What is it about technology that can cause smart people to make dumb decisions? I see companies investing a lot of money on IT initiatives that don't meet the minimum daily requirement for common sense. It's not that the ideas are bad - in fact, most of them aren't. But they are not well thought out. They are baby ideas in need of adult supervision. It sounds simplistic, but if you can get a senior business executive to commit to delivering specific results on an IT project, you will have done most of the heavy lifting necessary to ensure success.
A few years ago I reviewed an IT strategic plan for a large retail company where an IT investment of $US200 million was recommended over a five-year period. This plan was generated by a very large, very well-known IT consulting company at the request of the CIO. Nowhere in the document was there any discussion of the business payback for this investment.
Another instance occurred at a large media company. At my client's request, I intervened on a strategy project in which the approach was not going to result in specific value commitments. When I raised my concerns with the consultant (from another very large, very well-known IT consulting company), I was informed that there was no way to calculate ROI for IT investments. Since he was missing the point, we spent the next two hours on "Business 101" and revised the approach accordingly. The sponsoring general manager specified value commitments and the project received $US30 million in funding.
Both projects got funded, but only the second was fully implemented. The real difference in the two examples, however, lies in the quality of the up-front planning. With the first, unsuccessful project, a significant amount of work had to be spent redoing the financials. By the time this foundation work was complete, the senior executives were suffering from hangovers caused by a series of bad projects (usually the result of lots of expenses and no discernible business benefit). In the end, they decided not to fund the rest of the project. In the second, successful example, the work focused on supporting front-line operations, with clear benefits to the media company. The sponsoring general manager made sure the organisation stuck to the plan so that it could implement the business change and realise the benefits.
Why is it so important to quantify the payback of IT projects? Because general managers will truly focus only on those things that will make them money. No reasonable general manager is going to champion an IT project that's poorly defined or not worth doing, especially if it runs into trouble. When times get tough - and there are always tough times on major projects - it's all too easy for executives to axe the initiatives where the project rationale is not broadly understood, as with the retailer example I mentioned.
It's a mystery to me why seasoned business executives follow the "build it and they will come" philosophy of technology investing. Many people believe the rapid pace of business dictates this fire-ready-aim behaviour. After one of my talks to a CIO professional association on this subject, yet another consultant from another major IT consultancy let me know that IT investment justification disciplines don't have any relevance in the dotcom world. Tell this to the VCs holding the bad dotcom paper.
Our current faith in the devil we don't know has given us permission to hold technology above the long-established business codes of conduct that require investment justification and accountability for results. Many CIOs give lip service to these disciplines. Although most of you, in my experience, prepare formal project justifications, very few of the justifications include commitments by general managers for explicit results within a specified time frame. In fact, in most organisations, the IT department prepares the justification, which leads to the project being considered complete when the software is implemented rather than when the benefits have been realised. As a result, the justification process becomes form over substance - simply a box to check off on the way to obtaining funding. In letting general managers get away with not committing to projects, CIOs are putting their projects and careers at risk and ensuring that IT is kept in the back office - with all the other administrative functions.
If you want a seat at the boardroom table, here's what you need to do:
Define the rules. Make it clear that executives must demonstrate some type of business result for their IT investments. Make sure everybody knows that a big somebody will be watching. A CFO of a major entertainment company not only reviews the business justifications when project plans are being drawn up but also remembers these commitments when budgets are reviewed.
Use operational measures. It's admittedly difficult to draw a straight line between most investments and the financial impact. Fortunately, every business has operational measures such as customer service, cycle time and product quality that, over time, will result in financial impact. These measures can be identified by examining the underlying drivers of the financial results. For example, for a restaurant chain, speedier service affects peak time throughput and will increase sales (provided that there is excess demand for the product and customers are turned off by long lines at the counter or drive-thru). IT improvements that increase speed of service are easier to commit to and measure than the resulting increase in sales.
Be unreasonable. Effective leaders ask their organisations to deliver what is believed to be impossible. When I was a practising CFO, I once asked my controller to prove that his request for a new financial system could pay back within a couple of years. I thought I had killed the request. Imagine my surprise when he came back with a justification based on tax savings created by the system's more sophisticated fixed asset processing. Even boring replacement projects can be made exciting if the team is challenged appropriately.
Stage the funding. Most investments are a guess about the future. By staggering the funding in multiple stages, you motivate people to continuously prove the concept to gain more funding. Conducting pilot and proof-of-concept projects are the best ways to do technology projects, because they allow us to refine our knowledge and understand the risks and true scope.
Invest in the front line. This is where your company interacts with its customers and channel partners, and where small changes can lead to big dollars, because you can influence thousands of transactions, decisions and behaviours. For example, in the restaurant business, investing in IT at the store level is the only game in town. If you can save labour hours, millions fall to the bottom line. When you define a promotion correctly, the average dining check increases, which has a huge effect over millions of transactions.
Evaluate the portfolio. Create specific measures for IT projects, but allow some room for R&D, infrastructure and risky investments. Annually or more often, examine the impact over the entire capital budget. As with your personal financial portfolio, select a mix of sure things and fliers and evaluate your decision process based on the overall result.
If you are still wondering whether all this applies to you, ask yourself which part of ROI your organisation manages most closely: the numerator (benefit) or the denominator (costs - mostly IT). If your company spends most of its time discussing the cost side of the equation, you don't have good investment management processes in place and IT is probably viewed as an expense to be minimised rather than an investment to be optimised. Without measurable results, IT will be considered a necessary evil rather than a strategic management lever and will be subjected to the tyranny of subjective performance assessments.
In contrast, the road to specific business commitments for IT projects leads to a hundred valuable discussions about the concept, the work required, the skills necessary, the barriers, the accountabilities and the measurements. If you haven't travelled down that path, then as a first step, pick two projects - a dog and a star - and work with the sponsoring business executives to define and commit to measurable business impact. My guess is that your dog will be redefined, reduced or eliminated, while the star will be recognised for the jewel that it is and be better funded and championed.
Susan H Cramm, formerly vice president and CIO of information technology at Taco Bell and executive vice president and CFO at Chevys, a Taco Bell subsidiary, is president of Value-dance, an executive coaching company based in California
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