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Summary
Few corporations have a clear idea of the benefits they receive from their IT spending. While they may be able to assess their gains in efficiency from, say, server consolidation, they are in the dark as to whether their purchases of applications running on those servers are enhancing or diminishing their profitability or competitiveness. At the same time, most companies cannot link a large percentage of actual IT costs to specific users. Consequently, managers do not know when something they are doing may be driving unnecessary IT spending. Lacking a way to measure the direct cost drivers, most corporations allocate a "tax" on departments and business units based on some indirect measure such as headcount or occupied space. All of this diminishes the effectiveness of (and satisfaction with) the IT department - people cannot control their IT cost allocation formula, have only a limited idea of what drives IT spending and have no way to assess the benefits they receive from their IT systems. In this environment managers reasonably enough try to limit the size of the IT budget rather than optimizing their spending by assessing costs and benefits. To maximize its value, companies must extend their IT governance activities to include ongoing assessments of the effectiveness of these investments and give business units greater understanding and control over how they drive IT costs.

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Today governance, when it comes to information technology, focuses heavily on restricting capital spending. But the capital budget is only a small part of IT spending decisions; organizations usually do not understand and fail to optimize the value of the existing portfolio of IT capabilities and assets. Companies are able to measure the total cost of their IT spending, but they have a poor understanding of which activities in individual departments and divisions drive those costs. Equally important, they have a limited understanding of the benefits they are deriving from their IT portfolio. IT organizations that have minimum service level agreements may think their department is user-centric when typically it isn't. Service level agreements do not measure the business value of information technology. What's the value of 99.999% availability of an application that fails to deliver operational capabilities that competitors already are offering? CIOs who want to increase the strategic value of information technology in their company must begin to focus on measuring the value of IT capabilities to the business, which means for line-of-business executives as well as the finance organization.

The process of unlocking strategic and operational value from IT investments begins right after the investments are made. Typically, advocates prepare a rigorous business case for the money to be spent acquiring capabilities (such as applications or hardware). However, our research finds few organizations ever follow up to determine whether that business-case expectation was satisfied. Moreover, to determine the value of an investment these business cases focus mainly on direct cost savings. While this approach makes sense for pure infrastructure (such as servers and storage) because these reduce the cost of delivering needed capabilities, it ignores the value to the company of the capabilities themselves. The value derived from consolidation software, for example, lies in closing the books faster, thereby providing actionable information sooner as well as reducing the risk of errors and non-compliance - activities that promote effectiveness, not efficiency.

Assessment
CIOs must have ways to measure the business benefits of existing and new IT investments, including how they affect their ability to manage risk. Having an appropriate costing methodology (such as activity-based costing) is a core requirement. IT departments need to work with their "clients" to establish metrics to assess how well information technology is supporting business units, finance and other administrative elements. This is an important first step in understanding how IT can deliver value as well as giving the CIO a more useful way to concretely demonstrate the value of IT spending - value that should be measured in terms of achieving key performance indicators and avoiding key risk indicators. CIOs who have this capability will be able to demonstrate the value of the money spent on IT and to shift spending to areas that business managers see as important and away from those that they do not. Our research shows that companies that reported having formal processes and that used metrics to drive them were more likely to spend their IT dollars effectively. Moreover, the research shows that those CIOs who are viewed as good stewards of IT spending are rewarded with faster growth in IT budgets and are able to spend a higher percentage of their budget on innovation, rather than maintenance.