Giga: Measure Business Value Created by IT Spending to Fight Perceptions of Little Benefit

An examination of IT budgets shows typical organizations devote approximately 75 percent to maintenance and operations and about 25 percent to new projects and initiatives. Most organizations rely on the 25 percent segment to create the systems that will allow the organization to change business processes, enter new markets, or restructure the way they do business. Unfortunately, only one-third of these new initiatives can be considered successful, in that they return a business value greater than their cost. Therefore, only 33 percent of the 25 percent segment of the IT budget, or 8.33 percent, creates additional business value. Organizations where the split between maintenance and operations and new projects is 80 percent and 20 percent, respectively, fair even worse. In these organizations, only 6.67 percent of IT budgets return incremental business value to the organization.
Such is the environment into which IT managers must make their budget proposals and stake their careers. In fact, with the hurdle rate for IT investments hovering at 30 percent to 50 percent, the eight cents of the IT dollar that result in successful projects will create eight cents to 20 cents of business value. Combined with the approximately zero to six cents of value created by projects that deliver some, but not "profitable" value, and the five cents to 15 cents from additions and enhancements to existing systems, and the net result is an overall return on investment of approximately 13 cents to 41 cents of business value. Such returns are actually quite respectable. The problem, therefore, is less of return on investment (ROI) and more of measurement and communications.