Evolving frameworks for measuring IT value and performance

Measuring IT Value

The progression of how enterprises measure information technologies' (IT) performance has been a progression from inward-centric metrics of performance to advanced analytics that capture contributions to strategic objectives. Chief Information Officers (CIOs) often measure their performance by cost reduction and system consolidation while Chief Executive Officers (CEOs) measure IT by the contribution to new business growth (Trkman, McCormack, de Oliveira, Ladeira, 2010). There are many strategic frameworks that enterprises use to map the contribution of IT, with the Porter value chain being the most prevalent (Porter, 1986). The intent of this analysis is to evaluate the most critical metrics that an enterprise can use to measure the effectiveness and efficiency of IT. These metrics also fuel the methods used to measure toe economic value of an IT department to a given enterprise as well. This aspect of measuring IT value will be defined in addition to evaluating the models used for measuring the economic vale of an IT department to a company. Finally there is a brief discussion of whether or not traditional financial ratios and measurements must be applied to measuring the value of IT or not. In reality these metrics are often only showing a part of the Return on Investment (ROI) of any IT investment. To get the complete picture of performance, enterprises needs to align their IT efficiency and effectiveness measures to specific strategy performance, and the Porter value chain is ideal for defining these interrelationships (Porter, 1986). Financial metrics only provide part of the insight into the ROI of IT needed.

Frameworks for Measuring IT Value

The frameworks that have been traditionally used to measure economic value of IT are no longer flexible enough to deal with the level of agility and complexity that enterprises are dealing with daily. These traditional frameworks including the Balanced Scorecard, Capability Maturity Framework, IT Costs vs. Benefits Analysis, and many others have been created primarily to measure IT's value in purely financial terms without looking at its strategic value (McShea, 2006). Each of these frameworks are also designed to take into account financial metrics that are easily defined and tracked, given the highly structured reporting systems supporting them. The metrics of IT efficiency, namely transaction accuracy, speed and scalability, along with inventory turns, managing of complex supply chain, sourcing and strategic systems performance, all quantified through relatively closed processes, miss the point (Columbus, 2008). The same holds true for those metrics that measure effectiveness, as the nature of these analytics is predicated on only those methodologies that can capture the most structured data. Measuring effectiveness with these limited methodologies that deal only with the most structured reporting processes only deliver 30% at best of all available performance data at best (McShea, 2006).

Given the constrained nature of analytics and metrics that are predicated only on the most measurable efficiency- and effectiveness-based methodologies in place in enterprises, it is not surprising their value is diminishing as uncertainty grows in the markets enterprises serve. CEOs are now demanding that the Balance Scorecard, IT costs vs. benefits analysis, and capability maturity frameworks have an element of customer-based data in them, at the very least, demand-driven insights and intelligence (Barrett, 2007).

Conclusion

Balanced scorecards are now integrated with supply chain data at Toyota to better manage both the IT investment and its contribution to the performance of their supply chains (Dyer, Nobeoka, 2000). This example illustrates how efficiency and effectiveness of IT in and of itself is becoming increasingly secondly to the role of IT in enabling more effective business strategies over time. The impact of IT systems on supply chain performance is easily quantifiable and brings an added dimension of demand-driven insight into the analysis (Trkman, McCormack, de Oliveira, Ladeira, 2010). This is precisely why the measuring of IT value on financial ratios alone is only partially correct; The full value chain of an enterprise needs to be seen for IT value to be measured correctly.