IT Focus Area: strategy
March 6, 2015
Calculating the Value of IT
Chief executive officers (CEOs) and board of directors are looking to get more value out of their information technology (IT). They are also looking to create and enhance their digital capabilities to drive growth, respond to threats in the marketplace and create new competitive advantages with greater agility.
As a result, IT budgets are on the rise. Almost 65 percent of U.S. companies increased their IT budgets in 2014, according to the annual IT trends study by the Society for Information Management. The average percentage of revenue put toward IT this year is more than 5 percent.
IT has become a critical part of every company and it is vital that it is measured.
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However, technology has become too important to stay within the IT department alone. To speed the deployment of digital business capabilities, IT budgets and spending have moved beyond the traditional walls of IT and have spread throughout the business.
The chief marketing officer, the chief digital officer and chief innovation officer, to name a few, now control almost 40 percent of the traditional IT budget, according to analysts. This number is expected to rise as high as 80 percent over the next three to five years.
With today’s new desire for a rapid push toward a digital business, it is the perfect time to overcome the failed IT measurement models of the past and use a simple, accurate and data-driven approach to measuring IT.
The New IT Metrics
What are these new metrics that IT should be judged by?
Business capabilities divided by the cost of IT.
It’s math. It’s not rocket science.
This ratio should become the standard for measuring IT effectiveness. Just like miles-per-gallon (MPG) measure a car’s efficiency, dividing business capabilities by department costs becomes the MPG of IT.
It is essential to measure business capabilities consistently so the numbers don’t waver as components and competencies change over time. Some business capabilities are not necessarily numeric by nature, but a scoring index is possible. As long as you are consistent with how you score them, you can create numeric values and data models that can be governed.
For example, financial data from accounting and other systems of record can accurately create the costs/value of technology when translated into this “IT MPG” formula. Using data-driven metrics ensures reliability and legitimacy when measuring business capabilities.
When the measured outcome of these metrics is business capabilities, you can lay out how much business capability you are creating/supporting by investing in various parts of your technology. Once the discussion is framed in terms of business capabilities, a common language is established, a value system for your technology can be built, and dialog across the company will improve. When employees can understand how investments in technology are made in order to drive new or better business capabilities, discussions around buy/hold/sell technologies can be more productive.
The New Model of IT
Skeptics and naysayers argue that more measurements and deeper data points alone will help measure the business value of technology. For the last 20 years or so, this has been the approach, but it has had limited effectiveness. Metrics without a value system aren’t always an accurate image of what the business needs to move forward. By creating a value system by which you company measures the business capabilities of your technology investments, you can make better decisions about allocating resources.
Today is a perfect time for new thinking.
Business capabilities divided by IT costs is the proper metric.
This equation fits nicely into a corporate performance management dashboard. Senior leaders and board of directors can quickly understand the effectiveness of IT.
In the long term, companies can assess if they should share this metric with investors or use it as a valid benchmarking comparison with other companies.
New IT models provide agility, speed, digital capabilities and customer-centric approaches to companies looking to drive organic growth and profitability.
Now is a great time to measure the impact of IT in a new and meaningful way.
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