IT Value: Made to Measure

A perennial question for business is whether spending money on computers, software and IT services is money well spent. Is IT an investment or simply the cost of doing business in a world where the web, the internet, email and desktop PCs are simply the tools of the trade?

It has been over two years since Harvard Business Review published Nicholas G Carr's article 'IT doesn't matter', which sent shock waves through the IT industry and raised serious questions among businesses leaders about the value of IT.

What is clear today is that any expenditure on IT needs clearly defined objectives that can be measured against improvements in the business.

The IT industry has taken note and now almost any expenditure is sold on business benefits. However, some of these will be hard, if not impossible, to measure.

PROCESS-FOCUSED APPROACH

John Chaplin, chairman of marketing agency Glasshouse Partnership, believes only certain types of IT investment can be linked to an improvement in business.

Chaplin, who worked for 17 years as executive vice-president at Visa responsible for IT and payment processing, says it is hard to make a business case for operating system software.

Operating systems such as Windows XP, Linux, Solaris, Aix, HP-UX, zOS/400 and z/OS are the underlying software that make the computers function; without the operating system the computer hardware cannot operate and cannot, therefore, run any business software.

In spite of their importance, Chaplin maintains that you cannot make a case for operating systems.

PROCESS AUTOMATION EXAMINATION

Instead, according to Chaplin, FDs need to examine the processes that run within their businesses and the efficiencies that can be gained through automation by investing in application software.

One example of an area that can be assessed in this way is the call centre environment, where efficiency can be calculated by comparing staffing levels with the number of customer calls being taken.

Beyond head count and call rate, Chaplin says: "[Staff] productivity can be dramatically improved if case administration can be conducted while the person is in contact with the call centre."

In his experience it can typically take five to six times as long to carry out follow-up case administration after a call than it takes to do it while a caller is on the phone.

If this can be achieved, one call centre operator can handle more of a customer's query, and more queries can be handled per member of staff. At Visa one KPI that was raised by 10% per year was the throughput of call centre operators.

MULTIPLE MEASURES

Another simple metric to measure is stock levels. The success of a manufacturing IT system can be measured in terms of improvements to stock levels and availability, which has a direct impact on the bottom line.

Bemis, a manufacturer of bathroom fittings, has just completed the installation of IFS Applications, an enterprise resource planning system, to manage operations in its UK and Italian manufacturing plants.

Lee Oddie, financial director at Bemis, has assessed the level of order processing with the new IFS system running at both plants compared with the previous IT system. Oddie says that, with the same software running in Italy and the UK, Bemis can reduce the duplication of stock held, at a saving of €400,000 a year.

David Metcalfe, senior vice-president of research at Forrester Research, urges financial directors to avoid falling into the trap of measuring the percentage of revenue spent on IT compared with peers.

Metcalfe says that there are very specific reasons why a business might spend more on IT as a percentage of revenue - because of its organisational structure, for example. Centrally run businesses generally spend less on IT than those that are more distributed. Instead, he suggests looking at the role of IT in products and services.

POTENTIAL BENEFITS

The place to start looking for IT benefits is by measuring how an IT investment improves operational efficiency.

In a new study, 'The Path to Operational Efficiency: Financial Services Institutions Drive Holistic Business and Technology Transformations', independent research firm TowerGroup found that a haphazard approach to IT was holding back gains in operational efficiency which could be achieved through smarter use of IT.

Guillermo Kopp, vice-president of the cross-industry research practice at TowerGroup, says: "Many institutions are finding that their operational efficiency is burdened by convoluted business processes, fragmented IT systems and intricate legacy interfaces." The research found that:

• A fragmented approach to technology on the part of a financial institution can bring additional hidden costs beyond those due to inefficient operation, among the most potentially damaging of these are flaws in data integrity and information security
• Careful evaluation of a financial institution's expense structure can distinguish real improvements from makeshift cost cutting, as well as effective transformation efforts from added overheads
• Optimised business processes in selected vertical functions can typically reduce costs by 30% - for back office areas that operate like a labour-intensive service factory, the savings can be even higher

NEW FUNCTIONAL VALUE

According to Kopp, while everyone was measuring efficiency ratios, it is also necessary to assess how changes to IT can be syndicated across an enterprise, creating new functional value.

While the TowerGroup research focused on global financial institutes and measurable gains in operational efficiency through the smarter use of IT, such efficiencies can be achieved in any industry.

The top 25% of businesses - as defined by the Hackett Group benchmarking service - in terms of sales, general and administrative, and supply chain performance, had more efficient back office IT systems compared with their peers.

The top 25% of finance departments were able to cut operating costs by 23% by using a single Enterprise Resource Planning (ERP) application, while implementing data and technology standards.

The Hackett Group, which has benchmarked 3,300 businesses over the last 13 years, has found that such a strategy allows these finance teams to spend 31% less than their peers, operate with nearly half the staff and complete their financial reporting cycle more quickly each month.

In procurement, the top 25% of businesses spent 27% less than typical companies on the procurement function and operated with 38% fewer staff, and the best HR departments were 87% more likely to use common HR applications, while relying on fewer benefit and compensation plans. They also spent 27% less per employee on HR than their peers and operated with 35% fewer HR staff.

MORE FOR LESS

A common theme for the top performing companies concerned doing more with less.

Less business applications reduced the complexity of moving data between different IT systems. Staff self-service – through online access to the company's HR system and online catalogues of preferred suppliers in procurement – all amounted to tangible business gains in terms of efficiencies.

According to Andy Pfeffer, programme leader, business applications performance at Hackett Group, two business functions that can be radically improved through the company's ERP application are payroll and travel expense reporting: "With electronic payroll advice, enabled through ERP, payslip post and distribution costs are removed, access to payroll information is instantaneous and payroll staff can be redeployed to areas of higher business value."

The same is true of travel and expense reporting. If staff file their own expense reports electronically, he says, data accuracy is improved, the cycle time is quicker and head count can again be reduced.

PROGRAMME OF CHANGE

Pfeffer urges FDs to treat any new IT system as an overall programme of change, rather than merely a standalone project. "Try to drive performance improvement by measuring performance attributes before and after," he suggests.

In Pfeffer's experience, 70% of businesses make the mistake of managing the implementation of an IT system as a series of separate events: design, build, test, deploy then walk away. Some 40% of top performing companies, as defined by the Hackett Group, run a post-implementation business case.

The challenge is correlating the business improvement with the investment in the IT system. Research from analyst firm AMR research has found that only one in ten businesses are able to measure the ROI in an ERP system.

IMPROVED CUSTOMER SERVICE

The greatest IT value comes from improvements in customer service, according to Derek Prior, research director at AMR Research. This can be measured by looking at the proportion of on-time deliveries, order accuracy and order-to-ship time.

"These are all measures of how good your ERP system is at fulfilling customer orders," he says. "If you achieve a net improvement, then you can directly calculate the value in terms of cash."

Clearly, the business needs to look at how well it is able to fulfil customer orders before implementing the IT systems for the improvement metrics to be meaningful.

But Prior has a caveat: if a key performance indicator is to reduce inventory level, and after running the ERP system, inventory level is down by 10%, how can you be sure the change has come directly from using the ERP system and not from a change in the industry?

LICENSING ISSUES

One big area of concern and something that can eat away at obtaining measurable value from an IT system is software licensing.

A study from AMR Research found that businesses were using only half the ERP licences they purchased. The issue arises because of too good to be true licensing deals that suppliers use to win new business, where several products are thrown in for free or with vastly discounted software licensing fees.

"You may be buying more because the supplier has provided a good deal," Prior warns. "But it is not about the huge up-front discount. There is only so much you can [install] in one go."

So businesses are buying more software than they need. Moreover, there are ongoing fees, such as annual maintenance, support and licensing associated with the products, even if they are never used.

TAKING CONTROL

What this means, according to a survey of 400 senior finance professionals undertaken by the Institute of Chartered Accountants in England and Wales (ICAEW), commissioned by Microsoft, is that FDs need to take more control of software purchases.

The study found that over half of respondents left the monitoring, auditing and policing of software use within their organisations to their IT departments. Only 20% of those surveyed said they included a software audit within their financial review.

Businesses need to buy the right amount of software licenses: too few and they risk hefty fines for running software illegally; too many and the company is wasting money, says Dr Paul Booth, technical manager at the ICAEW: "It is important that businesses take a risk-based approach to their use of licensed software."

"On the one hand, they risk wasting money if they are paying too much; while on the other, they risk finding themselves on the wrong end of a dispute with a software supplier if they are paying too little."

ONGOING PROCESS

What is clear is that to assess whether an investment on an IT system has been successful, it is necessary to measure the KPIs before and after the IT system is up and running, and continue to measure these through a programme of constant improvement to the IT system and associated business processes.

Tangible gains in operational efficiency through faster back office processing and reduced head count come from reducing the number of IT systems and enabling employee self-service. Revenue gains are possible by assessing how the IT system will improve the servicing of customers.