Measuring IS Value

Robert N. Phillips
CEO, Lasotell Pty Ltd.
www.lasotell.com.au

A long held dream of Financial Officers, CEOs and General Managers has been to find the right way to measure the value of the IS organisation to the company overall. Well, such measurements are now possible—in terms of the IS contribution to the company’s profit margin, no less. This article provides a brief overview of measuring IS value because managing information development in areas such as content management has an important role to play in assisting the IS organisation to make its proper contribution.

In the past, people have tried to use measurements such as Return on Investment and Total Cost of Ownership as indicators of the IS organisation’s contribution to company performance. While these measures can work for specific projects, they are unable to account for all the other activities that take place within an IS organisation that may or may not be supporting the business priorities of the company. Hence, another approach was using the Balanced Scorecard model to try to widen the scope of what was measured, but it still lacked the ability to measure the total IS organisation in a manner that was meaningful to business.

A company called CogniTech Corporation has changed all that. They have looked at the question from the business point of view. If the IS organisation is fully aligned with the priority needs of the business, then obviously the business gains leverage from the IS contribution to the business activities. The question is: how do you measure it?

CogniTech spent 5 years looking at the business-IS alignment factors and established a questionnaire that is answered by all the business stakeholders. The questionnaire asks the stakeholders to rate a range of their business understanding/perceptions and to rate their assessment of the IS organisation’s contributions to business activities. When all the analysis is complete, the most important measure is the IS Contribution factor. CogniTech’s research shows that IS Contributions higher than 48 have an impact on the company profit margin—every one point increase in the IS Contribution above 48 correlates to a 0.4% increase in the profit margin. CogniTech has confirmed this many times over in companies that have taken a baseline measure, adjusted their business-IT alignment, and taken subsequent measurements.

Not surprisingly, the single biggest component of the IS Contribution factor is how the business stakeholders rate the interactive planning activities between the business units and the IS organisation. But that rating is significantly influenced by the business rating of the IS organisation’s credibility and that, in turn, is highly dependent on the business rating of their customer satisfaction with the IS organisation’s performance.

Hence, the CogniTech measures are somewhat like the set of blood tests a doctor orders for a patient. When the results come back, the doctor decides a course of action and orders a repeat set of tests at a later date to assess the progress. When the business receives the CogniTech results, the managers have to make decisions about how to fix the business alignment. The amount of detail in the results goes a long way to highlighting the areas of misalignment, so it is a matter of working through the sequence (enterprise value and value measures, business unit value and value measures, IS organisation actions and action measures) to agree on appropriate alignments. The results of the measurements provide the basis of setting Key Performance Indicators for each parameter so that the whole process is brought under a manageable measuring system.

As an indication of the success that can be achieved by making these measurements and managing the results, one of the world’s largest mining companies is aiming for just over a 2% increase in its profit margin in an 18-month period ending late in 2002. In America, one company in one of the most price-sensitive industries in the country achieved a 2.5% increase in its profit margin in 1998/99.

And often, there is a bonus. In companies with little or no history of effective business-IT planning and/or uniform change control, paying attention to such activities will provide significant savings in the total IT spends. The savings arise from simply saying “No” at the right time. And that is in addition to what may happen to improve its profit margin.

The ramifications of having such a system in place are far-reaching. Take just one example—those usually very fanciful documents called business cases—usually written by people so enthused with desire for their project that their enthusiasm could light a small town for a month or two! Once the full range of KPIs are in place with the business and IT properly aligned, the business case can show precisely which measures will be affected and by how much. The owners of those measures can sign on the bottom line to say how much positive or negative impact they expect. Real numbers, not real dreams.

For additional information, visit CogniTech Corporation’s Web site.

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