A Better Metric For IT Efficiency

CIOs should implement a governance structure that aligns IT investments with business initiatives through use of the value map and includes the consideration of less tangible benefits in addition to the traditional financial measures. This becomes easier when IT sees itself as part of the business rather than as an indifferent provider of technology.

Technology capital budgets vary by industry. Our experience suggests that the majority represent 25% to 45% of typical operating-expense budgets. Yet many companies take a simplistic approach to capital budgeting, giving each function a little piece of the pie—usually based on the previous year's budget—without regard to business needs.

That approach may be one way to avoid infighting, but it's not the most effective way to run a business. Funding should reflect the reality that some activities are more important than others. While IT can structure the analysis and decision-making process, the company should ultimately decide how capital is allocated.

IT functions that want to be taken seriously must establish rigorous performance measures, just like any other business function. Historically viewed as a cost center, IT isn't always held accountable for efficiency and performance. But now, more IT organizations are repositioning themselves as product and service operations with clear metrics for service quality, asset use, staff performance, operating efficiency, and customer satisfaction.

To accomplish this, a growing number of IT functions are modifying their performance scorecards to reflect key business metrics and strategic objectives. For example, if a company is pursuing the strategic goal of expanding into China—and there is a technology requirement associated with it—that goal will likely appear on the scorecard. Similarly, many IT functions are becoming increasingly customer-centric and are adding customer-satisfaction metrics to reflect their new focus. Some retailers we work with monitor point-of-sale register activity in real time, not only to understand which products are moving and where, but to manage any register that's offline due to a technical glitch and ensure that the problem is resolved quickly.

A dashboard can help CIOs manage IT performance by integrating data into a single source. The trick is finding the right things to measure—those that matter. For example, many dashboards show technical details, such as server/network availability and help-desk metrics. But fewer include business measures, such as staff allocation, application-development project status, project time to benefit, and IT-asset utilization.

We also know from a recent survey that companies aren't diligently monitoring post-implementation benefits. This is changing for the better, but needs to happen more quickly. The most sophisticated companies not only include measures around project time-to-benefit, but also report on the level of post-implementation benefits.They're also simplifying operational performance to include only items the business cares about—application availability and disaster-recovery capability, for example, versus the details of network availability.

To be effective, dashboard content must be simple and timely. Time-sheet data, for example, should be available almost immediately to help managers identify and reassign underutilized staff. In general, equipment metrics like network availability should be updated daily, while application-development and people metrics should be updated weekly. To avoid data overload, limit each screen to no more than seven pieces of information. If users need more detail, they can click to drill down.

The idea of benchmarking IT against leading IT functions outside the company has a certain intrinsic appeal. But in many cases, internal benchmarking can be even more powerful and effective. The key to effective benchmarking, whether it's internal or external, is to look at detailed metrics that help explain variations in performance. Many companies simply evaluate IT operating expenses as a percentage of revenue. But that only indicates whether they're spending more or less than others—not whether spending is leading to more effective performance.

Gathering information on topics ranging from staff utilization and service-delivery models to IT-portfolio management can provide the insights necessary to drive operational excellence. That detail is generally easier to obtain from within.

Every IT application has a life cycle that must be consciously managed. Yet many IT functions give very little thought to how long an application should last, or when it should be refurbished or replaced. Without this knowledge, it's easy to waste money maintaining obsolete systems, or to let applications linger long after they've outlived their usefulness. The original business case can be a powerful tool for life-cycle management. Many IT functions require a formal business case for each major IT investment, but only the most effective keep their business cases up to date as conditions change. Even fewer track benefits to confirm that investments delivered on their promises.

An IT function that intends to be a true partner with the company must think about operational excellence in terms of value—moving beyond a narrow focus on cost efficiency—and linking IT activities, services, and investments to key business drivers.

Steve Poniatowski is a senior manager in Deloitte Consulting's business IT strategy practice. J.D. Wichser is a leader in Deloitte's business IT strategy practice.

How is your company spending IT resources to achieve overall business objectives? Tell us.

See Related Articles:

Plotting Success With Strategy Maps, February 2004
Why Is Growth So Hard?, May 2003
Decoding the CIO-CFO Relationship, June 2005