| “Only two of the thirteen companies that participated in the study agree that their IT departments are critical to corporate success. The remaining eleven companies all see their IT department as a necessary, but burdensome, cost pit.”
Mary Lacity and Rudy Hirschheim, Information Systems Outsourcing, Myths, Metaphors and Realities (1995)
This is the first in a series of NetworkD eNews articles that deal with a tough subject: How to fund needed but unbudgeted IT process improvements. This article frames the related hurdles without going into their solution or financial jargon.
Funding of Information Technology (IT) within almost all organizations remains one of the most daunting challenges facing Management at all levels. Not just IT management, but business management overall. Some estimates have placed annual funding related to IT (i.e., data, people, processes, technology) at greater than 50% of all capital expenditures, (i.e., spending on assets with more than a one-year useful life) [United States Department of Commerce Bureau of Economic Statistics]. While this statistic argues clearly for the importance of IT as reflected by spending habits, it also implies that effective spending on IT receives proportional scrutiny by business management. The issue, stated simply, is that how to express IT’s value is not always clear.
Even if you are that rare IT leader or manager who has a financial background, this only means that you understand the mechanics and jargon of taking a present value or surpassing some hurdle rate-of-return. Indeed, these financial calculation methods go through fads much like IT architecture, management methods, and buzzwords. Risk Adjusted Return on Capital (RAROC) and Economic Valuation are two such examples in use today. These financial calculation methods are quite good, but have proven to be a funding barrier because of the nature and extent of the needed IT process improvements. And, at the end of the day, Finance requirements must still be satisfied if you want their support ... HURDLE 1: Understanding what Finance needs.
While it helps, as IT leaders and managers, you do not need a financial background to understand the mechanics of financial justification, although it can’t hurt. What you do need is to be able to work with your Finance support people to supply the information and data they need to satisfy these financial calculations.
So, what is it about IT process improvements that make justification so elusive? One possible answer is that IT Management, too frequently, does not have a good understanding of the costs of services that they provide. IT services are everything that enables something as simple as a single program that supports a business area or as complex as a business-spanning function, process, and supporting tools (e.g., Service Desk, Change Management). To be sure, at a gross level and with the help of Accounting, IT Management can speak to operating costs and capital expenditures by cost center. However, these accounting methods typically do not measure how much it costs to deliver a quality IT service and whether the business value is justified … HURDLE 2: Understanding the costs of IT services.
Finance and Accounting only measure the tangible benefits and costs of an effort. Many of the most important benefits from great IT processes are intangible, though no less real. Putting numbers around benefits such as improved morale and customer satisfaction is less exact. However, such intangibles must be captured and assessed as they frequently serve as areas of competitive differentiation by customers … HURDLE 3: How to measure and value the intangibles.
Besides Executive Management, IT is arguably the largest single area with a holistic view of the business. In contrast, business line management has an excellent view of its silos and associated objectives. For these business line managers, personal compensation is most often predominated by silo financial results. IT service delivery and support is, at best, viewed as a large expensive black box that serves silo objectives. And, if internal customer satisfaction is low, it is a black box that too frequently fails to meet their quality needs. The paradox is that Business management has little personal incentive to promote IT process changes with far-reaching effects, the very thing that will improve service delivery and support. These IT process improvement efforts are frequently viewed as just too big to sponsor, even if their value is intuitively appealing. It’s safer to confine improvements to specific silo’d products and services … HURDLE 4: Cultural change to promote business ownership of IT services received.
We have spent a great deal of time and money bringing water to the horse, but we don't even know if he is thirsty, and we have no idea how to get him to drink [Davenport 1997].
Business Management must be more than engaged, they must own IT improvements. The “What’s in it for me?” must be made clear. If the value is clear, Management is adept at shifting funds to make the best decisions about how it should be deployed. In fact, at many companies, what distinguishes management at different levels is their ability to plan ahead for pools of cash to support changing business needs. In financial terms, this is called liquidity, i.e., getting Business Management to spend its money on IT in exchange for an increase in technical value. Executive Management encourages this flexibility. At a minimum, managers are accountable for staying within their budgets and producing expected results. If IT process improvement will add greater value, then hidden funds can be found squirreled away somewhere in the business… HURDLE 5: Show me the money!
Bottom Line: IT investment needs to be an integral part of a greater program of business process innovation and improvement. IT value must be described comprehensively in service terms, capturing both the tangible and intangible benefits and costs. Money can be found for improvements if the hurdles to funding are correctly addressed. If you are struggling to demonstrate the value of IT, NetworkD has the experience, expertise, and methods to help you be successful. Call or email us to learn more.
As noted, this is the first in a series of eNews articles devoted to unlocking IT’s value –
look for more in the coming months!
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