According to a recent Gartner survey of 620 CIOs, demonstrating the business value of IT continues to rank among the top five CIO priorities. In light of this, it’s not surprising that there's an increasing number of firms employing IT investment models that enable CIOs to monitor and manage IT investments in terms of business value.
Some CIOs, however, are clearly struggling with this challenge, while others are not pursuing it at all. One reason for this difficulty is that, while CIOs believe in the soundness of IT investment management models, many don’t feel they can pull it off in their organizations. The chief reason they point to is that their subordinates lack the financial skills to assess and manage their work according to business value.
Yet, there are IT teams that have pulled it off, despite the lack of financial savvy. Vitro, a glass producer nearly a century old, did just that.
Vitro’s formula for acquiring instant financial acumen
Vitro, founded in 1909, is a $2.8 billion glass producer and a major participant in three principal businesses: flat glass, glass containers, and glassware. Vitro’s IT team needed a way to compare the impact of various proposed IT investments and to track and manage its existing IT portfolio.
In 1999, a specific investment challenge at hand was a proposed company-wide desktop PC upgrade. Vitro decided to engage Glomark, a Columbus, OH-based firm that provides IT investment methodology training and software tools that enable organizations to assess and measure IT business value. Glomark’s approach was simple and yet immediately effective.
According to Ruben E. Melendez, Glomark's founder, president, and CEO, Glomark attacked the challenge by training 30 people from Vitro’s IT team on its methods and in the use of Glomark's Genius™ software tools. “With these tools, our IT people don’t need to be experts in accounting and finance in order to manage to business value,” says Gustavo Benitez, Vitro’s director of IT supply chain management. According to Benitez, all the Vitro IT team needs to do is collect and supply the process with well-defined pieces of information. In the final analysis, the IT team at Vitro gained the ability to assess and manage their project for business value without becoming financial experts; they just adopted a simple set of processes and learned how to use specialized software.
Following the success of this approach in enabling the project team to manage business value, Vitro made Glomark its partner, and Vitro now requires IT to use Glomark’s business analysis methodology and tools for any projects that call for an investment above $20,000.
In addition to helping Vitro make decisions that resulted in increased IT return on investment (ROI), the use of this methodology also helped Vitro avoid sinking dollars into projects that were not destined to produce appropriate financial returns. For example, in one instance, the IT analysts were considering an e-commerce Web site project that had already been approved by business management. When the proposed project was put through the rigorous analysis of the Glomark methodology and tools, Vitro discovered that the proposal sponsors had not accounted for shipping costs in building their model. When those costs were included, the project was shown to be unprofitable and was shut down before it started.
Another benefit Vitro derived was the elimination of redundant projects that had the same goal and could have had negative results. According to Benitez, one set of projects that fit this example had the singular objective of reducing Vitro’s inventories. Had they all been collectively executed, Vitro would have ended up with zero inventories. “Not a very good thing in our business,” says Benitez. Vitro is currently taking the next step in making even greater use of the ROI tracking tools provided by Glomark’s software. Using these tools will enable Vitro to capture and compare actual ROI with the originally projected “business case ROI.”
Key ingredients for success
So what are the essential ingredients for success in ratcheting up the ability of an IT team to demonstrate and manage business value? Melendez says, “There is no need for the IT team to become trained to think like accountants or develop financial competence. Software tools like Genius™ provide the accounting and modeling savvy. What is important is for the IT team to learn the basic assessment methodology and how to use the software tools.”
Jon Piot, coauthor of The Executive’s Guide to Information Technology and cofounder of Impact Innovations Group, says that it is the lack of methodology that is the real issue behind IT’s lack of capability in investment management. “Any IT organization, with the right process, tools, and training in place can become effective at IT investment optimization even if the team members lack financial savvy. Rigorous financial analysis is only a small part of the overall decision process,” says Piot.
Where to start
Piot advocates three basic steps for getting started on the road to better IT investment management:
- Establish a management forum as a place where the top business and IT executives of the company can discuss business and IT priorities. This forum can be used to ensure that business priorities drive IT priorities.
- Next, you need to put an overall process in place to evaluate, review, and approve projects. The chart shown in Figure A, from The Executive’s Guide to Information Technology, provides an example of this type of process.
- Finally, you need to implement a project evaluation method that enables you to "score" each project according to key factors, such as expected financial return, strategic value, and risk, so that projects can be properly assessed and prioritized. This enables projects to be compared to each other and lets you set hurdle rates for each key factor.
When initially moving into this investment management system, you'll need to go out and inventory all projects currently being executed by the IT department and all that are scheduled to be executed. “We call this the project rodeo," says Piot. “Generally, after this initial rounding-up work is completed, it becomes a matter of sticking with the discipline."
CIOs need the financial and business acumen support that CEOs receive from their team of immediate reports. These may not be the top competencies of the CIO’s team members, but with a solid set of policies, carefully structured processes, a clear set of methodologies, and the right tools from the right vendor partner, a CIO can inject a healthy dose of instant financial brilliance into his or her organization.