The Business of IT (IT from the CFO's point of view)

Hank Marquis, Practice Leader, Business Service Management, Global Knowledge, Inc.

Lack of an IT process costs the average Fortune 500 company the equivalent of $261,000,000 a year. No wonder more than half of all CEOs question the value of their IT organizations.

As a management consultant helping my clients attain competitive advantage from their IT investments, there's one phrase I hear all the time. It goes something like this: "We don't need a process; we're IT pros; we know what to do."

When I hear this attitude, I know I am working with an individual or a company statistically more likely to fail than to succeed. Don't misunderstand me - technology obviously has its place, but using technology correctly is simply more important.

In this article I am going to show how the lack of an IT process is perhaps the single greatest impediment to business success of all time. Then, I am also going to show you what you can do about it, because your IT investments can still deliver a competitive advantage if managed correctly.

The issue at hand is that many IT managers have reversed the IT-cart with the process-horse (putting IT before the process). If you are one of these IT managers, perhaps you will come to understand why you are most likely always at odds with customers and management who you feel "you just don't get it." If you are a customer or non-IT executive it may give you the motivation to make the changes needed to solve the real problem.

To begin, I recently came across the following statistics from 30 companies where senior leaders chose to improve process instead of chase technology. These organizations realized an average of:

• 34% cost reduction
• 50% improvement in schedule
• 61% productivity increase
• 48% improvement in quality
• 14% increase in customer satisfaction
• 4:1 Return on Investment

Then, there was another announcement about companies that focused on developing sound management skills (read process). These organizations generated:

• EBITDA of 16.2 percent versus 14.1 percent for typical companies (which would net a typical Fortune 500 company an additional $399 million annually)
• $247 million annually via a 22% improvement in net profit margin
• $992 million annually via a 49% improvement in return on assets
• $340 million annually via a 27% improvement in return on equity

Show me a technology - any hardware or software from any vendor - that consistently delivers results like these, please! When it comes to developing software applications, it's not the language [tool] you use, but how you use the language [tool] that really counts. IT people use tools in their jobs to build IT systems. Employees use IT systems as tools to carry-out business functions. How people use tools is the very definition of process. Use a tool the right way, and the benefits can be amazing. Use the same tool incorrectly, and the results can be devastating. What's the difference? Process, of course.

The High Cost of Common IT Process Failures

I may understand today's IT environment more clearly than most. What I don't understand is why many IT managers continue to believe that the next software version, hardware upgrade or hot new whiz-bang acronym will solve the current (fill in the blank) problem. It hasn't for the 29 years I have worked in IT.

Isn't it odd that we have heard this for so many years and the situation is the same? Is it inappropriate to start asking when it will improve? After all, by many measures IT is in a very sorry state. Now let's focus on what can happen when you have a poor IT process.

Self-inflicted IT Wounds

Every major study on the topic shows that about 70% of all IT failures are a direct result of an erstwhile IT worker doing something incorrectly. Put in another way, lack of IT process control is the reason for 7 out of 10 calls to every Help and Service Desk. If you did the math on this, using the industry average cost of about $25 a call, you would be astounded at the cost of "process-less" IT on this most basic of IT activities.

Let me help you: the average IT user calls for support 1.25 times a month. So, 10,000 users make 12,500 calls a month at a cost of around $3,750,000 a year. Of this, $2,625,000 is self-inflicted.

Cost to business: 70% of all outages; millions in waste; lost competitive advantage.

Shelf-ware

Shelf-ware is the hardware and software bought that either never got installed or (more likely) didn't do what was expected. Something like 25% of every dollar IT spends on hardware and software winds-up as shelf-ware almost immediately after its purchase. What doesn't go immediately to shelf-ware usually winds up on the shelf within 36 months, which is the average technology lifespan in IT. Few seem to notice that most accounting rules depreciate infrastructure over 5 or 7 years. This shouldn't be surprising since some 67% of IT organizations don't even track their software assets at all! So, what happens to shelf-ware? As long as it's on the books, it's an ever growing negative balance that constricts IT's ability to innovate and acquire new technology that could make a difference! Cost to business: 25% of IT hardware and software costs; lack of IT innovation; loss of competitive advantage.

IT Project Mismanagement

Perhaps the most waste in IT comes from IT project failure, the dirty little secret that virtually no one in IT seems to know about, but every IT user and customer lives. 70% of IT projects fail at a cost of $55 billion annually. That's about 22% of the average total IT budget wasted. But wait, there's more! 43% of IT projects that don't fail outright overrun the budget to the tune of about $17 billion in additional IT spending. That's $72 billion in lost and excess costs.

Just 20% of all IT projects finish on time, on budget and with the features promised. Abysmal failure is the phrase that comes to mind. Is there any question now why IT is universally despised by users and customers? Blame is pointless and counterproductive, but statistics show that you can double your chances of IT project success by simply using project management tools and techniques in the right way. Cost to business: 22% of total IT spend; delays, quality issues; loss of competitive advantage.

The CFO View

IT process failures produce huge numbers, which is unfortunate. Not only because of the sheer cost to these poor organizations, but also because the big values are hard to visualize and, as such, easy to ignore as "someone else's problems." Let me help: $0.22 of every $1.00 you invest in IT goes to canceled or challenged projects. When you roll in the shelf-ware costs and self-inflicted outages, you are nearing 35% of IT budget. But "so what" says the process-phobe. "The average Fortune 500 IT budget is less than $50,000,000. Assuming 35% of IT spend is wasted due to lack of process, the net loss is an average of $17,500,000 per year. It's just not that big of a deal, we make hundreds of millions or billions."

Worse than IT losing $0.35 of every IT dollar you spend, consider that this waste actively funds counterproductive activities and inefficiencies. The true cost of this inadvertently funded counter-productivity extends well past IT and into the business. This lack of understanding by IT managers and staff seems to me to be the very basis for business IT misalignment and what separates market leaders from market losers.

Here's why: the average Fortune 500 company has a 6.7% net profit margin. This means that for every dollar spent, the company makes just $0.067 - that's just under 7 cents - in profit. Ask yourself how many dollars you have to earn to net $17,500,000 in profit (at 6.7% profit margin).

Numbers are sometimes hard to grasp, so lets talk about something real, say, shoes. If you manufacture a pair of shoes at an average cost of $12 and sell them for $22, your gross margin is $10. At 6.7% profit you make just $0.67 when you sell a pair - that's sixty-seven cents. You would need to sell 26 million pairs of shoes to recover your wasted IT spend. Let me put that into a business context: How would you like to sell 26 million more pairs of shoes this year - at no additional cost!

This is the very stuff of competitive advantage, market leadership and industry survival. What is your cost to deliver $17,500,000 pure profit? The answer is astounding: average IT waste costs the average Fortune 500 company the equivalent of $261,194,029 in lost top line equivalent revenue (sales). Perhaps the inability to understand this and tackle it seriously and with a sense of urgency is why more than 50% of CEOs question the value of their IT organizations.

If IT still doesn't think it needs or wants process improvement, perhaps its time for CFOs, COOs and CEOs to reconsider IT strategy and take charge of the situation. Given these facts and the abysmal performance of the CIO/CTO role to address these issues, one can only ask what purpose they serve at all. Maybe this is why there is an undercurrent in business today questioning whether CIOs belong on the board, and even asking if the CIO role is an appropriate one at all.

Symptoms of Poor Process

Here is a simple test. If any of these sound familiar you probably have a "Process-less IT" problem, and you need to move to resolve the issue now:

IT always needs new toys

• SOA [or the next new acronym] is going to solve all these problems
• Self-service is going to solve all these problems
• [fill in the blank] is going to solve all these problems

Commitments missed consistently

• Late delivery on systems, applications, features
• Last minute crunches, overtime and efforts
• Spiraling cost overruns, missed budget projections

No management visibility into progress

• Your IT reports are techno-babble gibberish
• You're always being surprised
• You (or your IT team) is always "fighting fires"

Quality problems

• Customer churn rate increasing
• Cost to acquire new customers increasing
• Functions do not work correctly, customer complaints

Poor morale

• Turf-battles
• People frustrated
• High turnover

Faced with this weight of evidence, the most common IT response will be: "Yeah, but we're [choose one: different, unique, special, etc.] and our [choose one: situation, position, market, needs, etc.] is/are [choose one: precarious, complicated, difficult]."
Every IT organization is unique, yet all face the same constraints. There is very little that is unique or special about IT. This is good, though, because it means the solutions to all the common IT problems are also well known and proven.

If any of this sounds familiar, your situation is not special, unique or incredibly complicated. You don't need more IT staff, another upgrade, the next new tool or the hot-whiz-bang acronym. What you need is IT process, and if your IT managers are not telling you this, then you probably need some new IT managers.