Does IT add value? – The unsolved riddle
Alexander Brenner: "Investing in IT can indirectly generate quantifiable effects in terms of process costs"
What value IT adds is hard to measure, show and communicate. But there are some practical examples and a structured approach CIOs can use to solve this riddle at least to some extent, Alexander Brenner of Roland Berger believes.
How much value IT adds has always been a hot topic. Despite the financial and economic crisis, businesses still focus on how they perform and add value when it comes to communicating externally, even more than on reducing costs. Even so, fewer than half of all businesses are aware how much value IT adds and are pushing the issue internally.
This is partly because a business's specialist departments conventionally focus only on costs, but also because it is very hard to measure, establish and convey precisely how much value IT adds. It may be a core function, but it often does not get the attention it really deserves.
IT demonstrably has a direct effect on how a business performs as a whole, not just in terms of costs, but also in terms of sales. It has even been shown that investing in IT saves on process costs and can offer a much better return than simply saving.
IT can influence a business's value in three different ways:
How much value IT adds has always been a hot topic. Despite the financial and economic crisis, businesses still focus on how they perform and add value when it comes to communicating externally, even more than on reducing costs. Even so, fewer than half of all businesses are aware how much value IT adds and are pushing the issue internally.
This is partly because a business's specialist departments conventionally focus only on costs, but also because it is very hard to measure, establish and convey precisely how much value IT adds. It may be a core function, but it often does not get the attention it really deserves.
IT demonstrably has a direct effect on how a business performs as a whole, not just in terms of costs, but also in terms of sales. It has even been shown that investing in IT saves on process costs and can offer a much better return than simply saving.
IT can influence a business's value in three different ways:
- Efficient IT: Optimizing infrastructure and streamlining the project portfolio reduces operational IT costs, selective outsourcing reduces tied-up capital.
- Better management of demand for IT services by company departments: Acts on infrastructure (by optimizing SLAs, for example) and projects. However, improving demand management to add value can only be done in partnership with the departments themselves.
- Effects on a company's core business: Using IT optimally cuts process costs in specialist departments, reduces tied-up capital and/or increases revenue.
Little academic help available
The main way of adding value – using IT to optimize core business – is also the most difficult to achieve. There is no quick fix here: academic publications suggest a wide range of approaches for measuring and showing the value IT adds. How often the subject of "measuring and creating added value through IT" comes up in publications shows this is still very much an "unsolved riddle".
There are examples from the real world, however, that show this riddle can be solved at least in part. A leading hardware manufacturer recently announced it was changing its worldwide supply chain, for example, the aim being to carry many more products by sea in future. Conventionally, high-tech products are often carried by air, with sky- high costs as well. Things were going to be different now. From now on, the proportion of products for private customers shipped by sea would be increased from 20% to around 70%, or three million units.
The first results are already manifesting themselves. Value was up by 15 percentage points on the year before. But the only way they could send more by sea was if the manufacturers could plan their sales better. Today's sophisticated CRM and business analytics applications can help businesses move on from the traditional build-to-order model and focus more on making units in advance, without damaging their brand or benefits to their customers.
This shows clearly how investing in IT can indirectly generate quantifiable effects in terms of process costs.What this means for CIOs
What can we conclude from this generally? CIOs face major challenges: just how much value IT adds to day-to-day business is hard to establish, and it is the individual company departments that are in charge of investing.
There is no such thing as an IT budget, in fact, just a bundle of IT cost accounts. Which leaves a dilemma: while many businesses see IT as a standard product they can outsource, it is under the same pressure on costs and sales as departments themselves.
There is only one way to proactively justify IT spending: by quantifying how much value it adds to business processes. If in-house IT departments fail to do so, they will lose their raison d'être and end up as slimmed-down RTOs (retained organizations).Identifying value drivers and using them
There is no quick fix here. Our experience shows a structured, three-step approach provides a good basis for identifying the potential value concealed in IT and using it:
The main way of adding value – using IT to optimize core business – is also the most difficult to achieve. There is no quick fix here: academic publications suggest a wide range of approaches for measuring and showing the value IT adds. How often the subject of "measuring and creating added value through IT" comes up in publications shows this is still very much an "unsolved riddle".
There are examples from the real world, however, that show this riddle can be solved at least in part. A leading hardware manufacturer recently announced it was changing its worldwide supply chain, for example, the aim being to carry many more products by sea in future. Conventionally, high-tech products are often carried by air, with sky- high costs as well. Things were going to be different now. From now on, the proportion of products for private customers shipped by sea would be increased from 20% to around 70%, or three million units.
The first results are already manifesting themselves. Value was up by 15 percentage points on the year before. But the only way they could send more by sea was if the manufacturers could plan their sales better. Today's sophisticated CRM and business analytics applications can help businesses move on from the traditional build-to-order model and focus more on making units in advance, without damaging their brand or benefits to their customers.
This shows clearly how investing in IT can indirectly generate quantifiable effects in terms of process costs.What this means for CIOs
What can we conclude from this generally? CIOs face major challenges: just how much value IT adds to day-to-day business is hard to establish, and it is the individual company departments that are in charge of investing.
There is no such thing as an IT budget, in fact, just a bundle of IT cost accounts. Which leaves a dilemma: while many businesses see IT as a standard product they can outsource, it is under the same pressure on costs and sales as departments themselves.
There is only one way to proactively justify IT spending: by quantifying how much value it adds to business processes. If in-house IT departments fail to do so, they will lose their raison d'être and end up as slimmed-down RTOs (retained organizations).Identifying value drivers and using them
There is no quick fix here. Our experience shows a structured, three-step approach provides a good basis for identifying the potential value concealed in IT and using it:
- Producing and detailing a value driver tree specific to the business – usually present in business strategy/development
- Assessing IT as a lever for individual value drivers and detailing the effects and sensitivities as part of a business case
- Prioritizing and approaching value driver objects systematically where IT can add most value, based on the business case produced
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