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March 15, 2004

CIO ROI

Talk regularly with chief information officers as we do, and it quickly becomes evident that there are two prevailing views among them and their C-level technology colleagues on how to assess IT value. There also seem to be some very different habits over how they engage IT to solve operational problems, strengthen competitive capabilities, or develop better business strategies...

By CBR Staff Writer

The more traditional IT executive, who still seems to view IT in its traditional role as a cost center, tends to use the old-school financial yardsticks of NPV (Net Present Value), IRR (Internal Rate of Return), EVA (Economic Value Added), or break-even analyses, to try to measure the value that IT delivers. Business strategies are determined first and are thrown over the wall to IT where a blueprint of the systems needed to support them is drafted. Then some form of financial justification is mandated before any purchasing decisions are made.

Among this group, corporate IT measurement policies are all over the map and there are no clear formulas in place to measure ROI. There seems to be no discernible consensus about performance measurement either. More progressive CIOs, on the other hand, tend to challenge the conventional wisdom about what IT can and cannot do. They see IT as a powerful means for moving business into cutting-edge initiatives. That positive image of IT as business-strategy-enabler is helping them change how organizations implement IT strategy.

As a group they tend to spend more than their peers and rarely complain about inadequate IT funding levels. Think of CIOs in this camp as IT budget getters, not budget setters. For them budgets for IT initiatives are funded by the business, not set on an annual basis. They also claim the strongest returns from their IT.

Collaborative processes

This is because best-practice CIOs have worked to foster a more collaborative decision-making process, bringing together both IT and non-IT-related people, or technology and business types. They evaluate requests for new systems from the various groups by turning the request into an objective process often by using a senior technology resource manager to manage the process. This individual acts as a technology bridge, aligned to a business group with the sole purpose of developing an intimate understanding of their business processes and their technology needs. The outcome? IT projects are properly funded, deliver the required benefits, and bring real value to the business.

Value depends on whether an investment has to do with increasing the levels of efficiency and effectiveness in the way business is conducted, or whether it has to do with IT being used for strategic pursuits, or expanding and creating markets with IT. Different companies have different goals for IT. These might be improved productivity, reduced administrative costs, improved customer relations, or faster product development. The value derived from IT depends on what form of payback is intended and where it is likely to emerge in the business operation.

Progressive attitudes

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Good CIOs will put as much emphasis on gut feelings about the value of technology deployments as they do financial justification. They contend that quantitative metrics are not always a reliable way to assess true value as it relates to improved customer satisfaction or a business process improvement that results in a new product breakthrough. In fact, most executives agree that IT value measurement will never be airtight. While ROI is not to be ignored, progressive CIOs are more interested in how and to what extent IT investment will enable and propel growth strategies.

CIOs who still tend to be more interested in assessing ROI need to wise up. They might think that they’re being asked to cost-justify every technology investment, but what CEOs really want is a clearer understanding of how certain IT initiatives can help to create better, more agile business processes.

The article is based on material originally published by ComputerWire

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