Benchmarking &

Performance Management

White paper

Demystifying
the business value of IT
Operationalization of strategic IT themes
and measuring IT performance Norbert Vincent and Edwin Eichelsheim

The changing role of IT, from costs to production factor

Economic downturn and IT outsourcing pressured the IT budgets and IT organizations do
not seem to be the partner for business process outsourcing deals. The need for justification
of the value of IT seems to be more important than ever. Quint identified strategic themes
to leverage the benefits of IT to the business and defined a framework to implement and
operationalize strategic themes.
Value creation takes more than translating strategy into Key Performance Indicators (KPI’s) to
create results, more than measuring performance with KPI’s to influence behaviour. And above
all it requires adjustments to evaluate the planned performance in a dynamic business context.
The combination of strategic themes and the implementation of performance management
processes will ensure a mindshift within the business regarding the business value of IT,
from cost center to asset and production factor. The first phase is to define and measure the
performance, than to control the performance and finally to predict the value.
The path of value creation is a path of building knowledge on the effectiveness and efficiency
of your own business model, or to be specific on the IT Business Model. This knowledge will
help you answer questions like how will you make money on IT, how will you stop the discussion
that IT costs too much, how will you take position in a market landscape where IT Outsourcing
and Business Process Outsourcing gain market share against the internal IT organizations.
Therefore organizations need to start today to build this knowledge in order to cope with the
current challenges IT organizations face.

D a r e t o c h a l l e n g e
 The landscape IT organizations are operating in is becoming more and more complex
trends and
and competitive. The complexity is a result of the increasing heterogeneity of the IT
challenges
environment in response to expectations of the business. Achieving and sustaining
competitive advantage requires the business to become ever more flexible, requesting specific
information and content services. This translates into a requirement for both specialization and
flexibility from IT: specialization in order to achieve competitive advantages in terms of content
and knowledge, flexibility in order to achieve and maintain competitive advantages by being
able to respond adequately to changes in business context. IBM refers to this with their On
Demand strategy and Microsoft and HP both focus on the Adaptive Enterprise.

The increased competitive pressure for the IT organization originates from both the demand
and supply side. Competition on the business side has been transformed by the emergence
of Business Process Outsourcing (BPO) services. Consequently, highly specialized companies
compete (in)directly with the IT organization for a slice of the available IT budget.

From the supply side competition for the IT organization has stiffened due to the great number
of (offshore) suppliers and the high cost/quality they are able to offer. In other words the IT
organization is undergoing pressures on its market share both from the demand and the supply
side. The danger for IT organizations lays in getting 'stuck in the middle', with too little standing
vis-à-vis specialized business parties and IT suppliers.

To avert marginalization IT organizations need to clearly define their positioning towards the
demand side, concentrate on developing measurable IT business value, increase external
control, create market alignment and develop dynamic capabilities. Quantifying IT business
value has however traditionally been a hard nut to crack. Applying ‘performance management’
as a concept to tackle this problem is by no means new, but by approaching it from a slightly
different angle Quint Wellington Redwood believes it provides methodologies and metrics
which support IT organization in coping with the ever increasing complexity and competition in
their line of business.

IT organizations face the following challenges:

1. Make the value of IT transparent to the business
2. Implement strategic themes to cope with the trends
3. Become more predictable in both the costs and the value creation

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1. MAKE THE VALUE OF IT TRANSPARENT TO THE BUSINESS

Studies on the macro economic environment show that IT has positive contribution to the
growth of the gross domestic production. But who does benefit from this value creation on a
business level? This paragraph describes the benefits of IT for the business manager and the
IT manager.
The business manager is primarily interested in the effect of IT on a business services and
business process level. Business Managers can measure the IT contribution to their business
when they know how and where IT hit their profit & loss. This is business & IT alignment
from an economic perspective; IT value aligns with business methodologies like Economic
Value Added (EVA) and Activity Based Costing (ABC). In order to establish this economic link
Quint developed the IT Performance Value Framework. The first step in this approach Quint
determines which KPI’s the business uses and which KPI’s the IT organization uses and what
the current linkages between those measures are. The value assessment indicates how mature
your performance framework is.

The Value of IT
Macro-economic developments show that IT does add value. Analysis of the
IT does
Organization for Economic Co-operation and Development (OECD) shows that the
add value
ICT production in Finland and Ireland from 1996-2001 accounted for one percent
point of aggregated productivity growth. Another measure of the increasing contribution of
IT to the economy is capital deepening. Capital deepening refers to the increasing share of
IT investments in the total portfolio of investments. On a micro economic level market studies
show that IT as percentage of revenue or as percentage of operational costs increase up to
about respectively 7% and 20%.

So IT does add value and the role of IT is changing from a supportive tool into a production
factor. So does one create value with and through IT. This value creation is in the eye of the
beholder; both in the eye of the business executive / manager and the eye of the IT executive
/ manager.

The business executive is primarily interested in the contribution of IT at the product / services
level, the business process level and the individual productivity level. At the product and
services level, information is a characteristic of the service / product. At the business processes
level, information and data form the coordination mechanisms for activities. And at the
individual level IT increases the productivity of the people. Effective and efficient use of IT then
focuses on the right information for the right purpose, the right degree of automation and the
right use of IT tools. IT as part of the revenue or as percentage of the operational expenditures
are frequently used measures.

The IT executive is primarily interested in the return on IT at knowledge, information, application

and infrastructure level. He oversees the total IT architecture and needs to balance the
requirements of the users in the business. The IT executive needs to make the IT assets swet
and focuses therefore mainly on the Return on Assets (ROA).

Methods like Activity Based Costing and the Economic Value Add (EVA) are especially suitable
to calculate the cost prices of IT services and to measure the value contribution. Especially in
the situation where the business has adapted these methodologies, IT can "relatively easy"
show its contribution; activity drivers of business processes are forecasters for the used IT
capacity, and therefore forecasters of possible IT investments.

IT Innovation focuses on improving the outcome measures. Business projects and IT projects
tend to use ROI and the expected contribution to EVA as a measure to predict the future

—3—
 value of these projects. Another predictive measure is the speed at which innovation can be
brought to the market. This Time to Market measures the performance of the organisation in
the execution and delivery of innovations.

It is the combination of outcome measures and predictive measures that makes it possible
to plan the strategic themes and to check whether expected outcomes are realised or that
expectations need to be adjusted.

Although the value of IT at the financial level seems to be indirect, the impact of IT at a
business process level is far more direct. Direct refers to making things possible which
are not possible without IT (mobile communication), to being able to improve the business
product quality by adding information to the product (bank account information) or to charge
customers to provide information (stock exchange rates). Another contribution of IT is in the
(positive) trade off between business and IT capacity needed to produce business products
(reduction of employee cost per product) or between one technology to another technology. An
example of this technology swap is that the TCO of C/S technology (Client/Server) for a given
organization and architecture is higher than the TCO of Server Based Computing.

Leveraging IT for the business process Examples of outcome measures at a business process level
are the throughput time of processes, productivity and stock
Right levels. The use of IT can improve those measures by using
Right the right information at the right place, making optimal use
EFFECTIVENESS information
information
sources of IT tools and therefore the optimal degree of automation
Business and an effective and efficient IT support organization.
Process
Efficient
Efficient In order to demystify the business contribution of IT, Quint uses
EFFICIENCY information
IT support business management methodologies and metrics to measure
production
the business value of IT and IT knowledge, experience and
SPECIALIZATION FLEXIBILITY instruments to manage and control the value creation of the IT
IT
organization; the IT Performance Value Framework.

The IT performance value framework consists of five phases and aims to improve the IT
performance management capability of organizations. The IT performance capability is the
result of the combination of knowledge of the IT business model and the level of value creation
impact of IT. In the last paragraph I will elaborate on the maturity stages. In this paragraph and
the next paragraph the five phases of the IT performance Value framework are discussed.

The first step in the IT performance Value framework is the value assessment. The value
assessment determines which KPI’s the business uses and which KPI’s the IT organization uses
and what the current linkages between those measures are. The value assessment indicates
how mature your performance framework is.

The IT Performance Value Framework Phases

Value Strategic Theme Create Control Coordinate

Assessment Selection Strategy Map and Measure and Adapt

The next phases are the strategic theme selection and the creation of strategy maps and
the operationalization and measurement of the strategic themes. The implementation of
the strategic themes within the business planning & control cycle starts the continuous
improvement cycle.

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2. THE IMPLEMENTATION OF STRATEGIC THEMES

Strategic themes leverage IT to the business. In the strategic theme selection an organization
defines the economics and the qualitative and quantitative measures of the theme. This is input
for the creation of the strategy map. The strategy map forms the basis of how an organization
expects to create value with a strategic theme and which existing KPI’s will measure its the
contribution. The link between KPI’s and accountabilities sets ownership for the strategy
map. It is essential to create a learning process for the organization in order to improve
the acceptance of the KPI’s and to discover the economics of the KPI’s. At the moment IT
managers discover their truth on the value of the KPI’s, IT organizations can formalize the use
of the KPI’s. KPI’s will be the basis for the individual performance reviews of managers and the
KPI’s will be integrated in the business planning cycle. Successful integration of the KPI’s into
the business planning and budgeting cycle enables an organization to absorb the changes of
the dynamic business and regulating context in a controlled manner.

Strategic theme selection

Based on our experience, market studies and research Quint expects that Flexibility,
Standardization, Service Orientation, Compliance, Benchmarking, Performance Control and
IT-Governance will be differentiators to add IT value to the business.
The first phase of the operationalization of the strategic themes consists of the following
activities:
· Define strategic theme
· Define the do wells (the critical success factors)
· Define the predictive KPI’s

In the strategic theme selection an organization defines the Balance Scorecard (SOX) Strategy map
economics and the qualitative and quantitative measures of Theme: Compliance
the theme. This is input for the creation of the strategy map.
FINANCIAL
PERSPECTIVE

Create strategy Map Higher

market value
The strategy map forms the basis how an organisation
expects to create value with a strategic theme and which
existing KPI’s will measure its the contribution. Lower risk
Less risk
· Create a strategy map means lower
of penalties
· Plan the impact of the strategic theme on the existing out- WACC
come measures
CUSTOMER
PERSPECTIVE Better
An example of a strategy map is the map for the strategic
financial
theme compliance. The strategy map shows the cause and reporting
effect relations of the SOX - BS15000 implementation.
Higher trust
Experience with over a three hundred clients to explicitly in reported
describe cause and effect relationships between the stra- figures
tegic goals of the four perspectives made Kaplan and
INTERNAL IT
Norton to develop strategy maps [Kaplan 2004, page 12]. PERSPECTIVE

Strategy maps are based on the principles on strategy:

Improved level
strategy balances opposite powers, strategy is based on Security
of control and
a differentiated sales argument for the customer, value management
risk mgt
is created through internal business processes, strategy
consists of parallel theme’s that complement each other,
Investigate Auditing and
strategic alignment determines the value of intangible
every security improvement
assets [Kaplan 2004, page 26 and page 27].
incident plan

—5—
Measure and Control
These first activities are mainly analytic exercises, while the next phase requires a combination
of analytic skills and management control experience. The strategy map and KPI’s need to
be linked to the accountabilities and need to be integrated into the business planning and
budgeting cycle. Typical activities for this phase are:
· Assess strategic theme KPI’s against hygiene factors
· Create logical sets of KPI’s
· Link the logical sets of KPI’s to the accountabilities
· Set (learning) targets on the KPI’s
· Ensure the availability of performance information
· Define coordination mechanisms to monitor and review the performance

Several performance management methodologies describe these activities, but in practice

organizations find it hard to get it going. This is because it takes more than measuring
performance with KPI’s, it also requires influencing behaviour, management by example and
implementation of robust coordination mechanisms to evaluate the planned performance in a
dynamic business context.

The link between KPI’s and accountabilities sets ownership for the strategy map. It is essential
to create a learning process for the organization in order to improve the acceptance of the
KPI’s and to discover the economics of the KPI’s. A learning process sets the conditions for a
comfortable environment where dysfunctional behaviour can be minimised. This comfort zone
can migrate towards the real world of targets and bonuses. The learning period is for every
organization different.

Hygiene factors can be specific for a chosen strategy or strategic theme and can be generic for a
chosen business model and related business. Generic hygiene factors for an IT organization are
· Risk of loss of IT services
· Risk of loss of data
· Security failures
Hygiene Factors are the factors like compliance, risk, balancing short term and long term and
theoretical and practical issues. The hygiene factors represent the stakeholders, regulators,
auditors, risk officers, process managers and operational managers. The buy-in of those
stakeholders increases the chance of realizing breakthrough results.

One truth
Correct information is vital to performance monitoring. Therefore one needs to make a
distinction between management information and operational information. The requirements
of management information and operational information are quite different. By mixing the
requirements the costs and lack of speed of reporting (check, check double check and correct
the figures) will be higher than the value generated by the action, which is the result of the
reported information.

The requirements of management information are

· That information is in time
· That information is used to signal trends, with a relative character
· That information production is separate task
· That information is should be adaptable, fast to access to and available on a ad hoc basis
· That information is used for evaluation of results and steering

—6—
While operational information, mostly stored in the transactional systems, has the following
characteristics
· On line - realtime
· Predictable, precise, part of the task
· Focus on fast processing
· Status information
· Used for execution and registration

A proper definition of the performance metrics with reference to the information sources and a
well link between the reporting process and information providing process are the instruments
that facilitate the IT organization to cope with the challenge of the truth.

Managing the truth takes more than defining KPI’s, it asks for reporting processes that are able
to generate the management information out of operational information.

Coordinate and Adapt

Successful integration of the KPI’s into the business planning and budgeting cycle depends
on if and how an organization copes with the hygiene factors and "truth". By managing
these factors organizations will be able to absorb the changes of the dynamic business and
regulating context in a controlled manner.

The IT performance value triangle.

STRATEGY

CIO

SUPPLIERS PROCESSES CUSTOMERS

Department Department

EXECUTION OF ACTIVITIES

The coordination refers to top-down coordination and value chain coordination.

By assigning the right KPI’s to the coordination mechanisms (contracts, reviews, meetings etc.)
organisations can monitor the progress of the strategic theme.

Adaption then refers to the changes in the environment that influence the assumptions and
the planning of the strategic theme.

Dynamic coordination and adaption is crucial to measure and realise the forecasted benefits
from the strategic theme and therefore the value creation of IT.

—7—
 3. BECOME MORE PREDICTABLE IN BOTH THE COSTS AND THE VALUE CREATION

The IT performance capability is the result of the combination of knowledge of the IT business
model and the level of value creation impact of IT. The performance capability identifies three
stages measurable, controllable and predictable. With the growth of each maturity level the
complexity of business & IT interdependencies increases and the impressionability of IT costs
by the business rises.

Value assessment, maturity stages of value creation

What does the path of value creation look like? The path shows the increasing complexity in
the use of measures. An illustration of this increasing complexity is the way organizations do
their financial planning and budgeting. The least complexity is when organizations just plan
total costs, it becomes more complex when also the revenue needs to be forecasted. When
the costs and revenues are known the "profit" is forecasted on a total level. The next level of
complexity is that the same steps; costs, revenue and margin are performed on a product level
or market level. The products then become forecasters for total costs, revenue and profit.
It is at the level of products and services where organizations can differentiate their offerings
and influence the delivered value to the customers. When organizations can predict the value
demand from the customers and can translate this together with IT in consequences for IT
supply then IT organizations are ready for value based pricing

The above example illustrates that the path of value creation is a path of building
value creation
knowledge on the effectiveness and efficiency of your own business model,
maturity stages
or to be specific on the IT Business Model. This knowledge can help you to
answer questions like how can you make money on IT, how can you stop the discussion that IT
costs too much, how can you take a position in a market landscape where IT Outsourcing and
Business Process Outsourcing gain market share against the internal IT organizations.

The path or growth model consists of the phases measurable, controllable and predictable and
the growth model can accommodate CIO’s, CFO’s and Business Management to create more
value from IT.

IT performance capability maturity stages

HIGH

PREDICTABLE

CONTROLLABLE
Chance
to become
more
profitable
MEASURABLE

LOW

LOW HIGH
Performance Knowledge of IT Business Model

—8—
In the phase ‘Measurable IT’ organizations start on working with performance metrics. These
metrics are mostly operational and focus on whether department goals are achieved and that
costs are within budget. Typical measures in this phase are number of incidents, number of
problems and number of RFC’s (Requests for Change), resolution rates. In this phase the IT
organization needs to justify why IT costs so much.

In the ‘Controllable’ phase the IT organization starts linking financial measures to non-financial
measures and the IT organization really knows the risks they are taking. In this phase service
levels can be monitored, capacity planning is based on forecasts and IT Continuity, Availability
Management and Architecture are linked to control the risks. In this phase the IT organization
can start the discussion on the optimal usage by the business of existing capacity and
functionality.

In the ‘Predictable’ phase the IT organization is able to translate the business demand into a
predictable IT supply. The IT organization then can predict their TCO, their investment levels,
their operational expenditures and their innovation budgets. The combination of a predictive
business demand and a predictive TCO and a predictive utilization of the IT infrastructure and
applications makes that IT organizations can predict their margins or their results.

Another way to benefit from the knowledge on the demand for IT services is
differentiation
differentiation in the pricing of the IT services, this especially interesting for profit
in pricing
(center) IT organizations. Increase the price when there is more demand than
available capacity and lower the price when capacity utilization levels are low. In this phase
the IT organization will discuss whether it is not more profitable to also service the external
market.

Observations and conclusions

Business & IT managers do not seem to make the value of IT transparent. Possible causes of
this problem are insufficient knowledge of the IT Business Model and insufficient knowledge
how IT impacts the business performance.

In order to realize value from IT, organizations face the following challenges:
1. Make the value of IT transparent to the business
2. Implement strategic themes to cope with the trends
3. Become more predictable in both the costs and the value creation

To cope with the challenges Quint developed the IT performance Value approach and the
IT performance capability maturity stages. The IT Performance Value approach consists of a
model with five phases and focuses on supporting and training organizations to move from
one maturity stage to another; increasing the IT performance capability.

Organizations with a high IT performance capability are not only able to manage the IT costs
effectively, but they are also able to increase the revenue by calculating the right price for the
scarce information resources. Demystifying the IT value then enables organizations to make a
difference in the competitive market.

—9—
 About the authors
Norbert Vincent is senior consultant at Quint Wellington Redwood and specialized in cost and
performance management issues. He builds bridges between both operations and strategy,
as well as between financial and technical disciplines. Norbert is a frequent publisher in
management and scientific media. He is co-author of the Quint report on Trends in ICT &
Management 2005 and responsible for the 2006 Research Program.

Edwin Eichelsheim is senior consultant at Quint Wellington Redwood. He is specialized in

advising on service management, benchmarking and performance management and is (co-)
author of various publications in this field. In the past 15 years he has advised and supported
organizations globally on IT strategy, benchmarking, IT governance, IT portfolio, IT organization
improvement and ERP.

Quint Wellington Redwood: specialist IT management queries

Quint Wellington Redwood - or ‘Quint’ - is an organization consultancy that specializes in the

resolution of management queries in the field of IT. Our people are organization consultants
with a wide knowledge of IT. From eleven international offices we provide services in more than
twenty-five countries.

Quint clients are leading profit and non-profit organizations that rely heavily on IT. We try to
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technology and the provision of IT services to your clients. In doing so, Quint positions itself as
a service provider that is not afraid to view business from a different angle...

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