The key to gaining more financial return from corporate IT systems is to increase the value added by management.
Technology which is implemented by profit centres and is specifically designed to support operational, revenue raising workflows (such as in the financial services or insurance sectors) may be measured through standard Net Present Value calculations. If it directly increases cash flow then there is little problem in measuring its value.
In corporate systems which are generally considered ‘overhead’ it is much harder to assess whether a system has been worthwhile let alone profitable. How does a business assess the value of the company portal? How do they assess the value of information management systems? In most of these instances the business case for a new portal can simply be justified on the basis of (a) better user interface (often classed as the ‘user experience), (b) need to upgrade the current application, and (c) need for greater compliance. A cost analysis does not need to be run because the business needs some sort of portal and is not going to get rid of it, so the point is moot.
This is an appalling way to buy large corporate IT. Companies which purchase systems without rigorous cost analysis and a commitment to longer term cost reduction may reduce the lifetime costs for the simple capital purchase but massively increase the overall cost of IT throughout the enterprise in 3 ways:
- Increased Support Costs. The cost of support, training and change per user is colossal for corporate IT systems. Not only are support staff expensive but management increases to control support staff and management costs are infinitely more expensive and harder to control. With non-transactional systems such as portals and information management systems, management’s variable expenses also increase as the business tries to make the system work and fit into the business. In such circumstances, CFOs should monitor variable expenses in cost centres as such costs would not have appeared in the cost model for the initial business case.
- Increased Transactional Costs. Corporate transactions (the train of workflow) increases the further away information is from the customer. Portals and information/knowledge management systems are about as far away from customers as information can get. With each ‘transaction’ comes increased ‘setup’ costs as information is passed from management to management. Imagine, as a customer request is passed from the service centre to management it gets closer to a portal system and passes into almost a corporate black-hole as management attempts to find answers to questions which loop endlessly. Uncontrolled corporate workflow which increases transactions not only has the ability to increase management costs but it also has the ability to increase management. Management needs to ensure that transactional costs are minimised by keeping workflows as close to customers as possible. This is enabled by empowering service representatives to resolve customer disputes and queries themselves. Management should, ideally, not seek to micromanage but rather train well and guide through detailed, flexible policy.
- Increased Vertical Integration. With the complexity of modern systems, businesses have a propensity to duplicate roles or application functionality from shared service centres. Companies can reduce vertical integration by (i) ensuring that non-operational workflows are stripped out of profit centres, and (ii) cost centres have a lower management-to-capital ratio. Surveys have shown that companies can spend less than 10% on ICT budgets whilst still delivering 2% better productivity results.
Information is an incredibly valuable commercial asset. In many cases, companies hold vast reserves of ‘intellectual capital’ which can be commercialised and valued with a modicum of effort. In fact, companies should seek to understand the value of their information by constantly assessing the viability of divesting discrete parts of the business (for more on the value of an M&A approach, follow this link). Unfortunately, most businesses burn most of the value of their information through clumsy and blanket approaches to managing it. By purchasing systems which can be directly associated with higher transactional workflow and reduced variable management costs the return-on-information is vastly increased.