Eight Steps to Developing a Value-Driven IT Organization

Whats the difference between an IT organization thats a business partner delivering strategic value, and one thats a cost center of unknown or unrealized benefit?

The answer can often be traced to the decision-making processes and communication skills of the executives involved.

Led by Alternatives

An alternatives-led CIO begins with a specific activity or action item, and then focuses on the consequences of various options. A preoccupation with cost-cutting or, specifically, with total cost of ownership (TCO) typifies an alternatives-led organization. By its nature, TCO involves pursuing alternatives without guidance from a set of clearly defined business objectives, and then after the fact making a business case based on the results: If desktop standardization reduces costs, the reasoning goes, then cost reduction must be important to the business. Ultimately, the tactical tail wags the strategy dog.

Whats worse, such an approach can hurt business performance. Pursuing cost reduction as an end-all goal can encourage practices such as continual vendor switching and delaying replacement of PCs, which can degrade service quality to unacceptable levels.

To take another example, if an alternatives-led CIO were charged by the executive board to explore the potential of CRM applications, he or she would likely research and report on the relative features and capabilities of different CRM systems, rather than examine the business issues involved.

Driven by Value

Contrast this with a value-driven IT organization, which generates various options on how IT can best deliver optimum business value. The CIO is actively involved in the executive boards decision-making process, and develops plans based on a clear understanding of fundamental business objectives which can include improving communications with customers, defining multiple customer segments, improving service targeting, and cross-selling.

So, if asked for information on CRM applications, a value-driven CIO would begin by defining the problem to be solved in business terms, and then formulating a compelling case for whether or not a CRM system actually addresses business goals.

Transforming the Business

One key to a value-driven IT management strategy is the development of a common language between business and IT. Shared terminology provides a vocabulary to discuss future goals and to define meaningful measures of IT value, and enables IT and business managers to share decisions on issues critical to their organizations future success. By defining such areas of focus or areas of concern, a framework can be built to monitor ITs value contribution either as a developer of new channels, as the basis for improving business efficiency, as a provider of management information, or as a tool to enhance customer service.

Mutual understanding and clear communication between IT and business can enable a strategic initiative that literally transforms the business. Consider the case of the the UK Automobile Association (UKAA), which has evolved from a traditional roadside assistance association into a leading UK insurance company that also provides financial, travel and planning services all the while maintaining its lead in roadside assistance.

In the 1990s the UKAA formulated the following value proposition: Member renewal rates were highest among long-term customers. Increasing renewal rates among new members would therefore have a significant and lasting impact on revenue.

Working from this premise, the organization leveraged a highly strategic asset detailed information on motorists and evaluated a variety of alternatives based on specific business requirements. The result was the delivery of information to the sales and marketing group that was used to segment customers based on specific criteria and support telesales, targeted mail shots, and other promotional activities.

In a value-driven organization, performance management mechanisms such as chargeback, service catalogues, or balanced scorecards allow the business to understand the cost implications of new IT-driven initiatives, and thereby clarify ROI considerations. For example, by understanding the business objectives driving its IT investment, the UK Auto Association was able to monitor business performance over time, evaluate the contribution of the IT system, and assess whether the benefit was commensurate with the IT investment.

Eight Steps to Value

The benefits of value-driven IT management are apparent. What exactly, then, can an alternatives-led CIO do to develop the characteristics of a value-driven IT organization?

The process of transformation can be broken down into four stages and eight specific steps:

Stage One: Define the Context

• Step 1. Define the strategic context within which IT operates what is ITs role, what is level of business dependency on IT, what is the attitude to innovation, what is the investment balance between supporting and growing the enterprise
• Step 2. Assess the IT strategies of your competitors understand your competitors key strengths and unique capabilities; identify what can be imitated, utilized, and exploited

Stage Two: Build the Foundation

• Step 3. Get the basics correct provide cost efficient service at adequate quality, deliver quality solutions on time and to budget
• Step 4. Define service levels, build a service catalogue, use chargeback as a framework for constructive dialogue on future investment, not purely as an invoicing system

Stage Three: Construct a performance management framework

• Step 5. Develop quantitative linkages between business activity and IT volumes. Put business line management in a position to predict the impact of business decisions on IT.
• Step 6. Using the framework aid business line management to become accountable for future IT investment.

Stage Four: Develop the Management Process

• Step 7. Build a relationship between key people in both Business and IT to quantitatively review the business and IT performance
• Step 8. Repeat and verify the process regularly

The transition from alternatives-led to value-driven IT is a journey rather than a decision. It fundamentally requires building up credibility with the business, establishing a more open dialogue, and becoming increasingly engaged with the business in making decisions about IT investments and deployments.

Nigel Hughes is Group Service Leader for IS Strategy and Value of IT for Compass (www.compassmc.com).