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Measuring and Reporting IT Value (2 of 2)

My last post generated some interest, so here’s the rest of the examples.

Last time, I wrote about the simplistic approach to measure and report on IT value:

  • Is your IT group working on the right things?
  • Are they working on the right things well?
  • Is your IT spend comparable to industry norms?
  • Is your IT spend comparable to other measures of company performance?

A bit more detail … balancing quantitative and qualitative

  • (Quantitative) To make sure you have business alignment, the strategic objectives of the company should be identified, and all projects / IT investments should be aligned with those objectives. Track the relative size of spend for each of the objectives, and make sure it matches with your priorities (sample in previous post)
  • (Qualitative) Regularly (i.e. minimum once per quarter), review this aggregated spend with the business. Conversation around relative priority can easily segue into a “customer satisfaction” review.
  • (Quantitative) Check with industry groups or research firms to get an idea of the typical measure of IT as a percent of revenue (ex. IT budget of 1.5% revenue is typical for manufacturing firms). Be sure to clarify if this includes depreciation expense or not.
  • (Quantitative) For many companies, revenue isn’t directly impacted by IT as much as Cost of Goods or SG&A. It may make sense to compare annual growth rate of year IT budget to your company’s gross margin.

Here is a sample graphic showing what I mean …

Click to enlarge …

For this fictitious manufacturing company, IT costs seem to be in line with industry norms – comfortably less than 1.5%. However, IT costs are growing faster than revenue – not a good sign.

Worse yet – the second graph shows us that our gross margins are flat to declining – more bad news. If I was the IT director at this company, I shouldn’t be surprised by some serious budget pressure going into the new year.

Again, these are made-up numbers to illustrate one scenario. There are also things one can do with the graphs to hide problems or inflate good results – but the CAGR statistics tell the real story, so make sure you know how to calculate growth rates!

Another key point; generally speaking, for most manufacturing companies, IT investment is not as clearly related to revenue as it is to gross margin. In fact, for some companies, revenue increase/decrease is often driven by forces outside of IT’s influence!

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