Cost control is just the start in quantifying the benefits of IT projects. Helen Beckett finds that traditional measurement techniques no longer cut the mustard
It is no surprise that IT is often perceived to be the black hole of the balance sheet. Although the value of IT is expounded by analysts and suppliers, there is still no hard and fast way of making the connection between the cost of IT systems and the value of the benefits they deliver.
Research by Vanson Bourne on behalf of IT services monitoring and management group Managed Objects found a high degree of sensitivity instead to the cost and costing mechanisms of IT.
Among the 285 organisations surveyed, it found a lack of confidence in the measurement of IT costs: fewer than 10% believe the IT department does a good job of controlling costs, and 33% believe the measurement of IT costs is inaccurate.
Although concentration on cost seems out of synch with a company's quest for value, the findings do at least show a degree of maturity. "If the same questions had been asked 10 years ago, there would not have been the same sensitivity to cost," says Will Cappelli, research vice-president at analyst firm Gartner.
He supports the view that more sophisticated measures of IT have enabled a new cost consciousness and that this is a precursor to quantifying business value.
Certainly the current trend for users to move towards service oriented infrastructures enables improved costing of IT delivery. And it assists conversations about value too, according to Simon Clark, partner at investment company Fidelity Ventures.
"At this firm, IT is run according to the philosophy that 'any fool can cut costs': it is creating value that counts," he says. Service management tools are part of the "mood music" that helps the firm make investment decisions, he adds.
"Business Service Management from Managed Objects enables us to visualise all the IT components on a dashboard. They help us to better understand IT costs and what IT has achieved. The benefit of a services approach is that it forces a review of where money is spent."
More than 35% of Fidelity Ventures' IT budget is now spent on investment in the future rather than managing current operations, says Clark.
Although it is possible to make savings through monitoring service and investing the surplus, many IT investments continue to haemorrhage money because they are not capitalised correctly.
"Research shows that if an IT project runs over by a year and delivers 85% of its function, then it would waste 40% of the original investment," says Chris Tiernan, chairman of the Institute for the Management of Information Systems.
The first step to redress this is to do a more accurate calculation of return by factoring real-life experience into business cases, says Tiernan. For example, if projects typically deliver a year late, over spend by 25% and are short on functionality by 16%, then this should be built into the cash flows.
Another method that counters the leaking of funds through poorly performing projects is portfolio management. The model is used by the financial services market to evaluate and manage the risk of a spread of investments.
When applied to IT projects, the method regularly reviews not only whether a project is coming in on time and budget but whether it is delivering benefits over time.
ING bank has adopted an investment banking perspective on IT and uses mainstream financial mathematics to calculate the return on IT investments. In this way, the bank has a means of identifying projects that are technically well managed but deliver little value.
Equally important, it has cultivated a governance process and rationale that enables non-performing investments to be axed.
An absence of focus on profit can also create space for the examination of value, according to Chris Head, managing information leader at Henley Management College. He is impressed by Hampshire County Council's use of a "sinking fund" for IT projects - a pot of money made available to internal service investors.
Service managers can pitch for funds, but they have to repay them with money saved or made from their project.
"It creates a very strong motivation for investors to deliver benefits they set out in their plan," he says.
Although sinking funds and portfolio management play their part in extracting value from IT, to date no single model has gained broad acceptance. Even if a widely supported model for quantifying business value existed, politically it would be a tough call for the CIO to flag this up to the CFO. "Saying you have been doing the capital budgeting wrong all along is simply a non-starter," says Cappelli.
Joe Peppard, professor of information systems and director of the Information Systems Research Centre at Cranfield School of Management, agrees that finance directors are an unwelcome force for conservatism.
"Around September and October, I get calls from CIOs who are putting together their annual budget. They want help in answering the question they know their CFO will put to them: 'How does this spend compare with that of your peers?'
"It is the wrong question," says Peppard. "It is no use worrying what your competitors are doing because IT may have a different role strategically in their organisation."
Peppard recommends instead that businesses focus on the benefits that IT delivers. But he is critical of the traditional return on investment model that most companies turn to. "What they fail to incorporate in their calculation are the costs of change that must be implemented in order to accrue benefit."
A company implementing a customer relationship management system will tot up the cost of IT components, including software licences, hardware and consultancy.
But they leave out the cost of redesigning processes, the clean-up of data, and perhaps the cost of a redundancy bill if the system is more efficient. "The IT cost component may be smaller than any of these changes," says Peppard.
Tiernan agrees that focusing on IT investment in isolation is pointless. "The approach is back-to-front. Nowadays, IT is all about transforming the business: IT's value is about usage and not possession."
This calls for joined up thinking and evaluation between IT and the business. Ultimately, says Tiernan, in realising value from IT the buck stops with the chief executive.
As organisations consolidate their IT platforms, fresh challenges arise. How to allocate costs for a shared service infrastructure is not a trivial problem, says Cappelli. But the shift towards service-based delivery of the late 1990s represents a major breakthrough.
"It recognises that the value IT brings is through services rather than CPU cycles," he says.
There is a possibility that better measurement and costing of services means IT is sent back down to the engine room and excluded from the value debate. But Cappelli thinks relegation is unlikely at this stage of IT evolution. "The CIO has come closer to the business over time and is able to speak more authoritatively about value."
There is also the worry that money can be spent on measuring and monitoring to no purpose. An entire industry of service management is hoping to make great profits from the evolution of a service-based infrastructure, without making a concrete contribution to the quantification of value.
More accurate costing does at least mitigate the situation of the IT department delivering value today but doing a miserable job of communicating it. This is where service management can contribute to the debate, says Jim White, business technologist at Managed Objects. "It is an excellent way of articulating value to the business and of enabling a grown-up conversation to happen."
The law firm: ROI falls down
If a £10,000 spend is required to achieve a clear advantage in terms of service improvement, then I would not even attempt to cost justify, says Andrew Powell, IT director of Scottish law firm Brodies.
Hardest is the implementation that is not particularly cheap but where the outcome is a distinct improvement for customer service.
This is the category of investment that Powell had to justify when Brodies considered a content management system. I could not begin to quantify how the financial ROI would stack up, says Powell.
However, an internal survey did uncover potential wins. One senior partner regularly spent half an hour looking for a document. In an employment tribunal, a document could make the difference between winning and losing a £10,000 case.
The ROI method falls down here because the reality is you would not spend half an hour looking for a document in this situation, you would try something else, says Powell. Knowing how easy retrieval can be does give a warm feeling, he says.
The bank: Apply risk management processes
It is prudent for a bank to apply the same risk management to its IT investments as it does to its financial governance. ING uses portfolio management to evaluate and manage its IT projects.
Occasionally, active portfolio management entails cancelling projects due to actual or anticipated non-performance. This is not an easy step and ING says it has learned key lessons.
The bank warns that projects develop a momentum of their own and this momentum is not necessarily cost-effective. Accordingly, processes exist for regular, independent and objective review followed by positive action.
In addition, project cancellations are often seen as undesirable. ING instills a culture where cancelling or rescoping a project that cannot be delivered satisfactorily is seen as a sign of strong management and good governance.
The local authority: Ditch the it budget
At Hampshire County Council, the IT department holds only 2% of the budget spent on IT and the rest is run on a full trading basis, with spending decisions made by other business departments that hire the IT department.
All procurement and value decisions reside with service departments. It sounds scary but it is the only way to realise value, says Jos Creese, head of IT.
In addition, the IT department has a small pot of money that is used for developing ideas proposed by the business or services. “We are against the idea of doing major proposals before the board and in favour of a more relaxed approach to piloting ideas to see if they work,” says Creese.
It means an idea can be dropped at an early stage if it does not deliver and any small sums written off are more than repaid in experience gained.
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