Friday, March 12, 2010

The business value of IT

Robert Kaplan gave a good interview to, published in two parts, where he talked about strategy execution. In the first part, he explains how CIOs can align IT strategy with corporate objectives and demonstrate the business value of IT.

He gave interesting answers to the questions, like when the interviewer asked: How can CIOs help the business measure the value IT is contributing to the corporate strategy?, he answered: if you want to evaluate the impact of IT on business value, then you have to go to a methodology -- a strategy map -- and balanced scorecard, because often IT doesn't directly produce revenue. What IT does do is support a critical process like innovation or a customer management process, and the output from IT is greater satisfaction or loyalty among customers, such as the FedEx example. And because of greater loyalty, the customers transact more business with the company.

Kaplan also gave a good answer to the question: How can IT play a more active role in driving the business strategy?, he said: Depending on the strategy the business is following, the demands on IT are very different. If you look at Wal-Mart, Toyota or Dell, they are trying to follow a low cost strategy. The role for IT in this case is to lower the cost of working with suppliers, handling the logistics, and the distribution. IT is doing that networking with suppliers and making a platform for which customers find it easier to transact business. Another organization might be following a strategy of building long-lasting relationships with ongoing sales and services. There, IT is very much related to CRM, and perhaps data mining, to be able to understand customers better.

In the second part of the interview, he told about agile business and predictive analysis. His definition of to be agile is the ability to sense changes in the markets and customer preferences faster, as they are evolving, and be able to respond to it. It's not just information, but it's really analysis to see patterns in customers' purchasing decisions and preferences and have that [data] come into the company so they can respond to whatever these evolving needs are.

About predictive analysis, he said: Predictive analysis comes from analytics that are being applied to historical data. In the old days, you were using historical data to evaluate performance and reward people. Now you're trying to use data to help understand the future. Wal-Mart, for example, does a very good job of understanding the types of bundles consumers are likely to purchase. They're trying to predict the patterns of consumer purchasing and then arrange the offerings to encourage the buying of multiple products and services. We have crystal balls, but they're not very accurate. What we do have is data, and by having access to large quantities of data on consumer purchasing, then yes, that does help you predict the future.

The question is, are companies investing sufficiently in analytic methods to make sense out of the data? Raw data is useless, but if you can study the past and use various statistical methods to process the data, then you really can provide information and knowledge that's actionable and that will be predictable in the future, as long as historical patterns are persistent.

About risk management, he commented: Risk management was siloed and considered more of a compliance issue and not a strategic function. Now we see that identification, mitigation and management of risk has to be on an equal level with the strategic process.

Robert Kaplan wrote several books on management and strategy. He and David Norton are the creators of the Balanced Scorecard, and their books about the subject are worth reading (I wrote a book review about the first book: The Balanced Scorecard: Translating Strategy into Action). Their latest book, The Execution Premium, focuses on linking strategy to execution.

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