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IT VALUE AND THE CFO'S INCREASING ROLE IN GETTING BUSINESS RESULTS FROM IT INVESTMENTS

Businesses are critically dependent on IT for achieving strategic goals as well as short-term operational targets. Increasingly the CFO is responsible for IT plans and budgets and being asked to be sure that the IT investments a company is making are improving shareholder value. The CFO in turn is asking IT people hard questions: How do we justify new IT investments? Are we balancing our resources between requests for new investment and the needs of existing IT activities? How do we know IT is contributing to our business success? How do we measure and report the business return on IT investments? Overall, the CFO should also be asking, "How can I evaluate widely different IT investments with a consistent, business-based yardstick, and to produce predictable, consistent results for the company?"

In the past, senior management teams looked to IT management for answers to these IT value questions. However, the questions are not simply about IT, but they are connected to business as well. IT is, fundamentally, an enabler of business activity, enabling managers to make better decisions using information. It may also, for example, enable marketers to target more profitable markets, or may enable re-engineering of business process to reduce time cycles. In all of these cases, IT’s contribution is to enable a more efficient or effective business activity, which in turn results in improved profitability. IT is a partner in the bottom-line result, but it isn’t the only determining factor.

Traditional IT financial analysis works to translate IT’s enabling contributions into concrete estimates of reduced cost or increased income, and thereby produce a measure of IT’s contribution to profitability, or ROI.

Clearly the financial community needs new ways to assess IT business value. We begin to address the need by proposing two underlying principles for the CFO faced with IT value questions:

Financial Principle One: IT’s value is based on direct contribution to profitability and shareholder value.

Financial Principle Two: IT’s direct contribution to profitability and shareholder value is based on improving the company’s Operational Effectiveness and Strategic Effectiveness.

Whatever we do with IT, we do it with the expectation of directly or indirectly improving financial performance. The problem is, what constitutes “direct contribution to?” profitability?

First, IT can enable improvements in a company’s operations (operational effectiveness). If these business operational improvements reduce cost or improve revenue, the benefits may be directly measurable, and an ROI can be calculated. In other cases the connection to profitability may be less clear (e.g., improves customer satisfaction.), and ROI is difficult

IT can also enable the success of a company’s strategy (strategic effectiveness). For example, if a key strategy is increasing customer loyalty through improved customer service, IT has value when it provides tools and information for improved customer service.

In this context, the CFO plays a critical role, not only in understanding and communicating IT value, but in shaping the way a company uses IT. By insisting on a consistent, business-based yardstick for measuring all IT investments (new and on-going support for existing IT activities), the CFO can bring rigor to an historically political, informal process of making corporate decisions about IT. By making operational and strategic effectiveness the basis for this yardstick, the CFO can also inject a business-results rationale for assessing all IT investments.

To achieve this, we propose that companies adopt and CFOs implement the following principles for planning IT investments and assessing their business values:

1. Enterprise planning and management processes should produce explicit and actionable strategic intentions that can lead to the business and IT initiatives that will achieve them.

2. All IT actions should be driven by business strategic intentions.

3. Managers across all functional areas should have a common understanding of and commitment to enterprise strategic intentions.

4. Resources – both on-going expenses and new investments – should be allocated and budgeted based on explicit connection to strategic intentions.

5. Activities should be organized into resource and process portfolios for purposes of value assessment, performance management, quality and service level assessment, and resource commitment.

6. IT’s Business value should be determined by cause-and-effect linkages with business outcomes. Activities and resources should be planned, prioritized, executed, and measured based on their connection and contribution to business outcomes.

Unfortunately, many companies lack IT and business planning processes that follow these principles and hence cannot produce IT plans and budgets that consistently support business strategies. For companies to effectively answer the hard questions posed above, the CFO and the rest of the senior management team needs to work not only to adopt the principles, but implement process and culture changes to explicitly link IT investments and business strategic intentions.

We propose that there are five integrated management practices, focused on the IT/business strategy connection, that companies can use to jump-start the process and culture change. By adapting some or all of these practices to the company's business and IT planning processes, the CFO can ensure that the company is making the best IT investments that support the company's strategies, and bring tangible business value to the enterprise. These practices are:

1) IT Demand/Supply Planning: Constructing IT strategic plans with two distinct components:

• A description of the demand for IT services, generated by the business strategies and goals

• A description of the future supply of IT services

2) Innovation: Using IT to change the business strategies

3) Prioritization: Prioritizing all new IT programs and initiatives based on their expected contribution to business performance.

4) Alignment: Assuring that all existing IT programs and initiatives support the company's strategic intentions.

5) Performance Measurement: Measuring IT performance in business terms, looking at IT's impact on operational and strategic effectiveness

The practices also employ basic concepts of value, portfolio, and culture management in the five practices.

Value Management: Does our management team define business value in terms of its business strategy? Is the company able to perform its strategies effectively, and its operations effectively in support of the strategies?

Portfolios and Portfolio Management: Are all the IT resources (infrastructures and legacy applications as well as new development projects) optimally directed at business strategies? Without looking at the entire IT spend from the perspective of business strategy, resources will be wasted.

Culture Management: Does our management team understand the value of IT, and manage the business to achieve it?

The five management practices (and three underlying management concepts) focus on achieving positive answers to the IT Value questions. We want to be able to say: 1) We are able to translate our business strategies into IT actions; 2) We are investing new IT resources in the right places, 3) We are getting sufficient value from our existing IT assets and resources, and 4) we are spending the right amount on IT. Any company can learn and implement these practices. With effective management leadership, proper training, and a focus on adapting these practices to fit the company's culture, the CFO will answer the value questions with confidence.