The Management Side of IT: What is the Value of Your IT Department?
This is the first of a series of columns discussing the right way to manage IT. It is targeted at the CEO’s and CIO’s who have the main responsibilities for managing this critical resource.
My first question is “Do you know what the cost of IT is to your company? Most CIO’s and CEO’s know the answer to this question. It usually falls between 2% of revenue all the way up to 50% of revenue in the really high tech, web-based companies.
Sometimes companies have a hard time discerning the real cost since many charge-out their IT costs to the user departments and it is therefore buried within the separate departmental P&L’s. But assuming that it can still be calculated, it is the first requirement for answering the subject question. Remember this cost is expressed as a percent of company revenue.
Usually this number is discussed in detail during budget season. The CEO will ask the CIO “What am I really getting out of this very high cost department?” It would be unusual for a CIO to have a quantitative answer. Usually the response will be to enumerate the systems that have been developed and the heavy schedule that is anticipated for the next budget year.
I believe that this area is a great opportunity for IT. We often talk about how IT managers need to become more business oriented. Well here is one of the ways. Wouldn’t it be more “businesslike” if IT could answer the question by stating that the savings that were achieved by the new picking system were XX% larger than the ROI estimated and that these savings will continue to increase over the foreseeable future. Or how about being able to confirm that the revenue increase originally planned for the new CRM system has been exceeded? Now that’s a business answer.
As great as it would be to answer the question in this way, it is very difficult to achieve. Here is what has to happen. Approximately one year after the implementation of a new system (one year is minimum so that the system has time to be fully functional,) a team has to be assembled that will analyze the first year results that have been achieved. This requires users to document savings or revenue increases and IT to determine development and production costs. Then a financial analyst should take that data and compare it to the original ROI and determine the results. Combined the team should also attempt to predict these values for several years into the future.
This data is sometimes very difficult to collect; department managers are often reluctant to share cost savings data since it could restrict their operation. For example, suppose the ROI was based on saving five heads in the first year and an increasing number into the future. This process will force the department head to show that these cuts have or have not been made. It is common practice to move these heads to other projects rather than outright release. In these cases, the management will have to justify this action.
In addition, when IT systems do create a savings they are rarely recognized for the result. It is usually buried within the cost structure of the department and provides the department the opportunity to show that it has, through good management, lowered its costs. Thus there can be resistance to be overly supportive of this process.
Probably the best way to accomplish the goal is to have a third party such as Finance or Audit do the work. This enables an unbiased look at the matter and the resulting conclusions will be a lot more trusted. It also solves the problem of finding the original workers on the project who may have already moved on to other projects, departments or even left the company.
At the end of the day, this process is the only way to answer the questions, “What is the value of a project? And ultimately “what is the value of IT to the enterprise?” The process is fraught with difficulty, but well worth the effort. In addition to answering these critical questions, the process will also raise the stature of IT within the organization. That is very important as we move to more digitally dependent enterprises.
About Paul Ingevaldson – Paul retired from Ace Hardware in 2004 after 25 years of service. His last position was Sr. V.P.-International and Technology. In that capacity he was responsible for Ace’s International business, which operates in over 70 countries, and the total IT operation both for the company and for the retail stores. Since retirement he has stayed very busy writing IT articles for Computerworld and CIO Magazine, acting as a guest lecturer in a local MBA IT course, doing several IT conference keynotes, and some international retail consulting.