Measuring IT Costs and Value

In 2003, Nicholas Carr wrote an article for the Harvard Review that questioned the value of IT, and ever since there has been a far ranging debate into whether IT has a meaningful contribution to make. This interest shows no signs of abating, confirmed by a British Computer Society (BCS) survey of nearly 400 senior IT managers, conducted during March and April 2005, which found that top of the list of concerns is quantifying the value of IT, closely followed on this occasion by the perennials of security issues and lack of representation for IT at board level.

However, before any value judgements can be made on IT performance it is imperative that the relevant measurement processes and metrics are put in place. Unfortunately, those IT departments capable of providing this information are in the minority; small wonder then that IT remains isolated, misunderstood, and treated simply as a cost centre by senior management. A contributing factor, although not an excuse, is that this is difficult and costly, requiring ongoing resources and commitment. This absence of measurement means that most organisations have no idea whether investments in IT are providing increased efficiency, added value, or competitive advantage.

An inordinate amount of IT executive time seems to be expended on measuring and controlling costs rather than focusing resources on initiatives that will add value to the organisation, probably because costs are easy to identify and quantify. This is unfortunate as there is a strong correlation between the knowledge growth of an enterprise and its market valuation. It is becoming increasingly important for IT management to ensure that measurement mechanisms are put in place to identify intangible assets such as brand, organisation culture, customer loyalty, innovation, knowledge management systems, and the value of staff knowledge.

Business Issues

With the investment in IT generally amounting to around 4% of total income, and sometimes accounting for over half of total capital expenditure within an organisation, there is a growing need for more transparency and formalised control, along with better measurement of the IT environment. The role of IT management is shifting away from being the guardians of technology to focusing more on aspects such as investment planning, budgeting, governance, service quality, and risk management.

In addition, there is increasing prominence being placed on the ability of IT deliverables to match organisation objectives. Unfortunately, there still appears to be a lack of focus by IT management on understanding the organisation's main value drivers. Without this it is impossible to formulate an IT strategy that will meet the organisation's needs. IT must improve transparency and visibility, with accountability for performance related to these value drivers.

An important aspect in gaining this awareness is to ascertain the level of IT spending that is aimed at keeping the organisation running. The challenge for IT management is to supply services that can support the organisation's growth requirements, whilst minimising the amount spent. In many instances it is a significant investment, equating to around three-quarters of the total IT budget.

It is important that the proportion of IT investment utilised to maintain the current systems is measured, so that it can be conveyed to senior management and fairly charged out to the rest of the organisation. The IT department must grasp the thorny issue of chargeback: whilst the expectation is that in many instances no cash actually exchanges hands, how can the user perceive value when IT services are provided for 'free'?

The effectiveness of IT investments is a very significant factor in the ability of IT to provide value. IT management must make a conscious effort to measure and monitor IT spending and, once this is understood, endeavour to increase the proportion of spending on enhancements and new services designed to transform the organisation or grow its overall value. Research indicates that many organisations have a long way to go in redirecting IT spending towards more 'Change the Organisation' investments - these currently amount to around 30% or less, which in many instances equates to, after accounting for mandatory expenses and wastage, less than 8% of the total IT budget.

Method Issues

Most organisations have very little visibility into IT performance. This needs to change, due in no small part to the growing compliance and regulatory pressures, which entails the IT management having the wherewithal to prove the department is being run effectively and offering value. To provide this transparency and accountability many enterprises are turning to governance as an important mechanism for controlling the organisation. Butler Group recommends the deployment of IT governance, used in conjunction with the corporate governance initiative, and employed not just for compliance and management reasons, but also for providing a framework for measuring IT costs and value.

It is important that IT projects are not viewed in isolation but looked at holistically as one element for improving the effectiveness of the whole organisation. What has been found to work well is incorporating IT projects as part of organisation-wide initiatives, where the IT element is an enabler rather than the main driver. A good Portfolio Management solution helps an organisation select the right blend and balance of IT investment, as it is critical that those projects are selected that make the best use of both limited financial and human resources, and provide the maximum value.

A value identification and mapping approach has merit when comparing various IT projects, as it will allow the discovery of IT value and also enable the monitoring of the actual value contribution on a continuous basis. Butler Group believes that IT value management is an approach that can bring a new perspective to IT alignment and capability measurement. When ascertaining initiative value contribution, the use of traditional financial measures, such as Return On Investment (ROI) and Total Cost of Ownership (TCO), whilst remaining important, should not be used exclusively in making investment decisions, as these monetary-based measures tend not to take any cognisance of IT capability and risk.

Another significant aspect for IT management to consider is the need to make sure that the level of investment being made in IT is delivering value for money in comparison with industry peers and the wider environment. To meet this requirement benchmarking is increasingly being employed as a way of ensuring that the best possible value is being realised from IT investments. The use of benchmarking can bring a number of benefits, including being a vehicle for better performance and collaboration, along with helping to identify gaps in operational effectiveness.

To enable IT management to get their message across to stakeholders and internal staff good communications are paramount. This is where methods such as Enterprise Architecture, business case, and Balanced Scorecards come into their own. A well-prepared business case is a way of putting forward project details in a standard format, which helps purvey professional competency and makes it easier to compare projects. Balanced Scorecards can provide a mechanism for monitoring and conveying IT performance that simply encapsulates the state of the IT environment. However, it is necessary for IT management to agree a small number of metrics with stakeholders, get buy-in from staff, and instigate a regular review process.

In order to provide the required levels of transparency IT management must put in place the foundations of well-managed IT assets, comprising infrastructure, processes, and skills, along with the use of automation, which form very important enablers for successful measurement processes. Ad hoc manual methods based on spreadsheets are no longer acceptable or a practicable solution; especially as data quality for accurate and comprehensive IT reporting is now crucial. In order to reach the required level of consistency the deployment of an integrated toolset and common repository must be an area of focus, as is the setting up of feedback loops and dashboards within the IT governance framework. The implementation of a structured process to manage IT investment can provide significant benefits. Accenture has found that savings in the IT budget of 10-15% are possible within one year, whilst better IT decision-making can improve IT productivity by up to 20%.

For those organisations unsure how to proceed, Intel's 'Managing IT for Business Value Capability Maturity Framework' provides a valuable basis for ascertaining current competence and future direction. Butler Group recommends that organisations look to put in place remedial action to attain Level 3 as an urgent necessity, bringing definition to the measuring process. The organisation should have plans to reach Levels 4 and 5 over the medium term, evolving IT to an optimised state where the IT department is seen as a value centre, works within a sustainable economic model, and provides core competency.

Market Issues

The economic climate over the last five years has had an impact on IT investment. Starting in 2000 many organisations were required to pursue cost-reduction strategies across the whole enterprise, which included the IT department. Research indicates that the cuts in IT budgets reached a peak around 2002, and there is now a swing towards investment in growth, with the focus returning to increasing revenue, rather than cost efficiencies. This has enabled IT management to direct more IT spending to programmes that support organisation growth and transformation. This is an opportunity which IT management must not squander by ensuring the new funding is used both efficiently - doing things right, and effectively - doing the right things.

The diversity of licence and deployment models available in today's market provides organisations with an opportunity to maximise value and improve flexibility. The IT department must make the most of new technologies and application delivery methods found in the marketplace, such as outsourcing, near-shoring, new architectural and delivery models, infrastructure consolidation, and IT management/governance tools. In addition, the use of a common infrastructure platform and software stack as a foundation for providing value through the benefits of integration, speed of deployment, and interoperability, as well as a large developer community, should not be underestimated.

It is essential that organisations review existing licence agreements and service provision mechanisms to ensure that they are meeting the needs of the business and providing value. The increasing use of Open Source Software (OSS) in the enterprise environment is also causing vendors to review their licensing and pricing. From a user's perspective licensing and service delivery should be an integral part of IT strategy, and not dealt with after the event. The need for an effective IT measurement process is again brought into focus by these issues.

The marketplace for overarching IT management and governance suites is still very immature, with the key software vendors still adding new components, sometimes by acquisition. Butler Group believes that this will persist in the short term, particularly since some of the larger purveyors focusing on IT management have yet to fully enter the market with all-encompassing, fully integrated offerings. However some vendors have started to adopt an IT governance marketing angle to their products, which would indicate an increasing interest around the subject.

Key Findings

• Research indicates that in many organisations less than 8% of the IT budget is actually spent on initiatives that bring value to the enterprise.
• It is not a question of how much is invested in computer systems but the effectiveness of the spending.
• Focusing IT investment on an organisation's value drivers will improve competitiveness.
• Organisations have become quite competent at measuring IT costs, but not the value. ROI/TCO type measurements should not be used in isolation because they ignore elements such as risk and IT capability.
• IT investment must be measured not only at the inception of initiatives but also throughout the project lifecycle.
• The absence of tools and methods is a major contributor to the lack of successful measurement.
• In addition to compliance and management capabilities IT Governance can provide a useful framework for measurement, making sure that IT and organisation investments are synchronised.
• Portfolio Management and value mapping are useful mechanisms to ensure that limited IT resources are channelled to the initiatives that will provide the most value.