The Search For IT Value Forget About ROI:

Think About Business Process Cycle Time

(January 2003)

• Introduction
• Why ROI does not work for IT and cannot
• Business process management
• Cycle time

Introduction:

ROI is really Return on Risk capital, with the I upfront and the R hypothetical and delayed

The aim of this article is to help CIOs and their planners ensure guaranteed business value from their organizations’ information technology investments by proposing that they abandon the fruitless search for Return on Investment (ROI). Instead they should focus their resources on the most effective IT target of opportunity and evidence of payoff: improving cycle time in business processes that are W3 in nature. W3 here stands for Win-Win-Win; an improvement in performance generates value for the organization, its customers and relevant business partners. Cycle Time Improvement (CTI) then becomes the equivalent of a Dow Jones Index: a metric that answers the question “How well is IT doing?”

IT in large organizations for decades was centered on taming the technology: systems development, integration, and architecture. Now its priority is the search for business value for money. That search has largely centered on ROI as both the base for business justification and the metric of IT performance. It is a false lead and a fruitless search. ROI is largely a misnomer in the context of IT. It is really Return on Risk, not Return on Investment.

Every seven years or so for the past three decades, ROI once again becomes the main concern in the IT field. Often this reflects 5-7 fat years being followed by 5-7 lean ones. In the good years, business justification is simple: innovation, market share, and competitive advantage or competitive necessity are the main drivers of IT investment growth to meet the opportunities of business growth, with the dot com era the most obvious example. Then come the lean years of business retrenchment with IT cost restrictions, postponement of discretionary investments, messages about the Something of the Future falling on deaf executive ears (B2B, CRM and mobile commerce are currently in that situation), and demands for “hard” measures of payoff from IT, with of course the post dot com era again the obvious instance. The search for ROI begins anew.

It will be an endless search. The very fact that after so many attempts over so many decades we still have no reliable measures of IT payoff shows this. There are thousands of studies of the link between IT investments and measures of return. None of them have found any correlation between investment and any measure of financial performance.1 The ROI advocates’ intention is meritable, since obviously IT must demonstrate value and present financially sound business justifications. But the ROI approach will never achieve this; it is inappropriate to IT investment, impractical in its application, conceptually invalid, managerially unreliable and empirically unsupported.

But if ROI is not the reliable measure for planning and assessing investments, IT urgently has to find a metric of value. One of the byproducts of the dot com collapse and the recession that followed has been that IT is now just a discretionary expense. Companies that felt they had no choice but to make investments in ERP, Y2K remediation, CRM and e-commerce in the 1990s have put IT on hold in the 2000s. They are looking for ROMI rather than ROI – return on minimized investment. They are highly risk averse. They increasingly look to turn IT from a largely fixed capital cost to a variable expense through outsourcing and partnering. They demand strong financial control of IT. IT took credit for its business contribution on the upside of the now-defunct business expansion. It must pay its way on the downside of the cycle.

In this context, IT has to demonstrate economic value. Cycle time is the most basic indicator of value. Companies can do things better, faster or cheaper. The evidence is that when they handle key processes faster, they also become cheaper and better. That is because cycle time reflects the combination of accumulated expenses, the tying up of financial capital, the complexity of organizational coordination, process inefficiencies, information systems incompatibilities, resources allocated to error-handling, administrative overload, communication breakdowns, and information gaps.

Reducing cycle time cuts all these; IT is the enabler for achieving this. To show how IT is contributing to customer relationships, supply chain management, organizational productivity, business process management, competitive positioning, cost efficiency and organizational productivity the Dow Jones equivalent indicator is simply Cycle Time Improvement (CTI) in identity and priority asset processes. CTI is not a complete measure of IT payoff any more than the DJI is – the Index can be affected by a major move in a large company’s stock price or by industry sector volatility, for instance.

Cycle time improvements similarly may vary widely in their impact. Improving the cycle time for, say, payroll processing from four weeks down to five minutes simply means that people get paid; there may be some cost savings but no competitive differentiation or advantage to be gained from the improvement. Payroll is a background liability process – it is background to the company’s operations, as contrasted with identity – the processes that define its branding reputation and differentiation to customers, staff and investors – and priority processes, the engine of competition. Payroll is a liability process in that however well it is performed, it drains economic value from the firm in terms of the capital it ties up. Asset processes generate value. Figure 1 gives examples of the Process Investment matrix discussed in more detail in The Process Edge (Keen, 1997) and The eProcess Edge (Keen and McDonald, 2001). The full matrix is shown in Figure 1 below. Process Worth is the economic nature of the process and Salience its strategic prominence and impact.

Figure 1

The Process Worth/Salience matrix

Why ROI does not work for IT and cannot

ROI – return on investment – would logically seem to be the priority goal for getting business value from IT. If financial capital was free and if the lead times for major initiatives were measured in weeks and if successful implementation was guaranteed, then that logic would hold. It does not apply at all, though, to the situation that businesses everywhere now face. Assessing IT initiatives in terms of ROI will not help companies make IT a force for improving costs, margins and profits in the 2000-2003 recession and whatever recovery follows it. All that this is likely to achieve is a delay or canceling of major initiatives, slowing down of purchases, budgetary game-playing and IT being seen as a cost to be controlled or cut back. The dilemma created by looking for ROI in this increasingly difficult, uncertain and volatile environment is that your firm must get the business results of the “Return” but cannot afford the capital costs and development time and risks of the “Investment” side of the equation. CIOs must make it their leadership mission to find the “R” without asking for the “I.”

In addition, using ROI as the basis for IT planning and business justification has many proven flaws. It can sometimes work adequately at the project level, where “return” can be defined and measured. But even here, so many elements of payoff rest on quantifying the value of “soft” benefits that usually begin with “better” – better customer service, better communication, or better planning. Where “better” rests on IT first building an enabling infrastructure or platform, the problem of even defining payoff becomes even more complex. The difficulty can be illustrated by asking our readers to define the measures of return on their education: your own expenditures, your parents’, scholarships, and loans. What are the investment figures? What are the most appropriate measures of return: starting salary after graduation, ending salary and pension, family well-being, your social contributions?

Look at the Internet and then recall the railroads. It took around eighty years before the payoff from that investment in Europe and the U.S. showed up in economic figures – indeed, the data point to an initial reduction in US productivity as capital was diverted from its thriving agricultural sector.2 How would you even begin to measure the overall return on investment for Web-based initiatives? Your company’s investment in laptops? Your CRM systems? In all these instances, no one even knows the appropriate short-term indicators of return. But, as many Chief Financial Officers remind their CIOs as they glare at them through clenched teeth (to quote from a somewhat lurid bodice-ripper romantic novel), they certainly know the measures of dot com investment losses – cash, capital and erosion of shareholder value.

By far the weakest aspect of the ROI approach to IT business justification is that it is a misnomer. It really stands for Return on Risk. IT is inherently risky because of the never-slowing change and resulting volatility and instability in the technology, the difficulties of meshing technology, process and people, and the uncertainties of large-scale systems development. Many IT investments are in infrastructures that in themselves do not generate value but enable applications that can do so. Examples are ERP, CRM and e-commerce platforms. Here, the I must be paid upfront, years before there is any chance of R and with the R highly uncertain. Given the high failure rate of IT and the many gaps between promise and delivery of benefits over many decades, business executives are naturally reluctant to invest on the basis of a business act of faith, especially after the fiascoes of the dot com era. For them, IT too often is Return on Gamble.

So, all in all, forget about ROI. The upfront I is too expensive and risky, the measures of R too complex to assess and measure, and the financial management credibility of IT too low to make it ever valid and effective.

Business process management

Business Process Management (BPM) is the generic term for the application of information technology to leverage the activities, routines, workflows, collaborations and interactions that constitute the core of an organization and hence its effectiveness. It has become more and more apparent over the past decades that competitive differentiation comes from process. The firm’s fundamental financial structures and its capital efficiency rest on process sourcing and integration. Process leaders in any industry outperform their median competitors by in productivity and profitability by 50% or more. This is most apparent in supply chain management, where process improvements across all industries have reduced the percentage of GDP tied up in logistics, inventory and supply chain costs by 40 percent in two decades. At the company level, it is visible in the successes of exemplary firms in commodity industries. Dell, Wal-Mart and Charles Schwab, for example, created a process edge that their competitors could not match.³ 

Earlier, Toyota transformed manufacturing through its process excellence in total quality management, just-in-time inventory and lean production. It pushed North American and European car makers onto a decade long defensive struggle to compete. Gaining a process edge has become even more important in competitive positioning as other sources of differentiation have loss their strength: advantages of scale, product and brand equity, manufacturing, distribution and location. The personal computer industry is an example. Many manufacturers’ products are the same, built by contract manufacturers using standard components. They are commodities, with market saturation and never-ending price erosion. Only Dell, the process firm that happens to sell computers, has thrived and it did so even during recession and the commoditization of the entire PC industry.

BPM is closely linked to IT, perhaps too much so in that many BPM proponents see its goal as the automation of workflows, instead of a meshing of people and technology. That narrow perspective runs the risk of repeating the boom to bust and hype to backlash that marked the Business Process Reengineering movement in the 1990s. But with that caveat, BPM will surely become increasingly central to business innovation in the coming years, especially given the recent fruition of many long-term efforts to make information technology faster for development, more flexible and adaptive in operations and built on modular, self-standing and automatically self-integrated components, rather the monster systems of yesteryear. Those “legacy” systems and such complex infrastructures as ERP and CRM constrained many BPM efforts. Now, Web Services4 are coming together – though still with gaps in open standards, the routine Microsoft variations and fights, and weaknesses of security. TQM developed with very little use of IT; Toyota’s kanban system was paper-based. BPR came out of the IT field, in terms of its leading proponents, consulting firms and methods, but it made only limited effective use of IT because it predated the Web and the key tools of Web services (most particularly XML, the standard for communicating and interpreting electronic documents between different systems). BPM builds on the non-technology side of process with a technology toolkit that enables many process designs that were previously impractical.

But BPM will fail, as BPR too often did, if it does not achieve its search for value and metric of value. BPR largely targeted muddled and cumbersome processes that had well-defined workflows. Too many of these just did not matter to the firm’s success. BPR got processes right – streamlined administrative processes, cut costs in transaction processes and routinized workflows. But it largely did not get the right process right. The classic instance is one of the two cases that in effect launched the BPR bandwagon through an article co-authored by Michael Hammer. This was Mutual Benefit, an insurance company, that reengineered insurance policy issuing and cut the elapsed time from 3-4 weeks down to 2-4 hours.

The company is never named in the later best-selling book also co-authored by Hammer. It had gone into receivership in the meantime. In the terms used in the Process Investment matrix shown in Figure 1, policy issuing was a background liability process for Mutual Benefit. It had neglected its priority processes – the drivers of competitive positioning. These were financial investment management and investor relations.

Business Process Investment, which is the pre-step to BPM, is a simple framework for classifying processes in terms of their Worth and their Salience. Worth distinguishes asset processes from liability ones. Asset processes generate economic value-added; the capital they tie up is the base for leveraging customer relationships, improving supply chain and logistics, and increasing organizational productivity. Liability processes drain value, no matter how well they are carried out. (See The Process Edge (1997) and The eProcess Edge (2001) for a fuller discussion of Worth and Salience and of value drivers for choosing which processes to target and which technical, outsourcing and change management initiatives – including BPR are best suited to each cell of the Process Investment matrix.)

The combination of BPM as the business aim, IT as a major enabling vehicle and Process Investment as the guide to targeting it points to the Dow Jones Index equivalent for IT. The measure of IT value is Cycle Time Improvement in identity and priority asset processes.

Identity asset processes are those that enable or even constitute the firm’s brand. For FedEx, these are guaranteed on-time delivery. Dell’s identity processes are its minimization of inventory and speed of service and end-to-end streamlining of its supply chain. Victoria’s Secret has made the shopping experience its identity asset; its goods are the same “Made in China” items that other stores in the same mall offer. Domino’s Pizza’s identity assets were built on guaranteed home delivery in thirty minutes – customers viewed this as its “brand” not any product advantage in terms of the quality of its cheese. Charles Schwab took leadership of online trading through its customer service identity asset processes and was able to command a price premium of $29.95 for trades that other competitors charged as little as $6 for. (Of course, when the day traders fled the market in 2000, Schwab suffered along with the rest of the industry, but it still maintained its comparative advantage through its process edge.)

Identity asset processes are, almost by definition, unique to a firm. They must be carefully protected and maintained. Priority asset processes are more clustered, with common patterns across an industry. They are the engine of everyday competition. For airlines, they include on-time arrival and yield management, for retailing store replenishment and supply chain coordination, for financial services cross-selling and service innovation, and for manufacturing quality management and product development. Priority asset processes are the ones where a 5 percent improvement per year or a 5 percent advantage over competitors translates over time to a distinct and sustained competitive advantage. In manufacturing, the Total Quality Management movement demonstrated how much priority processes mattered to the degree that the U.S. and European auto makers were pushed onto a decade-long defensive to catch up with the pace-setters led by Toyota. Once a company falls behind in industry priority process capabilities it can be very difficult for it to catch up again, however much it relies on new strategy, pricing, products, or new leadership; recent examples are Kmart, Home Depot, the many dot coms that, unlike Amazon, never built a process base, and the average airline trying to counter or imitate Southwest.

Cycle time

Slashing cycle time in identity and priority asset processes guarantees business payoff. Cycle time is not just time. It is the product of many factors: the complexity of the process itself, coordination of tasks and people, communication via a growing range of media, transaction processing, information quality, availability and access, document management, error-handling and exception management. Call this the process drag factor. Add to any of these and cycle time slows. Cut into any of them and it may or may not speed up. For instance, accelerating the first steps in processing a new customer loan application may have no impact on drag if communication between the sales and finance departments is muddled or if the relevant documents have to be entered into multiple systems before a decision can be made. A typical instance of the impacts of drag is the large consumer foods company whose sales reps spend 40 percent of their time repairing errors in invoicing. This illustrates not just the degree of process drag but the extent to which it extends across work and workers; many of the problems occurred outside the sales reps’ sphere of work and influence.

Drag and muddle are everywhere in organizations and a natural target for applying IT. The spirit of BPR was to blow the whole thing up and start again; this radicalism was its essence and it explicitly opposed the incrementalism and continuous improvement philosophy of TQM. IT units were strongly influenced by BPR and applied the emerging tools of workflow management and groupware to streamline procedures and information flows. In many ways, BPM is the sadder but wiser next generation of the combination of BPR and IT. Drag and muddle remain its target of opportunity. To avoid the Mutual Benefit syndrome, it must get the right processes right.

The ones to get right are the identity and priority asset processes with high drag and muddle. Obvious instances are:

• Any customer-facing process where improving cycle time is W3 – a win for the customer, for the company and for relevant business partners. The test of W3 value here is to ask, “Who cares?” When everyone in the process loops cares, this is a BPM target.
  
  
• Supply chain and logistics processes that cannot be directly automated because they involve judgement, negotiation, frequent exception handling, collaboration across business units and complex customer/supplier/intermediary links.
  
  
• Product development where time to market translates to competitive advantage or disadvantage.
  
  
• Deal processing: quotes for customized products, bids on RFPs and RFQs, complex or multi-party contracts, and special projects (change management, task forces).
  
  
• IT development projects.
  
  
• BPM itself.

So far, the line of argument presented here is commonsensical. The next and key reasoning, that Cycle Time Improvement is the Dow Jones Index equivalent for IT and should replace ROI as the metric of performance is less obvious, at least on the surface. Business value in BPM in particular or IT in general comes from doing something better, cheaper or faster. ROI advocates would argue that with appropriate analysis and planning, the impact of improvements in any of these areas could be calculated. The simple claim made in this article is that doing it faster will make it better and cheaper if it is an identity or priority asset process and W3 in nature. That is because drag and muddle add costs everywhere. They impede quality. They negatively affect the customer relationship, organizational productivity or business partner relationships and operations – in many instances, they affect all of these.

Cycle time is not simply increased speed but speed with quality. If speed is accelerated, cycle time may not be. That is because only part of the process gets faster but errors and customer dissatisfaction lead to rework. Equally, cost cutting may be a win for the company but a loss for the customer or supplier relationship. Airline cost cutting rarely benefits the passenger and squeezing suppliers rarely in the end benefits the company. That said, the evidence is that cutting total cycle time in processes that are W3 in nature directly improves cost and quality. Here are examples:

• A study of eight BPM initiatives explicitly targeted to CTI improvement in manufacturing showed improvements of 30-70 percent that also generated significant cost savings and productivity increases that directly amount to $1-2 million a year on investments of $100-250 thousand and 3-6 months of effort.⁵
  
  
• Study after study shows that 20 percent of all business documents have errors on them and that when IT is appropriately applied to W3 processes this drops to zero (customer self-management and self-service, B2B procurement portals). In the meantime, sales forces in consumer foods spend two a days a week reconciling contested invoices and “problems” with orders.⁶
  
  
• In supply chain management, CTI uniformly generates savings. General Electric’s experience is typical for leading firms. In the late 1990s it cut lead times for receipt of orders from an average of sixty to ten days. This generated direct cost savings of $500-700 million a year in purchasing costs, a reduction of 30 percent in labor costs and 5-20 percent in materials costs.
  
  
• Supply chain management is basically about CTI: just-in-time inventory, speed in order to delivery to payment, elimination of intermediaries and administration, etc. The University of Maryland’s surveys show that SCM leaders in any industry use half the working capital per unit of revenue and have half the inventory and overhead of their median competitor.
  
  
• The impacts of CTI on product development are well-documented. In pharmaceuticals, airplane manufacturing, the auto industry product development is among the most critical W3 ventures and the value of a month faster to market is easy to calculate. For a $X billion development over Y months, simply divide X by Y. 

The examples could be multiplied almost indefinitely. The old adage that time is money can equally accurately be stated as money is time.

The main reasons for BPM and IT to target cycle time are threefold and each is compelling in itself:

1. Cycle time can be dramatically decreased through the combination of process insight and information technology. The case studies cited earlier are typical not exceptional: a 30-70 percent improvement. This makes this an opportunity not to be missed.
   
   
2. The BPM methods and payoffs are proven and the financial risks and capital investment relatively small.
   
   
3. Cycle time is what the business cares about – as do customers.

The last point is the most critical for IT. The most frequent and very widespread complaint about IT from business executives at every level is about the gap between the business need for speed in every area to meet the demands of an ever more changing and difficult environment and the far slower time frames of IT development. IT has to provide business rate speed in its own activities and should also adopt as its mission speed with quality as the metric of business value for IT investment and performance. Showing where and how to cut cycle time in asset processes – the generators of revenue, relationships, and profits – via W3 by, say, 30 percent through focused 90-180 day projects in itself promises real ROI.

Together, BPM, the cycle time DJI equivalent and modular services offer the opportunity to transform IT, all for the better for both the profession and the companies it serves. The ending recommendation to be made here is very simple. Quickly scan your company’s operations and see how many identity and priority processes are both W3 in nature – all parties, customers, company and partners care about it – and full of drag and muddle. Choose a few and move fast – a 90-180 day venture. Monitor the CTI and identify the byproduct cost savings and productivity gains. Announce the results. Scale and extend the initiatives. IT is BPM and BPM is CTI. This is a recipe for success.