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If so, you're extracting the maximum business value from your investment.

Imagine a corporate swearing-in ceremony prior to the start-up of a new petrochemical refinery. Participants are a company's CEO, GPO, and COO. The chief executive officer (CEO) swears this initiative is a business project he will lead, supported by the chief financial officer (CFO) and the chief operating officer (COO).

GARY SKARKE

He further swears that the company's business processes will transition to the new plant and that workers will be ready for assigned responsibilities when operations begin. Everyone buys in--the CEO, GPO, and COO--agreeing that the refinery's objective is producing revenue and profitability.

Isn't this a ridiculous ceremony for top management? After all, it's how the company works anyway, and that's why these educated, skilled, experienced people are compensated well above the average worker. In reality, when information technology (IT) is the issue, this scenario shouldn't be considered ridiculous at all. Why? Throughout most of business and industry, upper management has not yet accepted full operating responsibility for projects with IT content and routinely abdicates leadership to the chief information officer (CIO) and the IT department, even though technology is only a business tool to help achieve company revenue objectives. A big secret is brewing full strength.

THE BIG SECRET: UNREALIZED BUSINESS VALVE (UNBV)

Y2K was big worldwide, but now something else is hitting balance sheets with an even more powerful impact. Every year, companies invest billions of dollars in IT systems, supposedly to improve business results, but many of these investments never approach business expectations. Why? Because of unrealized business value (UNBV)--a huge shortfall in massive IT investments and corporate bottom lines. Although the UNBV problem is wide ranging, it's the worst in comprehensive business systems such as ERP (enterprise resource planning), CRM (customer relationship management), and supply chain "solutions."

Unfortunately, information technology's business potential continues to be highly oversold, and companies greatly underestimate the difficulty of successfully integrating new technology into daily operations. If that just sounds like business as usual, ask whether anyone would fly on airplanes with the same failure rate.

How dismal can it be? Research by Big 5 firm Ernst & Young reveals that many utility companies achieve less than 50% potential value from initial ERP implementation--a $100 million value gap--and industry research cites a 70%-80% CRM software failure rate. Or consider results of an ongoing IT benchmark study by a well-known benchmarking organization, the Standish Group, whose findings note that despite a 35% increase in average IT cost to support end users in the last three years, 55% of analysts' time is consumed by collecting rather than analyzing data. Or in human resources, where IT investment has skyrocketed 40% in that same period, HR administrative costs have jumped 16%.

GROWING TECHNOLOGY WORLD, SOUNDS OF SILENCE

How important is the fact that technology keeps piling up productivity/revenue shortfalls? Scant years ago, the business world wasn't extensively electronic. How times change, with 70% of the workforce now regular IT users. Paralleling that user growth, a recent study by the Conference Board showed more than half of CEOs said, "Yes, ever-changing technology and the Internet are critical business issues." As technology becomes more pervasive, the bar is raised yet again in maximizing technology return on investment (ROI).

But why is UNBV a snowballing problem rather than being solved? Peer into the larger-than-life responsibility vacuum populated by software vendors, major consulting companies, and corporate management...and hear the sounds of silence. Vendors keep quiet about applications they sold that aren't working and/or aren't being used to produce revenue; consultants on big systems configuration and system integration remain mum about affiliation with systems not achieving business results; and since management was responsible for new system buy-in to hike business results, they're often the quietest of all...many are too angry to discuss the depressing results.

Unrealized business value cuts across business and industry worldwide because it wastes money on a grand scale and wastes company resources as well. When hundred of thousands to millions of dollars are invested on new technology that isn't fully integrated into a company's daily operations, that money is simply wasted. As for nonmonetary resources, the waste spills over in many directions including taking a heavy toll in time, energy, momentum, focus, and morale...and feels like a corporate root canal.

BPIT AND OTHER NEW LABELS

And underlying these problems is yet another: Executives involved in large-scale failures are scarcely enthusiastic about launching what may be another debacle. That, in turn, slows innovation and erodes technological progress because companies that can't sell their newly developed technology can't afford to develop more.

In this vicious cycle, the strong, positive leadership that company executives typically exert on a capital project simply vanishes on a business project enabled by IT (BPIT). BPIT? It's a step toward putting the right labels and terms into play to solve the problem of not realizing business value. It cleanly cuts through the nebulous "IT project," which only perpetuates a myth that IT is a boutique within the company's business.

Specifically, a business project enabled by IT should directly improve the company's business results, the ROI should be measurable from results achieved by the entire business, and IT's role should be to provide tools to reach these targets. For example, a BPIT may involve lowering the cost of raw materials by redesigning supply chain processes and implementing supply chain IT applications. In contrast, dispensing with the vague IT term, an information technology project (ITP) is a company project designed to enhance the company's capability by improving technical capabilities with the "IT factory." ITP may be largely invisible to operational users.

Tied directly to these terms are two keys to putting new terminology into play. One is operations integration, which represents knowledge/practices vital to ensuring that a new technology system is fully integrated into the day-to-day operation of the company and produces desired business results within a certain time and cost. The other key is VEST, an expression that should grow in importance as it becomes more widely recognized. VEST means to finish an economic investment in information systems/technology by extracting maximum business value. When fully VESTed, a system/technology produces the desired value in a company's daily operations.

PAYBACK TOOK A BACK SEAT

Most of the unrealized business value problem traces its roots to the 1990s and the "Big Project" syndrome. While many major companies claim they never denied interest in payback, others called payback irrelevant while pouring millions into ERP and other big technology systems. Their mantra was that big systems were crucial to unify corporate IT efforts, manage supply chains, and prepare for e-commerce. Why justify big systems solely on the basis of cost savings or revenue generation? A manager at a leading high-end software vendor says that, in this mob mentality, everybody bought big systems because it was trendy to do so.

But that rabid enthusiasm eventually subsided. For instance, although 86% of companies have implemented ERP, only one-third have fully deployed them enterprisewide, while another 30% are coping with multiple ERP platforms. Progress in CRM systems lags even further, with scarcely 10% of companies able to integrate records of both a customer's offline and online activities.

Delving further into performance statistics, the Standish Group reports that the light at the end of the tunnel is a dim candle. On projects with a major IT component, the virtual certainty is the project will be late, over budget, or both.

The report shows that barely more than half of software development projects of one-plus year duration are delivered on time. And looking at ROI, a survey of senior financial executives shows that only 49% said ROI expectations on technology investments were met.

WHAT'S THE SOLUTION?

Are technology investment and achievement of business objectives/ROI destined to never meet? Not at all, but major actions must be taken to turn around the entire situation. Executives must begin talking about the problem and learning from common experiences.

The place to begin change is understanding--and admitting--where square one is. First, key decision makers should accept UNBV as a major problem with the entire company affected by big systems delivering no direct or indirect payback. Second, since the learning curve for huge technology systems is still new, most companies aren't yet adept at designing, implementing, and integrating them. Most companies that can skillfully integrate a major capital asset, like a plant, into daily operations are not equally skilled at integrating changes in business processes or IT systems. That must change.

Rounding out the must-change agenda takes in a couple of other points. One, companies know that IT is responsible for an IT system's technical implementation but that business management is responsible for integration into daily operations. Two, as noted earlier, since many non-IT executives are still mystified by IT, business managers cannot abdicate responsibility for any part of their business touched by IT. Three, executives must find a solution to unrealized business value and become very accomplished at it because more potentially valuable information technology is on the way.

CFO IS INTEGRAL TO UNBV SOLUTION

Leadership strikes right at the heart of solving UNBV. Each of the five C-level executives (CEO, COO, CIO, CSO, CFO) has a unique role during BPIT's life cycle, with the CEO's main function centering on ensuring that what must be accomplished across the organization to achieve business results actually gets done. Meanwhile, the COO must ensure that all key work process changes are made and personnel are fully trained in those new processes using the enabling IT systems. As for the CIO, he/she must ensure the integrity and completeness of the selection, procurement, and implementation of all necessary IT systems in sync with the CEO and COO. And the chief sales officer (CSO) must ensure that the company's customers clearly benefit from the business project enabled by IT.

And the CFO? His/her responsibilities go right to the bottom line and business value. The CFO must ensure that the leadership team is fully prepared to bring in the BPIT on target, with its enabling technology fully VESTed, and must put in place all metrics proving the point. In addition, the CFO must ensure that the BPIT capital budgeting package submitted for CEO/Board signature will guarantee full acceptance of responsibility by individual members of the executive team. Given most companies current situations in working with BPITs, perhaps the CFO should hold the swearing-in ceremony that ensures the executive team is committed to doing what's required to achieve business results.

Overall, the CFO must assert leadership in establishing metrics to measure results of BPIT implementation, must assist the CEO in resourcing funds for implementation to realize business value, must be a devil's advocate for system investment, and must work with the CEO and HR officer to ensure monetary incentives are in place to sufficiently motivate the company's key players to complete the BPIT and achieve the desired business result.

ENABLED IS THE KEY WORD

Finally, a company must put the right contracts in place. For a successful business project enabled by IT, the C-level team must contract with each other for hands-on leadership. And they must use the right management disciplines designed for major improvement projects such as BPITs. Traditionally restricted to management of technical initiatives, it's now imperative that these disciplines of program and project management be readily employed on business initiatives.

For instance, program management focuses on achieving the business result of the BPIT, identifying necessary work to change how the company operates. Project management focuses on completing assigned work bundles such as redesigning work processes and selecting/implementing IT systems. Organizational change engineering, an additional discipline, focuses on mechanical steps that move the company to a different operational mode to meet BPIT objectives. Change engineering is the core body of knowledge underlining operations integration.

Unrealized business value is a huge business problem for companies as well as for economies. The solution is that initiatives must be envisioned as business projects enabled by IT and not as IT projects--putting the entire executive leadership into full play as BPIT leaders and using operations integration to fully VEST the initial economic investment made in the enabling IT. And, throughout, IT people in company business meetings must talk in business language and not IT jargon.

It's all so straightforward yet so challenging.

Winford (Dutch) Holland, Ph.D., is founder and CEO of Houston-based Holland & Davis (www.hdinc.com), and Gary Skarke is an HDI Managing Director focused on operations integration. HDI is a management consulting firm with more than 30 years' experience in wide-ranging industries including finance. Dr. Holland is the author of the just-published Red Zone Management: Changing the Rules for Pivotal Times.
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Copyright 2001 Gale, Cengage Learning. All rights reserved.

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Title Annotation:information technology
Author:Holland, Winford
Publication:Strategic Finance
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Dec 1, 2001
Words:2110
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