IT management in 2006
To make the case for IT spending, brush up on information value-add and knowledge capital|
10 JAN 2006 00:00 EST (05:00, GMT)
IT organizations and IT professionals are on the cusp of some big,
rapid changes courtesy of a short list of technologies and tech
strategies I'll explore in my next blog. It's just a question of how
many companies will have the courage to embrace change on a fast track
versus the slow and steady pace traditionally adopted by the majority.
I suspect that accelerating competitive forces will compel many to
advance more quickly than their level of comfort dictates.
Will this mean more IT spending? Definitely. Will there be continuing
pressure by skeptical senior business executives leaders to limit IT
spending? Yes. Everything depends on how effectively IT leaders can
correlate their spending to sustainable profitability and communicate
Are you familiar with Paul Strassmann? He's the renowned former CIO
(Xerox, General Foods, Kraft, Department of Defense, NASA), academician
(West Point, George Mason University), White House counselor and author
of numerous articles and books arguing with vivid statistics that there
is no correlation between IT spending and profitability. However, there
is correlation in other areas that are controllable.
He speaks about entropy
(chaos, lack of organization) as the nature of the universe and that
organizations, whether societies or corporations, tend toward
dissipation and disintegration unless they are properly structured to
grow and thrive. Part of what inhibits such organizing and structuring
in his mind is the generally poor attempts that are continually made by
IT executives in trying to demonstrate a positive correlation between
money spent on IT and profits. He points out the pitfalls, offers a
number of interesting analyses and suggests improvements in a 2004
article entitled Six Rules for Finding IT Value.
Paul created and trademarked the concepts of information value-added
and information productivity. This is brilliant work that posits that
value is a direct product of aligning IT with business, and failure to
make the value argument is why IT lags behind the expectations and, in
many cases, the basic requirements of business.
His information value-added concept
equates to profit minus the cost of capital invested by shareholders.
Think about a few of the components of profit -- labor, inventory and
customers. Without critical information about those components, it's
unlikely you'll have a profit. Given that fact, information value-added
derives from profits after taxes, tossing out preferred dividends,
one-time charges and other adjustments. Then, profit is lowered to
account for the returns owners expect on the invested net assets. When
that expectation is exceeded, you get value-added.
is his idea that takes the information value-added figure and divides
it by the costs of information transactions. These are the company's
selling, administrative and general expenses, of which
information-technology spending accounts for 10% to 35%. The message:
Managing information is your edge.
And knowledge, too. Paul has written extensively on the value of knowledge, or knowledge capital,
which he defines as a company's financial value minus market value. He
believes that by failing to show the true value of accumulated
knowledge of employees, of software, of databases, of organizational
capabilities and of customer relationships, CIOs are letting
accountants measure the value many IT-enabled benefits as intangible
and intangible benefits, which make up only 20% of the shareholder
worth of profitable firms. Consequently, much of the potential of IT is
lost when projects that would increase knowledge capital are said to
contribute only to "intangible benefits." In order to demonstrate IT
value, Strassmann believes project proposals must be allowed to
transcend the limits of conventional accounting, as defined by
accounting rules, and include gains in knowledge capital.
IT budgets will be under more scrutiny this year as exciting new
technologies and tech strategies roar into focus. We'll look at some of
these next. But unless the IT value proposition is adroitly made, I
don't think many IT leaders stand a chance of getting the dollars they
need for human and technical resources necessary to fully capitalize on
their promise. Or when they do, it will be too late: Competitors will
already be there. That will be a tragedy of lost opportunity.
Posted by David Foote