THE VALUE OF IT/BUSINESS ALIGNMENT A closer look at business service management

1. THE VALUE OF IT/BUSINESS ALIGNMENTA closer look at business service management September 2007 Rebecca Wettemann Vice President rwettemann@nucleusresearch.com Nucleus Research www.NucleusResearch.com

2. About Nucleus • A technology advisory firm delivering investigative analysis and advice. • 1000 published ROI case studies • 4.7M ROI tools distributed • Research centers in Boston, Paris, and London • The only firm registered with the National Association of State Boards of AccountancyRegistration #108024

3. 3% ROI 3 5, 2 2

4. Agenda • The IT/business alignment challenge • Business service management trends • Using financial metrics to value IT • 5 steps to better BSM • Examples • The metrics • Conclusion

5. IT versus line of business?

6. On a scale of 1 to 5, how effective is your IT/business alignment?

7. The challenge IT and Business have evolved … but not completely aligned.

8. Trends in BSM – the business view • I installed my own wireless network at home • Given the pace of technology evolution, things should work • IT should understand what the business needs – and deliver

9. Trends in BSM – the IT view • I’m given fewer resources and more challenges • Given the pace of technology change, it’s hard just to keep up • The business should have a more realistic view of what IT can deliver

10. Nearly 60 percent of companies are not consistently measuring the value their IT projects deliver.

11. Challenge Customers are asking two ROI questions: • Will I get a positive ROI from the solution? Does the application type have value to the company?Is that value greater than other potential projects? • Should I buy your solution? Why is your product better than others?How and when should I buy?Am I getting the best price?Can I make the business case to the CFO? ?

12. The challenges facing decision makers • Fewer than 25% of companies conduct any business-case analyses for IT investments • Most companies don’t have a standard or consistent way to calculate ROI for IT across the enterprise • Companies can’t prioritize their IT needs without an impartial and consistent ROI assessment methodology

13. Value Current and factual data Consistent ROI methodology Common tools and ROI metrics Using ROI in the IT process Project Decision Portfolio Management Technology Decision Technology Decision Technology Decision Technology Decision Technology Decision Technology Decision

14. ROI and the technology life cycle • Maximize • Manage investment • Identify additional benefits • Explore added integration • Plan and select • - Assess the need • Evaluate the alternatives • Choose the most effective fit for the environment • Prove value through analyzing costs and benefits • Retire • - Minimize investment • Identify new technologies • Upgrade • - Examine integration vs. return • Minimize disruption • Purchase and deploy • Negotiate a fair price • Prioritize initiatives • Uncover hidden costs and benefits • Justify the investment • Budget for future costs

15. Let’s look at ROI…

16. Why use financial measurements? Old Days • Choice was limited and the value was obvious. Today • Companies have many choices, often replacing current strategies. • Decision must be based on sound business criteria. Interoffice mail email Salesforce.com Oracle

17. Where to focus efforts? Can you identify the areas that deliver maximum benefit?Content management: Benefit

18. Cost vs. benefit Can you justify the upgrade or purchase decision? • Will the company get back more than it spends? • Did I get a fair price based on the benefits? • Can I prove this to management? • Can I prove this to the shareholders?

19. Prioritize projects ROI Payback Project A 345% 18 months Project D 128% 8 months Project C 54% 1 month Project B 120% 38 months Project E 205% 19 months

20. Standard ROI process • Identify • Top areas of real benefit • Impact to company/group • Stakeholders • Quantify • Measure benefit areas • Confirm values • - Survey • - Direct observation • - Estimate • Get benefit buy-in • Assess • - Calculate Metrics • Reconfirm values • Perform sensitivity analysis • Assess expected case/worst case FinancialResults

21. SOA alone is not the answer Companies are adopting SOA to drive: • Business process improvement (45%) • Portals (32%) • Master data management (27.4%) • Partner integration (24.5%) But … • Fewer than 4 in 10 developers use SOA. • SOA impacts only 27 percent of projects. Without management, SOA is just an integration project.

22. Business service management BSM links the availability and performance status of IT infrastructure components to business-oriented IT services that enable business processes.

23. The old answer • Measure and benchmark every SLA, KPI, data point, and throughput to show systems work (most of the time).

24. The better answer • Measure what makes sense, that is, what impacts the bottom line. • Revenues • Margins • Profits • Identify opportunities to increase each factor • Revenues • Margins • Profits

25. Understanding Benefits Cost cutter Compliance Turnaround Believability Growth Sustaining Most direct 1st Order 2nd Order 3rd Order 4th Order Most Indirect

26. Understanding Benefits Cost cutter Compliance Turnaround Believability Growth Sustaining Most direct 1st Order 2nd Order 3rd Order 4th Order Most Indirect

27. Five steps to better BSM

28. Step 1. Focus • Identify key areas that drive changes in revenues and margins. • Prioritize areas from greatest to least impact. Strategy: Five key factors Technology: business-focused reporting real user experience monitoring

29. Factor 1 - Breadth Does it impact a lot of people, or only a few? The greater the breadth of the application, the higher the potential return.

30. Factor 2 - Repeatability Will the application be used frequently or infrequently? The greater the repeatability of the application, the higher the potential return.

31. Factor 3 - Cost Is this a costly or relatively inexpensive task? The greater the cost of the task, or the greater the benefit, the higher the potential return.

32. Factor 4 - Collaboration Does this task involve collaboration among groups? The greater the collaboration component of the task, the higher the potential return.

33. Factor 5 - Knowledge Will this task involve management of key information? The greater the use of knowledge managementthe higher the potential return.

34. Step 2. Put feet to fire Link SLAs for specific applications to specific people Strategy: Map expertise to org chart Technology: Root cause analysis Automated delegation

35. Step 3. Make small adjustments immediate Define the range of variability that is acceptable to the business. Enable IT to make small adjustments immediately – before they become issues. Strategy: Delegate monitoring responsibility Technology: Dashboards, analytics, and data mining

36. Step 4. Evolve toward predicting instead of just correcting Broaden the conversation about how to improve IT service delivery. Strategy: Huddle – regularly! Use 5 factors to structure the discussion. Technology: Real-time and historical analysis, service desk metrics

37. Step 5. Keep going! Make the business case for greater IT – business alignment. Strategy: Get the CFO involved and use a standard structure for articulating bottom-line improvements. Technology: End user experience monitoring, feedback loops back to the business case.

38. Standard ROI process • Identify • Top areas of real benefit • Impact to company/group • Stakeholders • Quantify • Measure benefit areas • Confirm values • - Survey • - Direct observation • - Estimate • Get benefit buy-in • Assess • - Calculate Metrics • Reconfirm values • Perform sensitivity analysis • Assess expected case/worst case FinancialResults

39. 1) Identify the end result • Reduce time to market “Reduce the time to market for new products by 10%.” • Increase productivity “Provide tools that increase average worker productivity in marketing by 5%.” • Increase innovation “Increase the development of new products by 10% per year.” • Reduce cost “Reduce the cost of the accounting budget by 20%.”

40. 2) Quantify values • “Efficient searching tools will increase productivity by 5%.” • “Project management tools are not expected to change productivity.” • “Research base will increase re-use of information, resulting in a reduction in personnel time of 10%.” • “Electronic assembly of project materials will reduce delivery charges by $100,000.”

41. 3) Assess results • Percentage of direct to indirect benefits • Reliance on one or two key benefits • Worst case • Payback and ROI • Alternatives • Deployment strategies • Lease vs. buy • Other applications

42. Short finance class… Toolbox used to measure the value of technology: • Net Present Value • Payback Period • Return on Investment • IRR • TCO

43. @ 15% Interest Rate $152.09 $100 Year 3 Net Present Value NPV The value today of cash received at a future date given an interest rate. Use a spreadsheet or a financial calculator

44. Net Present Value • Serves as an indicator for bad investments • If NPV < 0, do not proceed • If NPV > 0, draw limited conclusions • Pros • Accounts for timing of cash flows by discounting future amounts • Useful for comparing two mutually exclusive projects with equivalent time horizons and initial investments • Cons • Value does not afford a simple interpretation for projects comparison • Results are very sensitive to fluctuations in the assumed discount rate

45. Savings Payback Period Time Costs Payback Period Payback The time period needed before net savings equal initial cost. Excellent measure of risk Should be the key measurement!

46. Payback Period • Serves as an excellent measure of risk and a necessary companion to the ROI metric • Pros • Provides initial screening and supplemental information to an ROI analysis • Useful for preliminary risk assessment • Quantifies a project’s deployment flexibility • Cons • Neglects all net cash flows after the payback period which may contribute to a positive ROI

47. Return On Investment ROI The average total savings over 3 years divided by the cost. Nucleus recommends a three year horizon but use a time period consistent with your organization’s standards. (Year 1, Year 2, Year 3) / 3 ROI = Initial Cost

48. Return On Investment • ROI is the ultimate litmus test; all other metrics should be considered supplemental • Pros • ROI quantifies all possible costs and benefits • Percentage metrics can be easily compared to the cost of capital, other projects, or a simple bank CD • Cons • ROI can only measure internal performance, not how one company’s investments compare to another’s

49. What about TCO? Total Cost of Ownership looks at costs and ignores benefits. • GREAT for comparing two similar applications • Good for budgeting • Bad for choosing applications • Bad for prioritizing projects

50. What about the others? • EVA - Economic Value Add(ed) is really ROI less the cost of capital. It’s simple but eliminates an important ratio: Is an EVA=3% good or bad? • TEI - Total Economic Impact is really just ROI but explicitly includes direct and indirect benefits. • ROO - Return on Opportunity is TEI made fluffier. • ROA - Return on Assets is only interesting if there are sunk intangible costs. • cROI – False, inflated ROI.