McKinsey on

Business Technology
Innovations
in IT management

Number 15, 2 Five trends that will shape business

Spring 2009 technology in 2009
4 IT’s unmet potential:
McKinsey Global Survey Results
14 Memo to the CEO:
Why we need an annual report for technology
20 How cloud computing challenges CIO roles:
A roundtable
28 How CIOs should think about business value
38 Document management:
A hidden source of value
28 McKinsey on Business Technology Spring 2009

Curtis Parker
How CIOs should think about
business value
Article at a glance
Many organizations can’t get a true fix on the value information technology adds to the
businesses it serves; defining, measuring, and maximizing that value remain elusive.
To throw light on this crucial issue, McKinsey collaborated with CIGREF (the association
of French CIOs) to study the best practices of a number of major French and inter-
national companies in various sectors. The key takeaway of this collaboration is a call for
CIOs to broaden their scope of action by adopting new levers, roles, and governance
practices that go beyond the purely technical and traditional IT capabilities.
 29

Grasping the business value from IT is challenging. CIOs

who are successful in this endeavor broaden their
scope of action beyond the technical sphere and traditional
IT levers.

Michael Bloch and If there’s any issue that routinely frustrates executives in many organizations, it’s how
Andres Hoyos-Gomez to get a true fix on the value that information technology adds to the businesses it
serves. IT is undoubtedly central to creating value and therefore continues to account for
a rising share of total investment. But defining, measuring, and maximizing that value
remain elusive. To throw light on this crucial issue, McKinsey collaborated with CIGREF1
to study the best practices of major French and international companies across
various sectors.2
1 
CIGREF, the “Club Informatique des Grandes
Entreprises Françaises,” founded in 1970, We interviewed 11 CIOs from these companies over a period from March 2007 to
strives to “promote the use of information
systems as a driver of value creation and November 2007. The in-depth nature of these interviews provided valuable insights, as it
a source of innovation.” It includes more than allowed us to draw directly from the experiences of CIOs—many of whose companies
a hundred public and private organizations from
every economic sector in France. have successfully used IT to gain competitive advantage. Analyzing their approaches to
2 
“The dynamics of information-system-driven
information technology helps to show how it can promote economic performance.
value creation,” CIGREF and McKinsey &
Company, 2008. We complemented these insights with international case examples.
30 McKinsey on Business Technology Spring 2009

Generating value-in-use
IT generates value at two complementary levels (Exhibit 1). The core asset value includes
MoBT 15
tangible
Value-driven items
IT such as hardware and software, as well as softer benefits such as
Exhibit 1 of 8 (including
the IT organization’s sidebar ex)
processes and skills. IT’s vitally important value-in-use varies with
Glance: IT generates value at two complementary levels: the core asset value (eg, hardware and software) and
a company’s core business priorities, such as whether it aims for an organizational
the vitally important “value-in-use.”
transformation or operational excellence. A different set of metrics is needed to measure
value-in-use, to account for both its economic and strategic dimension.
exhibit 1

IT−generated value
Exhibit 1
IT-generated value
Operational Resource
excellence policy
Security/
resilience

Core business Investment Value-in-use

priorities • Business value from IT
is of an economic and/or
strategic nature; has different
facets, depending on business
Operational priorities
planning • Metrics vary in accordance with
business context
• Business units own IT projects
and value created

Innovation
Asset value Core IT
• Includes
hardware and performance
software, IT organization’s
processes and skills
Transformation

Source: CIGREF; McKinsey analysis

Source: CIGREF; McKinsey analysis

 How CIOs should think about business value 31

Optimizing investment value

Take the example of a group focused on optimizing investments among its various
businesses—say, a banking group with multiple business units such as retail banking, con-
sumer finance, capital markets, asset management, and the like. The economic value
expected from the IT department can be measured through the improvement in the overall
cost-to-revenue ratio, while the strategic value can translate into a competitive edge in
terms of investment or acquisition capacity. (Since 80 to 90 percent of all synergies from
MoBT 15
banking mergers
Value-driven IT involve reducing the cost of operations, IT is indeed a key enabling
factor2during
Exhibit an acquisition.)
of 8 (including sidebar ex) The indicators that are tracked will be mainly financial, such
Glance: In the context of optimizing investments,
as the ratio of IT spending to revenue, the value of ITwill
and derivesthen
from dynamic control overwith
be compared the impact
the operating
of IT investments on each company’s operating ratios.
ratio—for example, operating costs over revenue (Exhibit 2).
exhibit 2

Exhibit 2 Operating costs versus IT spending

Operating costs versus Illustrative examples

IT spending

Company trajectory over time

High
Efficient IT executors High IT spenders

B
Ratio of operating costs to revenue

Trajectory
Typology of trajectories Virtuous Watch out!
A Heavy investment in IT leads to reduction
in IT spending and also in operating ratio
D B Reduction in IT spending does not lead
to reduction in operating ratio
C Underinvestment in IT prevents
improvement in operating ratio
D Effective, targeted investment in IT allows
Effective business enablers Heavy transformers
Low for very good operating ratio
Low High
Ratio of IT spending to revenue

Source: CIGREF; McKinsey analysis

Source: CIGREF; McKinsey analysis
32 McKinsey on Business Technology Spring 2009

Measuring operations value

Similarly, in companies for which the priority is operational excellence (understood as
quality and productivity of processes), the business value from IT will be measured in terms
of key performance indicators (KPIs) at the process level. For example, IT will be seen
as valuable if the systems helped to reduce the delay for processing an insurance claim or to
ensure a no-error delivery of supplies to the production line (Exhibit 3).

At
MoBTone15 global logistics company in our study, IT greatly improved supply chain operations—
Value-driven IT
a key factor in a radical transformation—by helping the company to optimize its
Exhibit 3 of 8 (including sidebar ex)
parcel-loading and
Glance: For CIOs focused on truck-routing activities
operational improvements, and
IT’s value to develop
is measured mainlynew value-added
by process performance services, such
as same-day
indicators: delivery
productivity, on-time and made-to-order
delivery, and quality. solutions for customers. IT also provided
important data for more efficient risk management and better pricing.
exhibit 3

Performance measures
Exhibit 3
Performance measures
Typical key performance indicators % of customer letters processed within 5 days, 2006,
• Cost
production unit A (illustrative example)
Productivity of opening an account
• Cost of handling claim
• % of customer calls processed
Target
• Number of claims opened relative
to staffing level
On-time, in-full • Average time to open an account
delivery •% of customer letters processed
within 5 days
• Number of days incoming mail
remains in pending status Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Quality •% of contracts issued without error

Source: CIGREF; McKinsey analysis

Source: CIGREF; McKinsey analysis

 How CIOs should think about business value 33

Finding levers where IT and business units intersect

Traditionally, a CIO’s main responsibility has been using standard practices and
performance measures to maintain IT’s asset value. Developing value-in-use is a different
ball game, however, and CIOs need to examine new levers found at points where the IT
MoBT 15
Value-driven IT and the business units intersect (Exhibit 4). To succeed, CIOs must take on new
department
Exhibit 4 of 8 (including
roles—bridging sidebar ex) silos—that may take them beyond their comfort zones.
functional
Glance: Developing "value-in-use" requires a CIO to examine new levers found at points where the IT department and the
For one thing, they will need to collaborate with executives in the business units to work
business units intersect.
on major transformation projects, to coordinate strategic planning, or to manage
exhibit 4
investments collaboratively (see sidebar, “Next steps: Identifying the challenges”).
Business performance through IT

Exhibit 4
Business performance • Process reengineering
• Procurement/sourcing
through IT (lean, Six Sigma)
• HR support, redeployment • Configuration
• Change management (localization/pooling)

• Policiesaffecting security,
Resource resilience
Operational
excellence policy
Security/
resilience
• Dynamicmethods for
investment control
Core business Investment
priorities

• Operational-planning
Operational methods
planning • Project
portfolio
management

Innovation
Core IT • Technology watch
• R&D on specialized tools
performance

Transformation
• Program management
• Enterprisearchitecture,
systems architecture
• Transformation management

Source: CIGREF; McKinsey analysis

Source: CIGREF; McKinsey analysis
34 McKinsey on Business Technology Spring 2009

Seeking alliances
Cementing new alliances within the organization is critical (Exhibit 5). A CIO in charge of
optimizing IT investments at the group level will need to assume responsibility for managing
a portfolio of investments. To do so effectively, the CIO will have to join forces with
the CFO, who has expertise in maximizing returns on investment. If the corporate goal is
operational excellence, HR is more likely to be the CIO’s preferred ally. This is due to
the critical role of change management. Take the example of deploying a new enterprise-
MoBT 15
resource-planning
Value-driven IT (ERP) system: the critical challenge is ensuring that the target pro-
cesses
Exhibit 5are
of 8 codified correctly
(including sidebar ex) in the system, and that when it is implemented, the end users
Glance: The CIO builds alliances with
are sufficiently trained to effectivelypeers in areas relevant
leverageto supporting the company’s
the potential priorities.
of the new tool. This
requires
exhibit a 5 joint effort from HR and IT to synchronize and coordinate their tasks from

the initial
Building design to the rollout and subsequent life of the system.
alliances

Exhibit 5
Building alliances
Business unit Finance
managers Purchasing
HR
Example: CIO leading Internal audit
Resource
the way in operational Operational policy
excellence excellence Security
Security/
Support business units
resilience Example: CIO focused on
making operational
improvements optimizing investment
• Overview of total operating Finance Measurement and
costs/IT costs Core business Investment dynamic control of
• Operational indicators: priorities returns on investment
quality, cost, delivery from entities and IT
projects
Alliance with HR
• Change management Operational Alliance with finance
Strategy
• Skills management planning function
• Project portfolio selection
• Implementation of key
performance indicators on
costs and investments
Innovation
Core IT
performance

Transformation
Project
managers
Business unit
managers

Source: CIGREF
Source: CIGREF; ; McKinsey
McKinsey analysis analysis
 How CIOs should think about business value 35

Building better governance

The businesses that are the best at creating value-in-use, we found, embed their IT
governance within the broader governance practices. In practical terms, this requires IT
representatives to participate in company forums that traditionally have been the
exclusive domain of business unit leaders. At successful companies, certain core business
processes, such as managing the business project portfolio or determining the alloca-
tion of
MoBT 15 resources, dovetail with IT processes. This notion of an integrated business– IT
governance
Value-driven IT model can also apply the other way around: we have witnessed examples
Exhibit 6 of 8 (including sidebar ex)
of companies where strategic planning for IT actually serves as a platform for broader
Glance: The best companies at creating "value-in-use" embed their IT governance within the broader governance practices.
strategic planning by establishing mixed business– IT forums (Exhibit 6).
exhibit 6

Exhibit 6 IT−inclusive strategy

IT-inclusive strategy When a company faces a discontinuity (such as a business transformation or new kinds
of market regulation), a strategic plan specifically for IT can help translate business
priorities into IT initiatives.

Time-out required: Strategic-planning cycle Integrated mode: Strategic-planning cycle

Long term Company’s overall strategic vision Strategic vision (including IT)

IT strategic plan

Short term Budget framework, planning Budget framework, planning

Operational monitoring of projects Operational monitoring of projects

Major discontinuity for company IT governance integrated with business unit governance

Source: CIGREF; McKinsey analysis

Source: CIGREF; McKinsey analysis
36 McKinsey on Business Technology Spring 2009

Putting it all together

A simple framework summarizes the best practices we observed in our interviews. The
value-in-use of information technology emerges when the IT department, building on
a foundation of core performance, attacks problems and seeks solutions in areas that interest
the business units and IT alike. Alliances with business leaders create new roles for CIOs
and increase their scope of action. Governance practices that bring IT and business leaders
together institutionalize this new way of operating.

Next steps: Identifying At the best companies in our study, the CIO, the CEO, When this approach works, it produces a range of
and the business units essentially cocreate value-in-use benefits. Fresh synergies between IT and the business
the challenges when they integrate the elements of our framework units create a wider palette of skills for both as
(Exhibit A). But to tap the potential reservoir of value, the they take ownership of shared projects and increase
new partners must have a clear view of the challenges the intensity of their interactions. With leaders
they face (Exhibit B). from the two groups finally reading from the same
script, communications become more efficient,
CIOs need to understand what the business units expect since less translation time elapses between the formula-
from the IT organization and to articulate IT goals tion of business plans and their execution by IT.
in terms that business leaders can grasp. That means Of course, the real bottom line is that these benefits
eschewing technology jargon, making innovative combine to raise IT’s value-in-use across
proposals, and taking firm positions on cross-functional the enterprise.
projects. To be secure in these new roles, CIOs
must develop a range of skills that transcend their IT
core competencies; to give the emerging collab-
orative effort better grounding, they should create
forums where IT and the business units can set
common priorities.

For CEOs and business unit leaders, the main issue is

mind-sets: they need to stop thinking of IT as a service
provider and consider ways to build alliances with IT
executives. IT priorities should be set in clear business
terms. Leaders of businesses should proactively
draw their IT counterparts into strategic and operational
planning sessions.
 How CIOs should think about business value 37

MoBT 15
Value-driven IT
Exhibit 7 of 8 (including sidebar ex)
Glance: A simple framework illustrates best practices in creating IT value-in-use.

exhibit a

Dynamics of value creation through IT

Exhibit A
Dynamics of value creation
through IT
Understand the business priorities
Define and measure value
in business terms
Proactively propose Value of IT
business–IT initiative for the business

Build alliances and develop

Alliances/new new skills
roles for CIOs
Take action tightly synchronized Integrate IT governance into
with business units corporate governance
Joint business/ Integrated
IT levers governance • Processes and tools
• Forums

Getting basics right

Control quality, costs, delivery,

MoBT 15 and availability
Value-driven IT
Source:
Source: CIGREF
CIGREF ; McKinsey
; McKinsey analysisanalysis
Exhibit 1 of 8: sidebar exhibit
Glance: CIOs, CEOs, and business units must have a clear understanding of the challenges they face.

exhibit b

Exhibit B Creating business value through IT: Benefits and challenges

Creating business value Benefits for company Challenges

through IT: Benefits and For CIOs For CEOs/business units

challenges Value • Value-in-use of an economic and/or • Understanding expectations about IT and • Formulating objectives and priorities
strategic nature for business units formulating them in business terms in business terms
• Business unit managers take ownership • Proactively proposing business–
IT initiative
• Ensuring faultless execution

Action levers •A wider palette of IT and non-IT levers • Ranking priorities and sequencing • Involving IT in cross-functional
• More effective levers levers to be used projects
• Taking a position on cross-functional
projects

Alliances and • Pulling

IT and business unit skills • Developing non-IT skills • Moving the CIO away from a purely
roles together and fitting them to the • Being collaborative technical focus
context • Reinforcing IT’s cross-functionality

Governance • More direct interaction • Creatingsymbiosis between • Bringing IT into strategic and
– No translation phase business unit forums and IT forums operational planning for business units
– More business-centered dialogue

Source: CIGREF
Source: CIGREF ; McKinsey
; McKinsey analysisanalysis

MoBT

Michael Bloch ([email protected]) and Copyright © 2009 McKinsey & Company. All rights reserved.
Andres Hoyos-Gomez (Andres_Hoyos-Gomez@McKinsey
.com) are principals in McKinsey’s Paris office.