Measuring and Reporting IT Value (2 of 2)
My last post generated some interest, so here's the rest
of the examples.
time, I wrote about the simplistic approach to measure and report on IT
- Is your IT group working on the right things?
- Are they working on the right things well?
- Is your IT spend comparable to industry norms?
- Is your IT spend comparable to other measures of company
A bit more detail ... balancing quantitative and qualitative
- (Quantitative) To make sure you have business
alignment, the strategic objectives of the company should be
identified, and all projects / IT investments should be aligned with
those objectives. Track the relative size of spend for each of the
objectives, and make sure it matches with your priorities (sample
- (Qualitative) Regularly (ie. minimum once per
quarter), review this aggregated spend with the business.
Conversation around relative priority can easily segue into a
"customer satisfaction" review.
- (Quantitative) Check with industry groups or
research firms to get an idea of the typical measure of IT as a
percent of revenue (ex. IT budget of 1.5% revenue is typical for
manufacturing firms). Be sure to clarify if this includes
depreciation expense or not.
- (Quantitative) For many companies, revenue isn't
directly impacted by IT as much as Cost of Goods or SG&A. It may
make sense to compare annual growth rate of year IT budget to your
company's gross margin.
Here is a sample graphic showing what I mean ...
Click on the picture for a
For this fictitious manufacturing company, IT costs seem to be in
line with industry norms - comfortably less than 1.5%. However, IT costs
are growing faster than revenue - not a good sign.
Worse yet - the second graph shows us that our gross margins are
flat to declining - more bad news. If I was the IT director at this
company, I shouldn't be surprised by some serious budget pressure going
into the new year.
Again, these are made-up numbers to illustrate one scenario.
There are also things one can do with the graphs to hide problems or
inflate good results - but the CAGR statistics tell the real story, so
make sure you know how to calculate growth rates!
Another key point; generally speaking, for most manufacturing
companies, IT investment is not as clearly related to revenue as it is
to gross margin. In fact, for some companies, revenue increase/decrease
is often driven by forces outside of IT's influence!