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It business value whitepaper

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IT decision makers need to start managing based on value that IT delivers if they want to be considered true business partners. We present a tool that provides business value intelligence that allows ...

IT decision makers need to start managing based on value that IT delivers if they want to be considered true business partners. We present a tool that provides business value intelligence that allows CIOs and IT directors to quickly pick the right projects to be executed, steer projects and programs more pro-actively and optimize portfolio management. Interested? Contact us via +31 20 737 05 37 or info@morganclark.com.

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    It business value whitepaper It business value whitepaper Document Transcript

    •     Whitepaper IT  Business  Value:  the  Key  Business  Intelligence  to  Manage  the  IT  Organization   Willem  van  ‘t  Noordende  and  Amit  Manniesing,  Morgan  Clark  &  Company   September  2011  IT  decision  makers  need  to  start  managing  based  on  value  that  IT  delivers  if  they  want  to  be  considered  true  business  partners.  We  present  a  tool  that  provides  business  value  intelligence  that  allows  CIOs  and  IT  directors  to  quickly  pick  the  right  projects  to  be  executed,  steer  projects  and  programs  more  pro-­‐actively  and  optimize  portfolio  management.    Companies  are  producing  increasingly  more  business  intelligence,  but  are  they  collecting  the  right  data  to  effectively  manage  their  IT  organization?    Most  companies  gather  an  abundance  of  operational  intelligence  on  the  uptime  of  their  infrastructure,  the  uptime  of  business  applications,  the  number  of  support  requests  dealt  with,  the  number  of  changes  implemented,  etc.    although  few  of  these  companies  also  measure  if  these  systems  deliver  any  real  business  value.  This  reinforces  the  typical  perception  of  IT  as  being  a  cost  center,  wasting  budgets  on  projects  that  are  not  delivered  in  time  and  do  not  add  value.  This  does  not  mean  that  gathering  operational  intelligence  is  irrelevant;  rather  that  this  should  be  left  to  operational  managers  so  IT  directors  can  focus  more  on  the  high  level  objectives  of  their  organization.  As  the  IT  organization  matures,  business  value  will  become  an  increasingly  important  concept.  In  this  article  a  practical  approach  to  gathering  intelligence  on  the  business  value  of  IT  and  managing  IT  organizations  based  on  these  results  will  be  presented.  This  article  consolidates  elements  of  valuation  methods1  to  reach  a  recommendation,  meeting  the  objectives  of  this  article:  defining  the  key  business  intelligence  for  IT  business  valuation  and  proposing  a  practical  and  easy  to  implement  valuation  method.  First,  the  concept  of  IT  business  value  and  the  defining  business  intelligence  will  be  discussed,  followed  by  ways  to  measure  business  value.  In  conclusion,  recommendations  will  be  provided  to  make  intelligence  on  IT  business  value  actionable.  Defining  IT  Business  Value  (ITBV)  The  in  this  article  used  definition  for  IT  business  value  is:   “The  sum  of  the  quantitative  and  qualitative  benefits  that  any  form  of  Information  and   Communication  Technology  offers  to  the  business.”    Based  on  this  definition  a  number  of  facets  of  business  value  –  which  are  in  effect  categories  of  business  intelligence  –  can  be  distinguished.  Each  of  these  can  be  divided  into  a  number  of  metrics,  which  are,  depending  on  the  type  and  industry  of  the  company  and  the  nature  of  the  areas  to  measure,  applicable.  For  instance,  an  industrial  production  firm  will  benefit  from  production  automation  that  can  be  measured  by  metrics  such  as  the  amount  of  scrap  or  production  time,  while  a  financial  services  company  will  rather  implement  a  CRM  system,  of  which  the  value  can  be  measured  by  increased  revenues  through  cross-­‐selling.  The  following  overview  presents  a  (non-­‐exhaustive)  list                                                                                                                          1  There  are  a  number  of  known  methodologies  to  measure  the  business  value  of  IT  (Symons,  C.;  2006;  Measuring  the  Business  Value  of  IT),  such  as  the  Business  Value  Index  (BVI),  Total  Economic  Impact  (TEI),  the  
    •     Whitepaperof  categories  of  business  intelligence  to  measure  IT  business  value.  Many  of  these  are  adapted  categories  based  on  the  value  dials  on  which  Intel’s  Business  Value  Index  is  based2:   -­‐ Financial  value.  In  order  to  avoid  comparing  tangible  (financial)  and  non-­‐tangible  benefits   this  category  needs  to  be  separated  from  the  other  values.  Further  in  this  article  the  way  to   use  financial  and  more  qualitative  metrics  in  a  coherent  fashion  will  be  discussed.  Financial   value  covers  all  measurable  monetary  value  of  the  benefits  that  IT  delivers.  In  short,  this  can   be  cost  saving  or  avoiding  or  revenue  increasing,  naturally  there  are  many  forms  of  those.   -­‐ Improvements  in  product  quality.  Depending  on  the  industry  of  the  company  and  nature  of   the  IT  application  the  following  metrics  apply:   o Increase  in  customer  satisfaction.  Customer  satisfaction  needs  to  be  measured   consistently  preferably  by  an  external  party  to  avoid  having  a  conflict  of  interest.     o Decrease  of  the  number  of  support  requests  or  product  returns.   -­‐ Improvements  in  operational  efficiency.  Again,  the  specific  metrics  are  largely  depending  on   the  type  of  industry  and  the  nature  of  the  IT  application.  The  most  important  metrics  are:   o Increase  in  employee  productivity.  Although  complex  to  implement,  there  are   several  companies  that  have  implemented  employee  productivity  measuring   successfully.     o Reduction  of  the  number  of  defects.   o Decrease  of  the  time  to  market.  The  more  efficient  the  production,  distribution,   marketing  and  training  process  is,  the  faster  a  product  can  be  ready  for  sales.     o Increase  of  production  unit  uptime.  This  can  be  cost  saved  because  of  reduced   factory  downtime  but  also  increased  revenues  because  of  web  shop  uptime  for  an  e-­‐ commerce  company.   o Reduction  of  the  number  of  days  of  inventory.  IT  offers  excellent  tools  to  facilitate   Just-­‐In-­‐Time  (JIT)  deliveries.   -­‐ Risk  avoidance.  This  benefit  is  delivered  by  systems  that  monitor  security,  processes,   systems,  etc.  to  avoid  costly  errors  or  disastrous  situations.  There  is  one  generic  metric:  Total   cost  avoided.  This  is  calculated  by  the  cost  of  a  risk  multiplied  by  the  probability  of  the  risk  to   occur.   -­‐ Social  improvements.  This  group  of  benefits  describes  the  improvement  of  the  contribution   of  the  company  for  society.  Popular  metrics  are  the  reduction  of  (direct  or  indirect)  CO2   emissions  and  the  reduction  of  the  amount  of  waste  produced.   -­‐ Business  agility.  This  group  is  based  on  Real  Options  Value  theory  (Oracle  Corporation   [2010])  and  defines  how  well  and  how  quickly  an  organization  is  able  to  adapt  to  changing   circumstances.  In  an  agile  value  chain,  IT  systems,  business  processes,  and  information   sources  must  be  set  up  such  that  they  offer  multiple  options  to  new  (and  sometimes,  yet  to   be  defined)  requirements,  rather  than  just  supporting  the  old,  well  defined  ones.  The  main   metric  here  is  the  reduction  in  time  and  impact  to  implement  changes  in  the  business   process.                                                                                                                          2  Intel  Corporation:  1.  “Using  an  IT  business  Value  Program  to  Measure  Benefits  to  the  Enterprise”,  Carty,  M.M.  and  Lansford,  R.  [2009];  2.  “Managing  IT  Investments”,  Intel  White  Paper  [2003].    
    •     Whitepaper The  data  revealed  by  the  above  metrics  is  often  available,  although  hardly  ever  is  this  data   compiled  into  true  business  intelligence,  mostly  because  it  is  scattered  across  many  systems.  The   next  sections  will  discuss  how  the  retrieved  intelligence  can  be  used  to  measure  the  business   value  of  IT.  How  to  Measure  IT  Business  Value  As  demonstrated  in  the  above  section,  there  are  two  dimensions  of  IT  business  value:  the  financial  or  tangible  benefits  and  those  that  are  non-­‐tangible.  The  financial  benefits  are  best  assessed,  using  traditional  methods  based  on  ROI  (Return  On  Investment),  DCF  (Discounted  Cash  Flow),  EVA  (Economic  Value  Added)  and  NPV  (Net  Present  Value)  calculations.  In  addition  to  these  traditional  methods,  the  metrics  presented  above,  need  to  be  gauged  and  consolidated  into  a  single  business  value  indicator.  This  approach  roughly  follows  the  Business  Value  Indicator  methodology  successfully  used  by  Intel  for  more  than  a  decade.  For  each  of  the  metrics  introduced  in  the  previous  paragraph  a  conversion  needs  to  be  made  by  a  team  of  experts,  further  referred  to  as  Business  Value  Intelligence  team.  The  Business  Value  Intelligence  team  converts  the  metrics  to  a  simple  scale  from  -­‐10  to  10,  where  -­‐10  indicates  maximum  negative  value,  0  neutral  business  value  and  10  maximum  business  value.  Further,  depending  on  the  industry  of  the  company  and  the  nature  of  the  IT  investment  this  team  needs  to  weigh  the  contribution  of  each  metric  to  the  index.  The  sum  total  of  the  score  of  all  weighed  metrics  will  be  the  business  value  index.  The  methodology  described  here  uses  elements  of  the  Balanced  Score  Card  method  and  Intel’s  Business  Value  Index  framework.      
    •     WhitepaperThere  are  two  major  challenges  in  the  above  methodology  that  need  to  be  addressed:  accuracy  of  business  intelligence  and  the  cost  of  measuring  IT  business  value.  Data  accuracy  needs  to  be  assured  by  the  Business  Value  Intelligence  team.  This  means  that  the  team  needs  to  be  given  enough  resources  and  political  power  to  deploy  data  enhancement  initiatives.  The  second  challenge  is  the  risk  that  the  cost  of  measuring  IT  business  value  exceeds  any  possible  benefits.  In  order  to  avoid  this,  focus  should  be  put  on  high  impact  projects  and  a  clear  and  sensible  prioritization  of  projects  to  be  measured  needs  to  be  made.  Small  investments  should  be  bundled  into  larger  programs  as  much  as  possible  to  create  a  coherent  IT  strategy  with  efficient  value  measurement.    The  Business  Value  Intelligence  team  The  Business  Value  Intelligence  team,  as  referred  to  in  the  previous  section,  is  a  new  organizational  entity  that  needs  to  be  setup  to  handle  the  following  tasks:   -­‐ Manage  corporate  IT  business  value  metrics  and  ensure  they  stay  current.  Further,  adjust   those  based  on  lessons  learned  from  previous  measurement.  This  could  include  modifying   metrics  that  are  initially  qualitative  to  become  more  quantitative  the  more  experience  the   team  gathers.   -­‐ Assist  business  owners  and  IT  managers  in  establishing  business  cases  for  IT  projects.  The   team  needs  to  ensure  business  cases  include  all  IT  business  value  generated,  based  on  the   metrics  defined  above.  Further,  the  business  case  should  point  out  when  business  value  is   delivered,  i.e.  the  team  should  offer  business  value  planning.  The  team  should  offer  solid   financial,  accounting  and  statistical  knowledge  to  define  the  financials  benefits  of  a  project  as   far  as  possible.  This  analysis  delivers  the  ROI,  DCF,  EVA  and  NPV  of  the  project  combined  with   the  IT  business  value  index.   -­‐ Setup  tools  to  gauge  metrics  during  and  after  the  project.  This  will  consist  of  setting  up   business  intelligence  tools  and  the  underlying  data  structures,  but  also  processes  to  measure   value  creation  in  cooperation  with  business  owners.  In  most  cases  data  will  need  to  be  pulled   from  multiple  sources.  For  some  metrics  periodical  qualitative  research  might  be  needed   (e.g.  to  measure  customer  satisfaction).   -­‐ Conduct  baseline  measurements  to  be  able  to  properly  measure  the  increase  of  value  per   metric  after  new  IT  investments.   -­‐ Manage  data  collected  and  manage  a  tool  to  represent  gathered  business  intelligence  in  a   dashboard.  In  this  dashboard  the  value  delivered  per  investment  or  project  will  be  visible  per   metric.   -­‐ Safeguard  the  uniformity,  accuracy  and  consistency  of  data  collected.  This  will  enable  trend   analysis  after  a  successful  period  of  data  collection.  Based  on  this  it  will  be  possible  to  build  a   reference-­‐card  for  the  cost  per  point  of  the  business  value  indicator.  The  team  needs  to  consist  of  employees  with  skills  in  finance,  accounting,  IT,  business  intelligence  and  reporting,  but  most  of  all  up-­‐to-­‐date  knowledge  of  the  business  and  its  key  processes.  It  needs  to  operate  outside  of  regular  project  organizations,  in  order  to  avoid  conflicts  of  interest.  After  all,  project  teams  are  focused  on  delivering  short-­‐term  results  and  there  is  often  no  interest  in  adapting  
    •     Whitepaperthe  project  to  changed  environmental  conditions,  safeguarding  long  term  benefits  of  the  project  or  measuring  if  the  project  benefits  are  actually  delivered.  Making  IT  Business  Value  Actionable  There  are  a  number  of  critical  actions  and  processes  that  the  availability  of  IT  business  value  intelligence  will  support:   -­‐ The  ability  to  select  winning  projects  that  deliver  true  business  value.       -­‐ The  ability  to  constantly  steer  programs  and  projects  based  on  the  expected  business  value   that  will  be  delivered.  If  due  to  changing  environmental  conditions  this  value  is  decreasing,   CIOs,  IT  directors  and  steering  groups  will  need  to  take  action  by  terminating  the  project  or   ensuring  additional  business  value  meeting  the  new  requirements  will  be  generated.  This  is   especially  important  for  high  risk,  long  running  projects.   -­‐ Knowing  the  business  value  delivered  by  all  IT  initiatives  enables  strategic  portfolio   management.  Initiatives  delivering  much  business  value  should  be  given  higher  priority   within  a  portfolio.  Further,  the  IT  budgeting  process  will  change  from  a  cost  based  approach   to  an  investment  opportunity,  knowing  more  accurately  what  business  value  will  be   delivered.   -­‐ Reinforcement  of  the  position  of  the  CIO/IT  director  and  IT  organization  to  become  partners   assisting  in  accelerating  the  business.  Using  business  value  programs  will  also  make  it  clear   throughout  the  IT  organization  what  the  business  objectives  are  that  should  be  supported   and  where  and  how  business  value  is  required  to  be  delivered.    The  remaining  question  is  how  the  above  actions  and  processes  can  be  facilitated  by  the  business  value  intelligence.  First  of  all  the  business  value  intelligence  will  need  to  be  published  in  a  dashboard  accessible  by  decision  makers  such  as  CIOs,  IT  directors  and  steering  groups.  Existing  decision  making  processes  will  need  to  be  modified  to  incorporate  business  value  as  a  core  element.  Finally,  IT  performance  reports  to  business  will  need  to  include  the  actual  business  value  delivered  instead  of  only  operational  metrics.  These  reports  should  be  consolidated  in  an  annual  IT  performance  report,  which  focuses  on  business  value  actually  delivered.         More  information  on  this  subject,     this  whitepaper  or     Morgan  Clark  &  Company?     Send  a  message  to     info@morganclark.com  or     call  +31  20  737  05  37