Have you Asked the Right Question?
Do you know how much you spend on information technology each year? Giving
some allowances for the debates and uncertainties in the classification of what
constitute information technology expenditures, the answer is easily derived.
But what does this figure mean? "Is it enough for my business?" or "Have I
overspent on IT?". Over the years, I am frequently asked by CEOs, CFOs and CIOs,
"What is right amount of expenditure for information technology?" "What is the
right percentage of IT expenditure over revenues?". Management wants to spend
enough on IT to ensure competitiveness. A typical consultant answer, especially
from the quality management people, will be benchmarking. Everyone wants to
follow the leaders, so average spending is not the answer. They want to know
what the successful companies spend on IT? The answer is a range 0.5%-10%. That
is too broad. What about only the leaders in their sector of business. The
answer is also a range, albeit a narrower range. Over the years, academics have
been trying hard to find a correlation between IT expenditure and the
profitability of business. Despite various ways of classifying expenditures and
valuation of businesses, there do not seem to be a definitive pattern. Some
losers spend much more than the leaders on IT expenditures (percentage wise).
I think we have asked the wrong question and hence get never get the right
The Right Question
It may seems like common sense, how much should we spend will depend on how
much value the expenditure is going to bring. I should not spend more than the
value that I expect to get. We could put in the time dimension into the
equation. The present value of IT expenditure should be less than than the
present value of all future business values that the expenditure is expected to
bring. If there are alternatives, such as in-sourcing or outsourcing, then we
choose the one that give us the maximum net present value. The right question
we need to ask is "How much business value does IT bring?"
Getting the Answer is Tough
While we know the right question, getting the answer is tough. What is the
Business Value? How much business value does an expenditure on a PC bring? What
about the expenditure for the network infrastructure? For majority of IT
expenditures that are in the support roles, the associated business value cannot
be directly computed. How can we find the proxies indicators and measurements?
We Will Help You
We will never know the value of any project unless we know the business we
are in. We need to know the strategic plan. Once we have a sufficient detailed
strategic plan of our business, we will be able to evaluate the contribution of
any IT expenditure.
What we have been trying to establish it to know the right things to do
first. This is a good start but is only half of the work. We need to have the
management and the processes to ensure that those right things are consistently
being done right. "Doing the Right IT and keeping IT right" completes the cycle.
The "Right things" change as the external environment changes. As business
changes, new IT projects and expenditures have to be made. But an equally
important thing to do is to retire those IT projects that are no longer
contributing to the new business plan. The constant review of "Doing Right IT
and keeping IT right" optimises the business value with information technology.
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