For every enterprise – big, small, online, and brick & mortar – it is all about the business, not about the technology.
Senior decision-makers, who are tasked with assigning the scarce resources of the organization, do not care about the technology, solutions, or advancements that the IT department is working on. What they do care about is how all of that adds value to the business side of things.
Does it increase revenue? Does it decrease cost? Will it boost the productivity of the organization? Is it helping the organization differentiate itself from the competitors? Is it delivering superior customer satisfaction? IT heads must ask these questions to themselves regarding every cost center in their department and justify its need for existence. For this purpose, they must define, measure, and extract the value offered by every asset and cost center in their department.
That’s a tall order!
IT departments play a central role in creating value for their organizations’ products, service, and operations. That is why businesses are steadily increasing their budgets. Yet, quantifying the value addition of this department is more of a skill, intelligent guesswork, and approximation, rather than exact math. In the increasingly competitive world, business leaders are always trying to minimize their costs by shedding off unnecessary overheads and expenses. This means that IT executives, especially the CIOs, must find a way to demonstrate the value added by their assets, resources, and department as a whole, to obtain the funding essential for achieving their departmental goals.
Visible Value Addition to Revenues
In most organizations, especially the service industry, the sales department enjoys a near celebrity status. After all, it is this department that is responsible for winning the bread and butter for the company. The reason is quite simple – their achievements are starkly visible. Their contribution to the organization can be easily measured – in dollars. To compete with them for the organization’s resources, IT heads must help the decision-makers understand the critical role they played in ensuring that the end consumer received a great product, even in such a complex environment.
CIOs must demonstrate, perhaps even quantify, how the resources, tools, or intra-organizational services they offer directly led to the creation or delivery of the product to the end consumer. It is very easy for the management to appreciate any reasonable contribution they made to the organizational sales. For instance, IT can directly measure the impact of something like an automatic quote generation tool. Suppose a potential customer selects their standardized requirements on the tool and shares their contact details. The system automatically generates quotes based on their requirement. This simplifies price comparison for the visitors. However, the business now has the contact details of the visitor, who can then be contacted with a more refined, or discounted quote, ensuring conversion. By tracking such conversions, the IT division can demonstrate its value to client acquisition.
Impact on Costs of Other Departments
IT is the only department in organizations that can produce cost reductions in other departments.
IT can optimize investments, minimize costs, improve productivity, streamline operations, and automate processes in multiple departments. All of these have a direct impact on the organizational expenses, and therefore, can be easily tracked and measured. Take the logistics business, for instance. When the trucks leave their origins or reach their destinations, the exact time of their departure and arrival must be tracked. This can be a one man or woman job. However, that single job requires 3 people working in 3 different shifts. With the use of simple RFID tags or bar codes and scanners, that job can be eliminated, which means savings on labor cost for the company. In this case, the savings realized from the digitization minus the acquisition & maintenance costs of the RFID or bar code and scanner technology is the value added by the IT. Not to mention the time savings, minimization of errors and other benefits that come with automation.
Measuring Operations Value
The lion’s share of the IT budget is spent on keeping the lights on in the organization. Gartner estimates that as much as 66% of the IT budget is spent on supporting the organization’s operations. CIOs can demonstrate the value offered by their support functions by quantifying the cost of those functions when obtained from third party services or agencies. In a fairly efficient IT department, the cost of the support functions offered by the IT to the business would be well above the expenses incurred in delivering those services. So, the value they add to the business would be easily demonstrable and justifiable.
Quantification of Customer Satisfaction
Every business leader appreciates its customers’ satisfaction because of its direct impact on customer retention. The cost of acquiring new customers can be anywhere between five to twenty-five times the cost of retaining them. Therefore, any positive impact that the IT has on customer satisfaction is readily appreciated and highly valued.
But, is it possible to measure the IT’s impact on customer satisfaction?
In many cases, the impact on customer satisfaction is direct. For instance, consider the case when the IT department implemented a new customer support system that drastically brings down the response time of the support and thereby, the issue resolution time for the business’s customers. Inevitably, this results in higher customer satisfaction. This can be tracked with surveys, or even measured by comparing new monthly retention rates with those of the previous months.
In other cases, the process may not be so straightforward. Measuring customer satisfaction and the IT’s contribution to it can be more complex. Then again, that’s the nature of the challenge before the IT heads.
Differentiate the Company
A growing number of visionary business leaders understand the vital role played by the IT department in their organizations. This is evident in the fact that 78% of the Fortune 500 companies now have CIOs on their boards. In the increasingly digital economy, the IT department is no more just an enabler, it is a differentiator. A large number of businesses have successfully leveraged in-house technologies and IT capabilities to differentiate themselves from their competitors and appeal to their target audience. Their products and services derive significant value from the organization’s IT capabilities. In such IT-empowered companies, CIOs can calculate the value of their contributions using the cost-to-revenue ratios. They can demonstrate successfully that the cost incurred in developing the differentiation or competitive edge is directly impacting the revenues – be it improving them or sustaining them.
The business landscape is growing more complex and more competitive than ever. Every department must demonstrate the value it adds to the organization effectively in order to win its share of funding. Thankfully, there are many ways for CIOs to substantiate the business value offered by their department to the organization.