The CIO as “Chief Investment Officer” How to Measure Things Right?

Each organization has specific, measurable goals and objectives they have to hit through investing in IT. 

IT investment in many organizations is a controversial subject. Statistically, more than two third of technology initiatives don't have a direct measurable effect on the bottom line, and even much less of them can contribute to the top-line business growth. No wonder the business perceives IT as a support function, and even a cost center. To reinvent IT to get digital ready, IT leaders first need a way to define value to the organization, and to do that, it needs to properly understand all elements of value that are translated to the organization, and how all the pieces and parts of the organization are ultimately impacted, for good or bad, by each new initiative. IT leaders should act as “Chief Investment Officer,” understand the pros and cons of different measurements such as  "Return On Investment vs. Total Cost Ownership," and know how to play those number games wisely.

Return on Investment: Return on Investment tells business management how well an IT investment repays the company. The digital mantra for IT leaders is to run IT as a business. Thus, for many CIOs, they need to be able to support the essential investment with sound Return On Investment reasoning. CIOs must learn how to leverage data to help business leaders decide whether or not a tech investment is worth making. Measurement is never for its own sake, it needs to tell the story, not just the finance part of the story, but also tailor different audience. Fundamentally, you have to determine why you are doing it, which strategic business goals or objectives are you trying to reach. IT shouldn’t answer these questions by itself. It needs to invite business across functions to provide information about the potential benefit, and IT brings information about the cost, the ROI calculations should be a joint undertaking. More specifically, Return on Investment -ROI is a ratio, a percentage of the dollar amount your company gains from your IT effort over what it initially spent in simple terms, it’s the company’s payback. What are the best methods for calculating ROI? A cost-benefit analysis simply compares IT investment cost to its anticipated financial benefit.

Total Cost of Ownership: TCO is often held up as the other critical metric for IT performance, the usual argument for IT investment is being what you want to provide a service at the lowest possible cost, both in terms of acquisition cost and ongoing "care and feeding." The proper TCO measurement is dependent on knowing all of the associated costs for an asset or service. In IT, this includes hardware cost, software licenses, personnel, “hard” or physical asset, etc. Each one of these elements carries its own costs, which in turn must be partially or fully allocated to the asset or service in question. In order for TCO to have real meaning, the costs must be related to accounting methodologies, financial policy, and asset utilization. TCO is an important measurement to build trust with “Buyers” of services/ solutions IT provides. Because, TCO, when done with granular cost pools that reflect the cost of assets and then roll up those costs into service features, is a great tool for building the trustful relationship between “buyers and sellers.” Especially now, the business can order commoditized IT services from third-party vendors more easily. IT shouldn’t take its customers for granted, it has to prove that the combination of quality and price for any given service feature is competitive for delighting customers and comparable to the marketplace from cost/performance perspective. Still, the measurement shouldn’t add another layer of complication or create silo and the big gap between IT and the business. Sometimes overemphasizing TCO puts one into a commodity mindset in IT which spurns talk of misalignment with the business. TCO is important to measure but should be only one dimension of the overall decision in a technology purchase

TCO vs. ROI: There does not exist one tool that can be used to dictate the direction of the organization or the investment strategy of the business, you must use an integrated approach. TCO is a component of a management framework that gets to ROI. Often times, C-level executives are oriented on hard costs vs, soft costs upon technology investment, but soft dollar costs cannot be ignored to get a true TCO for any technology or service. TCO is just a due diligence thing we check along with many other factors, such as TCO, ROI, Macro and Microeconomic indicators, Net Present Value, Internal Rate of Return and Time to Payback., etc. A solid risk-benefit analysis needs to be put together before any type of decision is made. CIOs need to understand different measurement, play the number game wisely, and help business leaders decide whether or not a tech investment is worth making. As all of those metrics are meaningful to the business executives. IT leaders need to learn how to leverage them for truly running IT as the business.

Each organization has specific, measurable goals and objectives they have to hit through investing in IT. Follow “SMART” principles to measure the result. Do not confuse the means with the end. Total impact and total value should be what needs to be defined, not just cost. Cost is a component of value, but ultimately what matters most to an organization is value. Use hard numbers if you can, measure the right things, and measure them right.

Posted in: CIO Leadership,CIO Master,IT Finance,IT Performance Management,KPIs