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IT Value Methodologies: Do They Work?

IT Value Methodologies: Do They Work?

Three experts weigh in on whether IT Value Methodologies can help a CIO's never-ending quest to prove IT's worth.

All of this puts a big premium on the options value of IT, meaning that many IT investments today are made on the basis of business or technical flexibility (customization value), or better quality decisions (information value), or to preserve future options and hedge bets (portfolio value). Traditional IT valuation is focused on cost, service quality, and enabling productivity and revenue, and it does a poor job reflecting this increasingly critical aspect of IT investment. There have been considerable advances in real options value as applied to IT. However, these valuation techniques are not developed to the point where they are readily adopted by businesses.

Scott Holland
IT practice leader, The Hackett Group, a strategic advisory firm that provides best-practice research, benchmarking and business transformation services to improve performance across SG&A and supply chain activities.

It is possible for IT to drive significant value. But this value comes in places where CIOs don't generally look for it.

The best place for IT to look when developing a value methodology is in other parts of the business. Top performing companies use IT to improve both efficiency and effectiveness in key back-office areas such as corporate finance, procurement operations and human resources. IT helps these areas reduce overall costs, redeploy resources and provide greater strategic value to their organizations.

For example, our research shows that world-class IT organizations now spend $US9024 per end user, 7 percent more than typical companies. But with the help of improved technology, world-class finance organizations spend 45 percent less than those at typical companies; world-class procurement organizations spend 25 percent less; and world-class HR organizations spend 13 percent less. The net result? By achieving world-class performance in these four key areas, companies can reduce SG&A costs by $60 million per billion of revenue. This is a powerful value proposition. And optimizing the performance of IT is critical to realizing these benefits in other SG&A functions.

One powerful starting point we've seen for companies looking to generate IT value is a comprehensive back-office benchmark that captures detailed data across the enterprise on spending, staffing and other key metrics on a function-by-function level in IT and in finance, procurement, HR and other areas.

One global Fortune 100 company we work with did precisely this, with the goal of reducing SG&A costs. What they discovered was that transactional costs and staffing levels were exceptionally high in several areas, including finance and HR. The level of automation in these areas was also unusually low. So they embarked on a multimillion-dollar project designed to consolidate their worldwide operations on a single ERP system, and use this system to automate transactional activities.

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