In 2016, as South Africa’s economy continues to soften, organisations in every sector remain under pressure to manage costs.
For the IT department, it has never been more urgent and important to prove the value of technology investments – reported in relation to business metrics.
In times of budgets being slashed, there is even greater need to invest in the right places for the right reasons. Short-term IT spend needs to be seen in the context of longer-term value that it brings. Where value realisation is practised, implemented IT projects are critically analysed to reassess their business value and strategic alignment.
IT value creation
Traditionally, IT would focus on simply delivering on business requirements – and if a project or a solution landed on-time and on-budget, it was considered a job well done.
Today, business expectations are far greater. CIOs should be working with their business stakeholders to ensure that projects are aligned with the organisation’s strategies, and that the value of any specific programme is accurately defined.
IT value can be categorised into four broad domains:
- Value preservation… efficiently supporting and safeguarding traditional business operations
- Value unlock… generating increased value from existing IT solutions – perhaps with minor enhancements or changes
- Value add… new business initiatives and innovations
- Value creation… entering entirely new products, markets, and channels
Value preservation merely sustains the organisation’s existing momentum and trajectory. It is in the ‘unlock’, ‘add’ and ‘creation’ domains where performance is accelerated and increased momentum and sustainability develops.
While it is true that the more strategic the IT investment, the more intangible the initial benefits are, organisations can only start getting a grip on the true impact of IT spend if they start developing a maturing business capability to measure investment across these four domains. Importantly, each domain needs to be measured differently, ROI is not the best measure of value preservation and value creation needs to be aligned with cash-value-added or success rates (the measure that venture capitalists use). Critically these must cycle, fail early and fail fast!
How to begin
The first step to defining IT value creation is to analyse the performance drivers of each functional business area in the organisation, and translate these into a set of business metrics. As the strategic realm is translated down into measurable KPIs, one can more easily see how IT investment should be funnelled into the areas with the highest importance and the greatest potential for financial return.
Ovum research suggests that most organisations have ‘run the organisation’ to ‘change the organisation’ ratios of about 80:20, or at best, 70:30.
This means that many high-potential innovation and growth projects – which have to battle with each other for the 20 or 30% – receive no investment. While the costs of just maintaining the existing IT estate consumes the bulk of IT spend.
For organisations looking to compete with fast-moving rivals, this spend weighting puts them at a severe disadvantage.
We need to turn this on it’s head… and take a leaf out of Amazon, or Uber’s, books. These are prime examples of organisations that invest heavily in their technology platforms, forsaking quarterly returns or short-termist shareholder concerns – and focusing on building enduring value.
The challenge is that digital transformation possibilities have dramatically changed what is enduring. What businesses thought was sustainable five years ago may not be in their best interests today.
Paying you back in spades
In times of belt-tightening, today’s smartest companies are focusing their available resources into digital platforms – enabling the creation of digital assets that will power their growth in the future. Critically, these enable innovation and creativity and more importantly rapid change capability, supporting the build measure learn change cycle. And continuously improving so that you never create legacy.
A retail bank, for instance, may be hesitant to add new costs to their balance sheet as we enter an economic downturn.
But the value of rapidly delivering improvements to their mobile banking app portfolio could far outweigh the investment. The bank would see this value expressed in many ways: like decreased cost-to-serve, attracting new customer segments or customers in new regions, or fewer branch, call centre and administrative staff.
Further to this, as customer transactions and behaviour are analysed more closely through digital technology, even more new value streams emerge – such as better credit scoring and risk management, or more accurate propensity modelling.
One simple model for measuring value (all credit to Terry White) assumes that you can’t be competitive unless you’re different in three ways; faster, closer, cleverer!
Examples like this abound in any industry and any business. By building sustainable digital platforms, and connecting all IT investments to clear value drivers, the CIO and her team can effectively lobby the executive suite for increased investment in ‘change the organisation’ programmes, one initiative at a time.