Maximising IT investments

As a small boy, I learned the basic trick of solving a maze. The trick was always to start at the end and work backwards, writes...

As a small boy, I learned the basic trick of solving a maze. The trick was always to start at the end and work backwards, writes Chris Potts.

Whenever people ask me how to maximise the value of their IS investments, I suggest they apply the maze principle: start with value and work backwards. It hardly sounds like an earth-shattering insight, but in practice it means a real shift in people's mindsets and their organisation's management processes.

It seems that most people are still looking to solve the "value from IS" puzzle the hard way.

No value, no money?
It's a sobering thought that the bottom-line costs of IS can exceed net profits. Some annual organisation's costs account for more than 20% of their annual revenue.

Without real evidence of the business value these costs generate, we shouldn't be shocked that - with talk of recession - the IS budgets are the first to go. Even the US, regarded by many as the only place where investments are generating measurable productivity gains across the whole economy, IS spending is being cut in anticipation of tough times ahead.

Now is a good time to focus on maximising IS investment value and sharing some best practice about ensuring that this is what you get for your money. This is where the maze principle helps.

Working backwards
What does your organisation call value? To apply the maze principle, the first thing to sort out is what your organisation regards as value - eg net profits, customer satisfaction and brand awareness - and not just from its investments.

There's no reason to separate these from everything else. If you find that you are aiming for different values from IS investments compared to the other things your business is doing, then this is the first sign that you need a rethink. You also need to recognise that your organisation's view of value as it evolves over time, sometimes quickly.

Rule of thumb
Whatever your organisation calls value, you can use a rule of thumb to divide it into two categories - operational and strategic. We use simple definitions: operational value contributes to this year's business results; strategic value contributes to future years.

Depending on where you are in your financial year, the likelihood of delivering net operational value from new investments can be slim. Many investments will be contributing to strategic value.

This is a major reason why you need to align your IS investment strategy with other business plans, since they are future value.

Value investments
There is also a very important difference between the direct value and indirect value of investments. The direct value of an investment stream may be a 20% increase in customer satisfaction.

That is what your investment is aiming to achieve. The indirect value of the same investment is a financial measure such as net present value, internal rate of return, payback period or something similar, depending on financial policies.

The indirect measures provide a basis for comparing initiatives that have different direct values. If you use indirect measures too literally for prioritising initiatives, beware. You may end up doing the wrong projects.

Value milestones
The next stage is to establish value milestones. Using the example of increasing customer satisfaction by 20%, unless you are planning to achieve this all in one go, you need to say what the intervening increases will be and when.

These are your value milestones and achieving them becomes the foundation of your programme and project management, design decisions and so on.

Having set the value milestones, you can determine the individual initiatives that will deliver them. Some will need investment, providing you with the building blocks of your IS investment plan. But be prepared for value milestones to change.

Core competency
In today's market, organisations can choose outsourcing, partnerships and the supply chain to source their IS needs. The one in-house core competency that will always be needed is maximising the value to the business of your IS investments. This is not what you can realistically hand over and entrust to a third party.

Maximising value must be the primary focus of your organisation's investment strategy, the core of your "IS mindset" and the driving force for your IS management processes.

The maze principle is a reminder achieving this elusive goal is to start with value and work backwards. You may end up with a different-looking strategy and investment plan, but they are much more likely to succeed.

Chris Potts is director at management consultancy Dominic Barrow.

How the maze principle works

The maze principle starts at looking what value the business is trying to achieve then deciding how IT can deliver.

  • What does your business see as value? Is it profit, employee satisfaction or brand awareness? If your IT systems are working towards different ends then it's time for a rethink

  • IT investments will usually be long term so they must be aligned with long-term business plans

  • IT value can be measured both directly and indirectly. The indirect value will usually be a financial measure, which can be used to compare with other initiatives

  • Set yourself value milestones to assess how an IT project is progressing en route

  • While outsourcing has its place, maximising value is best done in-house.

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