Sunday, March 31, 2013

IT Indicator

IT is an integral part of the business, and every IT project is a business initiative. 

IT is pervasive in any contemporary enterprise today, however, most of IT organizations still get stuck into lower level maturity, with the reputation as a cost center, IT should work with stakeholders to develop KPIs that show how IT is improving business and enforcing business capabilities. Here are four views of KPIs, from IT cost breakdown to IT Performance quadrant; from PMO measure to business capability metrics.

1. IT Cost Breakdown

The big challenge facing business today is the "Speed of Change,which is often applying activity-based management concepts to IT services. Essentially, that involves a very detailed cost breakdown of the IT Services, to a resource unit level, for example, which is then allocated across geographic and business hierarchies, using cost modeling techniques. Performance is measured at many different levels in the hierarchies, by region of the world, country, the line of business, business unit, account, program, senior VP, junior VP and so on. The mappings are ultimate between direct, indirect, fixed and variable costs and revenue, for the purpose of determining the economic value of the IT services and assets, including their value above their costs.

The cost breakdown provides insight into where the most money is being spent, which in turn identifies opportunities for bottom line improvements. A chargeback can be done on a more equitable, actual usage basis, rather than assuming everyone is using the same amount. The detailed data becomes a base from which statistical analysis can be performed to do far more accurate financial budgeting projections, based on natural growth rates at a fine-grained level and capacity planning is more accurately predicted too. Collecting and acting on business feedback is the most important project each year for every IT department. The goal of cost breakdown is to provide a clear, measurable view of the business’s top IT priorities.

The senior leadership team should ask every department how much the IT service is worth to them. Each department will need to measure that in a way appropriate to their business function. The things that can be measured from within the IT function are all surrogates for real performance indicators. Measuring them and improving their scores will probably improve the actual performance of the IT function but the relationship between the surrogate and real performance is not guaranteed
(1) IT Savings (IT work which positively impacts the bottom line)
(2) IT expense as a percentage of sales
(3) IT spend per employee
(4) IT employees as a percentage of total employees
(5) Uptime % for business critical systems
(6) Customer service % of positive responses
(7) Utilization of key IT managed resources
(8) TCIT (Total Cost of IT) includes all costs associated with building, running and operating the IT environment and includes workforce costs, license costs, hardware costs, software costs, systems costs, outsourcing costs, a portion of HR costs, etc. (In other words, more than just the IT budget)
(9) IT ROI Ratio = (Net Operating Revenue – (Total Expenses – TCIT))/TCIT
(10) Return on IT Investment = Net Operating Profit / TCIT

Of course, the first time that you measure, it is pretty meaningless. And furthermore, the metrics will be different for different industries. The controversial point for IT cost breakdown is: With today's complex enterprise architectures it's becoming more and more difficult to identify the cost per unit. When the business has to include a measurement methodology in every service request over $X, the business becomes a much more prudent IT purchaser. When we spend all the time on debating measuring what IT is doing and practically no time discussing measuring the value produced, then all we accomplish is to perpetuate the disconnect between IT cost versus IT value. 

2. IT Performance Quadrants

Managing stakeholder expectations is key to the success of IT. So depending on which stakeholder and what the role of the CIO is to your organization, metrics can be created that show governance and effectiveness of IT. Plus, IT KPIs should be focused on what is relevant to the target audience with a clear purpose as to what is being measured and why. There are four main purposes for IT metrics:
A: Provide transparency into IT
B: Aid setting direction for IT
C: Drive performance of IT
D: Communicate the business value of IT

There are at least three target audiences: IT, IT management, and business leadership. Each has a different focus. For instance, IT will measure CPU utilization, disk utilization, program defects. stuff that the technical staff should and does care about, but business units and for that matter, CIOs don't necessarily care about at a detail level. For IT management level (CIO & direct reports), things like project delivery, How much time we spent on new project delivery vs. support and administration, overall system uptime, help desk service levels at an aggregate level, etc. things that give us an indication as to whether things are running OK at a department level. IT should also understand the main KPIs that the business uses to measure their performance. While these are not IT metrics, understanding them will enable IT to have a better business conversation about what we are doing and how it will drive business And at the strategic level, the well set of IT metrics need to be available to present at the big table for business communication performance. 

Here are the IT performance quadrants:

(1) Customers 
  • Net Promoter Score (NPS):  IT internal users and/or end customers whatever works for your business, consider using them to measure customer and/or partner advocacy of your IT organization
  • Service Desk: Customers Satisfaction Surveys 
  • Lead time to ship an order 
  • % of support customer calls fixed at the first call or before a call (self-healing) 
  • % of order returns 
  •  Time to market a new offering
    - % of business suppliers linked to your IT     
(2) IT Service/Project Performance 
This needs to be an easily understandable KPI but probably built up from a complex set of / OLA's - KPI's - Project success factors. 
  • IT: Projects Delivered/On-Time 
  • Dev: Projects On-Time/Budget 
  • Adherence / Defects in Controls & Compliance ( aligned to SOX, PCI, or any standard 
(3) Fiscal Health 
A simple KPI that can be tracked but built up from the budget performance:
  • Average cost, whatever the businesses believe are the right measures
  •  Balanced Budget
  •  IT Service Chargeback is often the best metric but has debatable data collation mechanisms Variance etc  
(4) Organizational Capacity 
  • Turn-over 
  • Absenteeism 
  • Engagement/Satisfaction 
  • Learning and Development      
A well-defined scorecard should contain a good mix of outcome measures (or long-term strategic value) along with performance drivers to track the progress in the short term (operational value) in spite of capturing multiple perspectives, the balanced scorecard must still retain a strong emphasis on financial outcomes. Whatever metrics you find value in using must be relevant and resonant to your audience, as well, or your credibility will significantly suffer.

3. PMO KPIs 

Running IT as a business, every IT project is a business project. CIOs act as an intrapreneur, to ask self two questions:
Question 1: most important. If I own this company and pay everyone paycheck, what do I like to see from my IT department?
Question 2: how much of the IT budget is spent on three buckets: (1) keep the light on activities, (2) to do business better, and (3) to grow the business. These answers will guide CIOs further to ask for different metrics which can meet customers/partners at where they are at. It seems very simple, but it’s a daunting task to define the category and then work on your OPEX and CAPEX.

PMO KPIs can further help CIOs to run IT as a business:

(1) Project Management Office KPI - ROI 
ROI is an important KPI for top management however slightly more difficult for a PMO to measure. The PMO provides the framework in which success is built so this KPI is a softer metric that illustrates the influence of the PMO on the overall performance of the organization. Tip, at least, one of your KPIs should try to illustrate this.

(2) Project Management Office KPI - Time to market
This is an easy one to build a KPI around. Your PMO should be increasing the speed at which Projects are delivered thus improving time to market. Likewise, with better compliance with project schedules, the PMO also helps ensure that a product meets its release date.

(3) Project Management Office KPI - Resource Utilization
An effective PMO ensures that time is being used in the most efficient way possible by assigning resources to the tasks that are most suited to them thus maximizing the value of that particular resource. Building a KPI around this principle will highlight the value the business is receiving from its own resources. 
·  IT Spend per employee: absolute and variance 
·  Employee Customer Satisfaction 
·   % of Projects in IT budget versus Run 
·     IT Maturity level 
·    IT R&D Spending 

4. IT KPIs to Measure Business/IT Capabilities

IT is an enabler of current and future capability for both the organization and its ecosystem (the market comprising competitors, suppliers and other agents, regulators and so on) much of the board conversation about IT should be framed in respect of the business activities and the ecosystem, still, strategic KPIs may be hard to define, but it helps enforce effective communication at strategic conversation. Thus, CIOs need to pursue tactical, strategic and innovative alignment with the business.  The long-term growth is usually based on a unique set of business capabilities, how can KPIs capture such "capability" insight or process effectiveness, innovation?
Understanding and having a visual representation of your IT/Business capacity will result in your ability to understand where your internal resources are being deployed. With this metric in place, you can then begin to decide which business units /departments/ stakeholders are receiving too much capacity, and which ones are not. 

(1)  IT Capabilities to Enable Business Growth/Development: Assuming a healthy pipeline of work, trending to forecast on releasing new capabilities (the business getting what they paid for), IT value to the business can be categorized in a number of ways, here are four.
Improving Speed/Agility (Speed to Market, ability to change direction with the market, etc) 
Improving Revenue (enable the business to gain market share, enter new markets, etc) 
Lowering Risk (reduces business system downtime, create business continuity, etc) 
Lowering Cost (reduces the cost of the current business process, improve margins, freeing up capital for new ventures, etc) 

(2) CHANGE Capability: The metrics focus on the effectiveness and efficiency of change made is important. And change consists of one or more of the following:
- People change
- Process change
- Technology change

(3) Value-added Capabilities (Observational Assessment or through VoC with Stakeholders)
-Transparency
-Efficiency,
-Effectiveness
-Agility
-Digital Capability
-Innovation Capability
-Flexibility
-Scalability
-Monitoring and Control

(4) Business Capabilities from Multiple Perspectives:
  • People Perspective (Productivity Improvement, Operational Savings, and Cost Avoidance) 
  • Process Perspective ( Process Improvement, Time, and Period reduced for the business by IT) 
  • Information Technology Investment and Longevity of Investment (IT Expenditure Vs Savings)
  • Technology Perspective (Easiness and Usability, Features and Reduction of Bottlenecks) [NPS would be the best option] 
  • Governance Perspective: for CIO dashboard - the Governance layer (the Evaluation, Scope, and Monitoring) and the tactical management layer (Run, Build, Deploy and again Monitor).  
Modern CIOs are customer relationship managers, strategic communicators, project managers, and innovation experimenters; if, as a CIO, your key metrics focus only on cost, then don't be surprised if you are managed on cost. If your metrics are all pointed backward at the technology, then don't be surprised that the business can't really understand the value of IT. Only through the well-defined set of KPIs, IT can both qualitatively and quantitatively measure value delivery to business and achieve a high-performance result.




161 comments:

Great article. Many IT leaders tend to focus on the cost of IT for reporting - many miss the most important metric of the Value of IT in terms of increased performance and savings.

What a great article. I have been doing research for onsite IT services for my business class' client. I am so glad I came across your post. I think that your post was very helpful and very interesting to read.

Hi, Thaddeus and Brielle, thanks for commenting, the traditional efficiency-driven IT KPIs can't well reflect the performance IT needs to prove as value center, only through different perspectives, such as overall capabilities, cost transparency, project success., etc, IT can turn around and build a strong brand in leading business transformation. Thanks.

Great article but i am not sure these reflect the changing landscape of business and IT. For me, the CIO needs to be measured in few different ways e.g. how quickly CIO is able to integrate a new technology into the overall architecture of the organization? How clean, structured and accessible data CIO is able to maintain and how much revenue through in sights he is able to drive?

Let's stay at bench marks for a while but there is a real need to add few more pertinent metrics to his portfolio

Its really informative, some facts and other points given here are quite considerable and to the point as well, would be better to look for more of these kind for efficient results.

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Great article and I enjoyed reading it.
I would like to know what suggestion on how to measure below information
- Improving Speed/Agility (Speed to Market, ability to change direction with the market, etc)
- Improving Revenue (enable the business to gain market share, enter new markets, etc)

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A good article covering necessary scope for developing KPIs. Developing KPI s for value added services are quite challenging.

Outstanding article, Pearl ! You made my (and my CIO) day !

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Thank you for such a useful and interesting article. I especially liked the fact that IT is an enabler of current and future capability for both the organization and its ecosystem. Much of the board conversation about IT should be framed in respect of the business activities and the ecosystem because it helps enforce effective communication at strategic conversation.

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To enhance IT's role from a perceived cost center to a value driver, it is essential for IT organizations to collaborate with stakeholders to develop meaningful KPIs. These KPIs should demonstrate IT's impact on business capabilities and performance. The suggested approaches include detailed cost breakdowns, performance quadrants, PMO measures, and business capability metrics. By aligning IT metrics with business goals and transparently communicating value, IT can effectively contribute to strategic business success.
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