Is IT Worth it?

IT Organizations or Second Class Citizens...

Corporate America treats IT organizations as "Cost Centers" better known as second class citizens.  This goes back to my previous post on "Corporate Finance for Techies...".  Most of corporate IT comprises professionals from an architecture, application development and IT operations background with the "degree in eliteness" in descending order.  Architects think they drive technology in the enterprise, Application Development Teams (if there are any - mostly the architects are embedded in these teams.  They still consider themeselves the elites) think they do the "Real Work" and IT Operations laugh at the other two and think "if it were not for us...you guys would be nowhere".

On a more serious note, I often think why is this the case?  Firstly, why is a department that is the latest addition to the other more conventional ones such as Finance, Sales and Marketing, perceived as a "Cost Center".  Simple answer - CIOs don't do a good job of two things.  Firstly - they do a poor job of correlating the value of their organization's output to the Enterprise Value of the firm.  This is because they are incapable or going after the "quick wins" and "low hanging fruits" - which are tactical and mostly do not add or augment Enterprise Value of the firm.  Secondly - they are not "forward looking".  In other words, they do not "think" about using "IT as a Revenue Generating" catalyst as much as a "Cost cutting tool".  Those that do, come up with disruptive and Killer Apps - Internet Retail Banking, Online Payments, Online Trading...I can go on.  One can argue whether these ideas originated from the business or from the technology community.  I would argue - they orginated from technologists who were interested in making their firms "earn more money" than "save more money".  They were thinking of what Gary Hamel terms as the "Opportunity Share" of a market that is non-existent at that point of time.

So why are IT organizations second class citizens?  Finance does not bring in revenue - but does not have a reputation like IT.  I think it is due to this inherent nature of technologist to experiment, perfect and be proud to flaunt a "cool new gadget" or "solution" and NOT focus on trying to help their firms generate more revenue.  It also due to their nature about trying to solve the 20% of the problems which have insignificant or a very low impact (positive or negative) on the firm's bottom line.  Basically it is also due to the "Capex heavy" and "Opex bleeding" nature of the department.  Every business case for a new IT project has a "Hardware", "Software" and "Professional Services" sections.  All this adds up to a VERY LARGE NUMBER which DOES NOT TRANSLATE to ENTERPRISE VALUE" - I am just a stickler for Enterprise Value.  Every department's existence in Corporate America or any other economy must be contingent about their ability to add "value" to their firm.

IT Organizations (comprising architects, developers, testers and operations personnel) have to think "Revenue" NOT "Cost".  It is not a paradigm shift - it is just trying to figure out a way to extend their thought-process to transform the "coolness factor" of a "new gadget or solution" to "add value" to the firm.  Putting it simply - they have to get out of the "solution mode" and start their thought process from "What business problem am I solving" or better still "How can the coolness of this new technology add value by generating more Revenue for my firm".  Believe me if they just start thinking on these lines - we would have more killer apps.  Killer apps are an after thought - though technologists think they know what is a killer app.  Suppliers of IT products and services consider their products no less than a killer app.  However, it is the problem that these apps finally solve makes them a killer app.  On the demand-side of IT, the CTO organization is rarely thinking of "value" or "revenue".  They think in terms of "cost", "process automation", "reduction in manual processes" - all geared towards automating manual business process with the use of technology.  Why is it that they do not learn from the examples of Online Banking and Online Payments that IT can be also be used to generate revenue...

What is really tragic is the mypoic perspective of CIOs and CTOs.  They are there to "fix" a problem.  But they are fixing the symptoms or saving their jobs.  Hence the short life span - 18-24 months on an average.  I think they are to be blamed for turning the IT Organization into a second-class citizen.  CIOs and CTOs assume that their job is to cut costs by automating business processes (which is not a bad beginnning) and "keep the lights on" - as they say.  As more CIOs/CTOs try and introduce visionary and breakthrough solutions to existing and anticipated business problems, this trend may change.  Companies with those kinds of CIOs/CTOs fall in the top 10% of the leading companies in any industry vertical - Schwab in Financial Services, DELL in Online Hardware Retail, Amazon in Online Retail Aggregation to name a few...Others are mediocre companies that do not believe in IT as a differentiator - or I would say that there CIOs/CTOs do not have the courage to think so as they "assume" too much about their job responsibilities and do not want to make a difference...

Corporate Finance for Techies...or am I looking for my next "cool" gadget?

What is "cool" does not provide "value".  What provides "value" may not be cool.  What is "cool" may have "value" that needs to be communicated.  So where do the poor techies go - "coolness" is their mojo.  Not with the intention to trivialize the value of "techies", it seems that more and more software vendors are targeting their products at the "early adopters" and are failing at the "mass adoption" stage.  This is clearly a problem which leads to the understanding of why "good" technologies do not catch-up.

Doing some thinking around this for a while now.  I came to the conclusion that "techies" do need to be taught corporate finance 101.  That should not be a stretch since Black Scholes was driven by laws of thermodynamics.  It is imperative for "serious technologists" to understand the concept of "Enterprise Value" as defined in corporate finance.  It is more important for software vendors to prove the contribution of their technology to their consumers.  This can only be achieved if technologists understand the concept of "value" the way the "market" sees it.

Projects or investments add to the "Total Enterprise Value" if the the returns from the project, usually denoted and loosely defined by ROI (Return on Investment), is greater than the company's cost of capital.  In other words the returns from the investment in technology need to offset the cost of the interest paid by the company on its debt and equity components.

Technologists need to understand the nature of their company.  If they belong to the supply-side (software product and services vendors), it depends on how the company is funded.  If the company is highly leveraged, the cost of capital is biased towards the cost of debt.  If the company is a public company, then the cost of capital is a mix of the cost of debt and equity.  Technologists on the supply-side are mainly driven by market demand of their products.  However, a knowledge of corporate finance to just this extent allows them to better prioritize and rationalize the product road map.

On the demand-side (corporate users of technology) perform a charade of a so called "business case" which essentially ends up in the form of a Discounted Cash Flow (DCF) showing the Net Present Value of any IT project to be a very high number (mostly in millions).  This is good corporate citizenship.  However, the goal of the business case is not to create "value" in the organization.  It is usually to work an angle off the CIO's Capital Expenditure (Capex) budget.  The real kicker is when the project gets initiated, no one really controls or even looks at the "assumptions" made during constructing the DCF.  This is usually due to two reasons.  First, the cost of the project has created a hole in the CFO's pocket and we don't want to boil the ocean.  Second, the assumptions made (especially those around the cost components) are no longer valid and let inertia prevail.  Job security, quest for building the resume with "cool" technologies, hoping to get a job at Google...probably are the more prominent vested interests than actually creating "value".  The poor CIO who has a life span of 18-24 months is looking at "quick wins" or "low hanging fruits" - whatever those mean.

The real problem arises from the so called technology proponents from the demand-side - namely the "Architecture Groups" start imposing their "standards" and "SOA evangelism" into the CIO's agenda.  Not denying that these groups do bring some kind of an "unknown, non-quantifiable cosmic" value to the IT organization,  but has anyone questioned or correlated their "value generating" abilities to the stock price or even the Return on the Invested Capital (ROIC)? 

I am petrified and appalled at the fact that we continue to talk about "Enterprise Architecture", "Technology Evangelism", "Standards" etc. etc. - but we don't bother to spend any quality time trying to quantify and capture the IT "value" in corporate finance terms to convey and communicate all the good work around sound investments in technologies with a high NPV.  The "Enterprise Technology Strategy" must be guided by "value" to business.  Period!

So as the CIO do I not have the corporate responsibility to help improve my stock price?