Understanding the ROI of Value Creation

Despite the apparent economic recovery, many companies continue to focus on cost-reduction and, in the process, persist in demanding reduction of already-stressed IT budgets. In this environment, creative approaches are required to ensure availability of funding for critical IT services and initiatives.

One way IT executives can safeguard their IT budgets and preserve funding for critical initiatives is to reallocate non value-creating IT spending to efforts that create direct and measurable business value. In 2005, Gartner released the results of a study suggesting $8 out of every $10 companies spend on IT is “dead money;” going solely to sustaining IT operations and not creating any value for the company. While levels of IT spending have changed since that report originally was published, that ratio appears to have held steady.

A first, critical step for companies to enhance IT value is to change this ratio, and spend less on sustenance and more on value creation by asking questions like:

  • How can currently-deployed IT assets and services be leveraged to create new value for the business? (For example, deploying a document management system used by HR to increase the efficiency of accounts receivable.)
  • Are there unrealized process improvements inherent to the company’s existing applications? (For example, a sales force automation module of an existing order management system that has been implemented but not activated.)
  • Could granting additional users access to certain data (while preserving segregation of duties) yield performance improvement results? (For example, would billing and collections be able to recover more revenue if they had access to relationship records in the company’s CRM system?)

While it will be a challenge to do so, realizing even 10% more value on current non value-creating IT spending could have a significant positive impact on both the IT budget and the company’s financial performance. To put that in perspective (and accepting the Garter ratio as canon), a company with a $15M IT budget:

  • Spends $12M annually on IT salaries, upgrade and support costs for applications and infrastructure, telecommunications costs and other items that are necessary to provide IT services to the company but generally are not considered “value-creating” by the business; and
  • invests only $3M annually on strategic projects, R&D and other IT initiatives that have a defined ROI and are viewed by the business as creating value.

If the company is successful in reallocating even $1 out of every $10 from non value-creating IT spending to strategic initiatives that are more broadly viewed as creating value and can receive a dollar-for-dollar return on that investment, then $1.5M has effectively been added to the company’s bottom line. More importantly, the company’s perceived value of annual IT spending may begin to change and business executives become more likely to question what business value might be lost if the IT budget is reduced.

A 10% reallocation of non value-creating IT spend to value-creating strategic initiatives is an important first step, but only a first step. Future articles I will explore additional means to protect IT budgets and enhance the value companies receive in return for their annual investments in information technology even further.

Matt Podowitz is a strategic management consultant assisting entrepreneurial, middle market and Fortune 500 clients maximize returns on investment in operations and information technology and address business considerations in strategic transactions such as mergers, acquisitions and divestitures. He is a Certified Management Consultant and Certified in the Governance of Enterprise Information Technology, and specializes in leveraging business functions that historically have been viewed as cost centers to create tangible value for the business. Matt can be reached via the contact page on his personal business blog, ITValueChallenge.com.