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The potential for information technology to substantively add value and change the competitive landscape for thousands of companies has never been greater. New technologies are coming online, vendors are more willing than ever to negotiate, and investment money is starting to flow again.
Yet the ability of IT leaders to speak convincingly about measuring the business value of their contributions has never been more suspect. Technology executives need to get much better at showing and telling the value of IT. We need to "talk" the IT value "walk."
For this CIO Habitat report, we asked IT execs participating in the recent Las Vegas CIO Boot Camp -- plus CIOs attending the May Forum of UCLA's IS Associates -- to talk about the metrics they use to document IT value. As expected, the vast majority of metrics discussed were machine-based measures of device utilization and system availability. This is Metrics 101. To graduate to the next class of IT measurement, we must find a way to reflect the business value being created.
The Bible for Measuring IT Value Hasn't Been Written
When Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations 229 years ago, he set forth a theory of value still used around the world. Its guiding principle was that objects and/or services are valuable because of scarcity or because of the amount of labor embodied in them.
Unfortunately, IT has no corresponding Adam Smith. While many have tried, the bible of IT value has not yet been written. Most organizations don't have the metrics, methods or mind-set to authoritatively dissect a proposed technology solution and expose the future value it will deliver. Very few CEOs today are involved in developing IT metrics (see "Measuring IT Value"), and most companies (82%) don't use any outside providers to track such metrics.
Indeed, an environmental truth that eats away at the credibility of our profession is that many IT organizations aren't even all that competent at specifying the cost of IT projects, let alone the value they might generate. This is a long-lived problem that must be fixed.
Kelly Williams, executive vice president and CIO at San Jose, Calif.-based mortgage industry innovator First Franklin Financial Corp., knows the value of metrics. His industry (sub-prime mortgage financing) didn't really exist until Fair Isaac Corp. came up with a metric (the FICO score) to reliably measure the credit scores of potential borrowers. Credit scoring is a method of determining the likelihood that credit users will pay their bills, and a credit score condenses a borrower's credit history down to a single number.
Wouldn't It Be Great If We Had Such an IT Value Score?
"While there obviously are many tools and processes for measuring 'how' IT works, I have seen very few used in a way that effectively measures the value or contributions that IT makes to the business," Williams notes. "This is a source of great frustration."
In the absence of an internal process for monitoring value, many enterprises benchmark their costs. For example, RadioShack benchmarks costs as half the value equation, with return on key projects measured as the other half, says former CIO Evelyn Follit.
CIO Habitat research confirms that very few organizations have a formal way to measure IT value, although most (60%) do benchmark various IT performance measures. Why is this?
MIT Media Labs' Michael Schrage, who is co-director of the e-markets initiative there, says he's seen numerous efforts to measure IT value over the years, but "nothing really impressive."
"I'm pushing organizations to use 'process metrics' as a bridge between technical capacity and business capability," Schrage says. "The metrics I see that I take seriously are the Web-based ones that measure customer satisfaction with the Web site interaction."
Many CIOs, sensing political danger, avoid the value metric issue entirely. As one midmarket CIO at a manufacturing company puts it, "We use wet fingers in the air now to ensure we are going with the wind."
"It's not the IT metrics that matter. Tying business metrics with IT performance matters more," adds consultant Priscilla Emery of e-Nterprise Advisors in Altamonte Springs, Fla. "The other departments within the organization tend to take credit for increased sales through Web access, increased volume because of marketing and better products, etc. It's tough to measure IT's value unless it is part of the business equation at the beginning of a new product or service lifecycle."
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