Microsoft REJ Methodology Touted for Quantifying Value of IT Investments

PASADENA, Calif., May 14, 2002 — The incessant blare of a fire alarm interrupted one of the first speakers last week at Microsofts second annual Business Value Summit. Though the Pasadena hotel eventually issued an all-clear notice, the unexpected interruption was appropriate for the task at hand.

The event gathered more than 200 IT executives, technology industry analysts and Microsoft employees to answer another type of alarm — one thats going off in many corporate boardrooms.

After investing in IT for decades and spending mightily to avert Y2K problems, the top brass at many companies now want quantified dividends from their IT investments. Just as they scrutinize other capital expenditures, directors are demanding measurable returns on their technology investments. The current economic slowdown has only magnified their desire to ensure that IT investment not only creates value, but also delivers business advantage.

Speakers at the summit — including leading academics, IT analysts and business directors — see the boardroom concerns as an indication that businesses are still struggling with how to strategically invest and implement IT. To overcome this, conference participants agreed that business leaders must be able to quantify the value of IT in their own parlance. Speakers called for new ways to improve communications between business-focused CEOs and technology-focused CIOs, some pointing to tools such as Microsofts Rapid Economic Justification (REJ) model as the way to get business leaders on the same page and to ensure IT investments align with the overall goals of the business.

“Organizations need to understand how to get the most out of their IT investments, and the IT industry needs to make sure it is doing all it can to realize the full potential of the sustained business growth that IT provides, said Shafeen Charania, director of Microsofts Business Value Group.”
This summit is our opportunity to extend the dialogue around quantifying the value of IT investments, and then realizing those benefits.

No Management Without Measurement

Microsofts Business Value Group organized and sponsored the summit, which included two days of speakers and roundtables focused on helping IT and business professionals better understand and maximize the value of enterprise IT. The group’s mission began three years ago — before the current economic slowdown, before Y2K and before many technology companies were addressing business value.

Not long after the din of the fire alarm subsided, a quote from business management guru Tom Peters became the mantra of the summit:
“What gets measured gets done.”
Or as one speaker, Rob Carter, executive vice president and CIO of FedEx, rephrased it:
“You cant manage what you cant measure.”

Carter explained how measurement — specifically, FedExs ability to use package and other tracking information to serve customers and measure employee performance — drives the companys growing empire of delivery services. Largely due to new information technology such as the Web site, Carter said FedEx has been able to increase its daily average number of shipments by 260 percent over the past two years. Whats more, theyve been able to do this while also saving US$226 million last year as a result of this Web investment.

FedExs IT-driven success didnt happen by accident. Carter explained that he and other IT executives had to earn the respect of the companys business leaders by listening to their concerns about IT and understanding those concerns in relation to the companys larger business challenges. But earning this respect was made easier, Carter said, by CEO Fred Smiths understanding of technology and the value of constant quantification and measurement.

Other speakers called CEOs like Smith the exception. They described a sprawling gap that now separates most business leaders from their technology departments. The corporate position of CIO was created in the 1980s to bring an understanding of business necessities to IT departments. But Dwight Davis, vice president with the analyst firm Summit Strategies, said a disconnect still exists in many businesses.

“There is no common language today,”
said another analyst at the summit, David Caruso of AMR Research, a firm that tracks the business impact and value of technology.

IT consultants and vendors such as Microsoft have responded by developing new ways to ensure IT investments align with the dynamic imperatives of business. Notable are new tools that quantify the business returns on IT investment using standard business metrics, such as Return on Investment (ROI), Internal Rate of Return (IRR) and Net Present Value (NPV).

REJ Looks Beyond Traditional Measurements

Microsofts REJ is an example of this new approach to closing the
“value gap.”
It is a step-by-step process for quantifying the value of IT. The process starts with a team of business people identifying a companys critical success factors (CSFs) and key performance indicators (KPIs) and agreeing how they will measure progress. The group then determines the technology that addresses these factors, estimates the benefits and costs, assesses risks and presents the investment in terms of the companys preferred metrics, such as IRR or NPV.

In assessing the benefits of technology, REJ looks beyond traditional measurements, such as the reduction of labor costs, and measures specific benefits, such as more productive time for workers, shorter cycle times for taking products to market, increased flexibility and reduced worker turnover, Microsofts Charania said.

Davis and other speakers applauded REJ for doing several things that other vendor approaches dont. It emphasizes identification of the unique requirements and objectives of a particular enterprise, without overlooking risks. In addition, REJ has been validated by independent authorities such as KPMG Consulting and Gartner Group.
“If you look at it, you can see its not something thats been tweaked to skew to favor Microsofts products,”
Davis said in an interview.
“You can see it applies to any companys technology.”

This transparency made all of the difference for Siam Commercial Bank, said another summit speaker, Charamporn Jotikasthira, executive vice president for the Information Technology Division of Thailands oldest bank. One of more than 200 companies that have conducted REJs since Microsoft started doing the studies two years ago, Siam Commercial Bank used REJ to assess new IT investments and measure the success of older ones. Jotikasthira urged Microsoft to extend REJ to quantify IT benefits in key vertical markets, such as banking.
“You need measurement and communication to get buy-in at all levels,”
he said.
“REJ bridged the communication gap between IT and business executives.”

IT Spending Too Narrowly Focused

While REJ and other frameworks may increase understanding about IT investments, other hurdles also prevent many businesses from realizing the full potential of their IT investments. The most challenging concerns, speakers said, may be how companies spend their IT dollars.

Between 60 percent to 80 percent of corporate IT dollars are dedicated to maintaining legacy IT systems, said C.K. Prahalad, professor of business administration at the University of Michigan Business School and founder of PRAJA, a San Diego-based software firm.

With such a significant percentage of company budgets devoted to out-dated, less flexible technologies, the ability to innovate is limited. Flexibility and innovation are more essential than ever, Prahalad said, because todays customers are increasingly less interested in products, such as compact discs, and more interested in the underlying experiences, such as direct access to music. For businesses to rapidly create wealth, they must be able to rapidly develop new IT applications, something they cant do when so much of their IT budgets are going to legacy systems, Prahalad said.

Businesses often resist spending more than a fraction of their IT dollars on new or untested technology services and applications what FedExs Carter calls
“ROI rule breakers”
— because their potential for return is often hard to quantify, even with frameworks such as REJ. But businesses must not shy away from these investments or they stand to lose their customers to old and new competitors in todays increasingly global and agile market, speakers said.

“Business success is about innovation, but innovation is uncertain,”
said Jeanne Ross, principal research scientist at the Center for Information Systems Research at Massachusetts Institute of Technologys Sloan School of Management.

Ross said companies must use their IT dollars to do three things:

  • Extend their current offerings by repackaging them as new online services and products. This kind of extension creates short-term profits.

  • Expand their offerings through research and development to help redefine their business models. This helps cement long-term growth.

  • Extract maximum value from existing efforts via centralization and standardization. This helps drive efficiency.

Spinning off Corporate DNA

Businesses can also generate new sources of IT value by identifying the applications or services in their IT arsenal that distinguish them from the competition and then licensing those processes to other businesses — even the competition, in some cases, said Bruce Klassen, vice president and managing director for the West for A.T. Kearney, a management consulting firm. Some companies are already spinning off what Klassen called their
“corporate DNA.”
Amazon.com, for example, has licensed its sites online search capabilities to other retailers such as Toys
“R”
Us and Borders.
“The real value is creating entirely new value chains,”
Klassen said.

As more companies follow the lead of innovators such as Amazon.com, these companies will need IT vendors to help identify and develop these new revenue sources.
“The ability of Microsoft to partner and fundamentally enable and drive new revenue sources is really exciting,”
Klassen said.

Summit Strategies Davis said the XML-based Web services that Microsoft is supporting will be at the heart of many of these new partnerships.
“Web services have the potential to provide the glue to support integration between vendors and partners,”
he said.

Coming Next: Value Focus

In addition to increased partnerships, businesses can expect vendors and consultants to develop more tools and other offerings to help them create and quantify the value of IT, speakers said.

These tools, Charania predicted, will become a standard part of technology decision-making as businesses demand even greater accountability and certainty in their technology investments.

“Understanding business value is the bridge,”
he said,
“to aligning technology with investment, and to effectively measuring IT performance.”

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