Measuring Up

Measuring Up

The new generation of Australian CEOs is vastly more IT-literate than the old, and thus acutely aware of the strategic contribution of IT to the business. Yet for some executives, management of IT remains a "discomfort zone" -- not least because in their eyes important IT projects seem to have a habit of running over time and over budget and failing to deliver anticipated benefits.

But for CIOs, the news is not all bad, as a new report from research and advisory firm International Market Assessment (IMA) highlights. At least there is now a much greater awareness than in the past of the strategic importance of IT. CEOs now rank aspects of IT management such as improving customer service (88 per cent), improving communications (88 per cent) and controlling costs (82 per cent) as very important to their business. Better still, some 98.5 per cent rate IT in current operations as being important or very important to the CEO.

And CEOs are increasingly aware that getting the most out of a company's IT investment means applying the principles of good business management to IT as much as to any other area.

But, as the IMA report, Making Your IT Investment Pay: How leading companies are managing IT for superior business outcomes, makes clear, a past history of project failures is not the only thing making CEOs uncomfortable with matters IT. The rapid pace of technological change and the still uncertain place the management of IT has in many organisations must also share much of the blame.

If having a better understanding of CEOs' thinking on IT can help CIOs overcome some of that discomfort, then this report should provide rich material for study.

Based on in-depth interviews with chief executives and senior executives from leading companies, and incorporating insights from a CEO survey, the report focuses on how Australian companies are getting the most out of their IT investment. The report makes clear that effective CEOs apply the principles of good business management to IT as much as to any other area of the business.

"Ensuring that IT delivers the desired business outcomes is not attained through one-off technology solutions, but through competence in managing and implementing IT projects successfully. Too often, IT is seen as a 'special case' and fails to be subjected to the same expectations of competent supplier management, cost control objectives and performance monitoring as other areas of the business," the report says.

Yet even when CEOs recognise the potential of IT to achieve tangible business outcomes, barriers to achieving those outcomes remain. Management still does not understand IT well, especially in comparison with other management functions like marketing, production and finance.

Furthermore, managers find it hard to assess the benefits, while time and cost overruns remain common. The communication gap between IT staff and their customers in the business can cause difficulties. (Recently we have been having a pretty intense dialogue within the executive group about IT strategy and what is driving IT developments. This serves two purposes: to create a better appreciation of IT issues with senior executives, and to create a better appreciation on the IT side for what's driving business needs. -- Royal & Sun Alliance Australia managing director Ewoud Kulk) And management can still occasionally hear pleas to consider IT a special case where normal investment measures are inappropriate. Successful companies reject such special pleading and expect both the supply and management of IT services to be subject to the same expectations of competent supplier management, cost control objectives and performance measures as other areas of the business.

Successful CIOs, the report implies, will pull out all stops to comply with those expectations.

But other aspects of the management challenge remain. Consider the "process paradox", seen as one possible reason organisations find it hard to identify IT investment outcomes. As the BPR wave of the early 1990s demonstrated, improvements to processes may add little to the company bottom line and may even be counterproductive. Take the case of US firm Mutual Benefit, which cut down the time taken to issue an insurance policy from three weeks to half a day, was lauded for the achievement by Harvard Business Review, then promptly went broke.

"The moral to the story is that IT investments need to be directed to value-adding processes, not those that are eroding company value," the report says. That this is never easy is illustrated by the fact that more than half the CEOs surveyed said they found IT investment benefits more difficult to assess than other types of investment. "The pervasive spread across various business functions of most IT investment, the presence of opportunity costs, the extended time-frame for implementation, and the consequent blurring or movement of the base line for measurement" make it harder to assess the value IT has, one CEO put it.

Strategy Games

CIOs certainly don't need another rehash about the importance of aligning IT with business strategy -- in fact, most will have been preaching the message to the executive for years. And it seems CEOs are increasingly recognising that getting the most out of the IT spend means rewriting the agenda so that it is driven by business priorities rather than internal IT concerns.

Take the comments of Philips Electronics Australia managing director Justus Veeneklaas: "There are two areas where a CEO in our business must take a personal interest: product development and IT. Managing these functions has much in common. Product development people are creative, high-calibre engineers; but if you don't give them enough work, they create their own -- although what they will develop and when they'll deliver it is completely up in the air. The same is true for IT. Some of the best brains in the company are found in IT, but unless they are well managed, they create their own agenda and will fiddle around with systems forever. If senior managers don't get on top of this they [IT people] will keep on developing things whether there is a business benefit or not."So if the report accurately reflects the thinking of most Australian organisations, business-aware CIOs can expect more support from the top in their efforts to achieve a business-driven agenda into the future.

Smart companies, the report makes clear, are developing frameworks designed to ensure IT is driven by demand, not supply. Philips and Telecom New Zealand, for instance, have both adopted a framework similar to that developed by Australian management consultant John Smyrk when he sought to clarify organisational thinking on how IT should be managed.

Globally, Philips has split its IT function into two: IT strategy and planning and day-to-day operations remain in-house, while IT supply is performed by a separate department named Origin. IT planning, Veeneklaas says, will remain in-house forever. "If IT planning went, we would no longer be master of our own thinking," he says.

Philips' structure conforms beautifully to Smyrk's framework, where supply of IT products and services (including systems development) is in the hands of internal or external IT specialists. The primary management objective is to ensure efficient delivery of systems to the organisation. No supplier is held responsible for delivery of business outcomes. Instead, it is the business users "consuming" the systems (delivered by the IT specialists) who are responsible for delivering benefits, since this "consumption" of the systems leads to the realisation of business outcomes.

"This approach reinforces what many CEOs already know: the value from IT comes from how companies use, or consume, the information generated by IT systems, not from the technology itself," the report says.

One lesson for the CIO: the need to ensure the activities of supply and consumption are not confused, thus making it easier to identify problems when it seems IT systems are not delivering on business value. While IT specialists typically manage and conduct IT architecture planning, there is a strong need to keep that IT group focused on the pragmatic to avoid white elephants, the report says, and getting the balance right on IT infrastructure is a key management challenge. And, of course, the role of the IT specialist is on the supply side, as the planners and managers of the infrastructure -- at least where the partnership between IT and the business is working well.

"Ideally, CIOs combine technical understanding with business knowledge. They know the business capabilities of technology, understand the constraints of the existing infrastructure, and work with business units to determine how to obtain business benefits by deploying the technology effectively," the report says. "The senior IT executive, whether the title is CIO or something else, should effectively combine partnering and mentoring. But there is also the role of setting and enforcing standards and architecture compliance. It's hard to be a coach and mentor as well as the chief of the IT police."And if ever you feel the need to argue for governance of your area, why not arm yourself with these words from Telstra Corporation finance director John Stanhope: "There's a trend these days for CFOs to win control of the IT organisation, but I don't necessarily think it's a good thing. Many organisations set up an IT control group, but never really let them do their job. A CIO needs to have overall control of systems development. If you squeeze a central IT group, a satellite group will pop up in another area. You need to recognise the need for IT policy-making and architecture and give someone the power to control it."Decisions, DecisionsUS research shows the link between IT investments and productivity improvement is weak, suggesting many proposed benefits of IT end up adding little to the corporate bottom line. To overcome these problems, the report says, successful users of IT achieve business value from IT investments by:- Treating IT as a component of a business proposal, and making it subject to the same rigorous financial evaluation as other major investments. As Royal & Sun Alliance's Kulk put it: "Whatever investment you make there's always a large number of assumptions made in modelling costs and investments. It's not all that difficult in IT, although perhaps we haven't always been as good at it as we ought to be. IT is subjected to the same rigorous evaluation process as any other investment proposal."- Making business units accountable. If business units are responsible for reaping the benefits of investments, as they are in Telstra, Philips and Telecom NZ, it is easier to ensure those benefits are actually delivered.

- Following a rigorous investment process, including ongoing evaluation and control of all projects with an IT component and post implementation reviews to encourage organisational learning. That also means being aware of all hidden costs, including time spent in training and the cost of correcting errors resulting from an inability to operate the system.

"We (the IT board) have six meetings a year exclusively devoted to IT. We talk about platform selection, system change decisions, and new investments in software and hardware," Philips Electronics' Veeneklaas says in the report.

"Although we are not IT technocrats, we are good IT users and we know how to make decisions. What we always focus on is whether we need it. Is it justified?"Avoiding project failure means developing a clear understanding of the underlying causes of such difficulties. If IT projects have a poor reputation, it is often deserved. An incredibly high percentage of projects are either cancelled before completion or run way over time and budget. The report considers common causes of IT project failure as a way of helping companies keep projects on track.

Failures of communication and highly politicised turf wars commonly lead to project failure. Size is also an enormous risk factor, with large all too often equating to complex. "Much of this complexity is due to the larger number of stakeholders involved and the consequent communication problems. Where possible, projects should be chunked into several projects of smaller scope that can be developed in a sequence that allows incremental benefits to be achieved with each chunk," the report says.

Projects also fail when the separate roles and responsibilities of the IT specialists and the business units aren't clearly defined. Failure to attribute ownership can be fatal. And of course scope creep (which occurs when new functionality is added to the project without first undergoing an agreed change management process) and cost blow-outs can devastate a project.

The report also identifies another (surprising) cause of project failure: if executive management expects projects to fail, chances are they will. Melbourne Water Group IT manager Bob Thomas had a managing director who claimed to have never worked with anyone who delivered a major IT project on time.

"The first time we delivered a really big project on schedule, he said it was a fluke," says Thomas. "After several more projects came in on schedule, we were able to demonstrate that IT should not be treated any differently. If you allocate several million dollars for a project, it's not unreasonable to expect a satisfactory result. The project must be defined properly, researched adequately and testing planned accordingly. The same should be expected of IT as of any other capital expenditure project. You have to treat it as seriously as you would any other business decisions."Simplify processes before implementing any new IT system, the report recommends. Promote ownership of projects. Pilot new systems.

Establish clear and unambiguous requirements for the frequency of project reviews. Focus on measuring the things that matter. Pay attention to both the effectiveness and efficiency of IT investments.

And don't rely on formal project reports as the best indicator of project status. The report notes that project managers, sponsors and business managers will all tend to send good news upwards whenever possible. That means learning the true status of the project will often involve "walking the talk and asking project team members to rate the likelihood of success".

The experience of Australia's top CEOs shows that frequent informal communication is more accurate than lengthy project reports. Culture also plays a role. If an organisation doesn't allow failure, those at the top are unlikely to hear about problems until it is way, way too late. Above all, conduct a full and frank post-mortem when IT projects fail. It may just do wonders for your credibility.

Melbourne-based International Market Assessment (IMA) in cooperation with Unisys produced the report Making Your IT Investment Pay. The report is based on research undertaken in late 1997, including responses to a survey completed by 70 CEOs of organisations based in Australia and New Zealand, along with in-depth interviews of senior executives from IT-leader organisations such as The Australian Stock Exchange and Telstra. For more information, contact IMA on (03) 9650 7188

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