Innovative consumer technologies demonstrate the promise of IT, but internal IT groups often fail to keep pace. Changes in how technology investments are selected, delivered and communicated are required to harness the opportunity.
The expectations for technology in business have never been higher—thanks to the consumerization of IT, disruptions across the tech stack, and the emergence of new technology-based business models—nor have the pressures facing corporate IT departments been greater. Technology continues to permeate life and business, and companies are emphasizing IT in their short- and long-term strategic investments to build and broaden their competitive advantage.[1]
However, the perception of the value that technology and IT departments brings is low for many companies. Too often, big technology investments fail to meet expectations—or worse, they become white elephants and sunk costs. Many IT departments have failed to meet the challenge of the emerging technology opportunity.
As technology investments take a more prominent role in top leadership conversations, IT leaders will be tasked with maximizing the value of their technology investments to create a competitive advantage. Traditional approaches aren’t cutting it.
So how can business leaders and CIOs maximize the value of their technology investments to drive competitive business advantage? By tackling three important areas: creating business-IT partnerships, realigning investment allocations, and better measuring and communicating value.
Reaping the Rewards of Your IT Investments
Why are these three areas so important? Because capturing the transformational power of technology can reap immense rewards.
There are many benefits:
More partnership and better alignment help focus technology investments on the right areas. Partnership and alignment are fundamental to success, as they enable more informed tradeoffs and reduce bias in technology investment decisions. They also encourage more shared responsibility between business and IT for delivering technology results. And lastly, this focus clarifies the role the IT group seeks to play, be it innovator or cost optimizer.
Shared accountability leads to shared success Bymaking technology initiatives business-led, executives from both teams are responsible for success. This shared accountability will lead to higher project success rates and a better understanding from everyone in the organization of what role IT plays. Shared accountability also improves transparency by tracking investment benefits from the creation of the business case to project execution and post project reviews.
Clear IT resource performance metrics better communicate the value delivered by IT. The success of IT resources and investment is based on data-driven metrics which measure delivery against the strategic goals of the enterprise, not IT operations. Once a base set of IT metrics is tracked, corrective adjustments can be made to improve IT and business results. Sharing accountability and clearly communicating results can improve the odds of positive budget adjustments, drawing the thinking away from expense and toward investment.
Crossing the Chasm
Leading organizations have built advantages that allow them to unlock the full potential of their technology investments. These leaders form partnerships between their IT departments and the business, they carefully manage their technology investments, and they measure and communicate the value of investments in business terms.
In the following sections we look at the three approaches these companies take—how they differ from the traditional approaches and how they tackle the biggest challenges.
1. Align business and technology strategies. CIOs commonly take full charge of technology investments, but often without any connection to their business partners. This often results in suboptimal investment results. Making IT investment decisions based on a joint business-IT partnership ensures that technology investment decisions—the technologies selected and projects deployed—are consistently and tightly linked with business priorities, that the tradeoffs and implications of any purchase are clear, and that the requirements are strong and long-lasting. It also ensures that the IT organization has an understanding of long-term business objectives, and that junior staff has the clarity and ability to link objectives, programs, and projects to business and technology strategies.
The following steps help to get this approach done:
- Establish a forum of business and IT leaders. The first step is for business and IT leaders to align on long-term strategies and technology roadmaps. This allows IT to be engaged earlier on in the process, with a role in strategy decisions. IT should have more forward visibility into potential ideas so that it can have a chance to share the demand and check alignment with the overall technology roadmap.
- Communicate mutual understanding. Business and IT leaders need to communicate the links between strategies and programs. It is important for both teams to understand the strategies of the business and the IT function to improve the odds of achieving goals.
- Define processes and accountabilities. The role of IT—as business partner, cost optimizer, service provider, or something else—should be clearly understood. At the same time, both parties need to be accountable; there should be joint ownership of business results. This includes accountability at a project and overall budget level. Performance management should be holistic, balanced, focused, and action-oriented.
Partnership and alignment is a prerequisite for technology investment success and must be continually remastered and maintained.
2. Uncover the total value visibility of your technology investments. Perhaps the biggest issue we hear from executives about their investments is that IT is not driving innovation, not generating top-line growth, or not developing the capabilities needed to position the company for longer-term competitive advantage. Too often, IT fails to capitalize on its strong position to help optimize how investments are allocated, and cannot industrialize its infrastructure to lower costs and enhance the customer experience. Because it touches all functions and all lines of business, it should have a holistic, enterprise-wide view that puts it in position to maximize its value.
Traditional approaches fall short in three key areas. First is by taking a “one-size-fits-all” approach to decision making, which hinders the ability to get a comprehensive analysis. Second is by giving into our innate aversion to risk; when it comes to picking investments, managers usually fear loss more than they value whatever gains may be possible. Lastly, despite the various governance committees most companies have, typically there is a lack of fundamentals needed to govern investments and monitor whether they remain aligned to business objectives.
A holistic approach to understanding the value of your investments means addressing all the interdependent components of your technology landscape. Following are the steps:
- Define a strategic investment plan leveraging asset classes. Consider IT investments as you would a financial portfolio with different buckets of asset classes of varying returns and risk profiles. Use the corporate strategic agenda to allocate capital by asset class from the top-down. Example “classes” include innovation, strategy, cost, or operations—all of which of course should be fine-tuned to the organization’s evolving needs. Allocations should reflect external market factors such as competitive dynamics and trends as well as internal factors such as investment climate, and business and IT priorities.
- Assign projects to asset classes. Examine your projects and assign them to specific asset classes by looking at factors such as type, size, duration, investment type, risk and return profile, value (such as business flexibility), potential revenue increase, costs, risks and, strategic impact.
- Evaluate the economic value and strategic alignment of projects within asset classes. In evaluating investments, different types of value will come into play, ranging from risk mitigation to cost optimization to revenue increases. The first step is uncovering all sources of value, followed by calculating economic value by applying the right valuation techniques, such as net present value, internal rate of return, real options, and value at risk. You can start with simple analytical methods and move to advanced methods as the organization matures and greater buy-in results in aligning and mapping analytical methods with asset classes. In addition, assessing strategic alignment will determine alignment to IT strategies and priorities. The assessment methodology is primarily qualitative and ensures less tangible sources of value are considered and quantitative precision is balanced with non-quantifiable benefits
- Prioritize targets within asset classes, and leverage investment plan to determine the optimal portfolio mix. Prioritize within asset classes based on economic value and strategic alignment. Compare projects within an asset class to ensure apples-to-apples comparisons. Finally, develop scenarios to create prioritized projects within asset classes based on pre-defined capital allocation thresholds defined by the strategic investment plan. In the end, a prioritized list of projects by asset classes can be chosen based on the top-down strategic agenda
Strong investment governance that provides oversight to investment funding and execution, and provides feedback to funding decisions will help to ensure ongoing alignment with enterprise priorities.
3. Measure and communicate value. Most IT groups struggle to transparently communicate the true value of technology, focusing instead on either IT operations measures or end-user satisfaction rates. The common perception is that IT costs too much, delivers too slowly, and doesn’t offer long term differentiating value.
IT leaders can address this by using metrics that help explain IT’s value to business leaders, rather than just confuse them. The best IT organizations link their performance to business goals—for example, increases in customer acquisition, incremental revenue growth, end-user satisfaction, or retention rates.
IT will need to expend some initial energy to align metrics and build reporting capabilities. Once in place, these measures can clarify value and improve IT’s reputation within the organization. The most important first step is to link business strategy and objectives with IT strategy and goals. Complete approaches take four steps:
- Assess impact on business contribution. What is the impact of technology investments on generating revenue, increasing the customer base, or reducing costs?
- Evaluate effect on customer experience. How do our technology investments affect our customer relationships, and how does our IT appear to customers?
- Monitor innovation pipeline. How do we manage innovation so that we can achieve our business vision? How much do we spend on innovation? How do we track innovation success?
- Track IT operating performance. What must IT deliver to satisfy its business partners and consumers?
Once the groundwork is laid, IT metrics cannot stay stagnant. Leaders make adjustments and tweaks as the business climate and enterprise objectives change to drive the best return.
Meeting the Challenge
Technology advances are raising expectations for internal IT. To deliver on the promise, IT groups must change how they align with key stakeholders, make investment decisions, and measure and communicate they are creating.
IT leaders must speak the language of business to demonstrate the value delivered by IT. Recognizing the multifaceted contribution that IT makes to business value and following a disciplined process for allocating investments, IT and business leaders together will make better investment decisions, which will ultimately increase the value IT delivers. By communicating that value, everyone in the company will be on the same page.
About the Authors
Christian Hagen is a partner in A.T. Kearney’s Strategic Information Technology Practice, based in Chicago, and can be reached at christian.hagen@atkearney.com. Jason Miller is a principal in the Strategic Information Technology Practice, based in Chicago, and can be reached at jason.miller@atkearney.com. Sachin Mahishi is a principal in A.T. Kearney’s Strategic Information Technology Practice, and can be reached at sachin.mahishi@atkearney.com.
[1] IT 2020 report footnote