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Strategic Insight:
Open Memorandum: Increasing Payback from Information Assets

  Column published in DM Review Magazine
May 2003 Issue
 
  By Richard Skriletz

OPEN MEMORANDUM

TO: COMPANY CEO, CFO AND COO

FROM: RICHARD SKRILETZ

SUBJECT: INCREASING PAYBACK FROM INFORMATION ASSETS

DATE: MAY 1, 2003

CC: COMPANY CIO

The evidence is clear and incontrovertible: Real companies in every industry are saving millions of dollars and generating new revenues by the smart use of information assets. This is being done even with a corporate focus on cutting costs. This memo is to encourage you to take advantage of your company's existing information assets and use them to improve company performance and results. Specific steps that you can take to improve company performance are provided to help you create an action plan.

Begin With Value

Companies are saving hundreds of millions of dollars and increasing revenues through effective use of IT assets, especially information. Today, I want to focus on action. The good news is that any company (including yours) can achieve a similar success, but achieving success requires changes in company policies for IT budget planning and ensuring payback from IT investments.

Value comes from a focus on the business. There are two components to this focus: helping business units get the work done and tracking results for improvements in performance. Helping the business is an important use of company resources. Unfortunately, improving business unit operations does not always provide better company results ? too often the total improvement in results is less than the sum of investments in operational improvements. It is up to you to keep the big picture clear and focus on improving company performance. The practices for allocating IT resources need to be addressed so that your needs are met.

In the IT budget, items such as computer equipment, software maintenance and other resources necessary to support business operations are nondiscretionary. In most companies, this accounts for 80 percent of the IT budget. While there are cost-cutting opportunities here (outsourcing, system consolidation, more cost-effective technology), cost cutting alone will not improve business performance for the long run.

Using IT information assets for improving the business must be funded as a discretionary project. The problem is that discretionary budget items only amount to 20 percent of the IT budget; and, as you know, there is more demand for IT resources than can be met. Discretionary items usually support business units (new software, systems, office computers) and IT infrastructure (portals, e-security, intranets). It is time that some of these funds be used to improve specific business results.

Recommended Actions

  • Reserve 2 to 5 percent of the IT budget for executive-level projects focused on using IT information assets to improve business performance. There will be an outcry from those who believe their needs are urgent, but you need to think of this as necessary or as a 2 to 5 percent IT budget reduction for an executive initiative.
  • Create a separate unit in IT chartered to provide the information that executives and managers can use to improve business results.
  • Expect that some of this budget will be used for technology designed to extract information from your IT information assets and analyze it quickly and effectively.
  • Expect a payback of at least 100 percent on this investment each budget year.

Focus on Performance

Getting a real payback from IT investments has always been a problem. The costs and benefits associated with IT initiatives are estimated and used as a criterion for committing IT resources to an initiative. The track record for turning estimated benefits into improved financial performance is, unfortunately, woeful.

This is an opportunity to make payback real. Payback is achieved when critical metrics, or key performance indicators (KPIs), are identified and monitored. Product profitability is an example of a KPI ? knowing how profitable a product is allows decisions to be made to improve that profitability. Identifying your KPIs is essential for successfully improving business performance.

Recommended Actions

  • Select one or two business "pain points" that you want to address. These should be important enough that solving them will lead to improved performance (such as reducing customer attrition or increasing inventory turns).
  • Determine what KPIs and information will inform managers and executives about the current state of the business and indicate a positive course of action.
  • Expect updates to be delivered to you regularly (I recommend daily or weekly so that a desire to improve performance is maintained).
  • Keep the managers and the IT professionals providing the information focused until the improvement you want is achieved.

Reap the Results

Now real payback can be achieved. All it takes is measuring the improved performance and, with the CFO certifying the calculations, determining the bottom-line dollar impact associated with it. This is a necessary step. Without it, your needs and the needs of your company are not met.

Recommended Actions

  • Convert the performance improvements into their financial, bottom-line impact to the business. The CFO should certify the results.
  • Make sure the investment has paid off.
  • Start the process all over again with new business pain points.

The bottom line is that IT assets have important value to executives leading the company. This action plan focuses your IT investment into three important categories:

  1. Keep the business running ? 80 percent of the IT budget is dedicated to this (save money by outsourcing, system consolidation and cost-effective technology).
  2. Invest in improved business operations ? 15 to 18 percent of the IT budget is used for new software, applications and computing infrastructure.
  3. Invest in improved business performance with bottom-line impact ? Set aside 2 to 5 percent of the IT budget to direct your business to improved results.

You might even consider creating an IT scorecard or dashboard that tracks these categories and the results ? another action that I highly recommend.


Richard Skriletz is the national managing principal for business intelligence and data warehousing at RCG Information Technology, a leading national provider of IT professional services. Skriletz has more than 30 years of experience in information technology and consulting services in the computer, insurance, banking, utilities, telecommunications and manufacturing industries. He passionately believes that business intelligence is a critical success factor for business today and that successful business intelligence requires a focus on improving business results and strategy. Skriletz may be reached via e-mail at rskrilet@rcgit.com.

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