Enterprise IT Freakonomics
by Bruce Skaistis
Freakonomics, written by Steven Levitt and Stephen Dubner, provides an insightful look at how conventional wisdom is frequently wrong and can lead to inappropriate conclusions and actions.
As I read Freakonomics, I found myself thinking about enterprise IT metrics. Some organizations have tried to develop more meaningful enterprise IT metrics using Balanced Scorecard and other performance tracking concepts, but many organizations are trapped by conventional wisdom, and they continue to track the same performance and financial metrics that enterprise IT has tracked for years. In many cases, and in keeping with the lessons of Freakonomics, these metrics lead to inappropriate conclusions and actions.
Fortunately, Freakonomics does more than point out how conventional wisdom can get us into trouble. It provides solutions; solutions that can be applied to enterprise IT and enterprise IT metrics.
Measure What Needs to be Measured
A key premise of Freakonomics is knowing what to measure and how to measure it makes a complicated world much less so. As many CIOs will tell you, enterprise IT metrics can be very complicated and confusing. I believe this is because we are tracking the wrong metrics. We should start over and focus on two more meaningful metrics that most organizations are not currently tracking.
The first new metric organizations should track is "enterprise IT Net Value." Enterprise IT value is the business value produced by enterprise IT expenditures, but we need to look at more than just enterprise IT value.
The primary financial objective of most organizations is to maximize net profit, which means maximizing revenue while keeping the cost of doing business as low as possible. It should work the same way with enterprise IT. The objective should be to maximize enterprise IT Net Value by producing the most business value for the least cost. The formula for enterprise IT Net Value is as follows:
Enterprise IT Net Value = Business Benefits Produced - Cost of Enterprise IT Resources
(We also need to consider risk in the formula, but I will address how to risk adjust enterprise IT Net Value in a future briefing.)
I am the first to admit that tracking business benefits and the cost of enterprise IT resources used to produce those benefits is not easy, but it has to be done in order to provide a meaningful picture of how effectively an organization is using enterprise IT resources. It is the only way an organization will know that it is getting its money’s worth from enterprise IT.
The second metric an organization should track is "enterprise IT Agility." As the business media reminds us on a regular basis, corporate agility is critical to success in an increasingly competitive global marketplace. The companies that respond quickly to changing requirements and conditions will be the most successful. Less agile companies will not survive.
The pressure for corporate agility is forcing enterprise IT to become more agile too. Companies need to be able to quickly redirect IT resources and IT efforts to compete effectively. Accordingly, we need metrics to track how long it takes to provide new IT-based capabilities from the time that the need for new capabilities is first recognized. Most organizations measure how long it takes to complete an enterprise IT initiative after it kicks off, but we need to measure the total time it takes to respond to a new enterprise IT requirement.
For example, it might take six months to go through the request, review, prioritization, approval, and budgeting processes before enterprise IT even begins working on a new capability. Then it might take another three months to acquire software, order equipment, and arrange for specialized support or services. Enterprise IT might be able to implement the new capability in three months; but, in this case, it actually took twelve months to go from recognizing the need for a new capability to providing the capability. That is not agile.
Tracking how long it takes to make required changes or enhancements from start to finish, even when some of the time lapse is outside the direct control of enterprise IT, gives the best picture of enterprise IT agility.
(Cost and quality also need to be considered in tracking enterprise IT agility, but I will discuss those factors in another briefing.)
Tie Incentives to What Needs to be Measured
Another key premise of Freakonomics is "incentives are the cornerstone of modern life." The authors contend that poorly conceived incentives or incentives tied to the wrong measures can produce unwanted or unexpected results. They also contend that results can be manipulated if the incentives are strong enough. That contention certainly applies to many enterprise IT metrics.
The authors also believe that well-conceived incentives can drive positive changes in behavior and performance. In terms of enterprise IT, that means organizations need to create incentives for improving or maximizing enterprise IT Net Value and Agility.
There are at least three ways to increase enterprise IT Net Value: (1) Increase business benefits produced by enterprise IT expenditures; (2) reduce the cost of enterprise IT resources required to produce business benefits; and (3) reduce enterprise IT risks.
To improve or maximize enterprise IT Net Value, we need incentives tied to increasing business benefits, reducing costs, and reducing risk. To improve enterprise IT Agility, we need incentives for reducing the time from when an enterprise IT requirement is first recognized to when the enterprise IT solution is in place. That means speeding up enterprise IT management processes, reducing lead times, and reducing execution times.
Freakonomics teaches us three valuable lessons about enterprise IT and enterprise IT metrics.
Conventional wisdom is often wrong. Many enterprise IT metrics are based on conventional wisdom and, as a result, many enterprise IT metrics are measuring the wrong factors.
Knowing what to measure and how to measure it can make a complicated world much less so. Instead of tracking enterprise IT metrics that are not meaningful or actionable, it is time to start measuring and tracking enterprise IT Net Value and Agility.
Incentives are the cornerstone of modern life. We need to create well-conceived incentives for improving enterprise IT Net Value and Agility.
About the Author
Bruce Skaistis is the founder of eGlobal CIO. He began his career as a consultant with Arthur Andersen and was CIO of a large bank group before forming his own management services firm. He has extensive enterprise IT management, process optimization, and action facilitation experience.
Copyright ©2006 Global CIO, Inc. All rights reserved.