As IT organizations shift their focus to improving enterprise agility and driving innovation, top performers are finding new ways to drive value, according to new research from The Hackett Group, Inc. But typical IT organizations face significant challenges in this area, and The Hackett Group’s research recommends organizations focus on a number of IT strategy areas in order to make the shift towards value-based IT management and improve efficiency and effectiveness.
“The traditional way that IT creates value is changing,” explains The Hackett Group IT Transformation Practice Leader Mark Peacock. “In the past, business strategy and operational plans translated into the need for technology capabilities. Today, technology innovation has become a primary driver of business innovation and value creation. So the historic process has reversed itself, with technology-led value creation opportunities driving strategy while strategy simultaneously drives technology planning. This convergence of business and technology has made business relationship management a key skill, and increased the importance of IT planning.”
According to The Hackett Group IT Executive Advisory Practice Leader Scott Holland, “IT today has a historic opportunity to elevate its value contribution. But dramatic changes in culture and skill sets are required. IT organizations that fail to make the transition to value-based IT management will see their relevance erode as the business take control of their own technology roadmap, relegating IT to the role of a utility.”
While world-class IT organizations excel at driving greater business value, they continue to maintain a sharp focus on cost reduction. The Hackett Group’s research found that world-class IT organizations now spend 19 percent less than their peers and operate with 14 percent fewer staff, while delivering higher levels of effectiveness. World-class IT organizations also dedicate substantially fewer resources to “run” activities (55 percent vs 63 percent), and instead focus more investments in “build” activities (39 percent versus 30 percent).
One key to accomplishing this is lower technology complexity, the research found. World-class IT organizations have also developed competencies in agile and iterative development, moving beyond the traditional waterfall development approach to enable them to be more responsive to changing business needs and deliver client-facing applications more quickly.
World-class IT organizations are those that achieve top-quartile performance in both efficiency and effectiveness across an array of weighted metrics in The Hackett Group’s comprehensive IT benchmark.
One measure of the effectiveness of world-class IT organizations is their ability to help reduce costs in finance, procurement, and HR, largely through transactional automation and self-service enablement. World-class IT organizations also continue to increase their focus on enabling greater levels of effectiveness on front office activities.
Impact of cloud computing
The presence of cloud computing service models such as Infrastructure as a Service (IaaS), Software as a Service (SaaS), and Platform as a Service (PaaS) continue to be front and center for accelerating the drive to both higher levels of business enablement and increased cost optimization. The anywhere, anytime availability of these solutions creates an opportunity for business partners to have an agile service model that provides a level of comfort in their ability to support and manage their demand in the most expeditious, cost conscience way.
“With more and more businesses looking to work directly with the cloud vendors, it’s critical for IT to be included in any discussions on how and/or what cloud solutions may be the best candidate for supporting the business,” said Holland.
“As IT continues to be on point for how technology and data are being leveraged across the enterprise, these conversations are no different. IT’s role is not to complicate the process. They are there to ensure that there’s an understanding of how a move to the cloud could impact the ability to support future business demands. By including IT, there is a higher probably that technology landscape/roadmaps, defined as part of IT’s enterprise architecture role, will be governed and IT will be able to operate with greater levels of efficiency long term.”
The challenge ahead
The challenge moving ahead is for IT organizations to shift from internal process execution to focus on customer and business value. To master value-based IT management, The Hackett Group recommends that IT organizations develop competencies in several areas.
In order to enable technology-led value creation to drive strategy, IT organizations should take an active role in identifying opportunities for value creation, including internal process improvement, value-chain digitization, product or service innovation, and business model innovation. To facilitate the transformation from a focus on internal process execution to a customer- and business-value orientation, IT organizations should master value-based IT management, making investments in business relationship management integral to IT planning.
IT organizations should also establish value-based IT governance, The Hackett Group’s research recommends, to place the principle of business value maximization front and center through organizational and process design. Part of this is the clear delineation of IT and business ownership for strategy, technology acquisition, solution development, and application maintenance.
Financial management
Financial management is at the heart of value-based IT management, according to The Hackett Group’s research. IT organizations can elevate their financial management capability to improve chargeback and cost accounting systems, and develop a comprehensive total cost of ownership model for decision support. This may require IT to acquire or develop new financial management competencies.
While most IT organizations have mature internally focused performance management processes and scorecards, a focus on maximizing business value is often nonexistent. The Hackett Group recommends that IT organizations adopt value-based performance management systems which tie IT performance to business outcomes, complement traditional IT performance management and measurement systems.
Finally, to maximize value from technology investments, resource allocation decisions must be managed as a portfolio with different risk/reward profiles for investment alternatives, The Hackett Group finds.
IT organizations must integrate IT portfolio management with the portfolios of technology-based transformations in the business, based on value maximization. This collaborative portfolio management process should drive the IT agenda and underpin all funding and sourcing decisions.
