An article by Tom Costello in the May/June 2010 edition of the IEEE IT Professional magazine caught my eye because the title sounded like a new CD from a favorite band of my youth, “Status Quo - The Silent Killer “

It’s not every day I can say that about my technical reading!

Costello makes the point in his article that, today, IT are often asked to justify the business value of every initiative that touches IT with the underlying requirement that IT is expected to create value for the business.  He goes on to ask the question, “So how does IT create value when the business model ‘in play’ isn’t designed to do so?” and then, “What can technology investment achieve?”

Based on the premise that if the first 80% of technology capability in a particular problem space can be delivered at a given cost then the next 10% will have a similar cost and the next 5% the same cost and so on, Costello’s answer to this last question is based on trying to work out where your company is on this particular curve.

With some simple but interesting models and charts, Costello argues that the potential for IT to create business value is dependent on whether the business growth strategy at any given time is proactive, reactive or passive and where the business sits in relation to its competitors on a spectrum of profit margins for different revenues.  Essentially, Costello puts the case that the only case where IT can be expected to create business value is when the business growth strategy is proactive and the business has low revenue but high margins relative to the competition.

Costello presents and interesting concept and one that can be fairly easily constructed for companies competing in the public space.  it brings to mind Christensen’s disruptive technology proposition.  However, it has weaknesses.  For example, it assumes that the problem space stays the same and doesn’t allow for low cost innovation due to changes in either technology capabilities or the business environment.  Such changes effectively reset the degree to which the current capabilities satisfy the problem requirements back to below the 80% level.  I guess that Christensen would argue that this is precisely the opportunity that a disruptive technology seeks to address because its business model is more flexible that the incumbents.

Finally, I wonder what the equivalent of this sort of analysis is for the government departments?

“AIE” is the last in the series of four metrics for measuring the business value of IT that I introduced in my posting of July 7, 2009.  The first three in the series were the “Business Value Index,” “Total Economic Impact” (TEI) and “Val IT.”

AIE is considered to be the most rigorous of these four approaches but it has not gained widespread use.  With its mathematical, statistical and economic underpinnings, AIE provides investment decision-makers with a high degree of confidence in its results but there is a steep learning curve and it requires significant expertise.  Key features of AIE include:

• Rigorous “Unit of Measure” definitions even for such normally subjective elements as customer satisfaction.
• Systematic uncertainty analysis - quantification of the risk of an IT investment in such a way that it can be directly compared with a non-IT investment.
• Calculation of the economic value of information - AIE works on the logic that information reduces uncertainty, less uncertainty improves decisions, better decisions result in more effective actions and effective actions improve profit or mission results.  AIE includes a mathematical framework for calculating an pricing all this in dollars!
• IT investments as an investment portfolio - this is perhaps obvious from the previous three features but the rigor of the previous three features allows the IT investments to be analyzed alongside, and compared using, the same tools as those used extensively for non-IT investments.

“Total Economic Impact” is the 3rd in the series of postings on measuring the business value of IT that I introduced in my posting of July 7, 2009.  The 2nd in the series was the “Business Value Index” and TEI contains a number of characteristics that overlap with BVI:

• the use of a business case
• valuing intangibles
• calculating financial returns.

TEI adds:

• A methodology for quantifying risk
• The value of flexibility.

TEI has been used by Forrester for valuing IT investments.  It is of limited use in measuring the value delivered by IT in “normal operations” unless you take a view that the while IT budget is the investment. TEI is claimed to be more rigorous than BVI but the price of this is greater complexity.

TEI has four main components for assessing the total impact of a new investment:

1. Costs- the impact on IT

This looks at the costs incurred by IT compared to the costs of the status quo.  From the desired “Total Cost of Ownership” perspective, the “impact on IT” can be positive when money is saved or negative when money is spent.

2. Benefits - the impact on the business

Essentially, this is similar to the “Costs” analysis in that monetary flows, negative and positive, are aggregated, in this case, for all the non-IT departments of the organization.  Such flows would include improved productivity, training and so on.

3. Flexibility - Future Options

Derived from financial trading world, flexibility is measured as the value that this investment creates in terms of the ability to pursue other options in the future which are not currently available. The value of future options created is aggregated and added to the TEI,  For example, the investment being considered may be a change in software architecture which has a certain immediate value.  Additionally, at some point in the future, this change in software architecture could make it possible to switch to a cheaper hardware platform.  The switch to the less expensive hardware platform is not part of this project so the savings cannot be included in this TEI but there is some future value in creating the options and that value can be included in this TEI.

4. Risk

The first three types of analysis in TEI are additive.  The risk analysis reviews these the analysis of these three and generates an range of potential outcomes.  From this range, an expected or most likely value can be deduced and applied.  For example, if there is a 90% chance that the cost of training the business users will be $10k and a 10% chance that it will be $20k then the risk policy of the organization can be applied to make the risk adjusted cost $10k, or $20k or (10*0.9 + 20* 0.1) = $11k or some other value. Risk can be thought of as a multiplier of the sum of the first three to created “risk-adjusted costs” and “risk-adjusted benefits” to generate a “risk-adjusted ROI.”

I came across this in the July/August paper edition of Baseline magazine.  For those of interested in improving the business value of IT, the IVI is definitely worth watching and, if you have the inclination, participating.

The Innovation Value Institute, hosted at the National University of Ireland in Maynooth, researches and develops unifying frameworks and road-maps for IT and Business executives to create more value from IT and better deliver IT enabled innovation whilst validating that these frameworks/tools have a broad applicability across differing industries and contexts.

In association with its prestigious group of more than 30 consortium members, the IVI has developed a five-stage (of course) maturity model for mapping out IT improvements.  In addition to the five stages, there are four macro-processes:

1. Mapping IT like a business
2. Managing the IT budget
3. Managing the IT capability
4. Managing IT for business value

IT-CMF

For more information, check out the IVI website.

This is the second in a series of postings providing updates to our book, “The Business Value of IT.”  This posting explains in more detail the Business Value Index or BVI.  BVI was developed by Intel’s IT organization so it comes with the advantage of having been developed by practitioners.

BVI considers three dimensions of IT value:

- Business Value

Business Value measures both the tangible and intangible benefits of a project on a set of weighted criteria.  While there is the advantage of starting with Intel’s tried and tested criteria and weights, there is no reason why your organization could not adjust these to suit its own needs.  Some examples include:

- Customer need
- Business risks
- Technical risks
- Strategic fit
- Revenue potential (recognizing that this is not a fixed number is important!)
- Level of required investment
- Innovation
- Learning

- IT efficiency

IT efficiency measures a project’s impact on the IT organization.  For example, how well does the proposed project “fit” with the organizations enterprise architecture policy (where we are now) and strategy (where we plan to be in the future).  Again, a set of weighted criteria are used.

- Financial Criteria

The model separates business value form financial value.  It is possible for a project to have great business value with little or no financial value.  Projects with negative financial value can still be imperative for the business e.g regulatory implementations or “must have” competitive features.  The model uses Net Present Value, Internal Rate of Return and payback period (see our book for definitions) to assess financial attractiveness.

Intel uses the scores for these 3 dimensions to generate a value visualization of the comparison between candidate projects:

The nice thing about being professionally associated with a theme like “The business value of IT” is that people send me things - many of which are interesting and relevant.  My continuing education is always valuable but sometimes a little embarrassing.  For example, I was recently sent a copy of an old (2006) Forrester report by Craig Symons called. “Measuring the business value of IT.”

Immediately I recognized two things:

• This paper had a lot to say on a subject close to my heart;
• It contained important information which pre-dated the publication of our book but I didn’t know about it

Yippee (sort of)!

Naturally, I wanted to share this new information with the community who follow this blog.

The good news is that Symons shares my view that “The business value of IT can be measured.”  He observes that successful organizations observe the following best practices:

• Have an active IT Steering Committee
• Implement Portfolio Management
• Use a standard IT Value Methodology

Nothing new here but neatly put.  Symons goes on to recommend that selecting from credible IT Value Methodologies is critical.  He lists four:

1. Business Value Index (BVI)
2. Total Economic Impact (TEI)
3. ValIT
4. Applied Information Economics (AIE)

I will provide more information on these in future blogs.  For now, let me leave you, with Symons opinion on their relative merits from the perspectives of rigor and the degree to which they are quantitative.

Most rigorous = 1

1. AIE
2. ValIT = TEI
3. BVI

Most Quantitative = 1

1. AIE
2. ValIT
3. TEI
4. BVI

Eight out of ten business leaders say they “make major decisions with missing or untrusted information,” according to an IBM survey reported by Eileen Feretic in the print versions of Baseline (May 2009).  The best measurement systems and metrics are those that enable business leaders (including CIOs) to make important decisions. You would think that delivering this measurement information would be a key value contribution of the IT Department and sometimes that is true.  Unfortunately, all too often the IT Department is part of the problem.  The CIO cannot even provide metrics on the value of IT never mind the rest of the business.  Ms Feretic quotes from her interview with Dr David Friend, CEO of Palladium Group, “IT needs to be the keeper of the truth, the enabler of good decision making.  It can’t just spew out data.  It has to provide insight along with the information in order to help managers make good decisions.” If you are a CIO or a senior IT manager reading this, can you put your hand on your heart and say out loud that you are doing a good job of this?  What about for the IT department?

On his ITBusinessEdge site, Patrick Avery has just started a discussion thread on the Business-IT interface.  You may be interested in reviewing the comments and your own ideas will be very welcome!

If your interested in this blog, you might find the interview that I did with Ann All particularly the focus on risk.

Ann All\’s interview with me!

Its a week or two later and I have finally realized what was bugging me about a recent conversation with a group of representatives of an IT organization within a major company.

The theme of the conversation was how to measure the value of IT in a way that the businesses would understand.  In setting the scene for me, my new-found friends described all the classic symptoms.  The business can’t understand why IT projects cost so much and are often late; they perceive that they can’t possibly be getting optimum value because IT is a monopoly (with all that that implies).  On the other hand, the IT group can’t see how they can be expected to work in an optimally efficient way when the businesses cannot even execute a simple task like defining what they want perfectly first time.

Of course, I asked some questions specific to their environment and started the discussion about how they might make some progress.  It was this part of the conversation that started the niggling warning buzzer in the back of my brain.  They talked to me about the spread of their projects - nothing unusual there except the terms they used - something over half of their projects are “business as usual” projects and the rest are “initiatives.”  We continued the conversation to discuss which have business cases, how the business cases are monitored, how priorities are established and so on.  We started the conversation about how to work with the businesses to pick out value and compare it across projects.

Throughout the conversation, during the drive back home, through a very pleasant long weekend in Manhattan until now, the buzzer has been going in my brain.  What had I missed that might help? Finally, a conversation with a client who used the same term this week unblocked my brain.

What business value can there possible be in “business as usual” projects?

Of course, in hearing the term the first time, i just automatically translated it to the category “maintenance” projects.  But, hey, as an IT Value consultant, I think I prefer “Business as Usual” projects.

How many “Business as Usual” projects do you have?  By definition, they must deliver zero value to the business.  How much are you charging for your “business as usual” projects?  Do you think the business might have better ways to spend that money?

This led me to thinking about whether all maintenance projects are “business as usual”?  My first reaction to this question was that its a great value differentiating question.  I suspect that in most organizations the maintenance projects are a mix of business as usual and some tangible improvement to the business.  That bug fix - if left unfixed is it losing the business customers or costing money through some work around or is it just being fixed because its on a list that someone has?

The IT value optimization trick is to have a process in place that allows IT and the business to have a serious (but short) conversation about why IT is doing the ones that are truly “business as usual”.