Beyond Benchmarking: The Role of IT Diagnostics in High-performance Businesses

By Rich Chang,Brian R. Harris

and Mervyn G Maistry

When a CEO says to the CIO “I just got back from a conference and we’re spending too much on IT,” a common response is for the CIO to refer to a benchmark analysis to defend the IT budget.

Accenture believes both the question and the answer will most likely lead executives down the wrong path.

Here’s why: Senior executives are increasingly concerned with how they can get maximum business value from the money they spend on information technology. The immediate reaction revolves around how best to quickly diagnose issues and deliver results. For many, the quickest approach is to turn to benchmarking.

Benchmarking IT spending as a percent of revenue (or by headcount, desktop or other general measure) has long been considered a quick way to get to actionable recommendations to increase the value delivered by information technology. However, Accenture Strategic IT Effectiveness (SITE) professionals maintain that, while benchmarking is sometimes informative, it is seldom actionable because it does not provide a true picture of the effectiveness or value of IT spending and investments.

There are several reasons for this:

• The implied question in benchmarking is “How much am I spending on information technology?” Rather, the critical questions should be: What value am I receiving from IT? What value should I be receiving from IT? How do I get more value from IT?
• Accenture research has shown little correlation between IT spending as a percent of revenue and positive business outcomes.
• Relying on benchmark spending data can, in fact, be misleading, as commercially available financial benchmarks do not allow “like for like” company comparisons.

In addition to not providing a picture of how effectively an IT budget is being spent, an additional significant risk of managing information technology as a percentage of revenue is that this can lead to a capability gap. When revenues are down, companies seek rapid cost cutting initiatives and often cut strategic or discretionary spending first, shifting the balance to operational or non-discretionary areas what is sometimes called “keeping the lights on” spending. This approach has the unfortunate consequence of ultimately delaying or eliminating the technology initiatives that would underpin new business value and revenue growth.

Accenture analysis shows that one of the differentiators of the high-performance business is the ability to link IT investments to the creation of business value. Accenture believes high performance businesses prefer more comprehensive IT capability diagnostics either as an addition or a substitute for benchmarking. Unlike traditional IT benchmarking, an IT capability diagnostic provides an understanding of how to better align discretionary IT investments with business strategy and identifies actionable ways to drive business value for the enterprise.

An IT investment and spending diagnostic

Accenture’s SITE research indicates that high performance businesses allocate IT spending in a ratio of 45 percent discretionary and 55 percent non-discretionary. In a high-performance business, CEOs and CIOs focus on reducing non-discretionary IT spending and redirecting the freed spending to fund powerful new strategically and operationally high-value discretionary investments. High performance businesses proactively identify and stop investments that will not produce the expected business value.

Accenture has developed a number of unique IT capability diagnostics that focus on the value delivered rather than benchmark how much is spent. The Accenture IT Investment and Spending Diagnostic, for example, evaluates current discretionary and non-discretionary spending. More importantly, the diagnostic provides a portfolio view of discretionary spending, showing when spending choices are made and how well aligned and effective those choices are with respect to a company’s key business imperatives or objectives. It has been used successfully at a number of companies to help achieve greater business value from their IT budgets

The diagnostic is a powerful tool to:

• Help senior executives balance and redirect spending to projects that create value,
• Stop projects that do not create value and
• Systematically identify where to cut costs in non-discretionary spending.

When properly applied, this diagnostic will culminate in high-value initiatives to help meet business growth targets.

Eye-opening findings

Our experience shows that the Accenture IT Investment and Spending Diagnostic can lead to some eye-opening findings. For a healthcare services company, for example, the diagnostic uncovered that only 16 percent of a company’s IT budget was truly discretionary and very little was invested in innovation. The benefits of running the diagnostic for this company included:

• Helping senior executives establish the portfolio allocation of discretionary investments to guide investment management overall and to prioritize projects.
• Quantifying why senior executives had been dissatisfied with the company’s IT investments.
• Developing a new “portfolio” approach to IT investments by breaking down investments across discretionary categories.
• Providing an on-going mechanism for the business and the IT department to agree on priorities based on discretionary/non-discretionary allotments.

Another aspect of the IT Investment and Spending Diagnostic determines which current or planned discretionary IT projects are related to a company’s top three business priorities and then figures out what percentage of the total IT discretionary budget supports those priorities. The results can be startling. We see a range from 20 percent to 75 percent discretionary spending on the top three priorities.

Taking into account industry sector, company objectives and competitive forces and other factors, we believe there are optimum portfolio allocations of discretionary investments across several categories such as research and development and strategic, enabling and sustaining programs. While the allocation strategy will differ by company, overall, our experience shows that 60 percent to 70 percent of discretionary IT spending should go toward furthering the top three business priorities to achieve optimal results.

Other IT diagnostics

IT Capability Assessment: With revenue growth targets set, an IT capability assessment identifies gaps in capabilities and indicates the improvements required to attain those goals. The diagnostic examines a company’s IT systems across an enterprise using Accenture’s World-class IT Framework and evaluates how IT supports selling, fulfillment, customer care, financial management , human resources and other functions required to manage an enterprise. Our experience makes it clear that the key value driver is not benchmarking against best practices or “best” software but how well information technology enables growth.

Accenture conducted an IT Capability Assessment with one of the United Kingdom’s largest grocery retailers. The result was an improved ability to proactively manage IT spending with a savings of $35 million. The assessment also identified significant IT-driven improvements to the supply chain, merchandise optimization and operational effectiveness.

External Pricing Analysis: We believe that in order to reduce non-discretionary spending, it is important to compare low cost-sourcing alternatives, which is why Accenture developed Source/1, a comparative data analysis tool used specifically to evaluate IT infrastructure outsourcing. You may decide not to move forward with alternative sourcing arrangements, but at least you will have the information on which to base that decision. Source/1 enables senior executives to answer the question “If I were to outsource my company’s IT infrastructure, what would I pay?” then compare the answer to internal costs to make a fact-based outsourcing decision. One financial services company we worked with discovered a $35 million savings over five years by using a different provider.

IT Balanced Scorecard: CIOs often struggle to clarify the value information technology delivers to both senior management and their many other stakeholders within the company. Accenture’s experience has shown that an IT Balanced Scorecard, which includes financial and non-financial IT measures, can change behavior to align the IT organization’s goals and objectives and drive accountability for results. Accenture used the scorecard as part of our work with a global industrial company on an IT governance and transformation project to identify opportunities for cost reduction and to improve IT performance across geographies. The results included a cost reduction of 10 percent in the first year while maintaining or improving service, including providing consistent and reliable capability across locations in Europe and North America.

Companies aspiring to achieve high performance should consider going beyond traditional information technology return-on-investment metrics by taking into account the company’s specific financial and operating context. Diagnostic tools give senior executives a common language and options with which to assess and create IT-enabled value.

About the authors

Rich Chang, partner-Strategic Information Technology Effectiveness (SITE), Accenture, has global responsibility for the company’s Financial Services SITE practice. He has over 19 years of consulting experience, during which he built and led Accenture’s enterprise architecture practice for eight years. He specializes in developing business-aligned IT strategies, defining and managing broad programs to increase the effectiveness of IT capability, and the strategy, planning and development of enterprise architectures.

Brian R. Harris, senior manager-Strategic IT Effectiveness, Accenture, has over 16 years of experience in technology and business consulting specializing in transforming IT capabilities in the financial services and health services industries. He is a global practice leader for Accenture in the areas of IT spending analysis, benchmarking and value measurement, and IT balanced scorecards and dashboards.

Mervyn G Maistry, senior manager-Strategic IT Effectiveness, Accenture, specializes in IT organizational design, governance and IT outsourcing. Areas of interest are the strategic value of information technology and shareholder value creation. He has over 14 years of strategy and IT experience with a healthcare and investment banking background.

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