Managing the Business Value of IT

It's yet another new acronym, this time courtesy of The Hackett Group, but IT BVM -- IT business value management -- is a useful and revealing concept. Consider this: Global 1000 companies that excel in IT BVM generate on average $1.07 billion more operating profit on an annual basis and $645 million higher net profit than their peers. What's more, not one company Hackett studied in its latest Book of Numbers research managed to deliver superior financial performance without also being a top performer in IT BVM.

Hackett defines IT BVM as an integrated set of management processes designed to maximize the economic value derived from IT capital investments and operating expenditures. The global strategic advisory firm puts IT BVM firmly in the category of core competencies -- those that have a broad impact on corporate performance, are critical for the execution of business strategy, and provide competitive differentiation. "IT represents 40 percent of capital investment in most organizations across the board," observes Erik Dorr, senior business director with The Hackett Group. "If you take the position that 40 percent of your capital is not strategic, something is wrong."

Of course, many factors impact financial performance, and correlation is not proof of causation, as Dorr is quick to point out. "You cannot see this in isolation; when we establish that there is a relationship between this competency and financial returns we're not suggesting that if you address IT BVM in isolation you're going to get better financial results," he says. "On the contrary, we see that companies that outperform their industry peers financially have a number of things that they're good at, one being talent management, another enterprise performance management in general. And obviously they have strong leadership.

"So there are a number of attributes of those organizations, but certainly one of those attributes is a focus on IT as a value contributor and a strategic component," Dorr adds.

The processes that comprise business value management for IT account for only a small fraction of total IT resources -- about 3 percent to 7 percent, according to Hackett. That makes IT BVM a thin lever, but an extraordinarily powerful one.

Top performers tend to excel in four areas:

• IT investment allocation. World-class organizations spend a smaller proportion of their IT budget on utility and infrastructure expenses than their more typical peers do. This leaves more capital for innovation and improvement, usually in the form of discretionary projects.

• The project portfolio pipeline. Controlling the composition of the portfolio is key. One sign of mastery is a much lower conversion rate of initiatives into funded projects -- 40 percent for the top performers, compared with 88 percent for the peer group. Top performers are skilled at weeding out weaker projects quickly; less savvy companies tend to have a bigger project backlog and actually complete fewer initiatives.

• Project delivery performance. All of the companies in the top-performing group meet cost targets for at least 75 percent of their projects, but only about half of the mediocre performers can claim the same. Among the latter group, projects that are delivered often have cost overruns.

At the same time, even top performers struggle when it comes to delivering the benefits that their initiatives aim for. Only 57 percent reported that they hit benefits targets for at least three-quarters of their projects.

• Application portfolio management. This was the area in which Hackett found the biggest gap between the two groups. Companies with a high degree of IT BVM expertise track and manage their applications closely. Low-performing peers struggle with the proliferation of software assets and the resulting complexity, which results in higher maintenance costs and a reduced ability to respond to business needs. "The more complexity you have, the more work you have to do under the covers to keep everything operational and performing and integrated," notes Dorr.

Can project portfolio management (PPM) technologies help companies get a grip on these challenges? "There are some tools that will allow you to track various investment options and do risk assessment and ROI and put it all in a nice bubble chart, but that's really at the more innovative end of the software tools available," says Dorr. Most PPM packages are more geared toward managing individual projects or programs and the resources associated with them, he points out.

What about outsourcing? That's not a practice Dorr would recommend for IT BVM, though some companies have tried it. "At the end of the day, this is very much something you should own internally," he says.