Sources of IT Value
I talk and write a lot about value and the ability of IT to deliver real value for organisations. That’s our role, delivering value to our organisations through the smart and effective use of technology and information. Despite this I have never formally captured my thoughts on what are the sources of value for an organisation and how IT can impact these sources of value.
This blog seeks to address this gap and to provide an overview of what I believe are the six sources of value that IT can contribute to. These sources of value are reasonably generic, but too often when we pitch a business case or try and justify IT investment we pitch it in terms of what we see the value to be in IT terms rather than business terms. For example, I have a number of clients who talk constantly of the need to remove “technical debt”. Now I get that technical debt is a real and significant issue for many IT teams, I just don’t think the rest of the organisation cares. We need to realign our explanations to be more meaningful to non IT people. What is the real issue with technical debt? It will change based upon an organisation’s specific circumstances however most likely it will increase IT costs and slow down cycle times, which will cause initiative delay, and in the process delay planned benefit realisation. More understandable and if you can commit to actual dollar impact you are well on your way to an approved business case.
I believe there are 6 core sources of value for any organisation:
Organisations exist to provide products and services to their customers. Anything that you can do to support selling more product or the delivery of more services is going to add value to the organisation. There are many opportunities to increase revenue including:
- Making it possible / economic to serve new customer segments (e.g. a wholesaler could use an online channel to open effective access to retail customers).
- Making it possible / economic to serve new markets (eg selling overseas when you are traditionally a domestic only company).
- Provide new products and services which customers value. There are many ways to do this however two common examples are embedding technology into existing products (e.g. smart cars) or reselling information of value.
Remember when claiming increased sales that the true economic value of an increased sale is not the value of the sales, rather it is typically considered to be the net operating margin created from a new sale (revenue less costs incurred in making the sale).
In accounting terms the gross margin is the difference between the sales price and the cost of the good or service sold. If you can increase your gross margin you will add significant value to an organisation. One of the best opportunities that organisations have to increase margins is to optimise their discounting activity. If your company ever tries to drive sales by discounting then understanding what level of discount will maximise your margin is a valuable piece of information. Too often however, organisations simply guess or repeat what they did last time and end up leaving significant value on the table. In 2016 there are (and have been for over a decade) sophisticated price optimisation systems that can support an organisation to optimise their margins and add significant value in the process.
Reduce Operating Costs
If you can operate more efficiently and on a lower cost base then you will improve profitability by the amount of that cost reduction. This is classic achieving more with less and is the foundation reason many organisations began investing in technology. Technology supports more with less through process improvement. There are many examples where technology allows tasks to be done with less effort due to automation. The savings from this type of activity are typically reduced labour costs due to a more efficient process.
In my experience you need to be very careful how you calculate and present efficiency gains. I remember a time where I put a business case up justified with labour savings. The time savings were real, however the nature of the savings were relatively small savings of time across a large group of people. The savings easily justified the investment and my business peer was keen to proceed, at least until we talked to the CFO. Having reviewed the business case the CFO asked one simple but direct question. “What are their names?” I and my colleague looked blankly at him. “The names of the people who will no longer be working in the team?” It seems overly harsh, however he didn’t actually want names he was simply making the point that if nothing actually changed in the team in terms of numbers there really were no savings.
Improve Asset Utilisation
If you can improve the productive use of your assets then you can in effect produce more with less investment and improve profitability. Opportunities in this area may include:
- Using advanced analytic to optimise production schedules based upon a combination of switching costs, stock investments etc.
- Improving replenishment processes so that you move to (or toward) just in time inventory and thus reducing your investment in stock.
- Utilising technology to facilitate remote and mobile working and in the process reduce your office / real estate costs.
All organisations assume a certain level of risk simply by being in business however most organisations are very keen to reduce risk as far as practically possible. If you can support them to do this then you will add value to your organisation. Initially I think your focus here should be ensuring that your IT risk is well managed. There are many aspects of this from ensuring your data is safe, that there are no critical single points of failure and having an effective, tested DR plan and IT supported business continuity plan.
In my experience managing risk is one of the most effective ways to justify core infrastructure investment. Make the auditors your friend, help them to understand the risks that are inherent in your systems and when they highlight the risks you now have an effectively positioned risk based business case in the making.
This one may depend on your company however research has shown that high levels of customer advocacy and employee engagement are both associated with higher profitability and growth. As a result many organisations actively pursue engagement strategies in the belief that increased engagement will drive increased performance. So, if you can show that technology investments can support or enhance engagement with customers and with employees, then you have the basis of an effective business case. There are many examples available however let’s start with:
- Investing in a multi channel experience for your customers, which supports building advocacy.
- Investing in core collaboration tools that support team performance and engagement.
So there you have it, the 6 sources of value and some examples of how IT can help to deliver these sources. It would be great to get your feedback:
- Are these the only sources of value or are there others?
- Have you got other great examples of IT initiatives and how they add value for your organisation?