Unlocking IT value is the Holy Grail for many CIOs and executives concerned about the vast sums of money spent on IT. However, when asked, many executives have great difficulty in defining what they mean by value. No wonder it is so elusive!

Where do we stand?

For millennia, mankind could not describe the shape and size of our Solar System. The view from the Earth is highly deceptive. It appears to be flat and the Sun, Moon, planets and stars all appear to move around us. Why does the Sun move northwards for half the year and southwards in the other half? Why do some planets occasionally travel backwards and others stick close to the Sun? No geocentric explanation could deal with these “anomalies” adequately. We have to take a view from outside the Solar System to understand what is going on.

I suggest that we have a similar problem with IT and value.

In order to understand the contribution IT makes to value, I believe we need to move outside the IT Function but even the business functions IT serves are not far enough away (as they too have parochial perspectives) and nor is the executive suite (as do they also). I believe we need to move right outside the enterprise itself and stand along side those for whom enterprises exist.

For whom do enterprises exist?

For-profit enterprises exist for their shareholders who own them and all of their IT assets and pay all of the IT costs incurred by the enterprise. For-profit enterprises do not exist for their customers, staff, suppliers or anyone else but their shareholders. They could not exist but for their customers, staff and suppliers but they do not exist for them.

Not-for-profit enterprises exist to provide services to certain communities like citizens in a local authority area, patients of the NHS and beneficiaries of charities. (The members of these communities are all called “beneficiaries” below.) It is these communities for which such enterprises exist, not those who are funding them , their staff, suppliers or anyone else.

I, therefore define “value” as what enterprises provide to their shareholders and beneficiaries. We might very well talk in terms of value for money for customers; the value of staff, information, intellectual property etc; supplier added value, etc but these are all distractions from this most important form of value which gives enterprises their reasons for existing.

IT’s Contribution to Value

In my terms, IT per se does not provide any of this type of value. Indeed, it could even be said that IT destroys this value as it uses up shareholders’ and beneficiaries’ money. The question is: what do shareholders and beneficiaries get from their money which is spent on IT?

What IT does contribute is “capabilities” to enable business functions to create even more value, net of the cost of IT, than they would be able to create if they did not have these capabilities.

But does this mean enterprises should minimise what they spend on IT? In order to answer that question the IT spend needs to be split into two distinct parts, here called services and projects.

IT Services

IT services provide enterprise staff and others who interact with the enterprise, e.g. customers and donors through the Internet, with applications and facilities to help them do their work or deal with the enterprise more effectively and efficiently on a day to day basis.

When considered from the perspective of the shareholders and beneficiaries, all expenditures on IT services are really just part of the costs of running business functions but this is often obscured by the presence of the IT budget.

Just as with all other business costs, it is management’s responsibility to ensure the costs of IT services are continuously being minimised whilst achieving the business objectives. Outsourcers should do likewise.

Projects

All projects are investments of shareholders’ or beneficiaries’ money and so should increase what they will receive from the enterprise in future compared with simply passing the money over to them in the near term.

However, all enterprises have limited resources available to invest to create additional value. It follows that enterprises should maximise the return on investment (ROI) they secure from such investments.

This is a quite different objective from that for IT services, since maximising ROI might involve spending more or less. Hence it is absolutely vital to distinguish IT expenditures on IT services from those spent on projects.

Typically this is nothing like as straight forward as mapping IT operational spend and IT development spend onto IT services and work undertaken for projects. Also opex and capex do not map directly into IT services and projects either. Fundamental accounting changes and IT budget restructuring are often needed to do this properly.

Value from Outsourcing

IT Outsourcers undertake particular aspects of the work of the IT Function. They should be subject to exactly the same objectives as stated above, i.e. they should be:

a) continuously minimising their charges for IT services whilst achieving the service levels the business functions need to maximise their day to day value creation; and

b) helping to maximise the ROI of projects, within funding constraints, in order to maximise future additional value creation.

Outsourcers often talk in terms of improving quality, allowing management to concentrate on more important tasks and facilitating organisational change. Even so, it is still necessary to consider how these create more value for shareholders and beneficiaries.

How does improved quality translate into this form of value? If IT service levels have already been set to optimise the value business functions can provide and those targets are being continuously achieved then the only way outsourcers can deliver more value is by continuously reducing their charges. Otherwise, improved quality just decreases value, if it costs more.

Projects should maximise ROI. Here enterprises are not necessarily seeking the cheapest resources. Maximising ROI might require some very skilful, innovative, experienced and so expensive people from the outsourcer to design projects and assist in guiding them as they progress. Improved quality might be critical to maximising ROI from projects.

Unfortunately many projects involving IT are defined in terms of assisting with achieving business function goals which might or might not lead to more value, whereas they should be linked directly to value, as it is shareholders’ and beneficiaries’ money which is being spent and it is they who should ultimately benefit. Also the focus is often on whether projects are within budget, on time and delivering what was expected, not what maximises ROI which might be quite different.

So are outsourcers helping maximise value creation?

The answer depends on whether the IT Function, together with outsourcers, is delivering capabilities which enable business functions to create additional value net of the cost of IT; and whether the outsourcers are fulfilling both a) and b) above.

Solving the riddle of the Solar System depended on detailed measurements. Solving the riddle of the contribution of IT and outsourcing to value creation depends on understanding exactly what value means, who creates it and also having appropriate metrics. Where do you stand, with the shareholders and beneficiaries or somewhere else?