How does information technology contribute to business goals?
The question has stumped executives, academics, and IT professionals for years. And although some relationship clearly exists, and while arcane models and formulae abound, practical strategies to define and implement initiatives to enhance IT’s value contribution remain elusive.
For business executives, the challenge is to understand how effectively (or not) IT investments address strategic objectives. CIOs, meanwhile, struggle to justify new initiatives and, once they’re undertaken, to demonstrate and communicate their success.
Senior executives, evidence suggests, increasingly view information technology as a key strategic tool, but are disappointed in IT achievements. A Compass survey of 650 CEOs and senior executives from a variety of industries found that 38 percent expect IT to make a significant contribution to business results, while 25 percent expect a low contribution.
When asked about actual achievement, the numbers shift: 25 percent of CEOs believe IT provides a high contribution, while 33 percent say IT makes a low contribution. Meanwhile, 48 percent of CEOs expect IT to make a high contribution in the future, 22 percent anticipate a low contribution, and 30 percent foresee an average contribution. (For more information on the Compass CEO Census, contact [email protected].)
Boardroom attitudes are reflected in the thinking of IT executives. In another survey, a majority of IT executives felt growing pressure to demonstrate return on IT investments. The survey also found that a significant majority of the executives believed their metrics do not fully capture the value of IT, and nearly half lack confidence in their ability to accurately calculate ROI.
How IT Contributes
One inherent obstacle to measuring and enhancing IT’s value contribution is the fact that the contribution is often intangible or “squishy”. For example, a retail bank that introduces on-line account information provides faster and more convenient service. Yet showing a direct productivity or ROI benefit from this initiative is difficult. At the same time, competitive pressure requires such innovation for business survival.
Another challenge is specifying what is meant by “value” and, correspondingly, of parsing executive expectations regarding IT’s role. Some CEOs see information systems as strategic tools driving the business; for others, IT provides a strictly utilitarian function. And, of course, requirements vary widely by industry and competitive environment. To clarify some of these issues, the Compass CEO survey examined IT’s contribution from three perspectives: business performance improvement; cost reduction; and competitive advantage.
The executives concluded that IT does best in improving business performance: 46 percent of CEOs expect a significant impact in this area, and 32 percent say IT has indeed met their expectations. Just under a third of CEOs expect IT to have a high impact on cost reduction, while 24 percent rate IT achievement highly in this area. Competitive advantage fared least well in meeting expectations: 37 percent of CEOs expect IT to make a significant impact in this area, but only 19 percent are satisfied with the results. Interestingly, 54 percent of CEOs expect IT to have a significant impact on competitive advantage in the future.
Enhancing IT’s Value Contribution
A meaningful and actionable approach to enhancing IT value requires insight into the underlying mechanism of how IT can contribute to the business. From Compass’ perspective, IT contributes most directly when it affects business processes in a positive manner, or drives change at some level within a business process.
IT delivers value to the business when it drives improvements in business performance either over time, relative to the competition, or relative to best practice. In this context, business and IT management should seek to understand what specific actions could be taken through IT to improve business performance.
An effective IT value enhancement strategy focuses on specific IT-driven improvement opportunities at a low level within business processes. Examples include reducing the cycle time to enter a factory order, minimizing the number of manual interventions required to pick something out of a warehouse, or cutting the cost of routing a loan application from one department to another.
For example, in the case of the cost of a purchase order, a linkage can be established between an electronic data interchange (EDI) application and key business objectives, as shown in the chart below. The application can directly influence performance indicators such as employee productivity (as measured by purchase orders completed by employee, and by time required to complete a purchase order) and accuracy (as measured by number of errors per purchase order). These indicators can then be tracked to demonstrate an impact on reducing purchase-order costs.
A reduction in purchase-order costs, meanwhile, improves the efficiency with which materials are managed. Materials management costs can then be shown to impact the higher-level performance indicator of supply chain operations, which links to the critical success factor of cost management and, ultimately, to the strategic objective of profitability.
Similar linkages can be defined for IT’s contribution to any business process. Chart 2, for example, illustrates the impact of a document imaging system on the business objectives of a bank. Specifically, speeding up access to relevant documentation reduces the time required to process a loan application and extend an offer of a loan. Further up the hierarchy of performance indicators, an improvement in application approval time can be linked to the critical success factor of loan application abandonment rates, which reflects on the strategic objective of increasing customer satisfaction.
A different set of value linkages, meanwhile, can be established to represent the contribution of a document management system to process efficiency by, for example, lowering the costs associated with maintaining paper files.
IT Operations and Business Value
In addition to identifying linkages between business objectives and IT applications such as EDI and document imaging, a “root cause” approach to performance improvement can analyze and enhance the contribution of IT operational infrastructure to business success.
Consider an electronic bank, or most any online initiative. System availability and security are key measures of customer satisfaction – or more accurately, of dissatisfaction, since availability and security are more or less taken for granted. System failures and/or security breaches, however, mean loss of customer goodwill, loyalty, and accounts.
IT systems have a key role to play in availability, security, and reliability. As such, an IT strategy is essential to an effective “fundamentals first” approach to an online banking initiative. The key criterion that impacts customer loyalty is the number and frequency of previous bad experiences. The more common the experience of poor service, the more likely the customer is to look to an alternative channel or supplier. Hence, the key measure is number of times performance dips below acceptable levels.
This perspective enables management to take a proactive approach to define thresholds of acceptable system performance, and to reduce the frequency of ‘dips’ in that performance. Based on measurement and analysis of arrival patterns, service peaks, and transaction volumes, specific actions can be taken, such as increasing capacity, improving throughput and reliability, and managing demand.
Desjardins Focuses On Infrastructure
Another critical element of a value-oriented approach to IT management is to ensure that infrastructure strategies and development align with business goals. Consider the case of Montreal-based Desjardins S