Blog: Understand Value to Enable Communication
- 16 October, 2007 12:54
Last week FT.com and Techworld quoted some research from Micro Focus into the financial value IT systems provide to business.
Many companies have managed to control IT budgets by ensuring spend is focused through authorised procurement channels, consolidating supplier lists and rationalising software and hardware assets. Others have gone the extra step of outsourcing to gain even greater visibility of IT spend. There are plenty of techniques documented on cost management.
A nut which is more difficult to crack is how to value IT and quantify how this spend contributes to business performance, so the figures quoted in the research made for interesting reading:
Micro Focus research, carried out in companies with revenues from US$100m up to over US$1bn, shows that less than half of all CIOs & CFOs (48%) ever try to quantify the financial value of their IT assets. Only 37% of CIOs have tried, compared to 60% of Finance Heads. Less than a third of all respondents (29%) from both groups, ever try to quantify the contribution all their IT assets make to the business' performance.
Just over a third of CIOs have tried to find out the financial value of their IT assets. And that is in an industry with a spend of over US$1 Trillion per year. Are there many other industries which could get away with that?
CFOs control the spend across all departments, so it is not difficult to see why 60% of them have taken on the task of imposing onto IT the more familiar rigours of financial governance experienced by the rest of the organisation.
Anyone who reaches CxO level in a large company is clearly a "smart cookie", and has plenty of resource under their control to focus on the problem. So if we understand the costs of IT, why is it so difficult to quantify the return in business terms? After all, the projects were sanctioned with a ROI justification, right?
ROI justifications within IT tend to involve some degree of estimation. Usually, there is no track record of executing the same project in the same business circumstances leading to there being no sound historical evidence which can form the basis of the ROI predictions - so we make an informed estimate. The predicted project savings are rarely integrated into subsequent budgets, leading to the changes required by the project not being as widespread as sanctioned. Trying to track the return to see how it matches the basis on which the sanction was obtained seldom happens.
This echoes the findings above by Micro Focus, where only 29% of CIOs and CFOs try to quantify the contribution of IT to business performance. Of that 29% I'm sure many fail to realise an outcome, and my guess is the success rate is very low.
My business partner and I recently met with Neil Macehiter of independent analysts Macehiter Ward-Dutton. Neil is co-author of the excellent book "The Technology Garden", and its contents formed some of the background for our discussion about Business and IT alignment. In particular we chatted about viewing IT as a range of services presented to the business in a way that they could easily grasp.
I believe that these Business Services (which I define as the combination of assets, resources and the dataflows through them) are key to understanding and communicating IT in a way that the business understands, namely in financial terms. Neil covers this where he describes the language of business:
"...it's nevertheless clear from our research for this book that being able to talk about financial costs and business benefits is a crucially important part of the overall language that IT organisations have to develop. Whether you are having conversations about IT investment, giving feedback to stakeholders about how well the system resulting from an investment is delivering value or working through the complexities of how to change that system, you have to be able to be able to talk to business people in terms that make sense to them - and the language of business revolves around money." (The Technology Garden, p.61)
What is needed to enable us to speak this common language is an approach that allows us to:
- Define the services IT provides to the business.
- Know which assets are used to deliver those services.
- Understand the true cost of those assets.
- Work with the business to value the services IT provides, and what business processes and objectives they support.
- Compare the costs with the value.
Use cost/value as a basis of communication with the business and you will increase the likelihood of being accepted as a trusted part of the organisation.
This article was first published on my Keystones and Rivets blog.