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The CIO's Four Views of IT KPIs

10:15 PM PEARL ZHU 25 COMMENTS

IT is an integral part of the business, and every IT project is a business initiative.

IT is pervasive in any contemporary enterprise today, however, most of IT organizations still get stuck into lower level
maturity, with the reputation as a cost center, IT should work with stakeholders to develop KPIs that show how IT is
improving business and enforcing business capabilities. Here are four views of KPIs, from IT cost breakdown to IT
Performance quadrant; from PMO measure to business capability metrics.

1. IT Cost Breakdown

The big challenge facing business today is the "Speed of Change," which is often applying activity-based management
concepts to IT services. Essentially, that involves a very detailed cost breakdown of the IT Services, to a resource unit
level, for example, which is then allocated across geographic and business hierarchies, using cost modeling
techniques. Performance is measured at many different levels in the hierarchies, by region of the world, country, the line
of business, business unit, account, program, senior VP, junior VP and so on. The mappings are ultimate between direct,
indirect, fixed and variable costs and revenue, for the purpose of determining the economic value of the IT services and
assets, including their value above their costs.

The cost breakdown provides insight into where the most money is being spent, which in turn identifies
opportunities for bottom line improvements. A chargeback can be done on a more equitable, actual usage basis, rather
than assuming everyone is using the same amount. The detailed data becomes a base from which statistical analysis
can be performed to do far more accurate financial budgeting projections, based on natural growth rates at a fine-grained
level and capacity planning is more accurately predicted too. Collecting and acting on business feedback is the most
important project each year for every IT department. The goal of cost breakdown is to provide a clear, measurable view
of the business’s top IT priorities.

The senior leadership team should ask every department how much the IT service is worth to them. Each
department will need to measure that in a way appropriate to their business function. The things that can be measured
from within the IT function are all surrogates for real performance indicators. Measuring them and improving their scores
will probably improve the actual performance of the IT function but the relationship between the surrogate and real
performance is not guaranteed
(1) IT Savings (IT work which positively impacts the bottom line)
(2) IT expense as a percentage of sales
(3) IT spend per employee
(4) IT employees as a percentage of total employees
(5) Uptime % for business critical systems
(6) Customer service % of positive responses
(7) Utilization of key IT managed resources
(8) TCIT (Total Cost of IT) includes all costs associated with building, running and operating the IT environment and
includes workforce costs, license costs, hardware costs, software costs, systems costs, outsourcing costs, a portion of
HR costs, etc. (In other words, more than just the IT budget)
(9) IT ROI Ratio = (Net Operating Revenue – (Total Expenses – TCIT))/TCIT
(10) Return on IT Investment = Net Operating Profit / TCIT

Of course, the first time that you measure, it is pretty meaningless. And furthermore, the metrics will be different for
different industries. The controversial point for IT cost breakdown is: With today's complex enterprise architectures it's
becoming more and more difficult to identify the cost per unit. When the business has to include a measurement
methodology in every service request over $X, the business becomes a much more prudent IT purchaser. When we
spend all the time on debating measuring what IT is doing and practically no time discussing measuring the value
produced, then all we accomplish is to perpetuate the disconnect between IT cost versus IT value.

2. IT Performance Quadrants

Managing stakeholder expectations is key to the success of IT. So depending on which stakeholder and what the role of
the CIO is to your organization, metrics can be created that show governance and effectiveness of IT. Plus, IT KPIs
should be focused on what is relevant to the target audience with a clear purpose as to what is being measured and why.
There are four main purposes for IT metrics:
A: Provide transparency into IT
B: Aid setting direction for IT
C: Drive performance of IT
D: Communicate the business value of IT.

There are at least three target audiences: IT, IT management, and business leadership. Each has a different focus. For
instance, IT will measure CPU utilization, disk utilization, program defects. stuff that the technical staff should and does
care about, but business units and for that matter, CIOs don't necessarily care about at a detail level. For IT management
level (CIO & direct reports), things like project delivery, How much time we spent on new project delivery vs. support and
administration, overall system uptime, help desk service levels at an aggregate level, etc. things that give us an indication
as to whether things are running OK at a department level. IT should also understand the main KPIs that the business
uses to measure their performance. While these are not IT metrics, understanding them will enable IT to have a better
business conversation about what we are doing and how it will drive business And at the strategic level, the well set of IT
metrics need to be available to present at the big table for business communication performance.

Here are the IT performance quadrants:

(1) Customers

 Net Promoter Score (NPS): IT internal users and/or end customers whatever works for your business,
consider using them to measure customer and/or partner advocacy of your IT organization
 Service Desk: Customers Satisfaction Surveys
 Lead time to ship an order
 % of support customer calls fixed at the first call or before a call (self-healing)
 % of order returns
 Time to market a new offering
- % of business suppliers linked to your IT

(2) IT Service/Project Performance

This needs to be an easily understandable KPI but probably built up from a complex set of / OLA's - KPI's - Project
success factors.

 IT: Projects Delivered/On-Time

 Dev: Projects On-Time/Budget
 Adherence / Defects in Controls & Compliance ( aligned to SOX, PCI, or any standard

(3) Fiscal Health

A simple KPI that can be tracked but built up from the budget performance:

 Average cost, whatever the businesses believe are the right measures
 Balanced Budget
  IT Service Chargeback is often the best metric but has debatable data collation mechanisms Variance etc

(4) Organizational Capacity

 Turn-over
 Absenteeism
 Engagement/Satisfaction
 Learning and Development

A well-defined scorecard should contain a good mix of outcome measures (or long-term strategic value) along with
performance drivers to track the progress in the short term (operational value) in spite of capturing multiple perspectives,
the balanced scorecard must still retain a strong emphasis on financial outcomes. Whatever metrics you find value in
using must be relevant and resonant to your audience, as well, or your credibility will significantly suffer.

3. PMO KPIs

Running IT as a business, every IT project is a business project. CIOs act as an intrapreneur, to ask self two questions:
Question 1: most important. If I own this company and pay everyone paycheck, what do I like to see from my IT
department?
Question 2: how much of the IT budget is spent on three buckets: (1) keep the light on activities, (2) to do business
better, and (3) to grow the business. These answers will guide CIOs further to ask for different metrics which can meet
customers/partners at where they are at. It seems very simple, but it’s a daunting task to define the category and then
work on your OPEX and CAPEX.

PMO KPIs can further help CIOs to run IT as a business:

(1) Project Management Office KPI - ROI

ROI is an important KPI for top management however slightly more difficult for a PMO to measure. The PMO provides
the framework in which success is built so this KPI is a softer metric that illustrates the influence of the PMO on the
overall performance of the organization. Tip, at least, one of your KPIs should try to illustrate this.

(2) Project Management Office KPI - Time to market

This is an easy one to build a KPI around. Your PMO should be increasing the speed at which Projects are delivered
thus improving time to market. Likewise, with better compliance with project schedules, the PMO also helps ensure that a
product meets its release date.

(3) Project Management Office KPI - Resource Utilization

An effective PMO ensures that time is being used in the most efficient way possible by assigning resources to the
tasks that are most suited to them thus maximizing the value of that particular resource. Building a KPI around this
principle will highlight the value the business is receiving from its own resources.
 IT Spend per employee: absolute and variance
 Employee Customer Satisfaction
 % of Projects in IT budget versus Run
 IT Maturity level
 IT R&D Spending

4. IT KPIs to Measure Business/IT Capabilities

IT is an enabler of current and future capability for both the

organization and its ecosystem (the market comprising competitors, suppliers and other agents, regulators and so on)
much of the board conversation about IT should be framed in respect of the business activities and the ecosystem, still,
strategic KPIs may be hard to define, but it helps enforce effective communication at strategic conversation. Thus, CIOs
need to pursue tactical, strategic and innovative alignment with the business. The long-term growth is usually based on
a unique set of business capabilities, how can KPIs capture such "capability" insight or process effectiveness,
innovation?
Understanding and having a visual representation of your IT/Business capacity will result in your ability to understand
where your internal resources are being deployed. With this metric in place, you can then begin to decide which business
units /departments/ stakeholders are receiving too much capacity, and which ones are not.

(1) IT Capabilities to Enable Business Growth/Development: Assuming a healthy pipeline of work, trending to
forecast on releasing new capabilities (the business getting what they paid for), IT value to the business can be
categorized in a number of ways, here are four.
- Improving Speed/Agility (Speed to Market, ability to change direction with the market, etc)
- Improving Revenue (enable the business to gain market share, enter new markets, etc)
- Lowering Risk (reduces business system downtime, create business continuity, etc)
- Lowering Cost (reduces the cost of the current business process, improve margins, freeing up capital for new
ventures, etc)

(2) CHANGE Capability: The metrics focus on the effectiveness and efficiency of change made is important. And
change consists of one or more of the following:
- People change
- Process change
- Technology change

(3) Value-added Capabilities (Observational Assessment or through VoC with Stakeholders)

-Transparency
-Efficiency,
-Effectiveness
-Agility
-Digital Capability
-Innovation Capability
-Flexibility
-Scalability
-Monitoring and Control

(4) Business Capabilities from Multiple Perspectives:

 People Perspective (Productivity Improvement, Operational Savings, and Cost Avoidance)

 Process Perspective ( Process Improvement, Time, and Period reduced for the business by IT)
 Information Technology Investment and Longevity of Investment (IT Expenditure Vs Savings)
 Technology Perspective (Easiness and Usability, Features and Reduction of Bottlenecks) [NPS would be the
best option]
 Governance Perspective: for CIO dashboard - the Governance layer (the Evaluation, Scope, and Monitoring)
and the tactical management layer (Run, Build, Deploy and again Monitor).

Modern CIOs are customer relationship managers, strategic communicators, project managers, and innovation
experimenters; if, as a CIO, your key metrics focus only on cost, then don't be surprised if you are managed on cost. If
your metrics are all pointed backward at the technology, then don't be surprised that the business can't really understand
the value of IT. Only through the well-defined set of KPIs, IT can both qualitatively and quantitatively measure value
delivery to business and achieve a high-performance result.

Posted in: CIO Debate,IT Performance Management,KPIs,Performance Master

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25 comments:

Thaddeus Shegos says:

April 2, 2013 at 5:08 AM Reply

Great article. Many IT leaders tend to focus on the cost of IT for reporting - many miss the most important metric of the
Value of IT in terms of increased performance and savings.

Brielle Franklin says:

April 11, 2013 at 8:17 AM Reply

What a great article. I have been doing research for onsite IT services for my business class' client. I am so glad I came
across your post. I think that your post was very helpful and very interesting to read.

Pearl Zhu says:

May 13, 2013 at 3:15 PM Reply

Hi, Thaddeus and Brielle, thanks for commenting, the traditional efficiency-driven IT KPIs can't well reflect the
performance IT needs to prove as value center, only through different perspectives, such as overall capabilities, cost
transparency, project success., etc, IT can turn around and build a strong brand in leading business transformation.
Thanks.

Inder Dua says:

August 5, 2013 at 10:02 AM Reply

Great article but i am not sure these reflect the changing landscape of business and IT. For me, the CIO needs to be
measured in few different ways e.g. how quickly CIO is able to integrate a new technology into the overall architecture of
the organization? How clean, structured and accessible data CIO is able to maintain and how much revenue through in
sights he is able to drive?

Let's stay at bench marks for a while but there is a real need to add few more pertinent metrics to his portfolio

John Michle says:

September 3, 2013 at 3:22 AM Reply

Its really informative, some facts and other points given here are quite considerable and to the point as well, would be
better to look for more of these kind for efficient results.

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Swami says:
March 3, 2016 at 6:37 AM Reply

Great article and I enjoyed reading it.

I would like to know what suggestion on how to measure below information
- Improving Speed/Agility (Speed to Market, ability to change direction with the market, etc)
- Improving Revenue (enable the business to gain market share, enter new markets, etc)

Israel Cagan says:

July 7, 2016 at 10:16 PM Reply
This comment has been removed by the author.

Lionel Jayasinghe says:

February 18, 2017 at 2:47 AM Reply

A good article covering necessary scope for developing KPIs. Developing KPI s for value added services are quite
challenging.

Anand says:
March 27, 2017 at 10:48 PM Reply

Very Good Article.

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August 23, 2017 at 7:09 AM Reply

Outstanding article, Pearl ! You made my (and my CIO) day !

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