IT Performance Management

Peter Wiggers, Maritha de Boer-de Wit, Henk Kok

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136390791
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

IT Performance Management addresses the way organizations should balance the demand and the supply of information technology, optimizing the cost and maximizing the business value of IT. In this book several aspects of IT performance management are described. The way this management is executed and the techniques, which should be used, depend on the maturity of the relationship between the IT function and the lines of business of an organization. The foundation of the authors' approach is based on the flow of money and related management objectives. However, performance management is primarily based on perceptions. Therefore, this book introduces the IT value perception model. This model describes four separate levels of perception for the business value of IT. If the demand and the supply of IT do not share the same perception level, the balance is lost, which will lead to friction and inefficiency within an organization. This book is not about what is good or what is bad, but rather is about the 'what', the 'why' and to a limited extent the 'how' of managing the performance of IT. Therefore, the book finishes with a 'back-to-business' section in which a self-assessment checklist, a potential growth path and ten next steps are provided. This enables the reader to start applying this book in his every day working environment immediately. IT Performance Management:
* Provides an overview of best practices and available thinking on the subject of IT cost and value
* Describes the subject of IT cost and value related to management issues on IT strategy, portfolio management, service management, architecture and sourcing
* Addresses differing degrees of maturity between IT and the business, illustrated by case studies

Introduction and framework

1.1 Introduction

The subject of this book is the performance management of information technology (IT). It addresses the way organizations should balance the demand and the supply of information technology, optimizing the cost and maximizing the business value of IT.

We have written this book because we feel that this is the time to make a comprehensive overview of the thoughts and theories of multiple disciplines in the field of strategic management, financial management and information technology. Of course the idea of combining these three disciplines is not unique. In the early 1990s, the application of business economics techniques for information technology, referred to as Information Economics (named after the publication of Parker, Benson and Trainor, 1988), was popular. Ten years later, a lot has happened. It's time for an update.

In business strategy, the balanced scorecard approach has received high popularity and is used by a large number of organizations throughout the world. In the financial management profession, a lot of progress has been made in value-based management approaches, especially dealing with total shareholders' return. The focus on shareholder value and the stock markets has forced financial institutions around the world to improve their portfolio management practices. Another wave has been the spread of usage of activity-based costing, improving the way the resources of an organization are reflected in its product prices.

In information technology, the 1990s have witnessed an impressive improvement of service management practices within IT companies. However, this progress has been blurred by the dazzling speed of technological progress, forcing the IT departments to adapt their products and services almost constantly. The technological revolutions of the Internet and mobile telecommunication have been noticed and adopted by everyone. The end of the Internet hype and the economic downturn has forced organizations around the world to restructure. The main focus on the CIO agenda has shifted from maximizing business value out of information technology to short-term cost-cutting. But in the long run, both sides of the IT performance medal need equal management attention.

In this book several aspects of IT performance management are described. The way this management is executed and the techniques that should be used depend on the maturity of the relationship between the IT function and the lines of business of an organization. The foundation of our approach is based on the flow of money and related management objectives. To put it more bluntly: 'he who pays the piper, calls the tune'.

However, performance management is primarily based on perceptions. Therefore, this book introduces the IT value perception model. This model describes four separate levels of perception for the business value of IT. If the demand and the supply of IT do not share the same perception level, the balance is lost, which will lead to a lot of friction. For the different IT value perception levels, we have described a number of best practices and techniques. In this way, the book contains an overview of best practices and available thinking on the subject of IT cost and business value. Performance is always related to a target, a goal. So we will cover 'target setting' in a broad sense.

We need to state here that the concepts and principles in this book have not been researched in the academic field. They are lessons learned by professionals in the field, based on their experience with various organizations.

This book is not about what is good or what is bad. This book is about the 'what', the 'why' and to a limited extent the 'how' of managing the performance of IT. Therefore, the book finishes with a 'back-to-business' section in which a self-assessment checklist, a potential growth path and the next ten steps are provided. This enables the reader to start applying this book in his everyday working environment immediately. When you want to know more about the 'how' of IT performance management we would recommend another book in the Computer Weekly Series: Remenyi, Money and Sherwood-Smith (2000), The Effective Measurement and Management of IT Cost and Benefits.

1.2 IT as a business within a business

In the twenty-first century, IT has become a part of our economic society. There are industries that cannot exist anymore without IT: financial institutions, for example. The statement that IT is 'just another resource' that can be exchanged for people has become far too simple. Supported by IT, business can perform new activities that were unthinkable in the early days of automation. When used properly, this leads to far better service delivery to the customers.

In our view, the IT profession is young, but about to leap-frog into maturity. It is a profession that has suffered from various technology revolutions, which has led to numerous failures. The technology revolutions have led to a 'hype-led industry', where each new technology turned into a hype, which often led to broken promises. On the other hand, the success stories are numerous as well.

In order to help the thinking on the effectiveness of IT to a more mature level, we need to look at best practices in other professions and industries. Therefore, we regard IT as a business within a business. IT has its own place in the value chain of a company, but also has a value chain of its own. IT can help with the improvement of various key performance indicators of the balanced scorecard of the company, but also has a balanced scorecard of its own: the IT scorecard.

This metaphor of IT as a business within a business is a powerful tool to use widespread thinking on business strategy and financial management in the context of the IT department.

A business does not exist without a market. The IT functions within companies deliver products and services on the internal market. The demand for IT services is defined by the lines of business of the company. A complicating factor is that an internal market does not have free competition, which means that the demand and supply side of this market will not automatically be balanced by free competition.

Balancing demand and supply is a very important characteristic of IT performance management. In our experience with various organizations, we have come to the conclusion that the perception of IT services, its quality, its cost and its business value, are at the heart of discussion between the IT function and the lines of business. More often than not, the CIO is stuck in the middle.

1.3 The added value of IT

The IT value of a company depends on the strategic focus of the company and the level of perception of the IT services that are delivered to that company. Therefore, we want to introduce the IT value perception model ( Figure 1.1 ).

Figure 1.1 The IT value perception model

The IT value perception model shows two axes: the maturity of IT supply and the maturity of IT demand.

The maturity of IT supply deals with the professionalism and quality of the IT function in the organization. Maturity is measured in a number of different quality models, e.g. the Capability Maturity Model (CMM) for Software Engineering (CMM, 1995), or the IT Infrastructure Library (ITIL, 2002). These quality models describe guidelines on the processes that IT organizations can apply in order to improve their added value to the business. Although none of these quality models covers the IT function as a whole, the combination can give an indication to the overall maturity.

The CMM model can be adopted for the maturity of IT demand as well. This is about the self-awareness and self-consciousness of businesses to use and demand an appropriate level of quality from their IT supportive organizations. We can illustrate this maturity related to the ITIL process model. When IT is a facility, the business probably will not be aware of the existence of ITIL. When IT becomes a service, objective standards for service delivery will be started to be asked. At higher maturity, the business will demand an ITIL certification from the internal IT department, threatening to go to the external market.

The IT value perception describes the perception of the executive management of the added value that IT delivers to the company. There are four subsequent levels defined:

• 1 IT is a facility. Business has no overall view on IT, looks for solutions based on price. The IT department is regarded as a cost centre. They have to deliver what the business asks, at the lowest possible costs.
• 2 IT is a service. Business knows what service levels are required to run its processes. IT reduces the business IT costs and delivers quality service. Quality of service becomes more important than low cost. Starting to perceive the IT department as a service centre.
• 3 IT as a partner. Business manages its information requirements and has the capabilities to jointly create a business and IT plan. The IT department has adequate resources and capability to support the plan; it acts as an external service provider and becomes a profit centre, sometimes delivering services to other companies as well.
• 4 IT as an enabler. Business and IT jointly research IT solutions to achieve the strategic objectives and to develop new strategic objectives, resulting in a challenge for IT in implementing new technology and leveraging current technology. IT is perceived as an investment centre.

These four phases have been introduced as perspectives in Henderson and Venkatraman (1993) and were elaborated in internal IBM courses on IT cost and value (Rieger, 1995). It is important to note that IT departments will not 'walk through' the phases of IT value perception. A lot of IT departments will stay as cost centres, and for a lot of companies, where the usage of IT is not, and will not be, a strategic resource to reach the companies' objectives, this will work out fine. For other companies, the subsequent levels may be reached. However, these previous levels and responsibilities of the IT department will remain important, and in economic downturn, the IT value perception may 'fall back' to cost centre again. However, a mainstream growth path for an IT department will walk along these lines.

In most companies, IT is as a cost centre delivering services to the other business units. This means a natural focus on the cost effectiveness of IT.

As business units become more aware of IT possibilities, and IT services become more mature, IT departments are more and more pressed to prove their added value to the business. If IT is seen as a partner within the business strategy, this pressure becomes even more tense. The IT department will be forced to deliver market standard services. If they are self-conscious and mature, the IT department may start to deliver their IT services to the external market.

The ultimate business value of IT is delivered where the application of IT creates a new business model for the company; IT has become an enabler for the business strategy.

Now that companies implement their performance management strategies using balanced scorecard approaches and value-based management, IT business units need to jump on the bandwagon. The way to do this we call IT performance management.

In order to elaborate on the four levels of the IT value perception model, we will use four virtual IT departments. These departments do not exist in real life; they are used for illustrative purposes only. The descriptions are partly based on our working life experiences, both as employee from within, and as external consultants with clients. The other parts though are based on our imagination. The virtual IT departments will illustrate the IT value perception model in Chapter 10.

1.4 Reader’s guide

The subject of the cost and value of IT is not easy and there are no magic solutions. Much of the value you will get out of this book depends on the energy you will spend in using the concepts, theories and techniques of this book in your day-to-day work.

Because our readers will not share the same reference framework when starting to read this book, the value that can be obtained from this book can vary a lot. This section is meant to guide our readers to read the book in a way that provides the best added value for them.

The book roughly consists of three parts:

• 1 Concepts of performance management, where basic thinking on services, cost and value will be explained (Chapters 2 to 5).
• 2 Performance management related to business strategy and sourcing strategy (Chapters 6 to 8).
• 3 Practical guidelines, hints and tips (Chapters 9 to 11).

Readers who have a thorough understanding of the IT performance management concepts will be able to skip large parts of Chapters 3 to 5 at their own convenience. We advise them, though, to read Chapter 2 in order to understand our frame of reference in this book.

For readers who do not need to have a thorough understanding of the details of performance management, but do need to quickly grab the basic messages of this book, we suggest reading Chapters 1, 2, 9, 10 and 11; additionally, they can read the introduction and summary of the other chapters.

What is IT performance management about?

2.1 Introduction

An important aspect of every form of communication is to be sure to have a...