world of IT and why it's extremely important to the business. One of the issues that goes around now is [business people saying], "Hey, IT person, get out of your office and go visit the customer. Understand what's going on in the customer's life." In the past, an awful lot of the white-haired, 50-year-old males always knew what the customer needed and would go into their back rooms and do it. Today, business is so complex that we have no idea what customers really need without collaborating with them.
Another issue is that we're not very good at thinking far enough in advance to bring in the new technologies that help our customers. And when the customers decide they need something, they want it now. For me to have to put something through technology development for four or five months, that doesn't do any good, and [customers] say once again, "Hey, you IT guys, you're not up on the stuff."
LANI SPUND: I have a good anecdote about a cartoon I saw that [illustrates the] juxtaposition between the part of the company that generates revenue and the other part of the company that generates product and how IT is perceived by both. The cartoon was a dog being fed. He sees a person-in this case IT-come in, and the dog thinks, "Look at this. She feeds me. She pets me. She takes good care of me. I have shelter. I have food. She must be a god." And that's how our distribution channels think of IT.
Now let's talk about how [the rest of the company] thinks of IT, and how a cat, on the other hand, sees the same thing. The cat is saying, "Look at this. She feeds me. She takes care of me. I have shelter. Every whim that I could desire is here. I must be a god." So our [game producers] think of us as the servants, and our distribution channel thinks of us as the fundamental drivers who enable the business, and those are the two [constituencies] that we have to keep in mind.
CIO: How should IS be valued going forward?
SELTZER: I think one of the ways I would value IS is something we really haven't gotten into enough, and that is the possibilities of IS. In other words, a lot of the marketing of IS has been in the capabilities. You continually tell your customers about what you can do, all these great capabilities. But in many cases, they really don't know what the [unrealised] possibilities are. And the value of IT can really be enhanced if the IS person understands the business, understands the ability to partner with other people, and can take the capabilities and package them in a way that customers can really understand how they could actually use those capabilities to the nth degree. [Consider] the Internet: You're just bandying it around as this great tool, as opposed to considering the possibilities of using this tool to add value to the business.
CROWELL: I don't think we know how to value IT. I think as CIOs, we worry about it too much. I mean, I've never heard the CFO or the head of PR or the head of legal wonder, "What's the value of the law department?" I do believe that there's only one fundamental value of IT, and that is it takes cost out of a business process. Even the Internet, to me, does nothing more than say, "I can communicate globally with my customer, I know I'm one-to-one, and the cost [is nearly] zero." If that weren't true, we wouldn't care [about the Internet].
RODGERS: I think IT also must drive revenue.
CROWELL: Well, I think it does because it reduces costs.
RODGERS: But would you consider suggesting a new idea to be reducing cost?
CROWELL: I'm an economist, and I can't think of one order that has been generated simply by a computer. It's a facilitator, and it generally lowers the cost of doing business, and that expands the market. Yes, you can say that we've expanded the market and we're generating more revenue through e-commerce. But e-commerce is the facilitator, and it has lowered the transactional costs to such extents that you broaden the market. We're now global, and we couldn't deliver Better Homes or Successful Farming to a global marketplace [without technology]. The cost of doing that in a physical medium would be $15 an issue, and we wouldn't sell enough to make it profitable. But on the Internet, bang! We're 20 per cent global instantaneously.
SELTZER: I agree that at one time it really was an emphasis to take cost out of the business. But let's say we run a retail store today, and you have a value card. When the customer comes in and shops, she gives you the value card and earns points, and for getting points, she gets things back. Let's say we can get that customer to come into the store, and you scan the card when the customer enters the store. When that happens, the beeper from the operations manager sounds, and the operations manager says, "Mrs. Jones is in the store, and she's my sixth-best customer in terms of the gross margin that she generates." There are all sorts of things in terms of customer service where we can use technology to enhance the shopping experience, make the customer feel better, get loyalty and drive revenue. I don't think we're using technology to its fullest until we're doing that.
CROWELL: You could have done all that without technology. But it would not have been cost-effective. That's my point: Technology makes it cost-effective.
HICKMAN: I work with the investment community a lot, and I think using technology to take cost out of the system is a given. That gets you to Wall Street, for them to want to play with you. But the question that they will ask today-since technology is so important-is, "How are you using technology to grow the business, to be competitive with Corona, Heineken, Miller and Coors?" The last time I [met with Wall Street analysts], the stock went up $6 because I talked about [our new extranet] Budnet. [Analysts] all know that IT is about reducing costs, and you can never lose sight of that, but they want to see a balance. We happen to be a marketing company that sells beer. They're looking at us to be a software company that sells beer and just destroys the competition.
SPUND: I have 50 initiatives going on concurrently. Here's a good example of one: It costs $4 million to put in a new piece of infrastructure. That capability that we put in will allow our games to be built faster, our folks to communicate better and so forth. Now when I go to get funding for that, the question I'm faced with is, "Lani, if I spend $4 million creating a new game, we can make $100 million in revenues from that game. Should I spend the $4 million to get $100 million of revenues, or should I give you $4 million to create better capability? Show me the money." Basically, I can't show them the money because I can't prove it. I can't use industry statistics because they either aren't there, or they're suspect.
So the way I've justified these investments is I looked at these three things: What does it add to the promise-that is, what gets money on the table right now in terms of stock value? What real capability does it put in as far as the ability to go quicker than the competition and/or avoid potential embarrassing costs, like protecting intellectual capital? And the third is cost reduction. When I add all three together, all of a sudden my $4 million proposal starts to look reasonable.
CROWELL: I think I can take every example you all have gone through and show you that if you really analyse it, what you've done is made the process less costly. And if that wasn't true, then I'd optimize the business by eliminating marketing and sales and say, "We don't need revenue-producing people; we've got technology."
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