SMB Executive Concerns: Does IT Boost Performance?

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1 Key Issues, M. Yamamoto Krammer, J. Browning, R. Anderson, R. Brown Research Note 8 November 2002 SMB Executive Concerns: Does IT Boost Performance? Traditionally, IT costs were perceived as the cost of doing business. The purpose of IT investments in small and midsize business is changing to ensure that business initiatives are enabled and supported. Core Topic Small and Midsize Business: SMB Business View of IT Key Issues What new technologies will change small and midsize business processes in the next three years? How will small and midsize businesses measure and monitor IT's contribution to their goals and objectives? What best practices should small and midsize businesses employ to achieve the expected returns on IT investments? What strategies and processes will small and midsize businesses employ to ensure business and IT alignment? With a tighter regulatory environment, ongoing challenges to attract and retain customers to grow (or maintain) revenue and mixed signals about what investments if any to make while cutting costs, 2002 has tested the leadership, agility and creativity of small and midsize business (SMB) executives. SMBs are delaying investment in "nice-to-have" projects and as long as possible are deferring upgrades until they see signs of sustained profitability in their businesses. IS departments have been impacted by this investment climate. IT budgets were heavily scrutinized in 2002 because of the poor economy. However, even when the economy was healthy, most SMBs maintained lean IS organizations and underinvested in many areas. Disenchanted with the past performance of IT, some SMB executives have hesitated to fund IT projects without a strong business case. IT will continue to present opportunities for competitive advantage for many SMBs. Therefore, IT investments must be included in the enterprise strategy and must be measured for contribution to the bottom line. Business executives must consider the following Key Issues relative to IT when developing business plans in What new technologies will change SMB business processes during the next three years? SMB IS organizations traditionally have focused on technology. However, the success of the IS organization in delivering value to the business has less to do with the underlying technology than with the business processes IT supports processes that are used to deliver and maintain core competencies. Traditional IT measurements, such as system availability, throughput and performance, are valuable for the ongoing operations of IT Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 systems. However, they do not provide a complete picture of the value of IT to an enterprise's business objectives. SMB IS organizations can use technology to drive business value by leveraging real-time enterprise technologies, such as business analytics, total value of opportunity, process event management and performance dashboards. Used together, they enable CEOs, CFOs and other business executives to monitor the status of critical enterprise processes and to identify opportunities and potential challenges sooner in the business cycle. Additionally, faced with challenges that include delivering improved customer service and developing closer business partnerships and supplier interactions, SMBs will have to begin strategically utilizing integration technology to improve their connectivity and information processing capabilities with key business partners. Business process management (BPM) is one approach SMBs will take to describe process-level integration that will occur across different systems and applications within and outside the enterprise. Another area where SMBs can harness technology to create business value is by creating an IT architecture based on standards-based technologies to improve business adaptability and agility. SMBs that remain in rigid, constrained architectures will not keep up with future demands, such as adding, changing and extending business processes to address new opportunities. Finally, in an effort to gain efficiency in their supply chains, SMB trading partners will demand that more business processes be conducted electronically. SMBs should expect at least two major customers to request an e- commerce linkage by late 2003 and to demand it by the end of The good news is that technologies (for example, middleware, Web content management and portals) that have traditionally been too expensive for SMBs are becoming affordable. That said, SMBs must be careful to ensure they aren t oversold solutions, causing them to pay for functionality they don't need. Conversely, they must not be shortsighted in estimating their needs. The challenge for SMBs will be to select the technology and services that best fit their specific requirements, while minimizing the total cost of ownership (TCO) of the solution. To do this, business executives need to become more actively engaged with their CIOs with respect to strategic planning in both business and technology strategies. Business executives can't discount the role that technology can play in their businesses because of negative perceptions (of IT) or market dynamics (the effects of recession, for example). Investment in IT may be necessary to gain a competitive advantage. In many cases, investment in technology has become the cost of doing business for example, the investment in online banking by retail banks. 8 November

3 What strategies and processes will SMBs employ to ensure business and IT alignment? Many SMBs have not realized the IT efficiencies and benefits promised or hyped by vendors and the media. This is not helping the cause of aligning business and IT. The incorrect perception by some business executives is that technology cannot deliver true business value. This position has led to the IS organization being viewed as a cost center and has caused countless SMBs to fall short of corporate, customer and investor objectives. This degradation of IT's credibility has become an inhibitor to leveraging IT as a competitive weapon. Despite past disappointments, business and IT executives within SMBs should work together to build a meaningful framework from which the IS department can emerge as a strategic business unit. Key components for aligning business and technology include: Reflection of the business strategy in the IT strategy Involvement of IT executives in the development of the business strategy Funding allocation only to projects demonstrating alignment to enterprise objectives Incentives of IT executives and staff tied to reaching enterprise goals Business metrics to measure the contribution of IT projects to business value Additionally, SMB executives can develop a more complete picture of their enterprises IT spending requirements by evaluating and determining their baseline spending ratio: how they spend relative to industry peers, their technology adoption profile and their plans to grow the business. Those within the technology department must build their business acumen. In other words, they must understand their enterprise's business processes, which will teach them how business processes can be enabled and supported by technology. Application of business knowledge to technology decisions and priorities should be a development goal in the performance plans of the IS department. At the same time, management should develop an appreciation of the potential value of technology to the business among business line executives and staff. Items as simple as creating a dialogue and recurring meetings involving both sides must take place in a meaningful fashion (that is, these actions must be mandated and advocated by senior business leadership). What best practices should SMBs employ to achieve expected returns on IT investment? 8 November

4 SMBs have not realized the value they had hoped for from technology because of underinvestment in two key areas: Many SMBs have underinvested in enhancement activities that lend themselves to providing true business value. Operating system upgrades, server and PC upgrades are not enhancement activities. Business executives must recognize the need for ongoing funding of nonutility and infrastructure investments as a means to (at the very least) maintain competitive advantage. Not every IT investment will yield business results; the key is in prioritizing those investments for which business value can be defined, measured and attained in a given time frame. At least 30 percent of technology spending should be allocated toward enhancement activities. Many SMBs did not assess the business benefits (that is, increased efficiency, optimization, improved customer relationships and revenue opportunities) of the IT solutions they purchase. Investments in enterprise resource planning (ERP) to prepare for Y2K, and customer relationship management (CRM) because it was being touted as the next great thing, have not produced the promised value that many SMBs expected. This does not necessarily mean that they invested in the wrong technology solution. Technology alone cannot deliver business value; many SMBs underestimated the concurrent efforts required in the areas of process, culture and organization required to unlock the potential of the underlying technologies, allowing the synergy to bring forth the true business benefits relevant to their industry. One means of avoiding poor technology and business alignment is technology portfolio management. Portfolio management is an example of a simple, yet underused, approach for organizations to select and track IT investment to optimize returns. Widely used in the financial arena, it enables enterprises to develop an appropriate mix of investment based on risk tolerance, growth goals, timing and budget, and provides a communication vehicle among business and IT managers. Finding an optimal mix results in realizing business objectives with the least amount of waste and time by providing valuable information for decision making, and increasing coordination and adaptability. The approach also provides a mechanism to allocate funds among initiatives that serve to keep the business running and those that play a role in enhancing the enterprise, enabling them to gauge their investment decisions against industry and enterprise size baselines. Enterprises that first use this approach typically have an eye-opening experience, realizing that many efforts are in conflict with others or are redundant in some way. Through 2005, SMBs that manage their technology investments like a balanced 8 November

5 investment portfolio will realize 30 percent more return on their investments (0.7 probability). Acronym Key BPM CRM ERP SMB TCO Business process management Customer relationship management Enterprise resource planning Small and midsize business Total cost of ownership How will SMBs measure and monitor the contribution of IT to their business goals and objectives? There is often a disconnect between the value that the IS department believes it delivers to the enterprise and the value that the line of business perceives it receives. Common IT metrics, such as uptime and availability, are valuable, however, when measuring technology performance as it relates to the bottom line. Business and IT executives alike must move beyond IT metrics and develop a model that measures the impact of technology investments on achieving business goals. Rather than get frustrated at the lack of results that technology investments might have demonstrated in the past, business executives should recognize the importance of IT to the enterprise strategy, and build a framework to enhance present levels of business contribution. CIOs must also understand the business drivers that dictate the proper investments in IT. Once a mutual understanding and appreciation of the business strategy is established, IT and business executives should work in concert to identify the business metrics which align technology investments to the business goals. By using acceptable ranges and variances defined by business management, SMBs can employ a process to regularly measure them, alerting executive management of anomalies and exceptions in a timely manner. SMBs can use benchmarking and scenario planning to determine key performance indicators and measurements relative to critical IT business process. 8 November