Perception and reality: how to change business thinking about the value of IT

by Mary Ann Maxwell, Managing Director, META Group Asia Pacific

For most companies, the prevailing wisdom on IT market dynamics was developed during a growth cycle when revenue, earnings and technology opportunities were abundant. CIOs understood that much of what their IT organisation did was driven by some basic truths such as Moore's Law, Metcalfe's Law and other technology fundamentals, even if these ideas remained a mystery to business leaders.

While these principles are still at work - and still a mystery to the business - the underlying economics have changed. New considerations such as different business conditions, global uncertainty, a hardware glut, vendor consolidation and other factors have altered the technology landscape. As long as technological capabilities keep increasing and unit costs keep falling, price/performance improvements will continue to produce seismic shifts in IT. Missing the rest of the picture can lead to disaster.

Certainly, today's CIO must continue to manage costs aggressively. However, the challenge of extracting business advantage from these changing IT economics is becoming increasingly important. CIOs must analyse both the supply and demand sides of the equation. More importantly, the CIO must understand that often-elusive notion of value.

Understanding the value of IT

Creating, capturing and communicating the value of IT is consistently one of the challenges mentioned in META Group discussions with Global 2000 companies. A recent META Group survey of Australian CIOs identified value management as the most pressing problem that they were facing. When asked about the value of IT to the business, most CEOs and CFOs refer to financial measures such as ROI and contribution to EBIT. CIOs prefer to discuss business agility, cost management, quality and knowledge enhancement.

If you define value as 'relative worth, utility or importance', then both interpretations are correct. Best-practice organisations assess their IT investments through a balanced set of measures that are relevant to their organisation and that recognise the value of IT in both financial and business-enabling terms.

Value, however, has two components: real and perceived. The perceived value is often at least as important as the real value. CIOs often focus on the reality to the exclusion of perception, particularly when trying to quantify and present the value of IT to the business. This is a mistake.

Obviously, it is important for IT to make real contributions to the business and for CIOs to document the value of those contributions in terms that business managers can understand. However, these managers will also have a perception about IT's value to them and their business - and often this perception is at odds with the measurements the CIO presents. Furthermore, the perceived value can have a strong impact on real value, because often management may act on those perceptions rather than on the facts. META Group has found that IT outsourcing decisions are often made on the perception of IT efficiency and value rather than the reality.

So, whether the CIO recognises it or not, the IT organisation does have a 'brand'. And the CIO must proactively manage that brand via a formal value management process.

Managing the IT brand

Recent META Group research found that 70 per cent of IT organisations are still perceived to be cost centres rather than value centres. This makes managing the real and perceived business value of technology a critical issue for CIOs. The value that the business puts on IT and the effectiveness of CIO value leadership can be judged by asking the following questions:

• Are technology investments sufficient to ensure the proper renewal of IT assets and avoid exposing the business to unnecessary risks?
• Do business executives embrace their own accountability for technology-based business projects?
• Is the IT project portfolio increasingly focused on developing information and innovation assets?
• Is there a cohesive business vision defining the role of IT? Is there a matching IT organisation development plan?
• Does the CIO participate in business initiatives not founded in technology?

Attaining recognition for IT value

The value of IT is often measured in terms of the IT organisation and the products and services it provides to the business. There are three components to this view of IT value:

1. The capital asset valuation of the hardware and software systems in which the company has already invested.
2. The information that those systems provide.
3. The innovation opportunities that technology and information provide.

However, it is a mistake to speak of value in terms of any of these components without acknowledging that none of them provides any value if that value is not felt and recognised by the business.

Therefore, the first fundamental principle of value is found in the IT organisation:

The value of the IT organisation is encapsulated in its ability to apply technology to improve the effective use of information to drive and sustain beneficial business innovation.

It is difficult to arrive at an accurate real value for the IT organisation. But value, perceived and real, sets the stage for IT to enable, support and drive business change, which is the real goal of IT.

This leads to another key value principle:

Value is both real and perceived in light of the business's perception of the IT role.

A healthy IT organisation can perform three roles for the business:

• Infrastructure - Supporting the business by providing 'commodity' IT products and services (desktop services, core business applications, communications, connectivity). META Group estimates that 70 per cent of IT organisations operate in this fashion only. This means value delivery is contingent on the ability of the business to state what must be automated and at what cost.
• Change - Acting as a business partner that enables change (for example, implementing a customer management system that improves customer intimacy). Approximately 25 per cent of IT organisations operate in this mode, using market mechanisms (such as pricing and packaging of IT solutions) to discover what delivers value to the business.
• Innovation - Acting as the business by creating innovation opportunities within the business and its markets. Roughly five per cent of IT organisations have reached this state, where IT and business are essentially fused and there are tight linkages between business and IT planning, performance measurement, capability assessment, etc.

In the absence of a defined process to drive IT value management, CIOs cannot adequately communicate the business value of IT. This brings us to the final value principle:

In the absence of a compelling value proposition, price determines value.

Without a clear and articulated value proposition, the business will put all IT value into one category: expense. However, if efficiency becomes the only indicator of value of IT, then the company becomes fixated on continual cost-cutting. The need to facilitate business change and the value of driving that change becomes lost.

From cost control to value-add

To escape the cost-control death spiral, CIOs need to focus on the 'three Cs' of value management. The CIO must communicate value in terms defined by the business. Communicating value requires it to be categorised and captured, again using business terms.

• Value Categorisation - Most IT organisations cannot group their products and services into a finite set of value categories that are recognised as important by the business. Helpful methods for value categorisation include creating a product and services catalogue or using a portfolio approach. The crux is to recognise that an inability to drive a common, consistent and comprehensible categorisation of IT value will impede an organisation from changing its current value position.
• Value Capture - Capturing value requires CIOs to understand what the business values, then create a measurement program that reflects those metrics. Top methods for capturing value include formal and informal customer satisfaction surveys and a formal performance measurement program based on the balanced scorecard approach.
• Value Communication - IT organisations must constantly focus on value communication as a technique to positively affect perceptions. Customers should be made aware of information-driven business opportunities, internal IT capabilities, plans and constraints and ways to influence information-related investment priorities.

Value management means managing perception about the value of IT as well as the reality. It requires clear and consistent communication to reinforce the contribution of IT to the business. CIOs leading organisations that are viewed as value centres by their business colleagues are typically excellent communicators. They are able to clearly categorise the value of their products and services, to appropriately capture value and support the communication of it.

This value management process can dramatically change perceptions of value, ensure the capture of real value and ultimately optimise technology investment patterns for business results.

Mary Ann Maxwell is Managing Director of META Group Asia Pacific.