Are You Measuring Up? IT’s Time for an Accounting

Published in TDAN.com July 2002

Decrease corporate capability by holding the line on corporate IT budgets! Leading industry analysts suggest that unless IT budgets are increasing by 20-30 percent annually, the corporation is
effectively reducing its capability. But how can the corporation justify continually rising IT costs while it sees costs from the microelectronics industry dropping by 30 percent a year? Where is
the return on the corporate investment in IT? (1)

The capability of measuring the value of information technology has eluded both business and academia. Traditional economic measures such as Return On Investment, Return On Equity, and Return On
Assets, have proved inadequate. To data, no effective metric has been established. Academia has, for the most part, abandoned the quest, while business leaders still search for the answer.

We cannot measure the business value of IT by accumulating its cots and then translating those costs into traditional economic ratios. That is not to say that one should not measure IT. Indeed, a
total measurement program is an essential tool for assessing the productivity and quality levels of development and support activities. An asset management approach measures the corporate
investment in IT and redirects the corporate dialogue away from issues of “how much does it cost” or “how can costs be reduced” and focuses on senior management’s
responsibility for this capital asset. Getting a handle on the investment in information technology and measuring IT as any other corporate resource is the subject of this commentary.

RUN IT LIKE A BUSINESS

As long ago as 1984, Richard Nolan advised management that this “information technology activity” should be run like a business within a business.

“I know of no small business of more than $4 million in sales that runs successfully without accounting systems and executive leadership. I can make the same statement about DP
departments with similar operating budgets. But there is one fundamental difference between the $4 million small business and the $4 million DP activity. Without the accounting systems and
executive leadership, the small business goes bust.

Unfortunately, the DP activity doesn’t. It only goes into a state of perpetual turmoil, which frustrates senior management, DP users, and user management.”(2)

Mr. Nolan’s message may have had a limited audience at the time and may have largely gone unheeded. Still, his counsel, that the IT function be run as a business within a business, is
significant in that it implies that a strategic link between information management and business management is through a fundamental business practice – measurement. “If you
can’t measure it, you can’t manage it”(3), we are cautioned.

Nr. Nolan defined two key ingredients that are fundamental to a business operation perspective: an accounting system and executive leadership. The accounting system provides the metrics on which
the business plan is built. Certain measures, such as productivity and quality assessments, indicate the strengths and weaknesses of the organization. Assessing the organization’s strengths
and weaknesses is an essential part of strategic planning. The strategic direction of an organization is typically reflected in an “annual report” and acts as a beacon to encourage
investment in the future. It is this plan then, which provides the blueprint for leadership. This would suggest that the “blueprint” for information technology leadership should be
founded in an IT accounting system, which would provide the metrics on which the IT architecture is then built.

An accounting system is the basis on which such economic perspectives as Return On Investment, Return On Assets, and Return On Equity are developed. Analyzed over time, these profitability ratios,
combined with effectivity and efficiency measures, indicate important trends in the direction and health of an organization. The IT organization needs to develop an accounting system that will
identify important trends in the health of the IT organization. But, traditional economic ratios do not apply to the management of information technology. New perspectives must evolve. These
perspectives must be used to build a complete picture of IT management’s productivity and quality while facilitating a new focus for the management of information technology. An IT
“annual report” can use these assessments to validate past investment and invite future commitments of capital.

It has been suggested that the real economic return on information technology lies in the opportunities to redesign the way an organization does business. (4) But business is uncomfortable in dealing with IT as a force of “change”. Past relationships between business managers and IS managers and IS
professionals have been uneasy at best. This is due not only to the inability to communicate effectively in business terms, but also to “a history of great expectations from IT, of
grandiose promises and disappointing, sometimes disastrous, outcomes.”(5) The promise of corporate benefits through increased productivity and
enhanced quality are meaningless when IT management measures neither in appropriate terms.

There is now substantial evidence from external sources that past investment in information technology, leveraged toward productivity increases, simply has not paid off. Productivity among
information workers has shown no significant increase despite massive investment in information technology.

“Between 1980 and 1989, the share of office machinery in America’s stocks of capital equipment climbed sixfold – from 3% to 18%, according to econometricians at DRI, another
consultancy. The productivity of office workers, however, has barely budged. Mr. Stephen Roach, an economist at Morgan Stanley, an American investment bank, calculates that the average productivity
of an American white-collar worker is no higher today than in the 1960s – despite the thousands of dollars worth of computing power likely be [sic] sitting on his
desk.”(6)

“According to Gartner Group’s research, ‘white-collar productivity in 1987 was exactly at the same level it was in 1967.”(7)

Not only has information technology failed to deliver on white-collar productivity, the cost-savings associated with IT investments have failed to materialize. For most firms, IT rarely reduces
costs and its impact on cost avoidance is obscured through informational economies of scale. This is because information is not consumed by its use as with other resources. Therefore, superior
information can justify larger scales of operations. “Then, backed by a large financial base, less exposed to risk, and holding an informational lead, the firm can continue to invest in
research and development to maintain its supremacy in information, justifying a further increase in scale, and so on.”(8) This means that the
associated internal coordination costs, external coordination costs, and operational costs are never reduced.

Add to all of this the fact that, concerning IT today, “Most of the management dilemmas and challenges…are the same as were faced in 1980. Many are the same as in
1970.”(9) The conclusion must be that a thorough assessment of information technology within the corporation is long overdue.

COUNT THE HIDDEN COSTS

The evaluation and assessment of the investment in the corporate information resource is a formidable task for most corporations given the past performance of IT management. The business executive
has seen the investment in information technology grow steadily over the years with little in return. Industry has come to view the information resource as a strategic component of the
organization’s success. An accounting is at hand for IT. The elevation of the IS manager to Chief Information Officer appears to be a response by business management to this awareness.

“Investment in IT equipment grew from $55 billion to $190 billion in the 1980s, an annual growth rate of just under 15 percent. This merely continues the average growth rate in most
Fortune 1000 firms’ IT budgets throughout the 1960s and 1970s. IT continues to be the only major area of business in which investment increases substantially faster than economic growth, year
after year. While IT investment expanded by almost 350 percent in the 1980s, net plant and equipment spending as a percentage of gross national product (GNP) dropped by almost 25 percent.
Investments in computers and telecommunications now amount to about half of most large firms’ annual capital expenditures.”(10)

This level of expenditure demands executive leadership. Executive leadership demands measurements that provide the blueprint for direction. The IT executive can no longer manage by intuition. Hard
data is demanded. The IT executive must not only direct the application of information technology but at the same time quantify its value in terms that other business executives are accustomed to
– the economics of IT. The economics of IT must include measurements of IT productivity and quality. Where do these measures come from? Of what should they be comprised? Where does one start?
Again, Peter Keen suggests that the place to start is with the creation of an IT balance sheet.

“Managing costs should begin with the creation of an IT asset balance sheet and commitment of time, attention, and management resources appropriate to the amount of the capital asset
(most managers will be extremely surprised by its size). Management must then count all the IT costs, many of which will be hidden. Development compounds future operations and maintenance costs,
and organization, support, and infrastructure costs are frequently overlooked or obscured by an accounting system that expenses IT as overhead.”(11)

The proposition is to apply principles of asset management to information technology. Asset management is an approach of directing the management of a corporate investment to ensure that its value
is maximized and enhanced over the long term for the benefit of the corporation. While being a major departure for many organizations, several significant events will occur when an asset management
approach is applied to IT. First, what was unknown will be known in quantifiable terms. Many IT managers will reject asset management for this reason alone. Many a manager will fear that the
information will be used against them. Senior management must ensure, for all employees, that all measurement data will not be used as a weapon. Instead, the data is gathered to enhance the value
of the corporate investment in information technology. This will put teeth behind corporate policy statements which suggest the “information and information technology are a corporate
resource.” Now, this resource can be managed like one. Second, a shift to asset management principles must force a measure of “all” the costs of IT and establish the anchor
measurements necessary to judge where and how discretionary IT investment is made. Third, IT will find a significant point of integration with corporate objectives as the economics of both worlds
come together on the balance sheet.

MEASURE IT PRODUCTIVITY AND QUALITY

To repeat, the cornerstone of asset management is a totals measurement program. The data from the measurement program enables managers to accurately and realistically assess their strengths and
weaknesses. This means that the ability to plan the organization’s direction both in the long-term and the short-term depend on standardized, accurate measurements. The development of a
long-range plan can be defined as the aggregate of the answers to the following questions:

• Where are we?
• Where do we want to go?
• How do we get there?
• Who will do it?
• How much will it cost? and
• How will we know when we’re finished

The answers to all these questions are typically provided through econometric models built on both hard and soft data, but in each case quantifiable. In other words, carefully described
measurements of the organization are developed over time and analyzed in ways that estimates can be accurately applied to offer sound alternatives for the future. “There is a perfect
correlation between measurement accuracy and estimation accuracy: Companies that measure well can estimate well; companies that do not measure cannot estimate either.”(12) The ability to estimate well is at the heart of a successful plan. If one is to plan successfully for information technology, one must have available accurate
measurements of the investment, productivity, and quality of the information technology.

But what must be measured? As stated earlier, the baseline must be the corporation’s total investment in information technology expressed through asset management. Next, a total measurement
program must be established. Capers Jones suggests that a total measurement program for information technology would include nine topical areas. These areas include: (1) Operational measures;
computer utilization, downtime, response time, etc., (2) Ongoing projects measurements; monthly milestones or planned versus actual expenditures, status reports, (3) Production library and backlog
measures; how much money is tied up in software, (4) User satisfaction measures; actual interviews, (5) Completed project measures; function point metrics, (6) Soft-factor measures;
project-byproject survey of methods, tools, skills, organization and environment, (7) Software defect measures; correlation between defect levels and user satisfaction, (8) Enterprise demographic
measures; employees’ skill classes relevant to corporate goals, and (9) Enterprise opinion survey; provided by personnel experts. (13) These measures
would provide the backbone for a variety of useful economic purposes, including studies of IT production, studies of IT consumption, and studies of IT quality.

While a total measurement program may not cure all the ills that have plagued IT management, it will certainly bring IT management into the mainstream of business management. Other corporate
officers are accustomed to accurate, quantifiable measures of their performance. The CIO should accommodate the organization with no less. Together with the IT balance sheet, an asset management
approach, and a total measurement program, the IT function starts operating like a business within a business, running on sound business principles. This is the way IT management integrates with
the organization and in so doing, establishes the true value of information technology.

(1)Peter G.W. Keen, Shaping The Future: Business Design Through Information Technology (Boston: Harvard Business School Press, 1991).
(2)Richard L. Nolan, “DP Must Be Run as a Business Within a Business,” Stage by Stage, First Issue, Volume 1, Number 1, copyright 1981 by
Nolan, Norton & Company, reprinted 1984. (Mr. Nolan is a professor at Harvard University and is distinguished for advancing the Stages Theory, a framework for addressing the corporation’s
management issues surrounding information technology, and he was cofounder of Nolan, Norton & Company.)
(3)Ibid.
(4)Michael Hammer, “Reengineering Work: Don’t Automate, Obliterate,” Harvard Business Review, (July- August 1990): 104-112.
(5)Keen, Shaping The Future, 212.
(6)“A lot to learn,” The Economist, 3 March 1990, 64-65.
(7)Chris Sivula, “The White-Collar Productivity Push,” Datamation, 15 January 1990, 52.
(8)Vijay Gurbaxani and Seungjin Whang, “The Impact of Information Systems on Organizations and Markets,” Communications of the ACM, Vol. 34,
No. 1, January 1991, 65.
(9)Keen, Shaping The Future, 212.
(10)Ibid., 1.
(11)Ibid., 142.
(12)Capers Jones, Applied Software Measurement: Assuring Productivity and Quality (New York: McGraw-Hill, Inc., 1991), 2.
(13)Ibid., 38-40.