Getting out of the cost box

International Journal of Productivity and Performance Management

ISSN: 1741-0401

Article publication date: 1 December 2004

Citation

(2004), "Getting out of the cost box", International Journal of Productivity and Performance Management, Vol. 53 No. 8. https://doi.org/10.1108/ijppm.2004.07953haf.001

Publisher

:

Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited


Getting out of the cost box

PA Consulting Group’s international survey of senior information technology (IT) executives – “Getting out of the cost box” – shows that while 85 per cent of chief information officers (CIOs) agree that the perception of IT has improved across the business, their ability to realise long-term value from IT is weak.

CIOs may have improved their ability to manage IT costs over the last two years, but they are struggling to manage new investments in IT. As many as 65 per cent of respondents reported having successfully reduced or controlled IT costs, often by renegotiating suppliers’ contracts. But PA’s survey highlights the difficulties CIOs have in achieving value from future IT investments: 64 per cent of respondents strongly agree that IT projects are linked to business need, but their ability to create business value from these IT projects is less convincing.

David Elton, senior IT strategist at PA Consulting Group, said:

"If CIOs are to live up to the higher level of confidence that they currently command, they need to do more than control their IT spend. If they don’t work out how to define and deliver on the business case for new IT – and our survey says they haven’t – they risk another cycle of business disaffection."

PA’s findings point to five key weaknesses that CIOs need to address:

  1. 1.

    Confidence in business cases is low. A total of 64 per cent of CIOs strongly agree that IT projects are linked to business need, but only 36 per cent of respondents strongly agree that their organization produces clear business cases before embarking on any IT projects.

  2. 2.

    Risks are not understood. CIOs have low confidence in the ability of their organisations to manage the risks rising from business change, with only 21 per cent strongly agreeing they manage risk well.

  3. 3.

    Technology-led projects deliver less value. Savings made through “pure” IT or technology-led projects are significantly lower than through improved commercial management of IT supply. A total of 73 per cent reported savings from contract renegotiations, but savings from replacing legacy systems and implementing best of breed packages were significantly lower at 47 and 28 per cent, respectively.

  4. 4.

    Sourcing strategies do not reflect market trends. In making procurement choices, organisations are not distinguishing between commodity and specialist requirements, and in some areas their approach seems upside-down. For infrastructure purchases, the most favoured method (44 per cent) is to use a preferred supplier, but commoditisation of the market means that greater value for money could be sought. For business-specific applications, 92 per cent of respondents agreed that “fit with specific business needs” was “very important”, and yet most respondents (52 per cent) select suppliers via a tendering process.

  5. 5.

    Commonly used measures are not the best indicators of value. Almost all CIOs measure value, but correlation between measurement and perception of value delivered was not clear for all methods. Only 37 per cent of those who used “reduced cost” to measure value agreed that the perception of value from IT across the organisation was improving. For those using ROI, agreement was 53 per cent, whereas for those using shareholder value it rose to 93 per cent.

No single response to any of these challenges will guarantee success. However, PA believes that mastering the challenges identified in the report will help the CIO in “getting out of the cost box” and becoming a business leader who identifies and realises value through technology.

See www.paconsulting.com/IT for more information.