Measuring value in the digital age

How changing your mindset can help you make better technology investment decisions.

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In Deloitte’s recent global CIO survey, only 21 percent of CIOs report having a structured process for measuring the value of tech investments. Even more surprising, 14 percent say they don’t measure the impact of technology investments at all.

Survey respondents cite two primary reasons for the low numbers. First, they may have a business case process, but it’s usually ad hoc and operates by the “squeaky-wheel-gets-the-grease” principle. Moreover, there is no mechanism to track the performance and value of investments. Second, some fear that adding governance to the investment process will slow down innovation and increase time to market.

During the past decade, CIOs have commonly taken on initiatives that require large multiyear investments in platforms such as ERP and CRM systems; today, many are taking on significant digital transformations. Business leaders often go into these initiatives believing technology will solve their problem, but too often these projects fail to deliver the promised value.

A different take on tech investments can help CIOs change how investments are viewed. Here are three shifts in mindset that can help CIOs make more effective investment decisions.

From expense to investment

The majority of IT budget (55 percent) is spent on keeping day-to-day business operations running, with 26 percent allocated to incremental business change, according to survey respondents. CIOs with an expense mindsetoften feel they have no control over the fixed costs of business operations and little control over incremental change spending, since those projects have already been committed.

By contrast, CIOs with an investment mindset constantly evaluate the value technology investments deliver. This value may decrease over time or the cost of ongoing operations may no longer justify the benefits. Or estimated benefits may have been miscalculated, never to be realized. Evaluating IT budgets with an investment mindset often requires difficult judgments and decisions about projects. This may mean admitting to previous mistakes, but such analysis and decisions can help elevate CIOs to the role of business leader.  

A CIO at a consumer packaged goods company took the bold step of halting a multiyear, multimillion-dollar ERP implementation because the promised benefits were not being realized. By reallocating these funds to upgrade back-end systems — including an inventory management system that allowed the company to gain a competitive advantage and increase market share — the CIO delivered significantly more value.  

From project to product

CFOs often complain they are not able to determine tech ROI. This is partly because IT investments have always been viewed as projects, not products. A project mindset focuses on a discrete start and end date and a specific cost. The problem? These IT projects often span years and the investment reaches millions of dollars. Over time, business needs and competitive landscapes evolve. The company may change dramatically through M&A and divestitures. Or the original reasons for launching the project may no longer be valid. Yetmany CIOs find themselves trapped into delivering these projects on time and under budget — even if the project is no longer needed. 

A product mindset, by contrast,assumes that products will evolve to stay relevant and deliver ongoing value. The focus moves from project completion to product success. This perspective shifts the burden of success to the product team, which often consists of business and technology stakeholders. It can force collaboration and encourage a lifecycle perspective on the features, functionality, investments, and benefits of the product.     

As CIOs embrace the product mindset, they will likely need to build new IT capabilities. A CIO in a financial services company hired skilled resources to build strong financial models to estimate the initial investment in IT products and predict the future cost of running, maintaining, and upgrading these products. This provided transparency to the finance organization and allowed the CIO to help business areas make strategic choices around technology investments by clearly articulating costs and benefits over time.

From ad hoc to industrialized

About 19 percent of IT budgets is spent on business innovation — activities that create new business capabilities, according to CIOs surveyed. Most is spent on siloed digital initiatives and one-off business requests. Through ad hoc innovation, many organizations dabbling in emerging technologies without thinking through use cases and scalability, spreading investments across multiple startups without a broad strategy, or relying too heavily on traditional ecosystem partners and vendors for guidance.

Industrialized innovation is a disciplined, end-to-end strategy that generates an ongoing stream of new technologies and use cases with meaningful business context that can scale across the enterprise. The CIO of a healthcare company began investing in startups with the strict criteria to invest only in those aligned with the corporate strategy of developing leading-edge technologies and solutions in specific markets. Over time, this became an investment portfolio that allowed the company to become a recognized innovator and opened up options to acquire a handful of strategically aligned startups to develop and scale new revenue opportunities.

Calibrating the shift

As CIOs start to shift how they think about IT investments, they can ask these questions to help calibrate the current state and map out the journey. 

  1. What is technology’s value proposition in the eyes of executive management? Deloitte’s research shows that the CIO value proposition can be summed up in three ways: as a trusted operator, change instigator and business co-creator. If IT and the CIO are viewed as trusted operators, then the value proposition of IT investments appears centered on cost and efficiency rather than on innovation and change.
  2. How will technology investments impact business financials? CIOs can gain credibility by articulating the impact of IT investments to company financials such as EBITDA, revenue, or profitability. This can also be an opportunity to engage the Finance function or train IT leaders to analyze such data.
  3. Does the current decision structure inhibit innovation and agility? IT governance is often blamed for inhibiting innovation and agility. Many CIOs have modified existing procedures to be more agile in fast-changing business environments. But in some instances — for example, initiatives impacting core business systems — additional governance is needed.
  4. How is investment value measured and communicated? Yes, technology can be costly and complex, but it can also provide great value. But by clearly understanding and articulating that value, IT pros can help technology spending be viewed as an investment rather than a cost.

This story, "Measuring value in the digital age" was originally published by CIO.