The concept of aligning IT investments with business goals is as old as the IT function itself. Tangible examples...
of IT alignment, however, have been rare over the last 40 years, despite respected IT thought leaders widely promoting the concept.
The reason why is simple. Until a few years ago there was simply no need.
Through IT's infancy and adolescent stages, budgets and functionality dutifully followed the growth curves associated with Moore's law for more than 40 years. (According to Moore's law, "The number of transistors on a chip doubles every 18 months.") While Moore's views are likely to continue with regard to technological advances and cost reductions, its correlation with aggregate IT spending no longer applies.
Emergence of the 'need' for IT value management
Once upon a time, IT budgets were entirely dedicated to innovation. But the dot-com destruction of $3 trillion of shareholder value, coupled with high-profile examples of corporate mis-governance, has created a permanent shift in IT budget priorities and spending behavior.
Following that shift, the pendulum continued to swing the other way over the last few years with a 20% reduction in total IT spending. Alinean's research shows that the typical company today spends 90% of its IT budget on "lights-on" operations, leaving a scarce 10% for innovation. As market conditions require greater innovation to maintain competitiveness, the sunset of the IT budget growth era has resulted in a bona fide need to prove and improve returns from IT investments.
ITVM capability and maturity defined
Almost all companies have adopted some level of ROI analysis on their technology investments, ranging from elementary to sophisticated. Alinean has identified five phases of IT value management (ITVM) development to help companies create a thorough technology ROI approach, starting from the ground up.
Level 1 -- When in doubt, use spreadsheets
According to a 2003 IT Governance Institute survey, 80% of CIOs acknowledge the need for ITVM. Reminiscent of the mid-'80s trend to use PCs to solve every business process problem, IT and business professionals have responded with spreadsheet models that attempt to identify and quantify the business value of IT investments. Currently, more than 75% of companies use spreadsheets for ad hoc analysis of IT projects.
While better than not measuring IT value, spreadsheets inherently limit scalability and multiuser integrity. More importantly, most companies lack the subject matter expertise to ensure completeness (i.e., they have considered all dimensions of the project) and relevance (i.e., realistic real-world assumptions).
Alinean's research indicates that there is enormous payback to companies of all sizes that have adopted ITVM best practices. These top performers produce three times more shareholder value per IT dollar spent (a factor or 3.28 for companies with more than $1 billion revenue and a factor of 3.08 for companies with less than $1 billion revenue).
Interestingly, smaller companies (less than $1 billion in revenue) tend to achieve on average 70% greater shareholder value per IT dollar spent than their large company counterparts (greater than $1 billion revenue), due to cost advantages in security, compliance and other diseconomies of scale associated with managing and staffing larger IT infrastructures.
However, as the correlation between shareholder value and IT spending is much better among larger companies (1.5 times better among leading companies and 3.2 times better among profitable companies), due to their ability to develop robust processes and value measurement discipline, it is unclear where the optimal balance between governance and agility will occur and whether smaller or larger organizations will be the first to achieve it.
Realizing the competitive importance of ITVM, both large and small companies are shifting from the ubiquitous use of homegrown spreadsheet solutions to third-party tools and research.
Level 2 -- Leverage third-party analysis
The fundamental challenge with Level 1 ITVM maturity is that resources are finite and perspectives are limited to organizational experience. Given the constantly changing technology landscape and lessons learned from each deployment, articulating the theoretical value of IT investments is an enormous undertaking attainable only through a team of dedicated analysts with perspectives that span multiple organizations and industries. As these skills are rare, most organizations can't assemble the staff to produce accurate models reflecting the current technology landscape.
By leveraging credible third-party skills and assets, companies can tailor models to produce meaningful pre-implementation analysis and prioritization of proposed projects, and post-implementation assessment of results.
According to Alinean's research, 20% of companies doing ITVM analysis are deploying or exploring the deployment of third-party solutions. Almost all of these are doing so on a "phased deployment" basis that validates ITVM for their organizations with a group of pilot "super users" and more extensive analysis of major projects.
Level 3 -- Corporate governance through enterprise-wide deployment
While the rate of enterprise-wide deployment varies, the ability to validate ITVM benefits in phases as a precursor to broader adoption is common. Acceptance tends to be most closely correlated with change management and business performance measurement capabilities.
Level 4 -- Post-implementation measurement
Consistent and meaningful pre-implementation ITVM assessment serves as the basis for post-implementation comparison to actual results. Companies have begun to automate this with a closed-loop system that integrates business intelligence analytics to both measure and recapture unrealized results, and provide input improvements to subsequent predictive models.
Level 4 has given rise to additional opportunities and complexities: integration with complementary technologies such as project portfolio management (PPM) and business intelligence (BI) and business performance management (BPM). These IT governance technologies combine into a "total lifecycle" integrated approach to IT investments that span project selection and approval (ITVM), deployment (PPM) and automated post-implementation value measurement (ITVM/BPM/BI).
Level 5 -- ITVM service-level agreements
Once a mutually agreed upon standard measurement framework is demonstrated, buyers, sellers and consultants are empowered to pursue new levels of fact-based engagement and collaboration.
Level 5 allows companies to put their money where their mouths are -- with confidence. Through the consistent measurement of expected project value, buyers and sellers identify value opportunity, assign responsibility and share the fruits of success or costs of failure with objective service-level agreements (SLAs).
Years ago, companies wishing to focus on core competency were constrained by their inability to measure performance in areas such as supply chain efficiency, call center operation and IT support. These limitations have been superseded by SLAs that measure anything and everything. Metrics for cases per hour, cost per call, average handle time and other performance indicators allow companies to confidently provide outsourcers with objective standards.
As ITVM capability and maturity evolves, IT performance measurement will focus on business value, rather than operational metrics, as the basis for attracting capital investment and rewarding team members for their contribution to business goals.
Bill Johnston is the president and ITVM practice leader of Orlando, Fla.-based Alinean, a provider of ITVM solutions to CIOs, consultants and vendors seeking to assess and communicate the business value of IT investments. He can be reached at [email protected].