Using the Value Driver Tree to Align IT with Business Goals

Eric Hwang

and Kathy Rudy

All firms seek to build shareholder value. They do this by managing three key drivers: Revenue growth, margin improvement, and increased capital efficiency. Each of these generic drivers is a function of various, more specific drivers that reflect industry characteristics and market needs.

For example, for an oil company, a key measure might be the price of a barrel of oil, while customer retention rates would be critical in the financial services industry. Drilling down deeper, value drivers that are the domain of specific functions within the organization can be identified.

By constructing a Value Driver Tree, its possible to link specific, granular metrics of operational performance to strategic organizational goals. In the case of IT, this capability makes it possible to effectively demonstrate IT contribution to strategic business goals.

Establishing Links and Priorities

Once basic value drivers are identified, sensitivity and manageability analyses can help prioritize actions by determining which factors will have the most impact on improving performance. Specifically, stakeholders must address two key questions:

• What factors have a significant impact on the value of the firm?
• What factors can we influence or manage?

In other words, by identifying the factors that are most important, and of those, the ones that can be most significantly affected by actions, an organization can maximize the positive impact of improvement initiatives, and accurately track the effectiveness of those initiatives.

The Lost Customers Problem

ACME Insurance has a problem the company is losing customers at an increased rate, and its not clear why. Because lost customers and new customers directly influence revenue growth, this problem directly concerns the CEO, because his number one priority is to increase shareholder value.

To address the situation, ACMEs management team has assembled a cross-functional team to undertake a value driver tree exercise designed to identify specific actions that various functions within the organization can undertake to improve customer retention numbers.

ACMEs CIO recognizes an opportunity to use a value tree exercise to demonstrate and enhance ITs potential contribution to business results. Through a detailed analysis of the # of lost customers measure, she will develop IT-related branches of a value tree that link lost customers to specific measures of IT operational performance. As the branches of the value driver tree move further and further to the right, the CIO will work with her team colleagues to identify areas where IT can play a role in other functional areas. She will also identify specific value drivers unique to IT that can have a significant and measurable impact on addressing the lost customers problem.

Through this process, she will show the CEO why IT is important to the business.

Sensitivity and Manageability Factors

As a first step, the CIO examines existing customer data and identifies three factors that influence lost customers Death, Inability to Pay Premiums, and Disappointment.

The next step is to determine if and how IT can affect the various factors that cause customers to be lost. Through a Sensitivity and Manageability analysis, the CIO determines IT cant do much about customers who die or who are unable to pay the premium. However, Disappointment can potentially be influenced by IT in a variety of ways.

The CIOs next step is to isolate Disappointment as a driver of lost customers. Here again, the CIO applies manageability and sensitivity analyses to determine which drivers IT can influence. In this instance, Bad Service is a factor that is both highly sensitive as well as manageable. Rep Change and Competition, meanwhile, while highly relevant to, perhaps, the HR and Marketing functions, are not directly influenced by IT. At this point, the CIO focuses on identifying IT performance measures that can have the most influence on improving bad service.

At the next level of granularity, the CIO identifies Poor Customer Needs Analysis and Bad Information/Communication as IT-influenced contributors to Bad Service. Here, the analysis can become a collaborative process, involving, for example, the VP of Customer Service, who identifies factors such as lack of training of reps with IT systems, or high rep turnover, as personnel-related drivers of Bad Service on which IT has an indirect influence.

The collaborative nature of the initiative helps align IT measures with broader business objectives.

When the Value Tree is completed, the performance of IT systems can be connected directly to bad service, which in turn affects customer retention, which in turn is tied to increased shareholder value. As such, the linkage between IT and business strategy is established.

Through the Value Tree exercise, the CIO can demonstrate how IT investments can result in specific, measurable improvements in the quality of customer information, and how these improvements directly impact business goals.

As for driving actions on the part of the CIO, the value tree can identify the following steps as priorities:

• Improve knowledge of customer requirements/preferences
• Provide better information to customers

For the CEO, the exercise can produce a specific metric to monitor on, say, a monthly basis: the percentage of customers lost due to disappointment with poor service. The CEO can now quantify in terms of customers the ROI of the companys IT investment.

Summary and Benefits

For a CIO, a central benefit of a value tree exercise is to, literally, connect the dots between business issues and IT operations. The methodology allows the CIO to communicate with executives and business units in business terms, show the value of IT to the business, and identify ownership and reporting responsibilities within the organizational hierarchy.

Specific benefits of the value driver methodology include the following:

• Build consensus across multiple disciplines about whats important: Since the value driver tree is independent of existing hierarchical structures, the methodology enables firms to identify and document issues that are key to the success of the entire organization, and not confined to just one department.
• Prioritize investments and initiatives: The sensitivity and manageability analysis enable firms to define priorities and identify the high impact drivers. These drivers will then provide an objective basis for future investments and initiatives.
• Highlight redundancies and gaps in information flows: Since many key drivers cross multiple functions, the process can identify issues that would not normally have been apparent. For example, existing customer databases may not be linked between departments and require separate updates of the same information.
• Serve as a comprehensive training vehicle for new employees at all levels: New employees can use the value driver tree to better understand what drives the business and the factors that impacts its growth.

Eric Hwang is a consultant and Kathy Rudy is a senior consultant in Compass Naperville, IL, offices.