I was asked a simple question the other day by a CIO of one of our RetailIndustry client. The question was in the context of business we were conductingand he asked me, “what value your solution or technology provides to ourbusiness? What impact can it have on our business imperatives? I am being askedby my CEO to empower our Enterprise IT to make impacts on the overall businessand I am evaluating what technologies or platforms will enable me to do that.”
I tried to explain the business value, ROI and TCO of the technology investmentscan provide to his portfolio but that was not enough. The question got methinking and I had been possessed by this question since then.
Let me ask you if you are an IT consultant, an IT manager or a CIO, “what valuedo you provide to your organization? What impact have you made recently on thekey KPI’s of your company’s business which normally are revenue growth, profitmargin and market share growth? “
This is a serious enough thought that it requires deep introspection and analysis tocome up with an answer. Who knows, if you come up with something plausible, itmay save your job or may even get you a promotion.
Let us first define what these two terms mean and establish some common ground forthis discussion.
Value: Value is something which you provide tosomeone else through your service, product, knowledge sharing or an influencingthought. It basically describes how much the activity is worth to someone.Either in time, money or opportunity. In economics, value is calculated bysubtracting total costs from total benefits. The value can be tangible (as inmoney) or intangible (as in satisfaction). If you post a review and thatinfluenced someone’s purchasing decision then you delivered something ofvalue.
Now whether you can claim that the person making purchasing decision received ROI (Return on investment) fromthe value you provided is sometimes debatable. In that sense not all value ismeasurable clearly and that forms the basis for ambiguity of the value (Includingbusiness value). In financial sense, we can say that the value exists in thebalance sheet and hence we can say that it is created over time and not in apoint of time.
Impact: An impact is the net result of the activity or the value you provided. Impact is ameasurable entity which results from an activity. May be your activity resultedin new jobs, new customers, new revenue, new knowledge etc. Then it is said tohave made impact. Impact can have many potential measures of varyingdefinitions and degrees. If you provided a service or a product to a businesswhich helped that business in increasing their market share or revenue by x% ina quarter then you made impact on that business’s bottom-line. In a financialsense, we can say that the impact exists or gets reported on the incomestatement and is something which can be created at a point in time.
So, if we agree on these two term’s definitions as discussed above then we canproceed to discuss these two terms in the context of relationship betweenEnterprise IT and the Organization while keeping the questions we asked of usin the beginning. These questions are:
All of us have heard this oft-repeated comment that IT is an enabler of thebusiness processes. Some articles like the provocative HBR article “IT doesn’t matter” byNicholas Carr, even suggest that IT has become a commodity and really does notmatter for the organization since it does not create any business value. You will find numerous articles, books andpresentation from the big IT consulting companies and the enterprise IT vendorshow much “value” their products or services or IT investments create for theorganizations. I am yet to come across an article or a case study where the ITinvestments have delivered substantial bottom-line business impacts, theimpacts those are validated by a CEO or CFO.
Let me first differentiate between IT investments and technology investments madeby organizations. Most organizations today invest in engineering or productcreation functions which need investments in technology such as heavymachinery, manufacturing lines or robotics. So, a company like Intel may havemade investments in technology for their chip manufacturing plants or a companylike General Electric may have made technology investments in modernizing theirturbine manufacturing plants or a company like Amazon may have invested in roboticsin their huge warehouses (Drones may be?). These same companies also run prettysizeable business support function in their IT divisions which support theirnetworking, servers, and storage investments to serve their communication,collaboration, productivity and application processing needs. Let us keep thisdistinction in mind during this discussion and focus on the value or impact ofthese IT investments on the overall business.
We all agree that we need the IT to provide us with the corporate devices (such asPCs, Macs, and Tablets etc), applications and the common services such asemail, communications and collaborations. IT also provides the control and compliance for the enterprise securityto protect the corporate information. These tasks by IT are now seen ascommodity tasks and in this “cloud” era, can be met with a variety ofcloud-based services. So, the argument here can be while IT is providing thebasic services required for an organization to function, these are not reallyseen as “value-creating” activities. Especially when you think of value as thebusiness value or economic value to the business. Going back to our definitionof the term value, this becomes a question of how much business value does ITcreate which is going to be a difference between the business benefits andbusiness costs. And that is the hot button issue today for the CIO.
Typical enterprise IT spend and budgets run in multi-millions of dollars and the CIOsare always under the scanner to justify their IT budgets. Because of the natureof the Enterprise IT today, CIOs need to plan and justify the IT spend firstand then purchase the infrastructure to deploy. Given how well the deploymentgoes, this may or may not deliver expected business value to the organization. Thismeans that the deployed software or infrastructure may not enable the businessprocesses as expected or as desired by the business units. Then the businessunits start questioning the business value they received from the investmentsthey agreed to. And the impact of these investments did not even enter thediscussion since everyone is now stuck on the business value question itself.
There are times though that the some rare IT projects do succeed and some businessvalue is delivered by these projects eventually to enable some businessprocesses. Business units and IT teams do come to an agreement that a givenproject delivered some business value but then they often struggle toaccurately measure this business value or at least they can’t communicate thisbusiness value to broader audiences since the metrics for the business valueare either not available or are not clearly understood. This is when thequestion of “impact” enters the conversation.
Did the IT initiative or IT program make substantial impact to the organizationlike to market share, customer acquisition or retention, customer success orultimately to company’s stock price? These are the thing the executive suitesreally cares for anyways. Most of the time CIOs do not have clear answer tothis question because most of the IT projects are far isolated from makingdirect impacts on these business metrics. So, you invested in new data center,how do you relate that to the market share growth? You delivered cloud-based servicesfor CRM which may have reduced some costs but did that deliver customersuccess? And even if the CIO can claim that any of his/her IT initiatives didimpact some business metrics, does he have concrete data to support his/herclaims?
So, if we are caught in this dilemma then what is the way out? It is clear that thebusiness value matters and that IT should deliver the business value but as is everythingin our lives, this is the expected outcome. The organization made someexpenditure on IT projects and it expects to realize the benefits of these expenditures.That is the business value it would derive. It is just like if you bought a carthen you expect it to work and take you from place A to place B. You get thevalue from that transaction because the money spent is yielding you benefit oftransportation. But does it impact your lifestyle in a positive way or improveyour commute in some way?
One way to handle this “Value vs Impact” quandary is to think about going beyondthe value creation and deliver "economic impacts" to the business.The intent would be to enable the overall business to create "competitivedifferentiation" and "operating leverage”; thus giving the CEO theability to create a "responsive business".
This means that the IT should not be just a supporting business function like Legalor HR; but it should become another "core" business unit of theorganization. IT should have its own business plan which aligns with thestrategic plan of the business. This way it will have its own business metricswhich will bear direct relationship with the organization’s metrics. The CIOshould be able to report to the CEO that how much customer retention rate hasincreased because of the investments made in that new data center which deliverscritical Software-as-a-service CRM to organization’s sales force, allowing themto be more responsive to the customers. Another example would be to report on improvementin inventory levels due to better matching of forecast data with the productshipping data due to much improved analytics solution delivered by IT, whichnow aggregates the disperse data and allows to make better decisions formatching supply and demand in a region. This will surely make the CEO happy andexcited. This is where IT delivers the competitive advantage.
Now that we have reached a point in this discussion where we think IT should thinkabout delivering the impact to the business, let us shift gears and think abouthow this can be made possible?
One answer could be Business capabilities led IT planning and transformation. Iwill save it for the next article but to give you a sense of what it is, it isthe method of IT planning where you align business capabilities with technologycapabilities by modeling capability themes as IT priorities. This way astechnology continues to change that leads to opportunities to do thingsdifferently. And using technology to do things differently provides theleverage of gaining an advantage in the marketplace.