Ask the IT Consultant

May 12 2009   11:45AM GMT

Determining the Real Business Value of IT

Beth Cohen Beth Cohen Profile: Beth Cohen

Question:  What are some methodologies that can be used to help CIOs and other C-level executives define the business value of IT, particularly when all budgets are under increased scrutiny?

This is an excellent question.  IT managers need to be able to capture the real business value of IT so it can be demonstrated to C-level executives in support of enterprise purchases of and continued investment in IT services.  In the past, typically new technology implementations and large strategic business transformation projects were what got business executives’ attentions – partially because they are both at the highest risk of failure and offer the greatest opportunity for reward.  However, nowadays most IT executives are being forced to focus on squeezing the most efficiency out of their existing bread and butter project and operational budgets, particularly since enterprise appetites for high risk large scale projects are down.

The good news is that IT operational efficiency projects are now relatively easy to quantify by applying the standard bag of tricks, such as IRR, ROI, TCO and payback period tools. The ability to capture detailed business information in real time using business intelligence tools and LEAN manufacturing approaches can be and is being applied to measuring the value of the IT tools themselves.  This has given both business and IT management unprecedented insight into the value of a given IT process improvement tool or project.  Not only can these tools do a good job of capturing improved business productivity and efficiency, but they translate them into terms that executives can readily understand – how the tools directly affect their bottom and top lines.

For an example of the success of this approach look no further than the massive switch to virtualized IT services and all those data center consolidation projects that have all been justified by demonstrated real cost savings in both reduced capital expenditures and continued on-going operational cost savings.  The green data center movement is not capturing management’s imagination because it is cool, but because it is a terrific way to save lots of money in operational costs – in some cases as much as 30%.  The continued move toward more outsourced IT services is another way for companies to translate slippery IT budgets into more easily quantifiable bottom line expenses.  By using these tools management can gain a good understanding of how their IT dollars are actually being spent and how effective they are.  The logical next steps of improving the quality of IT expenditures are then that much easier to visualize and plan.

One last note that is often overlooked is that these metrics are all well and good at the enterprise level, but ultimately detailed metrics on human productivity remains extremely hard to measure.  It is what I call the “coffee factor”, the lost productivity due to people getting a cup of coffee because a system is slow or they are distracted by the poor user interface.  I predict that better tools for capturing this will remain elusive, but it will not be for lack of trying.

So what do you think?

Beth Cohen, Luth Computer Specialists, Inc.  IT infrastructure consulting services.

1  Comment on this Post

 
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  • Uditmathur
    Calculating Value generated by IT investment is a challange. Business value of a running concern is a combination of both the Earnings and the potential for Growth. IT projects typically help in enabling growth by laying a good foundation to build various initiatives . The immediate savings may be miniscule -but the potential for doing business at a larger scale is greatly enhanced by IT projects. As is true of any business enabler one cannot calculate the value generated by it in isolation. Business requires many enablers to create an environment conducive to growth. One cannot simply calculate the value generated by one enabling factor in isolation. The nearest one can come is to find the alternative cost of attempting to grow the business without that specific enabler by increasing the investment in other enabler. Then there is the theory of diminishing rate of returns of any enabler - each enabler. All this makes calculation of returns on IT investment quite complex and calls for expertise in IT and domain- a combination of rare skills. Udit Mathur IT Sr Consultant Tata Consultancy Services Cell:- +919871609331 Mailto: udit.mathur@tcs.com Website: http://www.tcs.com
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