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Why IT value management matters

Business leaders understand that performance measurement is a critical component of effective management. Identifying key performance indicators to improve predictability, for example, has propelled organizations such as Wal-Mart and GE to market leadership status.

Similarly, IT performance metrics clearly demonstrate operating efficiency. In responding to the need to do "more with less" over the last few years, many CIOs reduced their Total Cost of Ownership (TCO) in every possible way. "Doing things right" meant running the most efficient operation based on cost, service level and project performance metrics as measures of success. Yet for countless organizations, successfully lowering TCO failed to drive maximum IT value.

In fact, Alinean research shows that more than 90% of companies recognize that historical performance metrics are inadequate, and more than half are debating how to better measure business value effectiveness rather than standalone IT efficiency. More importantly, as cost cutting gives way to increased spending and innovative investments, CIOs' responsibilities will shift to derive maximum effectiveness: driving growth and proving business returns on IT investment beyond mere cost savings.

Alinean has developed an index that compares companies' Economic Value Add (EVA, an overall measure of corporate financial performance) relative to IT dollars spent. This Return on IT (ROIT™) index measures IT efficiency and effectiveness, rewarding companies

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with higher profitability and lower spending with the highest rankings.

Recent measures show that the top 10 percent performing U.S. companies with more than $1 billion in revenue (noted as "Great" in Figure 1) have a 95% correlation between IT spending and EVA, with an average ROIT that is more than three times the average profitable company's (noted as "Good" in Figure 1). In other words, these top performers produce three times more shareholder value per IT dollar spent.

ROIT Rank Selection Criteria Average ROIT Score (EVA/IT Spend) Degrees of Correlation between EVA and Total IT Spend
Great Top 10% 522% 0.95
Good Positive ROIT™ 159% 0.70
U.S. Database All Companies -3% 0.48
Poor Performers Negative ROIT™ -233% -0.33
Figure 1: Leading companies are achieving significantly greater correlation and value from IT spending

Research for 2004 indicates that ROIT leaders have begun to invest in IT at more than double 2003's spending levels, and preliminary research shows this trend is continuing and expanding in 2005. Reversing the cutbacks of 2001 through 2003, where superior performers cut spending more than their peers, today's agile leaders are expanding investments more than others in recognition of growing business opportunities and the need to proactively invest to catch the next wave of economic success.

Those who expand current performance measurement systems for IT to better measure and manage IT spending effectiveness -- rather than just efficiency -- will enjoy similar benefits. Those who remain focused on antiquated metrics will lag behind competitors in two ways: the amount of money invested in IT, and the leaders' commitment to "doing the right things right." In short, CIOs must measure the bottom-line business value IT has for the entire organization, to ensure competitive advantage.

The development of IT value management competency is a rapidly evolving journey, not an event. The good news is that there are entry points for all organizations. Those that learn and adapt quickly can dive in and establish a formal IT value management office with a vision for fully-integrated post-deployment value measurement. Others can derive significant value through a more conservative approach using value measurement training, engaging independent value experts for tough decisions, or running proof of concept pilots for validation.

As companies' budget priorities and accounting has become more scrutinized, IT executives' mandates have shifted. Companies are in the middle of a wholesale shift from a cost-based to a value-based approach, requiring new thinking and measurement metrics. Those quickest to adapt will be the quickest to profit, and laggards risk the competition surpassing them.

Bill Johnston is the President of Orlando-based Alinean, the leading provider of IT Value Management (ITVM) solutions to CIOs, consultants and vendors seeking to assess and communicate the business value of IT investments. He can be reached at bjohnston@alinean.com.

This was first published in February 2005

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