Mapping the true value of IT

Most analyses of IT value consider the quantitative aspects of the IT investment as parameters for evaluation. The quantitative parameters like Capital and Operational cost, revenue increase etc. are strong indicators of the value of any investment. Using these parameters is a strong starting step towards understanding how valuable a particular IT investment is to the organization. However, relying solely on the quantitative benefits of an IT investment is an incomplete evaluation of the value. Quantitative benefits would only indicate the dollar worth of the investment. However, how valuable the particular investment is to the organization is dependent on other factors, which may enhance or even degrade the true value of an investment.

 

IT Value

 

The IT Investment Value Tetrad, depicted above, extends the value of IT investments across four specific areas which affect a particular investment’s value to the organization. The four factors individually increase or decrease the value of an IT investment and their sum total is a very close approximation of the true value of the IT investment.

 

The IT Investment Tetrad defines the following four factors which contribute to the value of any investment:

Quantitative Benefits – The net financial savings or gains that can be easily quantified in monetary value. These benefits essentially include savings in costs or directly attributable increases in revenue of the organization.

Qualitative Benefits – Savings or benefits from the IT investment that are more difficult to quantify in financial terms, but are still significant to business goals, strategy or operations. These include benefits like Brand enhancement, organization and operational efficiency and knowledge capital enhancement.

Risk – The risks of implementing the solution, especially the managing of costs and the achievement of identified benefits. This includes risks of delays, adverse exigencies and risk of obsolescence. Value of the investment is inversely proportional to the magnitude of risk identified.  

Stakeholder Reach – The number of stakeholders, both in terms of number and type, which are impacted, positively or negatively, by the IT Investment. For example, core network equipment, which would benefit the working of the entire branch office, is ordinarily rated higher that software procured for the exclusive use of a particular department.

The above mentioned factors, when evaluated objectively, present a true picture of the potential value that an IT investment brings to the organization. Also, as this evaluation does not rely on any one type of factor but rather represents all the factors, this type of value finds acceptance to all stakeholders.

The most important characteristic of this evaluation is that the single value arrived at the end of the analysis allows an objective comparison of different investment opportunities which may be of different types. A comparison based on the pure quantitative value would be possible only between investments of the same type. Using the IT Investment Value Tetrad, an objective comparison and prioritization of an investment opportunity to buy networking equipment can be done vis-à-vis an investment opportunity to buy software. Given the current economic scenario and the ever increasing need to classify and prioritize IT investments, the Tetrad based analysis is a powerful tool to ensure better business value.

Benefits across the table

As defined above, the IT Investment Value Tetrad can enable a rational decision making process based on the true value of any IT Investment. The specific benefits for both types of stakeholders helps the process of Business IT fitment within the organization.

Benefits for Top Management:

  • Enhanced measurability and valuation of IT Investments
  • Increased objectivity in evaluating IT Investments
  • Increased clarity on the strategic role of IT in the business
  • Compelling business justification for Investments to present to external stakeholders

Benefits for CIOs and IT Managers:

  • Stronger Business based valuation of Technology
  • Objective prioritization of IT investments in relation to Business goals
  • Stronger business case to justify investment requirement
  • Increased contribution to the Organization’s strategic goals

Mergers & Acquisitions: Due Diligence – The IT view

Organic growth in organizations is slowly becoming a concept in the past. While many would argue that sustainable growth is only possible organically, the fast paced nature of business today forces organizations to add capabilities, preferably without the delay of  developmental learning. Albeit, there is an entire entrepreneurial business model of developing a niche organization and then selling it to a larger general conglomerate.

Due diligence during M&As are a core area of expertise that have been arguably the holy grail for a lot of Finance and Strategy consultants. Deep expertise in valuation and strategic synergy becomes the core area of focus in the M&A evaluation process. However, a third element, Technology Synergy has become a major supporting factor during the decision process. It is estimated, that up to 38% to 40% of synergy savings in a Merger or Acquisition are enabled by IT synergy.

Every organization today depends on IT systems as a prime enabler for its business efficiency. Therefore, ensuring the ability of the disparate IT systems of merging entities to yield themselves to relatively easy integration, becomes the prime consideration for IT due diligence and subsequently, corporate due diligence as well.

The real life

In reality however, IT would be one of the last things considered during a M&A. I dare say, that IT integration is often given the priority just above Administrative Logistics. After all, as one business leader once told me, “We’re just have to be moving the servers, right?? We can put them with the office furniture.” Not exactly the kind of regard that the CIO would have liked, but usually that’s what happens.

Who should be blamed for this apathy? I think both sides of the table, Business and IT are equally at fault. While business to a large extent, tends to keep IT away from the strategic decision making table, for its part, IT very rarely tries to position and justify itself as a core business driver.

Business IT non-alignmentThe main reason I believe this happens is that everyone is caught up with the operational aspects of the IT organization. Including IT itself!! The working of IT is a hygiene factor. If IT works, nobody really notices it. But if IT stops working, everything is blamed on it. The IT organization ends up becoming a high value back office operation, with no initiative to justify the business enabler value that it really has.

Moreover, too much focus has been placed by IT on its operational achievements. A new web portal in 24 hours, new ERP deployment in 12 months, 99.999% uptime, zero downtime, 75% optimum utilization; some of the things you’d hear at an IT review or in an IT departmental newsletter. But does business really care, other than a pat on the back?

This contradicting focus is what builds up distrust among the two towers inside an organization. CFOs and CEOs become increasingly assured of CIOs as money wasters and CIOs correspondingly think of CEOs and CFOs as ignorant, stingy and oppressive. The result, IT and business remain separate.

The solution is communication. Consistent, coherent communication between both parties. CIOs must strive to translate their achievements and needs, operational or otherwise, into business terms, profitability, revenue, and ROI. CEOs and CFOs must invite CIOs into the decision making circle and in many cases, coach them to project business value.

 

IT value in an M&A

A merger and acquisition exercise is an important area where the IT Organization can prove its worth as a true business enabler.  The important aspect for any Merger or Acquisition is synergy – business synergy, market synergy, financial synergy. The biggest aspect that IT can proactively address is Technology Synergy – the possibility of integrating diverse technology systems to work together.

While there is practically no framework to govern what constitutes good value in a Technology Synergy scenario, it is obvious that during a M&A, it is essential to go beyond the obvious. It is easy to look for infrastructure or software integration candidates, however it is essential to take a holistic view of the systems to encompass people, operational processes and data as well.

 

Some of the areas to watch out for while making a technology synergy audit are:

Presence of Legacy Systems

One of the biggest reasons a technology synergy can lose value is when any one of the entities still relies on legacy systems. While it can be argued that the industry did not warrant state-of-the-art technologies, in a merger or acquisition, legacy systems might prove costly to replace and difficult to maintain. In such a scenario, if the IT systems have to merge, the legacy systems have to be replaced by current technology. Usually it would be a question of which of the merging entities has more mature processes and technology. This would be the best candidate for becoming the standard.

 

Use of Open standards for Data Exchange

Every enterprise chooses technology based on a number of parameters, the most common being functionality, ease of use and cost [hopefully in that order]. One more parameter that CIOs and IT decision makers have to keep in mind is Data Exchange standards. Not necessarily in a merger or acquisition scenario, but increasingly enterprises need to integrate with technology landscapes of multiple entities – partners, customers, vendors and of course, the internet. Gone are the days when proprietary data exchange standards were used in the name of data security. Open data standards like XML and ASN.1, thanks to the all-pervasiveness of the internet, have emerged as the glue that integrates disparate technology systems.

 

Areas of consolidation

Most of the time, IT Infrastructure is taken as a given. It would seem as if all the enterprise applications run on their own. That said, the platform on which enterprise applications like Email, ERP, CRM, Web Portals run is as important and signifies a large investment if not planned properly. However, in an M&A scenario, this is arguably an area of relative happiness. When two infrastructure stacks are brought together, the result is more capacity. However the happiness is relative because the governing factor is the combined usability of this capacity. The two systems may not be compatible with each other or the relative capacities might be so far different that the combined capacity is hardly an improvement. CIOs and IT decision makers have to watch for consolidation possibilities, whereby systems can be merged efficiently with maximum reuse.

Cloud services, specifically Infrastructure as a Service offerings, aim to solve these issues. By providing vendor independent infrastructure platforms, IaaS deals solely in infrastructure capacity. As a result, two entities running on IaaS platforms yield themselves much easily to consolidation.

 

Process Reengineering

If technology is considered the heart of the IT organization, operational processes would be the nervous system. Efficient and mature processes, which get the job done, remove inefficiency and redundancy, enable IT to react faster to incidents, address business needs faster and ensure overall functioning of the IT system. The maturity of a process is governed by its ability to reduce redundancy and to adapt to business change. While making an evaluation of IT operational processes, it is worthwhile for the CIOs and IT stakeholders to evaluate processes on the basis of their maturity and depending on the business need, judge the magnitude of process reengineering that would be required on both sides.

 

Core personnel

Mergers or acquisitions are a worrying time for employees of both organizations, specifically due to the looming fear of redundancies and as a result, layoffs. Most of the time, the easiest way to show cost reduction during a merger or acquisition is to reduce personnel. While this may seem effective in the short term, it is evident that any merger or acquisition exercise is executed for growth. With growth, eventually there will be the need for additional manpower, more so in the IT organization. To avoid costly recruitment in the future, it is important for CIOs and IT stakeholders to evaluate their teams and decide on two specific groups of individuals. On the one hand, individuals who would automatically fit into roles in the resulting IT organization [including one of the CIOs] and on the other hand, individuals who need to be groomed to fit into existing or future roles. It is important to note, layoffs should be used only as a last measure and only in cases where a candidate is found irrecoverably incompetent. As far as personnel are concerned, reuse of personnel should be the qualifying factor for technology synergy.

 

Dilemma

If the acquiring entity, despite its size, has legacy systems, proprietary data exchange standards, low maturity processes and the acquired entity, relatively smaller, has more modern technology and best of class processes, which becomes the standard??

Cloud Computing: Addressing the scepticism

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I was in a Cloud Computing conference a week back and had the chance to interact with multiple CIOs and top decision makers in the Indian market space. A common reference that kept reverberating, despite the jazzy presentations and the free pens, usb drives, books was:

  • Cloud is great, but I won’t bet too much on it.
  • Maybe it works in the US, here [India] it won’t fly!!
  • Aah, that’s all hype. No substance. (My personal favourite)

The level of scepticism surrounding Cloud Computing is stifling. I mean, a little apprehension about a new [??] concept is understandable, but a whole community of decision makers expressing collective disbelief in a concept is a rather serious indicator of trouble. Cloud Computing Service Providers had better sit up and take notice of this scepticism.

I have to admit that the kind of marketing muscle put behind this concept of cloud computing is mind boggling. Everyone from industry experts to IT product vendors, IT services providers to Industry Research Agencies seem to have an opinion about how Cloud Computing is redefining business as we know it. The trouble is, these opinions, while being individually thought provoking, end up often being contradictory when taken together.

At the receiving end of this confusion is the customer, who is honestly searching for the business edge that he believes IT can provide, but the clarity of which remains completely elusive to him.

 

The confusion

No clear definition: One of the primary reasons of the attitude towards a powerful concept such as Cloud Computing is that it is not defined clearly enough. Today, if you were to ask the marketplace for a definition, chances are the definitions would be as varied as the number of products available in the market. The result: Confusion, total and absolute. And what you don’t understand, you do not venture into.

No clear adoption methodology: Even when you get Cloud Computing defined clearly in terms of its applicability to the organization, the larger hurdle that most customers fear is the implementation. Most of the time, customers have made medium to large investments in IT capacity and their biggest fear is whether they would have to junk all that investment to get onto the cloud. The other fear is the kind of complexity and skill requirement that would be needed for moving to the cloud.

No clear pricing logic: If one were to analyse the pricing mechanisms for various cloud computing business models, two main models emerge: the subscription model, where you sign up for a service for a period of time, and the pay per use model, where you pay for the service as per the time or amount you use. It can’t be concluded that one model is better than the other, but the pricing issues for customers run deeper than how service providers bill them.  Customers fear how costly the whole migration to cloud computing is going to be, in terms of upfront investment as well as recurring costs. That’s not including the fact that they will have to revamp their internal support teams to work with the new models of IT Service delivery.

No clear stand on data security: While most Cloud Computing service providers take security issues with a all encompassing “We’ve-got-it-covered” stance, it is very evident, from a potential customer perspective, of the deliberate and very visible attempt to downplay genuine security concerns. Most of the time, queries about security are answered by jargon filled replies about complex data encryption techniques and security devices.

 

Addressing the confusion:

There is only one solution to dispelling the darkness around cloud computing and that involves service providers, Product OEMs, IT Consultants and IT Industry Experts to exhibit jargon-free honesty about Cloud Computing. While the potential for Cloud Computing to address real pain areas within IT is huge, there are certain pain areas that Cloud Computing just does not apply to. It is necessary that Cloud Computing providers be absolutely honest about not just the possibilities but more importantly, the limitations of the cloud.

The following pointers might help customers and service providers engage more meaningfully about Cloud Computing:

Relevant Definition: The first step to addressing the confusion about cloud computing would be to define it meaningfully.  I believe that the most relevant definition for cloud computing would be in terms of the solution to the customer’s specific problem. Case in point: What makes better sense while introducing a Software as a Service based CRM package to a customer struggling with managing his salesforce and customers:

  • An online SaaS CRM package that absolutely revolutionizes the way you interact with customers, utilizing the latest virtualization, grid computing, PHP, Ruby on Rails………..  
  • A web based portal that is easily accessible from anywhere and allows you to share customer intelligence easily within your sales team, providing a central point of information, resources and data to help the salesforce effectively interact with customers. 
    Which one have you heard? Which one would you like to hear??

Clear Adoption Methodology: While the noise about the benefits and salient features of Cloud Computing are well know, the plethora of terminology invented around the concept is rather unnerving. It is essential for service providers to ensure customers have complete visibility about the components and implementation of the specific Cloud Computing solution. The customer needs to know in precise detail, among other things:

  • what changes they will have to make in their existing systems and processes
  • how complex the migration to the cloud would be
  • What are the possible issues / problems / risks associated before, during and after the migration
  • Possible impact on business during and immediately following the period of migration

TCO, not just Pricing: Cloud computing providers have been extremely careful about their pricing strategies, knowing fully well that the price of their services will be the most important factor to get customers to migrate to the cloud. After all, that was exactly what got the Outsourcing boom going, wasn’t it?? But in the post recession scenario, cost is at the very top of the list of priorities for every CIO. Most often, Cost seems to be the list. Stakeholders and decision-makers are increasingly being forced to trade state-of-the-art for most-bang-for-the-buck. In such a scenario, plain pricing incentives just would not cut it. Cloud computing vendors need to strongly and with clarity, demonstrate the monetary benefits of cloud adoption. The ability to classify and quantify costs, real or indirect as well as returns, real or long-term, will establish the vendor/provider as an expert in the services he delivers and build credibility for the service provider.

 

Clarity about security limitations: As a friend of mine in the Information Security field would say, nothing’s safe in IT. The truth of the matter is, anything put on a public network like the Internet is not safe. There is always, always a finite limit to what the best security measures can protect. So, cloud computing consumers must be discerning about the information they migrate to the cloud. Confidential data like Customer records, payroll, financial data, strategic plans should be kept under the organization’s control. Public data like websites, marketing material, customer interaction applications can be migrated to the cloud readily and would probably end up saving both resources and money for the organization.  

Cloud service providers would end up building a lot of credibility by being honest about the limitations of the cloud in terms of security. When a customer’s genuine security concerns are met with a condescending attitude like “Our cloud is completely safe”, without any solid evidence, it can put off a potential customer very very quickly. It is advisable for cloud providers to guide the customer through solutions which address his specific concerns, honestly laying down the pros and cons of all offered solutions.

 

In conclusion, cloud computing offers a large array of benefits for enterprises wanting to introduce a competitive edge in their information architecture. However, addressing the scepticism about cloud computing would take a generous mix of honesty and customization to part the clouds, so as to speak.