Time To Justify IT Expenses

With all the posturing about IT's strategic importance today, consultants are finding that only a small minority of companies make the proper business case for IT investments.

Ulysses Knotts, executive vice president and partner at AnswerThink Consulting Group, says too many companies treat IT as a stepchild they want to reduce costs in.

"I just met with a very large multibillion-dollar company in Atlanta," Knotts says. "It's spending millions on IT in decision-support data warehousing and they are totally disconnected from the businesspeople using all these applications. Does that make sense? How do they know if their IT investments are driving business value? They don't have a clue."

Charles Callahan, vice president of Booz, Allen & Hamilton, says without the proper linkage between the CEO's office and the IT department, discretionary IT investments will not be subject to the hard-nosed business case required of a new manufacturing plant or major ad campaign.

"When it comes to information technology, it's not the same set of metrics as other projects in terms of time and budget and return--and it's not particularly clear what the return is," Callahan says. "It's difficult to translate $100 million in ERP software to how many more widgets I can make."

Callahan estimates that two-thirds of IT budgets are spent in the name of efficiency--PC upgrades, new office applications and for reasons other than adding strict business value. But that leaves one-third of IT budgets that should offer a much stronger business argument.

Callahan believes that extracting real business value out of IT investments will only become more crucial as IT shops are increasingly required to add new capabilities, not just improve existing operations. For example, Home Depot was one of the first retailers to deploy handheld computers to better monitor inventory levels and to improve customer service on the floor. Lean inventories are now key to its profitability. And in less than two years, Charles Schwab & Co. Inc.'s online customer base has grown to more than 2 million users with more than $130 billion in assets, a direct result of an IT investment in Web-based trading.

Honeywell Inc. is another true believer. The global controls technology company invested $12 million to consolidate divisional

customer-support centers while building a Web-based knowledge-management system for customer-support personnel.

"The way this program was sold was to make commitments about the extent to which we expected to improve customer satisfaction and then set targets for revenue growth," says William Sanders, CIO for the $8 billion company. The business case also included permanent operational cost reductions with targets to profit-margin improvements.

One-third of Honeywell's annual $200 million IT budget is for discretionary investment. "Our investments in IT are compared with those in products and sales," Sanders says. "IT has to compete with all the investment options the company has."

At Eastman Kodak, the $14 billion imaging products company, CIO John Chiazza sees a marked difference in the company's IT approach. Chiazza recently returned to the CIO slot following a stint with a group that delivers support services to Kodak operating units in the United States and Canada.

"I can certainly recall in my earlier tour of duty we had a cost-center mentality rather than [looking at] how much value IT generates for Kodak," Chiazza says. Part of the change, he says, is due to a new senior management team. "They are IT-literate and have a better sense of how IT fits in the operation."

Kodak established an IT Governance Council comprised of business leaders across the enterprise, including the CFO and COO. IT decisions made by the group are sent to an operations team that has the CEO's ear. Although not all IT initiatives are approved through the sieve of a strict business value case, many are, including a recent discussion about an investment in an information appliance for in-store personnel who service film retailers.

"It's not an easy process...but it changes the game from, 'I will take as much from IT as somebody will give me' to an approach that this is an investment and any investment has to pay off," says Chiazza.