Not so fast, there. Brunsman is only comparing IT COST vs. what someone else (say, an outsourcer) would cost. Has nothing to do with VALUE to the organization IT serves. So we are back to square one on IT value.
For an alternative, go to www.cognitechcorp.com/benefits.

Are you kidding me? Did you really waste the whitespace to write this article? This concept has been around for years, and many reputable firms exist capable of demonstrating the value of IT. If you take an IT organization and break it into the same commodity components available in the market, benchmarks have existed for about 15 years (although the benchmarks may have shifted over time). In fact, unless an organization is mismanaged and barring any unique circumstances, an internal organization should always be cheaper than external options for one reason: profit. The external firms have to generate a profit, which should give internal IT a 20-30% head start. To answer your question, yes this is a viable benchmark. It's also been around for quite a while for those introspective enough to seek it...

Dear Colleagues,

Yes, the idea that a "market" will help to put a financial number on value is solid, and if I remember right, this is the same conclusion/solution that Henry Ford came to when he was faced with the analysis of his vertically integrated auto manufacturing process.

My firm's work in the development of community accountancy (CA) has been faced with a similar problem. And while it would be nice to have a market for everything of value and important, in practice this does not happen. Our solution has been to have "standard values" against which economic activity can be benchmarked ... and while getting the exact number is quite contentious, getting a correct profile of different standard values and choices is quite accurate.

Sincerely

Peter Burgess
Transparency and Accountability Network New York

IT is a cost center unless someone outside the business is writing a check for the services IT provides. How often does this happen for internal IT resources? Where does IT show up on the balance sheet? What revenue does IT produce?

This whole thing is smoke and mirrors.

'IT' should stop trying to be something it is not. Or be a profit center and produce revenue.

It's like trying to develop some scheme to value employees. Where do employees show up on the balance sheet? OH yes... under Liabilities. Employees ...our most valued resource.

Smoke and mirrors!

I see a lot of information on whether or not IT should be measured for efficiency and costs, if only to extract real IT value.

Two things:
1. Is anyone gonna write an article on how to do that? I see a lot of articles on why it should be done, but nothing on how (nothing free that is).
2. Is it really necessary to measure this? We already know that a decently managed IT dept profits the company by reducing the amount of manual labor -- that has been established over and over again. The value of IT is undeniably there. Why proceed with complex measuring of its value? A pitfall is, as with any employees in any dept, is the productivity of individuals. Without decent productivity, employees expenses can shrink your profit margin quite fast.

Another one is an IT dept that likes to buy software or hardware "toys". In real life, if your IT manager, CIO or CTO cannot "align" goals with business, buys outrageously and does not manage people efficiently, then you have a problem. If those 3 criteria are not managed, your IT head is the wrong one. Simply replace or upgrade.

I agree with the points made in the first two posts. What "value" are we talking about? “Business value,” which establishes a standard measure of value used to determine the business worth. Or, “economic value added” (EVA), which measures a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit.

In most cases when IT value is discussed, it is referring to EVA. That being the case, there are three components: net operating profit after taxes - (capital * cost of capital). This formula accounts for increases in revenues or cost savings.

I would however argue with one assertion by Mr. Hutchison that "an internal organization should always be cheaper than external options for one reason: profit". This may be mostly true for the very largest of companies, but economies of scale or currency differentials can dwarf the profit margin requirements by outsources. Also, outsourcing vendors can distribute the workload more efficiently across multiple high-cost resources, keeping them closer to their ideal utilization rate.

Another factor is the stepwise cost associated infrastructure and resources. For instance, if a parts manufacturer need to support e-commerce with its larger customers (GE, GM, Boeing, etc.), then they have to invest a fairly substantial amount just to get in the game -- hire at least 2 e-commerce experts (always need backup for vacations, sick time, etc.) as well as the infrastructure and software to support each customer according to their standards. An outsourcer would most likely already have trained staff, infrastructure, software, and for larger outsourcers, existing transactional relationships with target customers. Therefore, outsourcing could increase the agility of an organization to meet new market needs in a high-quality, cost effective manner.

A MAJOR caveat: since there is a profit motive, the allegiance of the outsourcing staff is to the company that pays their salary and they will be highly incented to keep customer-facing costs to a minimum. We all know where that leads…

To determine the true value of IT within an organization, unplug all the hardware (desktops, servers, mainframes, data/voice communications devices, etc) and see how long the company survives. The amount of revenue lost, amount of fines from regulatory agencies, and the total amount of employee salaries during that outage combined will equal the most accurate dollar value of IT. Of course, this method is not practical, therefore the true value can never be accurately determined no matter how many ways we try to slice and dice it.

For companies that look at IT as a cost center, shame on you...and I feel sorry for your shareholders. You are simply not asking (demanding?) enough of your IT organization.

As I see it, and as many of the top-tier IT leaders in the country will attest, there is only ONE true measure of IT value: "How much improvement in positive contribution to the company's bottom line is directly attributable to IT?" How much today, and how much is expected (and will be carefully assessed) tomorrow?

Companies that have not given serious thought and study to that question degrade into looking only at cost, which is taking the easy way out and saying that IT is simply a commodity, as opposed to a real source of competitive differentiation on a strategic level. (Can you say, Nicholas Carr?) Cost efficiency is a preliminary requirement to pursuing value at a higher level.....it is not the destination. Some of the previous posts appear to already understand that. I'm not sure, though, that Mr. Brunsman does.

IT provides the technology platform on which the company runs. It is a cost center. It does not produce profit. Just like accounting, HR and maintenance, IT provides a service that is necessary to the business but is not sufficient to define the business. If you want to check the reality of this, go to Monster...how many IT positions require knowlege of a specific business practice? How many developers, infrastructure people or CIOs care if they work for a paper company or auto manufacturer? By and large, they don't. IT is a service that often has dreams of becoming a business unit. So IT invents the CIO who builds an IT empire and we have endless discussions on the "value" of IT. Outside the context of the business in which it is deployed, IT has no value. Inside the business in which it is deployed it is another bolt in the business engine but it is not what makes the engine run.

Very interesting comments, gentlemen. Very informative. While I agree on all these concepts of determining IT value, I would like to suggest something very primitive that we might have overlooked.

In an enterprise environment, compare an accounts department using IT and not using IT; compare HR using IT and not using IT; compare online tickets/patients booking vs. manual. Check the cost difference. Now this difference is, in simple terms, the IT value.

Now, lets add complex formulas and theoroms and make this very complex!!! :D

There will always be an array of services that IT provides that are commoditized, and an array of services that provide strategic as well as intrinsic value within an organization. The problem with the market -- and with the general spin of this article -- is that it assumes there is a "mark-to-market" equation for all services. It is precisely those services that provide the most value to the organization that somehow get targeted by management consultants (I use the term loosely), short-sighted CEOs/CFOs, and disingenuous marketing organizations. Space, power, bandwidth, WAN networks, desktop & printer support -- these are commodities. Everything else, including application development, are relative to the organization and should be analyzed accordingly without expectations or an intention to commoditize. Otherwise, everything will look like the proverbial nail.