WHITE P APER Demonstrating Business Value: Selling to Your C-Level Executives

Sponsored by: Microsoft Randy Perry April 2007 Al Gillen

www.idc.com

INTRODUCTION
IT professionals today face a number of challenges. As if it were not enough that they have to stay ahead in one of the world's fastest-changing industries, where new technologies can emerge and become obsolete in less than a five-year span, they also must deal with internal business issues, in which top management often views their area of the business as a cost center rather than as a resource that boosts employee productivity and improves corporate agility in a globally competitive environment. This IDC White Paper is designed to better equip IT professionals to communicate the business value that IT operations provide to a company's operations by integrating a focus on the corporate return on investments associated with IT projects. The goal is to help IT professionals transform how executives in their organizations value the business drivers enabled by IT projects and, in the process, increase the ability to justify and fund IT initiatives.

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enhance employee productivity. 2 #206363 ©2007 IDC . IT professionals must be able to discuss the project in terms of not just the underlying technology but also how it will support business needs. and/or optimize the customer experience. including managing the growth of costs while improving services or capabilities. and articulating the business value to be delivered by an IT project. This alignment must incorporate common corporate mandates. FIGURE 1 The Seven-Step Process for Demonstrating the Business Value of IT Projects Source: IDC. measuring. Most important. 2007 Step 1: Demonstrate Alignment with Senior Executives When attempting to justify a new IT project. The steps are displayed in Figure 1. IT organizations first must gain alignment with their parent organization.DEMONSTRATING BUSINESS V ALUE: THE SEVEN-STEP PROCESS This paper discusses the seven-step process for understanding.

and customer retention. IT departments should establish benchmarks by measuring their current performance internally with KPIs. such as the volume of electronic business that its systems and software enable. customer online interactions. customer growth. ! Understand the financial decision-making criteria upon which the project will be evaluated. Key actions to take at this stage include: ! Understand overall corporate performance goals. Key actions to take at this stage include: ! Initiate dialog regarding the project with business decision makers and in particular with the CFO organization. They can also be measured externally. ! Establish benchmarks to measure current performance and develop appropriate KPIs in the areas to be addressed by the initiative. KPIs can include internal metrics such as achieving a particular volume of goods sold or driving toward a particular mix of premium products. KPIs could also include upside benefits of IT. develop a business case framework for the IT initiative that meshes with the organization's overall financial decision metrics.At this stage. The Appendix includes a sample benchmarking guide with several useful categories that most companies can quantify and track. ! Translate corporate goals into IT performance metrics. Benchmarks could incorporate metrics that measure the relationship of IT to other business units and to the business as a whole. Step 2: Establish a Baseline for Current Performance Successful organizations establish key performance indicators (KPIs) to identify potential problems long before they impact the bottom line. IT needs to champion a business case to demonstrate how the project will result in a competitive advantage for corporate objectives. using factors such as customer satisfaction. ! Working with the relevant financial organizations. ©2007 IDC #206363 3 . IT must make sure that the business case captures and presents business value metrics such as revenue generation. To drive home this message. These benchmarks should be used as a baseline against which to compare expected performance improvements to be gained by the new IT initiative. such as average user downtime hours per year.

users can make business calls). application. storage. Annual cost of service contracts. TCO TCO is a measurement of the total life-cycle costs of an IT investment. T ABLE 1 TCO Major Categories TCO Groups Hardware: Systems. The list of cost factors associated with a specific technology. management. networking. and users. IT staff: Full-time equivalents (FTEs) who support the clients. 4 #206363 ©2007 IDC . including metrics such as total cost of ownership (TCO). More than 40–50 distinct factors may need to be considered when performing a TCO analysis. and peripherals critical to operations. manage. and this step establishes the appropriate financial objectives and analysis framework based on an organization's overall decision metrics. typically at 15–25% of purchase. Table 1 demonstrates how these factors can be grouped into five major categories.. and the impact on end-user productivity. A TCO analysis helps decision makers determine which solution/product carries the lowest cost through its entire life cycle. middleware. which can include bandwidth and maintenance. it is the value of the working hours users do not have access to the applications needed to perform their jobs. applications. or activity is called the chart of accounts. internal rate of return (IRR). including acquisition. service. Services: Outsourced IT support or technology. Software: Operating system. security. User productivity: As a cost. The challenge is to focus on all costs to the organization — not purely IT costs. only some portion of the loaded salary (usually 10–50%) is counted as cost. and retirement. Organizations measure the financial impact of investments in a variety of ways. implementation. 2007 Annual loaded salary of user time lost due to application downtime. servers. and application downtime are the primary sources. discounted by a partial-productivity factor (i. storage. maintenance. and payback. Source: IDC. ignoring the more significant life-cycle costs to operate. Traditionally. As a result. Initial purchase and annual licensing fees. The sections that follow look more carefully at some of these metrics. operations expense. TCO Methodology Initial purchase price amortized over the typical life of the hardware plus annual upgrade and direct maintenance costs. companies focused on the purchase price of the technology or the primary capital expense.Step 3: Establish Realistic Business and Performance Objectives Any IT investment should have a measurable impact on a business' overall financial bottom line. and training. server. Network. Annual loaded salary (salary x load factor to account for benefits and overhead) of IT staff time associated with management. and maintain that technology. return on investment (ROI).e.

Translating Cost to Value with ROI Analysis In addition to quantifying the costs associated with the chart of accounts. most organizations also require a metric to estimate the business value to be delivered by the investment. Source: IDC. IT initiatives that can reduce IT labor costs are likely to find greater acceptance among financial decision makers.Through the course of numerous TCO studies. FIGURE 2 Typical Three-Year Server TCO Outsourced costs (3.0%) Software (7. presented in composite form. Perhaps the most widespread metric used in this regard is ROI.0%) Note: The figure is based on over 300 interviews conducted across numerous platforms. describing projects in ROI terms yields two benefits: ! The ability to articulate the expected benefits of the IT investment on the business in financial terms ! The ability to compete for resources on an equal footing with projects from other business units ©2007 IDC #206363 5 .0%) Downtime — user productivity (15. Figure 2 depicts the typical TCO allocation for a server environment over a three-year time frame.or five-year costs comes from two key areas: staffing costs and user downtime.0%) Staffing (60. 2007 Because the single largest factor affecting TCO is staffing cost. and initiatives that enable IT consolidation or automation can significantly reduce TCO across the IT infrastructure. For IT managers. Recent IDC research has shown that such technology initiatives coupled with organizationwide improvements in IT management processes can reduce IT labor costs by as much as 50%.0%) IT staff training (8.0%) Server hardware (7. IDC has found that the majority of the three. ROI is the financial return expected to be delivered by an investment and may encompass multiple methodologies for describing the cash flow of the investment.

IT staff productivity translates to IT staff having more time to perform higher-level activities to support the business or engage in projects that have been put on hold for lack of staff resources. increasing overall revenue for the business. For a business that relies on ecommerce. A more reliable infrastructure that can help expeditiously deliver business solutions may lower customer churn and provide greater opportunity for upselling and cross-selling. By getting products and services to market faster. Provide IT services as a product offering. a TCO analysis is useful to show that a migration to a next-generation server platform will lower the total costs related to delivering a specific service over time. Quantifiable benefits fall into three groups: ! Cost reduction. outside services. # # # An ROI analysis enables IT professionals to leverage the TCO analysis to create a business case for a financial decision maker. Such productivity gains are easily quantifiable and easily justified. or capital expenditures for hardware. This category refers to actual reductions in operational costs. Ideally. For example. software. A well-managed IT environment can impact revenue in four ways: # Speed time to market. thus increasing market share. turning IT into a direct profit center. ! Increased productivity. ! Increased revenue. Cost reduction usually results from more efficient management of resources. an organization may be able to establish market share sooner and grow it more quickly. a more reliable Web site results in less potential for lost revenue. or space. Benefits are quantified from the changes in the IT department and related changes in the overall organization. a cooperative effort is required on the part of IT management and operational department management to quantify the benefits. or reduced overtime. When increased productivity gains are realized outside the IT department. An efficient IT department that can develop cutting-edge solutions may be a candidate to offer services to external customers. Improve Web site reliability. increased output will have a fairly direct financial value — such as increased sales. which compares a current environment with a projected environment. 6 #206363 ©2007 IDC . In the long run.Conducting an ROI analysis is an extension of simple cost-benefit analysis. This category refers to better productivity on the part of both end users and IT staff. more invoices processed. customers may migrate from competitors' less reliable sites. such as expenditures on personnel. which enables the IT group or supported group to reduce spending on resources or grow without increasing resources. Improve customer service.

including the multiyear investment profile and cash flow analysis. the longer the time horizon. with the benefits phasing in and growing over time due to several factors: ! Deployment time. Go/no go hurdles may be set so high that they exclude nearly all IT investments from the discussion. an IT manager can compare the cost savings identified in the TCO analysis with the costs for the servers and justify the return for implementing a server consolidation initiative that involves obtaining funding to purchase those next-generation servers. As the number of users grows so do the benefits. for a hypothetical server consolidation investment. Variables Affecting ROI Analysis A number of variables affect ROI analysis.By comparison. the benefits realized exceed the cumulative investment. ! Analysis time horizon. ! User adoption. there remains a learning curve where users are not realizing all the benefits. including: ! Determining the appropriate ROI level. After full deployment. Most organizations require three. ©2007 IDC #206363 7 . Because investments typically occur up front with benefits stretched out over time. and the cash flow for the project becomes positive. As IT and users become familiar with the technology. For example. At some point. the impact of the technology's benefits will grow.to five-year horizons for ROI analysis. ! Growth. This policy was put in place to discourage IT investment. Benefits cannot start until after the deployment period. Deployment time is associated with even simplistic deployments. the better the expected ROI will typically be. from late 2002 until only recently. This is the point at which the project pays for itself. especially when tied to efficiency and scalability. many companies had set payback periods to as low as three months. an organization must be clear on the time horizon for the analysis. as well as a sample ROI analysis. When embarking on an ROI analysis. The Appendix includes a list of financial terms used in ROI analysis. using an ROI analysis. Even IT services require some time to transition. and it is known as the payback period. Organizations may ask themselves "How much ROI is enough?" The answer varies with each organization. Payback IT projects tend to have initial up-front investments.

payback. or benefits are delayed because users are slow to adopt. Limitations include lack of training or not having the right people to execute and manage the project. Key actions to take at this stage include: ! Identify barriers and risks associated with the project. Critical technology providers do not deliver on time.Key actions to take at this stage include: ! Settle on financial performance metrics to be used to judge the investment: TCO. ! Apply financial models to demonstrate expected financial benefits to be derived from the project. ! Technology. 8 #206363 ©2007 IDC . ! Establish specific performance thresholds. Step 4: Identify the Barriers. and the first project is delayed. etc. Management changes to project priorities delay deployment. Competitive pressures or customer demand push back the project. Political infighting or parent company relationships limit benefits. ! Market. Unforeseen or new requirements create additional costs. ! Dependencies. affecting the schedule or canceling a partially completed project. ! Management commitment and funding. The organization's financial position changes adversely. ! Organization. ROI. ! Financial. execute poorly. even in a less-than-optimal deployment experience. ! Vendors and service providers. incompatibility. One project is dependent on the completion of another project. lack of standards. ! Develop mitigation strategies for showstopper risks. ! Human resources. or limited scalability. Technology implementation is affected by early obsolescence. Deployment takes longer than planned. ! Legal and governance. The successful business case identifies risks and shows how they can be overcome or mitigated. or go out of business. Risks. and Solutions All investments have risks. Some risks that typically need to be addressed are as follows: ! User acceptance/adoption.

or other means favored by the organization. ! Articulate the specific value of each project to the organization and of its role in the overall technology road map. ! Show key technology road map dependencies.to five-year road map with specific IT goals and objectives. Step 7: Measure. it should be presented to senior management to gather input and to demonstrate that future personnel and technology initiatives are part of a structured plan that benefits the organization. Key actions to take at this stage include: ! Create a three. Each project should contribute to the overall plan. step enables the organization to learn from its experience and factor those learnings into the initial analysis and objective-setting stages for future projects. Analyze. Larger or more risky projects can be grouped with projects of more certain returns so that the failure or delay of one project does not jeopardize the entire plan. This critical. measured in TCO. starting from where it is today and typically extending out three to five years. Step 6: Show How Each Project Fits into the Road Map With a big-picture plan in place. and Communicate The final step consists of measuring the business metrics resulting from the IT project investment. but often overlooked. ROI. the business cases developed for each subproject are applicable. and communicating those results to senior management. The road map includes much more than technology and should include key dependencies. An IT road map shows how the technology infrastructure will evolve to meet these goals.Step 5: Develop a Road Map In addition to justifying individual projects. Key actions to take at this stage include: ! "Slot" each project into the road map. an IT organization should articulate how each project ties into the overall road map and contributes to long-term and short-term business goals. ©2007 IDC #206363 9 . performing necessary analysis to measure the actual financial impact. and IT projects or investments should be managed as a portfolio. activities such as implementation of IT management best practices. As the road map nears completion. At this stage. ! Demonstrate each project's role in the overall plan. an IT organization must demonstrate the value to be provided by its overall portfolio of investments and how the investments work together to support the organization's overall goals. and development and training of both IT staff and end users.

Some of the specific challenges and opportunities identified in this IDC White Paper include: ! Selling the strategic value of IT initiatives. the potential for improved business agility. Key actions to take at this stage include: ! Measure the project's performance against the benchmarks identified in earlier stages. Selling the value of IT projects to C-level executives requires that they view IT not merely as a cost center but as a strategic enabler of corporate business strategy. many companies have squeezed their IT budgets by delaying the acquisition of new technologies and by periodically reducing IT staff. IDC believes that CIOs and senior IT managers should reposition IT operations as a well-managed critical resource to support business growth rather than treat it as a cost center that needs to be starved to minimal life-support levels. Over the past five years. This trend has left many organizations seriously under-resourced to address new opportunities and poorly equipped to capitalize on long-term growth opportunities. Corporate goals will change and so must your plan. Such opportunities can help organizations create true differentiation versus competitors. The opportunities associated with successfully selling IT projects to C-level executives are significant and can include savings in IT labor costs. ! Be flexible. Follow-up cost-benefit analysis should be conducted three to six months after the rollout of each major project to show success and establish a track record so that the next project will be easier to justify.Organizations should periodically benchmark the overall IT environment and monitor KPIs specific to each project and assess the results to tweak the plan and demonstrate progress to senior management. 10 #206363 ©2007 IDC . ! Repositioning IT as a business enabler. CHALLENGES/OPPORTUNITIES Demonstrating the business value of IT investments presents challenges and opportunities. and the ability to better serve customer needs. ! Addressing under-resourcing in IT. Challenges to IT include gaining fluency in the language of financial analysis and decision making and working with financial and executive audiences to articulate the business value proposition of IT investments. ! Perform financial analysis using the models and framework adopted by the organization. ! Communicate performance against the plan back to executive management.

! Utilize the seven steps outlined in this paper. IT operations are the lifeline for many organizations' ability to address next-generation customer needs and go-to-market models.CONCLUSION IT is one of the world's fastest-changing industries. If IT management believes that it is running a cost center. and process changes at the business level can force major architectural changes to applications and infrastructure. Improved communication can result in benefits to an IT organization the next time a major IT project needs to be funded or the next time a corporation needs to reduce costs while boosting capabilities. Leverage business-oriented benefits of IT investment as opposed to traditional cost reduction discussions. IT professionals today need to: ! Change corporate culture to organize and manage IT like a business. ©2007 IDC #206363 11 . corporate management perceives IT as a cost center rather than as a resource that boosts employee productivity and improves corporate agility in a globally competitive environment. Companies can realize substantial organizationwide long-term benefits if IT professionals can build a better dialog and understanding with C-level management. then IT will be a cost center. tailored to the specific requirements of each organization. ! Establish the use of business value metrics for IT when dealing with corporate executives. ! Promote the value of IT and speak to other corporate management through the use of business terminology. At the same time. Remind senior executives that responding to companywide challenges requires a well-managed IT department. too often. Yet.

d) fully automated across the enterprise. answer a) no strategy/policy. b) have policies but not enforced. c) policies enforced and some automation. Source: IDC. which is associated with Step 2: Establish a Baseline for Current Performance.total staff Annual calls/user MTTR (hours) Time to launch new business application to 95% of users (months) Client applications management SLAs IT budget/revenue Servers/server administration Annual hours per user IT operating expenses/ IT capital budget Network devices/networking staff Average number of help desk calls/week Note: For each area under Best Practices. T ABLE 2 Sample Benchmarking Guide Financial IT budget per user IT Efficiency PCs/PC management staff Service Quality Downtime hours per month Best Practices Backup and recovery plan for client systems Backup and recovery plan for server systems Client system management Server management % proactive .APPENDIX Sample Benchmarking Guide Table 2 provides a sample benchmarking guide. 2007 12 #206363 ©2007 IDC .

but may be a company standard three or five years. Percentage reduction of the value of future cash flows accounting for inflation and risk. Return on investment (ROI) Used to rank investments. ©2007 IDC #206363 13 ." The value another investment would need to generate in order to be equivalent to the cash flows of the investment being considered. Analysis period Time period in years of the analysis. Use All investments should use NPV. Complex equation. Must be positive. Usually coincides with the operational life of the technology. software. discounted to reflect value in initial year of investment. and staff is followed by reduced annual IT staff and maintenance fees in year 1 and beyond. NPV equals total benefit minus total cost. Usually a companywide standard. in which the significant up-front investment required in hardware. Many companies use the rate at which they can borrow (cost of capital) plus a risk factor. The time it takes for the project to become cash flow positive. When companies do not want to spend money. T ABLE 3 Financial Terms Used in ROI Analysis Term Net present value (NPV) Definition Given an interest rate. NPV/(total investment). we consider the hypothetical case of an organization purchasing two next-generation eight-processor servers (including hardware and operating system) to replace/consolidate 12 two-processor servers. 2007 Sample ROI Analysis To demonstrate an ROI analysis. Source: IDC. but may vary by type or size of investments.ROI Analysis Terms Table 3 provides a list of financial terms typically used in ROI analysis. they establish an unrealistic payback. Payback Usually a companywide standard for measuring risk. Not useful if the project has a cash flow that goes positive then negative. Internal rate of return (IRR) "Hurdle rate. Figure 3 provides the annual server investment profile. Discount factor Usually a companywide standard.

for example.000 100.000 0 Year 0 IT staff Training Maintenance Install Software Hardware Year 1 Year 2 Year 3 Source: IDC. The user environment is growing 20% annually. 14 ($) #206363 ©2007 IDC . Figure 4 and Table 4 depict the cash flow associated with this example. The investment reflects the figures depicted in Figure 3.000 20.000 60. assuming the server consolidation deployment requires four months. by using metrics such as improved business agility and better employee productivity.000 120. In this scenario.000 40.000 140.000 80. and the benefits are modeled on a 50% reduction in IT labor and annual maintenance costs. This heavily front-loaded profile may be alarming to financial professionals and would require a strong justification on the part of IT management. the payback period is 15 months and the three-year ROI is 131% (NPV of total benefits/total costs). 2007 This example is fairly typical in that roughly 41% of the total investment in year 0 is made before any benefits are realized.000 160.FIGURE 3 Server Investment Profile 180.

820 522.284 191.579 0 155.000 Benefits Source: IDC.534 107. Copyright 2007 IDC.869 (71.FIGURE 4 Server Cash Flow 600.844 (155. A draft of the proposed document should accompany any such request.846 Year 3 517. or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager.000 100.000 400. 2007 Costs Cash flow T ABLE 4 Cash Flow ROI Analysis ($) Year 0 Benefits Costs Cash flow Source: IDC.793 167.896) Year 2 287. 2007 Year 1 95.905 NPV 682.000 300. press releases.000 0 Year 0 Year 1 Year 2 Year 3 -100. Reproduction without written permission is completely forbidden. IDC reserves the right to deny approval of external usage for any reason.380 179.000 ($) 200.241 160.379 325.000 500.000 -200.844) Copyright Notice External Publication of IDC Information and Data — Any IDC information that is to be used in advertising. ©2007 IDC #206363 15 .