Measuring the Strategic Value
of Information Technology
Investments

By Kurt Conrad, The Sagebrush Group

Differences over perceived value often separate proponents of new information technologies from those who allocate resources and define priorities. Such differences often become a roadblock to meeting business needs.

To overcome resistance, project justifications regularly rely on calculated cost savings, both realizable and imagined. Despite widespread use, cost savings rarely measure the full benefit of new technologies. In fact, if cost savings do provide a complete picture, the organization is probably limiting itself to the automation of routine, clerical operations and has abandoned efforts to provide strategic value.

Paul Strassman, in The Business Value of Computers, attempts to relate investments in information technologies to organizational success. His analysis focuses on decision making effectiveness, not capital, as the key variable to calculate an index called the Return on Management (ROM). Note that “management” is not limited to managers, but encompasses all activity that falls outside the scope of production or operations.

By contrasting organizations with low and high ROM, Strassman found that performance is related less to the amount spent on information technologies and more on how it is spent. He provides examples of strategic value that anticipates that later work of Hammer and Champy in Reengineering the Corporation. In both sets of examples, the sharing of a common pool of information is the basis for radical process simplifications and improved customer responsiveness.

Another important trend in this area is called Activity Based Costing (ABC). At the Hanford site, the term Activity Based Reengineering (ABR) has started to be used. Congress mandated the use of ABC in the Government Performance and Results Act of 1993. Hazel O’Leary has decided that DOE will adopt ABC ahead of the legislated requirements.

Budget reductions, the movement towards fixed-fee contracts, and outsourcing are all evidence of DOE’s desire to get more bang for the buck. ABC/ABR provides organizations with proven techniques to determine their per-unit costs, benchmark performance with other suppliers, improve performance, reengineer processes, identify outsourcing opportunities, or defend themselves from outsourcing attacks.

ABC/ABR and Strassman’s work also provide powerful tools for documenting the strategic value of what is often described as overhead. As budgets are reduced, many organizations respond by cutting overhead. This presentation describes approaches that can be used to demonstrate how overhead is critical to organizational effectiveness and how cost savings can be found, instead, by measurably improving performance throughout the organization