It is time for executives to insist that the value of IT to the business be measured and demonstrated.
Investment in IT continues to grow as businesses face increased competition, expectations and regulation. Too often, though, organizations experience the "IT black hole" effect--large sums of money go in, but no (or limited) benefits come out.
Computing the value of IT is not a technology issue, though. It is a business issue that should take into account tangible and intangible costs and benefits.
While raising awareness of the need for IT performance management often starts within IT, business managers should provide strong support.
IT performance management helps identify and quantify IT costs and IT benefits. In situations where costs and benefits can be easily quantified and assigned a monetary value, assessing returns on investment (ROI), net present value and payback period work well. These traditional performance measurement methods can successfully capture the financial worth of IT projects and systems, but they only demonstrate a limited part of the value that IT can deliver. Information systems often generate intangible benefits, such as "improved customer service". In addition, different managers and users perceive the value of IT differently.
According to "Measuring and Demonstrating the Value of IT" published by the IT Governance Institute (ITGI), good IT performance management should provide answers to questions such as:
- If we spend extra funds on IT, what do we get in return?
- How do our IT systems, capabilities and controls benchmark against competitors?
- Are we receiving the benefits that were promised?
- How do we learn from past performance and implement improvements?
- Is our IT strategy in line with our overall business strategy?
To work toward this goal, the IT balanced scorecard (BSC) evaluation method can be used to help IT management report on IT value to the board and executive management. The BSC can be applied to IT projects, investments and even entire IT departments.
Developed on the enterprise level by David Kaplan and Robert Norton, the BSC addresses the idea that the evaluation of a business should not be restricted to financial measures, but should be supplemented with a mission, objectives and measures regarding customer satisfaction, internal processes, and the ability to innovate and prepare for the future.
The objectives and measures of a BSC can be used as a cornerstone of a management system that uncovers and communicates strategies, establishes long-term strategic targets, aligns initiatives, allocates long- and short-term resources, and provides feedback and learning about the strategies.
On the IT level, the use of an IT balanced scorecard is a highly effective way to help boards and executive management achieve alignment between the business and IT. In a generic IT BSC, where IT is an internal service provider, the four intangible perspectives are:
- Business contribution, which captures the value created by IT
- User orientation, which represents the users’ evaluations of IT
- Operational excellence, which represents the IT processes employed to develop and deliver the applications
- Future orientation, which represents the human and technology resources needed by IT to deliver its services over time
Each of these perspectives must be translated into a mission, goals and corresponding metrics and measures that assess the current situation.
Cause and effect relationships between measures are essential components of an IT BSC and must be defined through the scorecard. For example, more and better education of IT staff (future orientation) is an enabler (performance driver) for a better quality of developed systems (operational excellence) that in turn helps enable increased user satisfaction (user orientation) that eventually will lead to higher business value of IT (business contribution).
Defining and monitoring performance measures that assess the business value of IT, whether or not BSCs are used, is a board and executive management responsibility.
If an IT BSC is developed, boards and executive management must identify which specific IT metrics they require and will import into the overall business scorecard. They must also ensure that IT project risks are in balance and the IT budget is realistic.
CIOs are then responsible for managing the IT budget and IT investments. They should provide an IT performance monitoring system, such as a BSC, that includes objectives and metrics that can be clearly and directly linked to business goals and/or the business BSC.
According to a study of 200 CIOs, IT directors and IT managers from 14 countries, the IT Governance Institute found that this co-responsibility of business and IT to measure IT value delivery from projects and investments was established in 43 percent of respondents' organizations. Twenty-one percent of the surveyed organizations assign the responsibility only to the business, and 15 percent assign the responsibility only to IT.
The appraisal of IT needs governance structures and processes that establish how IT investments will be made, and particularly how the different management levels--board, executive management and operational management--will be involved. The IT BSC can build a relationship between IT and the business by demonstrating IT’s added value to the business and its users.
In many organizations, IT expenditures account for a considerable amount in total costs. Although it isn't always easy, organizations need to quantify and monitor how much they are spending on IT and what they receive in return.
Wim Van Grembergen is a professor and chair of the Information Systems Management Department at the Economics and Management Faculty of the University of Antwerp, as well as executive professor at the University of Antwerp Management School. Van Grembergen is engaged in the continuous development of the COBIT IT governance framework. Steven De Haes, is co-ordinator Information Systems Management executive for training and research at the University of Antwerp Management School. De Haes is currently working on a Ph.D. on IT governance and is engaged in the continuous development of the COBIT IT governance framework.