Sainsbury’s baffled the City in January with an usual announcement. The retailer’s proposal, according to its chief executive Peter Davis, is to “simplify the financing structure of its outsourcing contract with Accenture”. But the details are far from simple.
Sainsbury’s planned to acquire a special-purpose vehicle called Swan Infrastructure, which it had established in 2000 with the aid of Barclays Private Equity to finance a major IT investment programme. The aim, according to Davis, was to create a direct relationship with Accenture, whose outsourcing contract had recently been extended for a further three years. “This would bring the IT assets onto our balance sheet as a measure of good housekeeping while we move towards business as usual,” said Davis.
It is rare for a business case for IT investment to be backed with the kind of sophisticated financial engineering that Sainsbury’s employed.
The reason for the supermarket chain’s special-purpose vehicle strategy is to back-end load the costs of a major IT infrastructure replacement programme, variously reported to cost more than £1bn.
But Davis’s announcement is also a reminder that the more complex the figures behind a business case for IT investment, the more difficult it could be to unravel the benefits later. Sainsbury’s latest move involves a significant reconstruction of its balance sheet – increasing net debt by £553m, EBITDA by £155m, depreciation by £100m and financing costs by £30m – which necessitated negotiations with Moody’s and Standard & Poor’s to ensure its credit rating wasn’t affected. All this to reduce annual IT costs by £25m.
Not many business cases for IT investment are going to be as Byzantine as this. In fact, a far bigger problem is that not enough business cases are going to stack up at all. When Chris Edwards, professor of management information systems at Cranfield University School of Management, questioned 105 managers last year, he discovered some worrying facts about the fragility of IT business cases. About a third thought the quality of IT investment appraisal in their companies was either “poor” or “very poor”. Even more alarmingly, nearly half felt the assessment of business benefits was “poor” or “worse”. More than half thought the group approving business cases for IT investment in their companies was “ineffective” or, at best, “slightly effective”. And two-thirds felt their companies were “poor” or “worse” at assessing the change implications for their new IT investment.
So, given reams of consultants’ reports – not to mention decades of horror stories of IT systems that never paid back or delivered on their promise – what’s going wrong? Can it still be that companies haven’t worked out how to evaluate the strengths and weaknesses of a solid IT business case?
In too many cases, says Edwards, it would seem so.
Edwards says one of the problems is that business cases are seen as a hurdle rather than the beginning of a journey which results in the new investment delivering measurable business benefits. And he fingers the big consultancies as part of the problem rather than the solution. “They may send in a couple of people to help develop the business case, but they’ll be making little money out of that. What they’re interested in is getting over the business case hurdle so that the project has a big budget and they can send in 10, 20 or 50 people to work on it. The very people you’re depending on to develop the case are those who want to get it over quickly,” he says.
Edwards is critical of business cases that don’t define the benefits. He recently evaluated a proposed IT investment for an international pharmaceutical company. “The business case was ill-thought out and the company couldn’t see the benefits. We ended up spending £80,000 on re-evaluating the project but in the end saved the company £29m.”
One of the problems is that FDs, CIOs and other directors who ought to know better allow so-called soft benefits to creep into business cases.
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Edwards says that any benefit which doesn’t have a manager’s name on it shouldn’t be considered. “I think managers are seeing they need hard benefits with somebody responsible for delivering them,” he adds.
Yet, while benefits need coherent numbers attached, David Elton, a member of PA Consulting’s management group specialising in IT strategy, says that numbers aren’t enough. He warns that boards may take decisions based solely on the figures without having enough “real understanding of the impact which the investment is intended to have on the business”. As a result, he says the wrong projects often get approved and inevitably fail to deliver on their promise. “Instead of being a tool with which to manage the project, business cases are regarded with mistrust and forgotten once the project has the go-ahead,” he explains.
Elton says business cases should contain a jargon-free description of the target outcome – the change the new investment will make in how the company operates. “Instead of simply saying this investment will enable £50,000 of net present value, the business case should explain how IT supports the business position.
“The business case needs to facilitate a realistic assessment of what’s likely to be involved in achieving the new business position, inside the firm and in the market. In particular, it should examine explicitly the various possible barriers and detail the costs and risks if steps are taken to overcome the barriers and the measure is forced through regardless of the barriers,” says Elton.
“Expressing business cases in terms of the target outcome allows decision-makers to apply their experience-based judgement to the proposition instead of passively accepting the stated costs and benefits. A focus on the new position also allows decision-makers to check to what extent the proposition is something the business really needs to do and formulate an idea of how much they’re prepared to spend on achieving it,” Elton explains.
Elton quotes a couple of examples of the approach in action. In one company, it was possible to reduce a portfolio of more than 100 potential IT projects to 25 – all targeted at improving the company’s salesforce effectiveness.
And, at an airline that urgently wanted to boost sales and cut costs, staff from the sales and IT departments worked together to define how specific projects could support account managers. As a result, the programme was scaled down from a proposed £1.4m investment to £600,000.
Martin Caddick, marketing director of Fujitsu Consulting, also believes that business cases need to demonstrate more than just convincing numbers. He says there are fewer opportunities for traditional cost and benefit analysis in business cases because there are fewer opportunities to cut costs as IT has already driven costs down in many companies. He suggests adopting a “value case” that aligns IT programmes with the company’s strategic objectives.
“The business needs to understand what is meant by value, and only those elements which the business recognises as adding value should be included when constructing a value case,” says Caddick.
Those companies that are most successful at building effective business cases usually have on board FDs and IT directors who share the same views about how IT can contribute value to the company. Caddick also believes that if FDs and IT directors can develop a common language for making an IT business case, it may help ensure that everybody has the same expectations as well.
Caddick also joins others in calling for more regular monitoring of the benefits of delivering the project at each stage of its progress. “You’ve got to measure the benefits of the project as you go. The business case shouldn’t be consigned to a bookshelf. You need to read it fairly often,” he says.
But the first step is to decide whether the process for developing IT business cases delivers what’s needed. Only a few will find they can’t make some improvements.
CASE STUDY ASTRAZENECA
One reason why business cases for IT investment get shredded by a hostile board is because the CIO and the CFO don’t always see eye to eye. They often have different views of what IT should be delivering in the business.
But that’s definitely not the case at AstraZeneca, where CFO Jonathan Symonds and CIO Paul Burfitt share a common vision – that IT’s mission is to add value to the company.
What makes AstraZeneca so successful is that its value-adding approach is underpinned both in the way in which business cases for new IT investment are put together and in the way IT’s performance is measured.
Take business cases. “When we do business cases for projects, we are increasingly putting them together based on a common model,” says Burfitt. “In the business case, we’re looking for four prime areas of business value.”
The first of these is adding to the bottom line either through cost savings or increases in revenue. The second is improved business performance other than cash, such as speeding time to market, increasing market share or improving personal productivity. The third is about improving scientific innovation. The fourth focuses on strengthening AstraZeneca’s “licence to operate” by, for example, improving governance or regulatory compliance – a vital issue in the pharmaceutical industry.
In many businesses, making the business case would be enough. AstraZeneca takes it a stage further by putting together an annual set of global objectives and then reporting on them to the chief executive every quarter.
Importantly, IT’s objectives derive from the broader business priorities of the company. So one purpose of the quarterly report is to demonstrate how IT is contributing to value creation in AstraZeneca. Or not, as the case may be. “Two of our company’s values are openness and honesty, so we try to be brutally honest about our performance. Where we haven’t done so well, we will say so,” says Burfitt.
The quarterly reports show how IT is performing against a series of milestones. “But for every project, it’s not just about delivering systems milestones,” says Burfitt. “More important are the business value milestones. So, for example, if we’re implementing an SAP system, we will look at the design, build and rollout, but we’ll also look at the business value it’s creating.”
This kind of value-creation approach is being deeply embedded in AstraZeneca’s IT culture. “When we put in a new system, yes, it’s our responsibility to meet the operating requirements, but we also share a responsibility to deliver the benefits. A project is not finished until the benefits have been delivered,” says Burfitt.