Accounting for IT Value

How do you account for the value IT brings to the business? This is a common question in today’s organizations, and it is fueled by concern about the high costs of information technology. It is now complicated by IT being a fundamental part of all businesses. IT is a “must have” feature of modern business, but it is also a “must count” feature of fiscal probity.

Accounting for IT value means knowing enough about IT costs and related business profess performance to ensure that technology dollars are going where they do the most good.

At an enterprise level, business and IT functions are now essentially joined at the hip. Because IT can enable many important business results, both its costs to the business and its advantages to the business can be considerable. Today’s IT and business executives are faced with the challenge of keeping IT costs down while keeping IT-dependent business processes at top-level performance.

The real value of IT to an enterprise consists of the business functions it enables the organization to conduct well for its business advantage. What organizations must know in their pursuit of IT value are the results of operational functions enabled by and enhanced by IT capabilities. Tracking IT costs and IT-supported performance provides ongoing knowledge of how IT value is being created, lost, or underused.

Why Track IT Consumption?

Move to IT Consolidation

As businesses strive to continually rationalize and refine their business operations, there is a growing preoccupation with taming the proliferating complexity of IT infrastructure as new capabilities and requirements are added. Streamlining hardware operability is becoming an important way to better use and manage IT resources.

For those who have not yet embarked on IT consolidation, the need for data on how IT is being used and what it costs is critical. For those who have undertaken IT consolidation, there is another side to the story. Consolidating IT services can make IT cost accountability more complicated and less definable. As IT services are centralized through consolidation, business units nevertheless must function as separate businesses that share IT resources; therefore, it becomes increasingly difficult to know who needs what and how much and who uses what and how much.

Demand for Cost Transparency

At the same time, business unit managers are demanding better IT cost transparency so they can make better decisions to take their business functions forward (for example, to achieve more responsiveness or to know what IT capabilities, at what cost, could increase their competitiveness). Business managers want cost information that will give them a good basis to make the tradeoffs that are likely between IT service and IT costs, and they want to know how much difference these tradeoffs make to their success – even distinctions within the IT expense envelope.

Better Planning for Business Directions and IT Investments

Precise knowledge of IT consumption patterns and costs can provide a basis for organizations to determine where they want to go next, whether in terms of a new business strategy or new IT investments. In the short term, too, such data can help to develop the best balance between two necessary components of a key business process (e.g., investment in people and investment in IT capabilities).

If consumption data is used as a business tool to track costs, it can be used for improving service where it matters and cutting costs where possible. This information can make all parts of the organization aware of their role in the corporate IT cost-benefit balance.

Issues To Consider

• Develop tracking parameters with input from key affected functions. It is unlikely that one functional group will have the visibility into all parts of the organization that is required for a solid model for measurement. A business team of key functions in the organization hammers out the tradeoffs required to do what needs to be done and then to develop appropriate metrics.
• Model service costs on key metrics highly correlated to cost drivers. To monitor consumption wisely, the business team should identify key factors that make a significant difference in usage and cost. If among 20,000 users, for example, most groups incur the same costs for licenses and people, then cost differences might stick out for those that consume a great deal of storage. This becomes a factor that drives IT service delivery costs.
• Make reporting meaningful to all constituents. Business service providers need to provide cost transparency for customers, but in a way that relates to the reason they are buying the service in the first place. “Fault in router” has less meaning for them than “orders issued from xx onward stalled until yy.”

Why Track (IT-enabled) Business Process Performance?

Close the Loop Between IT Costs and Business Outcomes

If you don’t look, you don’t know. IT is important for process performance, and the behavior of people in business processes is important for IT usefulness; both IT usage/costs and process performance, therefore, should be monitored. How well do the technologies support the process? How well do people use the technologies? How do you know unless you monitor the performance of critical processes?

Processes Are Where You Make Money

Business processes create new products and services that will satisfy customers and create profits for shareholders. According to David Norton, co creator of the Balanced Scorecard, “the right question is, what’s the value of my process?” Businesses can track the outcomes of various key processes (e.g., product development or customer management) because these processes directly impact both revenue and losses.

Manage Resources Better

Successful organizations always need to find adaptable ways to increase returns on their investments and expenses while minimizing known and unknown risks. A key way to juggle this balance is through careful management of the resources associated with both risks and returns over which the organization has some control. Then, the most reliable basis for such a balance is to track both IT costs and the business performance related to those costs.

Organizations that do so can take advantage of the monitoring data to undertake interventions to improve process performance, either through adjustments to IT capabilities and services, or through process adjustments that improve the way people work with technology and conduct business processes.

Issues To Consider

• Focus on what needs to happen. All business processes serve particular strategic ends, which can include product development, customer service, sales growth, or claims or order processing. What characteristics of that process would spell success for the organization? In the case of new IT capabilities applied to a process, what benefits (usually identified in the IT project’s business case) should accrue? For ongoing processes, what risk exposure could develop?
• Identify key performance indicators that answer, how would you know? Finding the right markers for desired business process performance is often a challenge for those charged with monitoring it. If a member of a business unit that was expected to improve as a result of a new or upgraded IT function were asked, “How would you know (if the IT function has made a difference)?” the business person would have to identify specific quantifiable markers beyond “better.” In this exercise, it is especially important for P&L managers to crisply define what they want IT to do.
• Connect the dots. Many specific functions make up identifiable business processes. How could one part affect another part, either positively or negatively? More than that, how could a particular process, by meeting its own performance objectives, undermine another process? For example, if logistics keeps to a target of sending orders only in fully loaded vehicles, how could that impact a sales process that promises quick delivery? The performance tracking process needs an internal logic.

Benefits

Tracking both IT costs and IT-dependent business performance provides valuable information for the future so that organizations can be in a better state of readiness to meet whatever business or economic conditions prevail. Organizations can use this data to closely manage enterprise activities to strategic objectives. They can:

• Focus on net benefits to the organization by comparing cost and usage data to related business process performance data, so one part does not unnecessarily compromise another part
• Plan for future IT-enabled directions more confidently on the basis of data that exposes costs and usage patterns, process outcomes, dependencies and non-IT factors that affect performance