Adding Value Through IT Investments (1)

Are we investing too much money in information technology and information systems? This is a question pondered by many CEOs and boards of directors today. Until recently, companies have made major investments in information technology, trusting that this measure alone would increase productivity. Now, decision-makers are increasingly questioning whether IT projects actually create value.
A survey conducted by CFO Magazin found that only 14% of executives state that their companies’ IT investments had achieved the expected return on investment (ROI), whereas 74% were unsure of whether they had spent too much money on IT in the past three years. Clearly, doubts are being raised about the benefits of IT investments, and managers are becoming more careful about giving the go-ahead to IT budgets.
What’s cause for concern is that these reservations are apparently warranted. According to a study recently published by Gartner, of the $2.7 trillion that flowed into IT investments worldwide in 2001, a stunning 20% was spent in vain because the money produced no positive effects.

ROI Studies are Booming

It’s no wonder in this context that a great demand exists for ROI studies that examine the possible yield of a planned IT investment, and that managers are seeking new methods for evaluating ROI. However, judging the economic benefits of an IT investment isn’t easy. That’s because, as a general-purpose technology, IT often has only very indirect financial effects and unfolds its productivity benefits only in conjunction with other factors.
Thus, calculating individual IT investments is not worthwhile, as typified by the following somewhat grotesque example of a U.S. electric utility. Its IT steering committee was presented with more than 20 business cases for planned IT projects. When the controller added up the promised cost and personnel savings, he came to the conclusion that the company could cut 110% of its workforce if it approved all the IT projects.

Corporate Strategy as a Linchpin

A business case for individual projects just isn’t enough. An individual examination provides no information about the opportunity costs that are incurred by new projects. It doesn’t become apparent whether the resources could be used more effectively in other ways. Furthermore, it provides no insight into the effectiveness of an IT investment in conjunction with other measures and productivity factors. This information can be ascertained only when a project is considered within the framework of the corporate strategy as well as the entire IT portfolio.
Companies that seek fully to exploit the potential of information technology must derive their IT strategy from their corporate strategy. Moreover, the existing business model and its processes should be continually examined to determine how improved methods (and the use of information systems) can increase productivity. In addition, existing and planned information systems, including related infrastructure and projects, should be administered and optimized as a portfolio of information capital, based upon clear success indicators and life-cycle considerations.
Today, many business tasks can be efficiently conducted only with the help of professional information management, which is why information technology that makes this possible has become an important productivity factor. The IT infrastructure used by a company to accomplish this task is thus considered productive capital, also called information capital. This information capital is for the most part — as are a company’s personnel resources and existing customer relationships — an intangible asset that develops only in the interplay with other business factors. The task of corporate strategy is to create the larger context and adapt to a changed scenario if necessary.

Closing Gaps in the IT Infrastructure

Corporate strategy defines a company’s goals in financial terms (shareholder value) as well as in relationship to customers, competitors, growth potential, and internal processes. From these goals, strategic programs can be derived that organize productivity factors and activities of a company in such a way that added value is created for customers, investors, and other stakeholders. The strategic programs are the basis for determining the required information capital and the corresponding IT strategy. It’s important to identify strategic jobs — roles that are critical to the success of strategic programs — and to support them effectively with IT, thus closing gaps in the IT infrastructure.

These gaps are identified by the Strategic Information Capital Council, which is comprised of representatives from the business divisions, strategic planning and controlling, the IT department, and other internal areas, and possibly including representatives from external interest groups (customers and suppliers). The Strategic Information Capital Council prepares decision-making on measures and the required investments that are intended to advance IT strategy, and monitors the success of individual projects. To accomplish this, it uses the Information Capital Strategic Readiness Map. This tool represents the current situation of the company from the strategic IT perspective, by illustrating the required portfolio of IT applications and technologies in order to support corporate strategy, as well as the status of implemented measures and projects.
An IT strategy aligned with corporate strategy ensures the creation of the IT infrastructure that is required to support and implement the business model for the future, as defined by management. The objective is to establish the strategic information capital required to ensure the continuing viability of the company. In addition to orienting the IT strategy and ongoing optimization of the IT portfolio from a corporate strategiy – that is from a future – perspective, possibilities for increasing productivity can also be found in the existing business model, the company’s daily business. But focusing solely on information technology is not sufficient in this regard. Added value can be created only when processes and practices are newly conceived.

Balancing Efficiency and Effectiveness

In any IT investment, efficiency goals (lower costs) should be balanced against effectiveness objectives (improved customer service). Research conducted by Erik Brynjolfsson, a professor at Sloan Business School at MIT, shows that, on average, companies emphasizing the effectiveness of their IT investments increase shareholder value more than companies that are concerned only with increased efficiency.
To achieve a balance of efficiency and effectiveness requires integrating business, operational, financial and information technology competency. This task is fulfilled by a Productivity Council that typically consists of representatives from the business, controllers, IT experts, and possibly marketing experts, personnel specialists, and engineers. The team continually searches for ways to improve productivity within the existing business model. These methods could be ideas and innovations for process improvements that result from a business view and can be implemented with the help of information technology. Or they could be new technologies that make it possible to optimize processes. The productivity council evaluates these possibilities, suggests measures and projects for their implementation, and documents the identified options. Moreover, it uses the Information Capital Productivity Enhancement Map to determine whether the objectives are being accomplished. This tool provides an overview of the existing portfolio of IT applications and technologies, and indicates the degree to which they support existing business processes.
The organizational framework in the form of a comprehensive Information Capital Management System, which helps to continually optimize the overall benefit of the IT portfolio for the company, is discussed in part 2 of this article.

Jürgen H. Daum
Jürgen H. Daum