Last week, we lay the foundation for a discussion on IT Value. This week, we look at specific areas where IT creates value.
IT Value, where art thou?
IT creates value. How does that value manifest itself?
The key areas where IT value manifests itself are categorized below. The value created by IT in each area is measurable. However, our focus is on the specific areas themselves where IT value is unmistakably present. We will discuss measuring the exact amount of the IT created value in each area later in this article.
Further, these areas are important because they are directly related to shareholder value. For example, IT creates revenues. Revenues are irrefutably related to shareholder value creation or so one would hope!
By making the connection with shareholder value creation, I hope we can further the cause of IT justification. This association is also important when creating a business case for major projects – nothing sells better and faster than a connection to shareholder value!
For those of you seeped in the supremacy of IT ROI, this discussion focuses on the “R” or return in that equation. The “I” or investment in the equation is quantified more easily and usually not debated much except to ask the question: “what is it really getting us?”
7 key areas where IT value shows up are:
- Revenues: IT can and does increase company revenues
- Cost: IT has a direct impact on reducing cost of business
- Time-to-market: IT lowers process cycle time. For example, IT capability lowers the time needed to get concepts to market i.e. create revenues from a smashing “idea”
- Quality: With the help of IT, the quality of products, services etc. can be dramatically improved. Better products = better revenues? Maybe!
- Productivity: IT improves employee productivity
- Customer satisfaction: IT systems can dramatically improve customer satisfaction
- Risk: IT plays a critical role in risk management
At first glance, it appears that each of these items is unmistakably linked to shareholder value. They are, except, none of them is an island. They impact each other and their net value is derived from factoring in the others. For example, higher revenues are neither a guarantee of shareholder value nor of its long term sustenance. Higher revenues can also be a cause for higher cost and risk, thereby diminishing their net “return.”
This is a subtle issue but an extremely important one. The calculation of “net return” must factor in all key variables. Additionally, the power of portfolio based approaches, such as project portfolio management, comes from this “trade off” because the same event or action can result in positive value creation in one factor and negative in another. Portfolio based approaches hedge this risk by betting on two apparently divergent investments so even when one of them fails the other compensates for it. More on this in the article on IT portfolio management.
Is this an exhaustive list? The answer to this question depends on the definition of each area. This is by no means an exhaustive list when it comes to ways in which IT creates value. This is an exhaustive list when it comes to the broad areas where IT creates value. Other sub areas exist and can be categorized in one of the mentioned in this article.
IT creates revenues
An organization creates revenues when it “sells” its “products/services” for a “price” to a “customer.” IT creates revenues because it can enable:
- Creation of differentiated products and services
- Facilitation of the sale of these products/services
- Setting a marketable “price”
- Reaching the “customers”
Creation of differentiated products and services
IT plays a crucial role in the creation of products and services to collection of revenues from their sale primarily through the following:
- Process automation: automating the various processes along the way
- Process integration: automating the integration points along the way
- Decision support: making better decisions through the collection and analysis of data along these processes
It is hard to imagine a company that can create its products or services without IT. From buying the “raw materials” to manufacturing and distribution, IT is pervasive across industry and companies.
However, our quest here is to make a direct connection between IT and revenues. We are not satisfied with just making this connection, however! We must be able to quantify the revenues generated as a result.
So, recognizing that supply chain, production planning and demand forecasting systems are critical to revenue generation in a modern company is not sufficient. We must make the above described connection.
Here are three examples of IT “directly” related to creating differentiated products and services:
Personalization in car manufacturing: Design your own car and get it delivered in 5 days. The demand for this service is unmistakable. The competitive differentiation this has provided the manufacturers who provide this service is undeniable. The revenues generated from cars sold this way clearly quantifiable. Without IT, this capability is impossible.
Personalization in computer manufacturing: Design your own computer and have it delivered within a week. Dell would not be the force that it is, without the immense power of this business model. How much revenue would it have made without this capability? Compare the days of Michael Dell making this computers in his dorm room to today. A bit of a difference in sales, wouldn’t you agree?
Again, undeniable cannot be accomplished without IT. Unmistakable, the resulting revenues can be quantified.
Personalization in insurance “manufacturing”: Progressive insurance offers its customers the ability to “design” their insurance policies. Revenues can be easily quantified and directly attributed to IT systems supporting this business model.
The connection between revenues and IT is direct and unmistakable. However, there are still complications in the measurement and allocation of the resulting revenues to the underlying components of IT capability. It takes a whole chain of integrated systems to accomplish the above mentioned capability – each link in this chain is important in its own right. The question is: how to allocate the resulting revenues to each of these integrated IT components?
Not to complicate this picture further but rarely if ever does a product get manufactured and sold to a customer with just IT i.e. without the active participation of other business functions such as sales, marketing and operations. The question then becomes: how to allocate the resulting revenues to each of these integrated IT components and related business functions?
The answer to this question or to be more specific, the energy expended in trying to get to it, determines where the use of IT value to drive better IT investment decisions veers off that desirable road and heads directly to the ditch of perpetual calculations for calculations sake!
Facilitation of the sale of these products/services
One of the best examples of IT’s value in distribution is the online sale of products and services. The revenue and IT connection in this sale is direct and unmistakable.
However, IT provides many more avenues for product distribution. To name a few:
1. Product configuration systems to tailor the product to the customer needs
2. Sales Force Automation systems to empower the sales team
3. Pricing systems
4. Order entry systems
5. Available to Promise systems
The revenue attributed to IT gets fuzzier as we get away from the “direct” sales model as in online sales. However, the connection is unmistakable.
Let us take a closer look at the online sale model itself. Revenue attribution in this case is also not as clear as it seems. Often, customers browse products online and then go and try them out in a store. Sometimes, they end up executing the sales transaction in the store as well. In this scenario, who gets the revenue credit?
Often, customers will browse a product in a store and then buy it online. In this scenario, who gets the revenue credit?
Sometimes, customers browse a product online and that drives them to the store to try it out. But when they are at the store, they see another product and buy it there. Should the credit for that sale go to the store?
It is easy to go down this slippery slope of quantification and allocation to the detriment of better IT decision making.
Setting a marketable “price”
Please note that I did not use the term “high” but “marketable” because higher prices are not the only means to create higher revenues. To the contrary, often they hurt revenues.
Market determines price. IT helps gauge the mood of the market in many ways. From simple “competitive price checks” to sophisticated and integrated demand forecasting, production planning and supply chain systems, IT can play a critical role in determining market price.
Often, price is not a direct dollar value for the product or service. It is a combination of factors that together determine what it would “cost” to own the product. For example, the “price” of a car includes its sticker price, cost of financing, cost of maintenance and depreciation that determines its eventual trade-in value.
IT can provide sophisticated pricing models and enabling systems that help manufacturers lower the price of entry that is represented by the sticker price of the car. Often, this entry price makes all the difference in actually making the sale itself!
Reaching the “customers
Revenues are generated by selling products. Revenues can be increased by:
- Selling more of an existing product to the same customer.
- Selling different products to the same customer
- Selling the same product to new customers
- Selling new products to new customers
Online sales are the most obvious example of reaching customers. These could be the same product sold online or “tailored” products specific to online customers. As discussed above, the connection to revenues is often direct but can also be indirect.
IT systems help reach customers in many other ways. For example, a careful analysis of customer data can identify ways of selling other products to the same customer. It can also identify product gaps that can help create new customers. It can also identify ways to increase sales by identifying whole new customer segments.
The revenue generating capability of IT is clear. This connection is unmistakable. It can help make better business cases for IT investments. However, taking this any further to get to the specific dollars and cents value of the resulting revenues is an exercise in futility. Fortunately, it is also very unnecessary!
About the Author:
Sourabh Hajela is a management consultant and trainer with over 20 years of experience creating shareholder value for his Fortune 50 clients. His consulting practice is focused on IT strategy, alignment and ROI. For more information, please visit http://www.startsmarts.com/. Or feel free to contact Sourabh at Sourabh.Hajela@StartSmartS.com