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February 8, 2006

The Business Creation of IT's Value

Converting IT assets into Business Infrastructure

In determining the business value of IT, the challenge is usually stated as identifying how business results are attributable to employing IT assets. As Gartner analysts refer to it, the topic is "the value created by IT within a company."

How IT creates business value. That sounds like a well-defined problem. But when doing the actual calculating, it quickly emerges that such phrasing must be expanded and clarified.

For example, it can mean "value caused by technological means." That sends us immediately to investigating the idea of "causes". But meanwhile, saying "value" might mean only some results (targeted) among many; or it might mean the net impact after subtracting undesirable results from desirable ones. Furthermore, value need not always refer to business "results" because business opportunity is as crucial to the overall scheme of things as are results. Finally, business value need not be only one of these varieties to the exclusion of the others -- and it is certainly interesting to notice the relationships that exist amongst the different types.

I.

One type, though, does seem to have a lead. Given the permanently accelerated pace of change, preserving opportunity sounds like an indisputable top priority. Strategic studies will quickly point at the fact that IT is now critically important to even an acceptable baseline visibility of what is currently happening, while also being similarly critical to the making of what comes next. That one-two punch establishes IT as profoundly important even if measured only through imagining trying to "see" or "do" without IT.

With that consideration, we have a view on at least two value scenarios that are beyond debate.

One is that IT allows work to be organized into standing processes where otherwise the complexity of the environment and the organization would probably not allow. Clearly, the benefits of having a process versus not having one pertain to both the health and the growth of the business -- by providing for both scale and scope as well as both resilience and consistency.

Another scenario is related to the first but not in the most obvious way. IT assets are asked to pay for themselves, and yes, the basic way for them to do that is to enable business activities that generate income or reduce costs. But the reason why they can do that is not so much a matter of the automation they intrinsically bring -- rather, it is about "organization" that occurs due to management. This time it is not the work that is being organized but instead the work's sustaining environment. Not process; rather, infrastructure.

II.

The environmental impact of IT is driven by the business management's transformation (whether poorly or well) of IT assets into business infrastructure.

In this transformation, resources are central. A resource is an asset that has a job. The essential transformative event is when the asset gets an assignment. Value generation is engendered in the assignment. Thereafter, the actual "production" of value is a problem of capturing it from the assignment.

But the idea of "value" still refuses to settle into a single simplicity. On the one hand there is financial value, and on the other there is functional value. The two types are in the same class when we see them both (i.e., financials and functions) as economic impacts -- but they do not necessarily coincide. For example, selling something, making something, and consuming something are quite different paths to benefits, and the timing and level of their respective benefits are not necessarily going to resemble each other at all.

In accordance with that, the business always has at least two ways to identify a given resource. As a financial item, it is registered in asset management data (where it is simply called an asset). But as a functional item, it is registered in configuration management data (where it is called a configuration item). To be clear, it is customary to ensure that the item is registered both ways, but as we just recognized above, the one way's reasons are different from the other's.

Still, thanks to widespread but casual notions of return on investment (ROI), configuration items might confusingly be typecast as "property", and subjected as such to direct financial impact assessments. This risks ignoring the effects of the item's current functional influences, but most organizations have already made adjustments to this by classifying and comparing costs and benefits associated with the "use" of the item. Usually, that move is calculated to reveal how expensive is the financial commitment to the item. In the typical classifications, assumptions about the item usage are set out as benchmarked experiences, generally classified as expectations regarding "acquisition" and "maintenance" (including storage), and "performance" and "support". The fiction built into this is the idea that there are many different ways to hit the same given benchmark, making it only necessary to pick which way has the best price. But the reality is that each available way changes the likelihood of hitting the benchmark, not just the price.

Still, the story of the "expensive experience" explains the habit of thinking about resources as "financial assets" ...The problem with that habit emerges when managing assets to those benchmarks is found to be not the same as enabling the business for its needs.

The more important perspective -- which avoids that problem -- is one that looks at the continuous organizing of items into a system of business support. Because business capabilities are increasingly predicated on the functional impacts of IT utilization, the business potential in that system is the "core" value of IT. By analogy, the U.S. superhighway network was hideously expensive to produce, but the economy (economic productivity) that it enabled is almost incalculably more powerful than the best that could be achieved before the system was delivered.

III.

Despite that idea, the notion of "IT Value" is often still confused by a failure to identify the point of view from which "value" is being defined. But if the reason for the discussion of value is to express how IT leads to important results from business functions, then the key issue is how effectively the business exploits IT as a resource.

To further clarify this subject, we would first distinguish the IT "department" from the information technology itself, and investigate how the business manages to leverage the information technology not just through deparmental overview but as an overall enterprise-wide discipline.

This discipline inherently crosses a variety of contributing business functions, a fact that is sometimes dealt with through process or lifecycle models that track the organization's attention to IT-related business goals.

But the primary virtue of those approaches is their description of how the business affects and rates the conformity of the IT resource to target specifications -- where specifications represent the business's theory (proven or not) of what functionally causes affordability and/or success. Said differently, they both provide a sophisticated technical explanation of resource links to business requirements.

The development, continuity and availability of IT resources for business enablement should also have visibility separately from those models -- as a system , the point of which is to continuously generate and regenerate an infrastructure for business.

In attending to the resources, this view is complementary to those other models but not redundant, because:
- infrastructure may be specified, but the practice of realizing the actual infrastructure is always executing (and virtually competing) against complexity, uncertainty and change.
- Then, the business reacts primarily to the reality of that execution's impacts, not to the implications of its measured level of compliance to specs.

Managers have the responsibility of helping the business get necessary business performance from the realities, regardless of the quality of the infrastructure. The infrastructure may have a certain distinctiveness (as measured by its current compliance to specs), but "value" is by definition a distinction with a difference. If the distinctive infrastructure is not making a difference to the business, then it is not generating business value.

IV.

As a result, the value of managing the IT -- that is, of managing the IT realization of a business infrastructure -- cannot be understood only in terms of the scores for reaching various intended states of quality. Just as in a car, instrument dashboards are necessary, but even though they may be highly accurate, they don't tell you whether you are winning the race.

Instead, the value of the management (i.e., delivering a business infrastructure from IT) must be detected in terms of its being a competency that has a certain impact while seeking maturity.

That said, the relationship between impact and maturity should not be taken for granted. For example, immature innovations can have gigantic impact, while very mature abilities may provide no significantly greater impact when just replacing other mature abilities. Impact correlates with the circumstances in which the maturity of the ability is applied. Where our concern is with "business value", the circumstances in question are the business needs.

V.

In its economic and competitive environment, the business's ability to respond as needed is always its top concern. So, the fundamental question that must be asked is always the same: what difference does the business want the infrastructure to make?

In making the answer come true, management's responsibility is to organize IT in a way that promotes the currently requested difference.

Competency in producing an appropriate infrastructure for business needs is the real target of the infrastructure management effort. Programs, services and operations must assure resource alignment with business needs. Architects, suppliers and business unit execs must coordinate the alignment opportunities. The following picture maps the coordination:

This goal emphasizes a type of focus on resources that must strategically assure their development, continuity and availability -- three dimensions of capacity, affected by many quarters of the organization..

The basis of that strategic perspective on resources is an understanding of how assets and configuration items -- two views on the same environment -- together describe capacity for business responsiveness.

The basics of the concept are as follows:
- the working environment is populated by items
- the items group costs into investments
- the investments support production
- the production converts demand into valid opportunity for reward.

However, none of those points occurs as described, except by willful action of the organization. Each point involves a commitment to handling the items involved at that point. Each commitment is based on a financial aspect and a functional aspect of the items. The chain of commitments creates capacity from the items.

Protection against the risk of diminished or insufficient capacity versus demand is one of the dominant points of view that the business brings to identifying return on investment. This means that to understand where value in IT comes from, it is mandatory to understand where demand is coming from.

Demand, by definition, arises when needs are prioritized into requests for action. But need itself comes not only from business ambitions; external forces on the business challenge the ambition that the business has of itself and its future. To accomodate and solve those challenges, the business response must apply diverse but coordinated management perspectives to the way that its capacity can be translated into appropriate action.

Said differently, the business does not spend time questioning whether it should use IT. But it spends time questioning how to use IT well. In seeing IT as a business resource, solving the problem of responsiveness means addressing :
- where the resource comes from,
- how employing it is supported, and
- what mechanisms can ensure that it is in the right place and hands at the right times.

This is where the business view of IT resource must be translated from a user-orientation into a provider orientation. The user-experience of the resource, as provided through the processes, systems and portfolio of holdings, is interpreted into management action items that generate or regenerate the infrastructure. A representative general illustration of that translation (click here and maximize) shows the highly familiar components of IT management, oriented to the way business recognizes its opportunity to leverage IT capacity.

This translation is one major facet of IT alignment to the business, underpinning the business value of the IT. More consideration of that alignment, as seen also in the first diagram above (or click here), helps to appreciate how the overall adoption and effectiveness of IT as a business resource is comprised of:
- strategic resource development: managing sources through IT programs;
- transactional resource continuity: managing events through IT services; and,
- operational resource availability: managing states through IT operations.

VI.

But what makes this all "systemic" ?

The general principle is that if you remove one part of the complex, the rest will "fail". Experience tells us that the segmentation of responsibilities and authorities can create sub-organizations or functions that are protected against the disappearance or failure of other parts. However, we now recognize that same insulation as the origin of "silos" that prevent the difference necessary for the business from being drawn from the distinction that the silo maintains.

Regarding infrastructure, what forces this issue of interdependencies into prominence is the degree of change that characterizes day-to-day business. Change means that there is no perfect static infrastructure, rather only one that is "good enough" to succeed on demand before it must be modified into an equally successful new one for subsequent demand. Constant reformulation of the infrastructure introduces tremendous pressure on its real-time reliability for business.

Because of the range of demand that the business wants to accommodate, the options and opportunity costs associated with composing support for business responsiveness are in much greater volume and variability. This increases the likelihood that modifying one aspect of the resource management will have a significant affect (even if latent) on whether other aspects will be effective for meeting other demands. By analogy, that wrong-sized spare tire up front that gets the car back on the road also takes away the ability of the braking and steering to automatically synchronize; the turbocharger of the engine takes away the chance to use a regular grade fuel; and so forth.

Consequently, as demand management and change management become more and more critical to the ordinary reliability of the infrastructure, the notion of successful infrastructure must refer to something increasingly more dynamic, and the concept of IT's business value must embrace the opportunity created and preserved by agility as the first key value measure.

Posted by Malcolm Ryder at February 8, 2006 9:05 AM

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