Gartner for IT Executives G00231740

CFO Advisory: Benefits Realization Overview

Published: 10 February 2012 Analyst(s): Michael Smith, Dave Aron, Bill Swanton

Research shows that only 60% of the targeted benefits from IT investments are actually achieved. Benefits realization refers to the techniques, disciplines and mind-set that enterprises and their IT organizations must adopt to improve the business value actually achieved from investments.

Key Findings

Most businesses do not maintain a formal benefits realization process. Those businesses that do maintain a formal benefits realization process achieve significantly higher actual benefits from IT investments. Benefits realization can be implemented at very little cost.

Recommendations

View benefits realization as a process improvement effort, where the process is initiative identification, assessment and implementation. Approach benefits realization like any other initiative implement it like a project. Develop a business case for benefit realization showing the costs and the benefits.

Strategic Planning Assumption

By 2014, fewer than 40% of all organizations will measure the business benefits of application projects.

Analysis
This research is part of a four-document module on benefits realization. The module comprises an overview document and related notes that examine three key executive issues in more detail finance and economics, risk mitigation and management, and business enablement.

Some would argue that the responsibility for benefits realization of IT-intensive business initiatives falls squarely in the hands of IT. However, the emphasis is now shifting from the industrial-age approach to IT, which focused almost exclusively on the delivery of technology (on time and on budget), to a benefits realization approach, focusing on all the projects and initiatives required to produce business results. As a result, CEOs must sponsor benefits realization as a discipline; CFOs must enforce that discipline; and BU managers must ensure that staff adheres to it. If benefits realization remains an IT-only process, then it will fail, and return on invested capital will suffer.

Executive Summary
Gartner's research shows that IT spending averages 4.3% of total operating expenses (see "IT Key Metrics Data 2011: Executive Summary"), and yet, evidence from the Gartner 2011 CIO Survey shows that, in most enterprises, benefits realization is poorly performed (see "Benefits Realization: The Gift That Keeps on Giving"). It is the responsibility of CFOs to work with CIOs to make sure that the enterprise has a strong benefits realization strategy in place, or it risks losing millions of dollars in unrealized value.

Basic Definition
"Benefits realization" refers to the techniques, disciplines and mind-set that enterprises and their IT organizations must adopt to maximize the business value of projects and investments (see "Benefits Realization: The Gift That Keeps on Giving").

Executive Issues
Finance and Economics
Benefits realization is not about ROI on individual IT-intensive business initiatives. It is about improving the business value generated from spending on IT across the enterprise. The impact of effective (or ineffective) benefits realization is significant, and small percentage point improvements can generate a significant return for the organization (see Table 1).
Table 1. Example of Typical Yield/ROI of IT-Intensive Investments Enterprise revenue = $2 billion; IT spending = 5% of revenue = $100 million Capital project budget = 30% of total IT spending = $30 million Average target project ROI = 20% Target returns = 100% + 20% x $30 million = $36 million Assume 40% of projects succeed (on time, on budget, on scope, with benefits delivered), 40% are challenged (achieve half of benefits) and 20% fail (no benefits) Yield on target returns = (40% x 100%) + (40% x 50%) + (20% x 0%) = 60% Actual return from $30 million investment = 60% x $36 million = $22 million (ROI of -39%) Left on the table = [$36 million - $22 million] = $14 million
Source: Gartner (February 2012)

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In the example in Table 1, moving 10% of the investment from the "failed" bucket to the "succeed" bucket results in an ROI increase of $3.6 million (from 60% to 70% yield on targeted returns). Small gains in benefits realization in individual projects may produce minimal impact, but improving benefits realization across all IT-intensive initiatives can lead to significant impact on the financial ROI of IT investments. However, CFOs must be cautioned about measuring benefits realization solely in terms of a point-in-time financial ROI calculation. Financial impact, strategic contribution, innovation, value protection and risk mitigation are also measures that must be factored into benefits realization.

Risk Mitigation and Management

It is crucial for the organization to focus beyond IT operations and the system development life cycle, to the broader and deeper life cycle of benefits realization (see Figure 1). "Harvesting" is where benefits realization happens, but many organizations continue to focus measures on "on time, on budget" deployment and are not effective in establishing a process for monitoring and reviewing the harvesting of value over the long term. CFOs should ensure that CIOs understand the phases of benefits realization (planning, execution and harvesting) and that benefits realization starts with a business issue or opportunity and doesn't end until the resulting change has been fully monetized.
Figure 1. Benefits Life Cycle
Shorter (not full cycle) Shallower (not all business areas) Focused on assets and activities

IT system life cycle

Maintain

Take the order

"Throw it over the wall"

Analyze

Design

Deploy

Manage IT contribution "Cradle to grave" Covers all business areas Focused on outcomes and benefits

Benefits life cycle

Planning

Executing

Source: Gartner (February 2012)

Traditional ROI approaches focus exclusively on accounting measures to assess benefits. Accounting metrics like revenue and costs are still the final determinants of business value, but these metrics must be extended to capture the effects of IT solutions on the business processes that precede them. Value models, such as the Gartner Business Value Model (see "The Gartner Business Value Model: A Framework for Measuring Business Performance"), have been developed for this purpose. These models can be used to measure and audit the effects of IT solutions on business processes and then translate those effects to hard currency benefits measured by accounting metrics. Because of the historical project-based approach to measuring value, the responsibility often falls in the hands of the program management office (PMO) in IT. However, this

Retire

Build

Test

Harvesting

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risks continuing the project-oriented approach to benefits realization and leaving money on the table. "Benefits realization is the responsibility of the whole enterprise. If you hold your IT organization responsible for benefits realization across the enterprise, you're setting yourself up to fail." Phil Cook, CIO, Electrocomponents

Business Enablement
By establishing an enterprise benefits realization discipline that is sponsored by the CEO, enforced by the CFO and adhered to by business unit leaders, enterprises can capture the planned benefits of IT investments and unexpected benefits that arise during the executing and harvesting phase. The most powerful techniques, in terms of their correlation with realizing benefits (see Figure 2) such as holding periodic harvesting reviews with key stakeholders, commissioning benefits audits, and "baking" benefits into budgets and incentive systems are much less commonly used because they are beyond the CIO's direct control. CFOs can help CIOs ensure that these more effective techniques are utilized to generate better benefits realization.
Figure 2. Traditional Benefits Realization Practices Are Used More Frequently but Deliver Limited Results
Effectiveness High Benefits audits "Baking" benefits in Harvesting reviews

Post-implementation reviews Project/program management Business ownership Change management Business case for IT investment

Low

Chargeback Rarely Sometimes Often

Source: Gartner (February 2012)

CFOs can be the driving force that enables CIOs to engage the business to embrace the more effective (but less frequently used) benefits realization practices. This becomes even more important as the scope of IT-intensive projects extends beyond efficiency and process improvements to the intangible, future-oriented benefits attached to strategic business models and innovation. CFOs can have a significant impact on how the business benefits from IT investments by working with

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business leaders to develop a benefits, rather than cost, mind-set for IT investments and working with CIOs to establish a methodology that focuses on the most powerful benefits realization techniques.

Questions the CFO Should Ask About Benefits Realization

What percentage of our operating and capital expense is spent on IT or IT-intensive initiatives? Is "on time, on budget" the measure of success for these investments? How do we measure the business value generated from these investments? Who is accountable for value delivered from these investments (CIO, CFO or other)?

Bottom Line
Benefits realization of IT investments is not just the responsibility of CIOs. As strategic and innovative initiatives become more and more IT-intensive, CFOs must make sure that an enterprise, rather than a project, approach is taken to planning, executing and harvesting benefits across functions. Otherwise, IT investments will continue to be measured by on-time and on-budget criteria, rather than business value, and millions of dollars in potential value from these investments will go unrealized.

Recommended Reading
Some documents may not be available as part of your current Gartner subscription. "CFO Advisory: Benefits Realization; Business Enablement" "CFO Advisory: Benefits Realization; Finance and Economics" "CFO Advisory: Benefits Realization; Risk Mitigation and Management" "Benefits Realization: The Gift That Keeps on Giving" "Application Benefits Realization Framework: Metrics and Roles to Improve Business Processes" "Executive Summary: Reimagining IT: The 2011 CIO Agenda" "IT Key Metrics Data 2011: Executive Summary" "The Gartner Business Value Model: A Framework for Measuring Business Performance"

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