Management Benefits

Taken together these metrics provide the CIO and the business with a superb set of IS management tools. They provide Key Performance Indicators and a language for alignment that both IS and business managers understand. They act as a motivator for IS managers to work closely with business in setting priorities, so it's a planning tool to maintain alignment. And they provide pinpoint analyses that can lead to real partnering between Outsourcers and Clients.

Major Benefit: Correlation with the bottom line.

Our unique measure of IS Contribution is still the only one identified by industry authorities (such as Gartner Group, see References) that correlates strongly with company financial performance. This means that when IS is effective (that is, doing the right things) the company makes higher profit margins. This is the chief argument for the importance of measuring and improving IS Contribution and alignment. (Download our Financial Analysis paper for ten case studies of re-alignment and profit-margin changes).

So, IS can help the company make more money, if it does the right things for the business. If IS is doing the right things for each unit of the business (that is, leveraging the achievement of their key business goals and objectives), then each unit contributes more to company financial performance. So: IS leverages the performance of units in the business, and each of them leverages profit margin for the enterprise.

When the business side understands that spending IS dollars on the right things helps financial performance, IS moves from being thought of as merely a cost center to being seen as a real partner to the business, and IS funding gets easier.

(In the public sector there are no bottom lines. But you can quantify (for the first time) the value of IS in achieving agency program goals, as required by the Federal Clinger-Cohen act.)

This graphic shows the progress of Alignco, a $4 Billion company in a rapidly changing industry. Over a period of 18 months, they improved their IS Contribution score (our measure of alignment) by six points and their profit margin from 1% below the industry average to about 2.5% above the industry average.

The CIO did this by using the Baseline Assessment data as the basis for Planning Interaction (re-alignment) meetings between business and IS managers, did several Quickcheck surveys to track changing goals in their units, and finally did a CogniTech Compact survey to determine the KPI measures for IS incentive pay. They targeted an overall 3-point increase in IS Contribution, and overshot that achievement by 3 points. (The full Alignco Case Study is available; see Publications.)

In the graphic, the red dots are the actual scores of our private-sector companies on their IS Contribution scores plotted against their industry-normalized profit margins. The green dots are their predicted scores, based on the regression coefficients. (The average IS Contribution score across the database is standardized at 50.) Note that below a score of 48, IS Contribution does not make much difference in profit margins, but in the High Performance zone (above 48), every point increase in IS Contribution is associated with a .4% increase in their industry-relative profit margin. Thus IT performance has to reach a certain level before it makes a difference in company financial performance.

So Alignco's industry-normalized profit margin increased by 3.4% in the 18 months of re-alignment work. In that year also, Alignco's general management were awarded the "Company of the year" medal for outstanding performance during de-regulation.

We have identified scores below 45 as a danger zone, because performance at this level usually means drastic actions may be taken, including replacing the CIO or outsourcing much of IT.

Is re-alignment based on metrics worth it? Most CEO's think so. Alignco's CEO would not let us identify even his industry, because he felt the re-alignment process gave them a big competitive advantage over their rivals.

For the statistically minded: How big is this relationship? In statistical terms, the R-squared between IS effectiveness and industry-normalized profit margin is .52. That means that IS alignment accounts for about half of the total variation in industry-normalized profit margin. (That's a number that compares each company in our database to the average profit margin for their industry (defined by their 4-digit SIC code. Profit margin must be normalized by industry because it varies widely from one to the next.)

While correlational data do not establish that this is a causal relationship, we now have enough data from repeated measurements in the same companies to make the case. Every time IS Contribution has improved, so has profit margin. In the one case where IS Contribution went down (because all IS resources were devoted to a mandated SAP project) profit margin did also. So it's a good bet that if you increase IS Contribution by re-aligning IS projects to operating business goals, profit margin performance will improve also.