Assessing and comparing different IT investment proposals are complex challenges and are likely to remain difficult for the foreseeable future, especially given that IT investments can have significant and diverse values.
Nevertheless, organizations do need to make investment decisions and implement approved applications. When providers enter this action stage of the process, it is important to ensure intended value meets everyone's expectations. Too often, IT investments become simply IT expenses. The intended value seems to have disappeared, or it is a pale shadow of organizational expectations.
Why does this happen?
Common reasons for value dilution are:
- We don't establish a clear link between IT investments and organizational strategy.
- We ask the wrong question.
- We don't state our goals.
- We leap to an inappropriate solution.
- We don't manage outcomes effectively.
- We mangle overall management of the project.
The link between organizational and IT strategy can be weak, incomplete, or nonexistent. At times, the organizational strategy is troubled. Even if the IT staff is executing well, they may be working on the wrong things or trying to support an organizational strategy that is flawed.
Linkage failures often occur because:
- The organizational strategy lacks depth, serving as no more than a slogan or a buzzword.
- IT staff think they understand the strategy, but they don't, with the result that they typically implement an IT version of the strategy rather than the organization's version.
- The strategists won't engage in the IT discussion, ignoring the importance of having such a discussion to ensure that IT leadership clearly understands goals and direction.
- The linkage is superficial (for example, a strategy to have patient care systems reduce nursing labor costs that does not address the question of how the change will occur).
- The IT strategy conversation is separated from the overall strategy conversation, as occurs when the IT steering committee has the wrong composition of members.
- The organizational strategy evolves faster than IT can respond.
Awareness of these common areas of linkage failure and examination of one's own organization and strategy should be key components during IT investment planning.
The Wrong Question
You should rarely ask the question, "What is the ROI of a computer system?"
You might just as well ask, "What is the ROI of a chain saw?" If you want to make a dress, a chain saw is a waste of money. If you want to cut down some trees, then you can begin to think about the return of a chain-saw investment and compare that investment with others, such as the return of investing in an ax. If the chain saw were to be used by a 10-year-old child, the investment might be ill-advised. If the chain saw were to be used by a skilled lumberjack, the investment might be of value.
Like investment in any tool, the ROI of a technology investment depends on the task to be performed and the skill level of the participants who are to perform the task. Moreover, a positive ROI is not an inherent property of an IT investment. Once the system is implemented, no computer genie arrives, waves his wand, and "poof" the return occurs. One has to manage a return into existence.
Thus, instead of focusing solely on return, a more worthwhile focus is to ask:
- What are the steps and investments, including IT, that we need to achieve our goals?
- Which "business" manager owns the achievement of these goals? Does he or she have our confidence?
- Does the cost, risk, and time frame for the implementation of the set of investments, including the IT investment, seem appropriate given our goals?
- Have we assessed the tradeoffs and opportunity costs?
- Are we comfortable with our ability to execute?
Examination of such management issues can greatly enhance the likelihood of the investment meeting its value potential.
IT proposals often include statements about the positive contributions that the investment will make to further organizational performance. But the proposals are not always accompanied by specific numeric goals for this improvement. If we intend to reduce medical errors, will we reduce errors by 50 percent or 80 percent or some other number? If we intend to reduce claims denials, will we reduce them to 5 percent or 2 percent, and how much revenue will be realized as a result of reducing these denials?
Failure to be specific about goals can create three fundamental value problems.
We may not know how well we perform now. If we don't know our current error rate or denial rate, it is hard to believe that we have studied the problem well enough to be fairly certain that an IT investment will help achieve the desired gains. The IT proposal sounds more like a guess of what is needed.
We may never know whether we got the desired value. If we don't state a goal, we'll never know whether the 20 percent reduction in errors is as far as we can go or whether we are halfway to our desired goal. We don't know whether we should continue to work on fixing the error, or whether we should move on to the next performance issue.
It will be difficult to hold someone accountable for performance improvement. Having clearly defined, measurable goals is important when determining who is responsible for progress and which efforts are successful.
Keeping such performance-tracking issues in mind when setting goals is important for value realization.
Related to the above, we often don't manage the outcome into existence. Once the project is approved and the system is up, management goes off to the next challenge seemingly unaware that the real work of value realization has just begun.
Support for the need for outcomes management can be seen in the reduction in days in accounts receivable at a physician practice of Partners Healthcare System, based in Boston. When a new practice management system was implemented, a precipitous decline in days in accounts receivable did not occur in the time immediately following the implementation. Instead, improvement in days in accounts receivable was progressive, because someone was managing that improvement.
Defining the Solution
At times, the IT discussion of a new application succumbs to advanced states of technical exuberance. Project participants become so overwhelmed by the prospect of using sexy new technology and state-of-the-art gizmos that they forget why they are having the discussion in the first place. Soon sexiness and state-of-the-art-ness become the criteria for making system decisions. Similarly, comparison of alternative vendor products can get lost in a discussion of which product has more features than another.
Although sleekness and features have their place in the system selection, they can be irrelevant to the performance-improvement discussion and are at best secondary to the discussion that centers on the capabilities needed to effect specific performance goals.
One guaranteed way to reduce value is to mangle the management of the implementation project. Implementation failures, significant budget and timetable overruns, or unhappy users all dilute value.
Project management becomes mangled for many reasons, including:
- The project's scope is poorly defined.
- Accountability is unclear.
- The project participants are marginally skilled.
- The magnitude of the task is underestimated.
- Users feel like victims rather than participants.
- The authority to steer strategic direction is too broad (i.e., all of the world has a vote and can vote at any time).
Value Achievement Studies
A study by Dartmouth College Professor J. Brian Quinn found that failure to achieve a solid return on IT investments often is the result of:
- A suboptimal organizational strategy or organizational assessment of the competitive environment. If the overall strategy is wrong, return typically will be insufficient no matter how successfully it is implemented.
- An acceptable organizational strategy, but one that lacks appropriate definitions of IT capabilities. The information system, if it is solving a problem, is solving the wrong problem.
- Failure to identify and adequately draw together all investments and initiatives necessary to carry out the organization's plans. The IT investment falters because other changes, such as reorganization or reengineering, fail to occur.
- Failure to execute the plan well. Poor planning or less-than-stellar management can diminish the return of any investment.
Value also can be diluted by factors outside of the organization's control. Author Peter Weill noted that the more strategic the IT investment, the more its value can be diluted.c For example, an IT investment directed at increasing market share can have its value diluted by non-IT decisions and events, such as pricing decisions, the actions of competitors, and the reaction of customers.
Even when IT investments are less strategic, value still is vulnerable to external factors. For example, a strategy to improve nursing productivity can be affected by shortages of nursing staff, or an IT investment directed toward improving the characteristics of the infrastructure can be diluted by unanticipated technology immaturity or business difficulties confronting a vendor.
Healthcare organization leaders often feel ill-equipped to address the IT investment/value challenge. Yet evaluating IT plans, proposals, and progress requires no new skill set. At stake is a strategic hunch in which the domain knowledge may be limited and value is difficult to define, similar to the day-to-day management challenges typically faced in a healthcare environment, such as devising a strategy to develop a continuum of care, examining new surgical modalities, or basing a strategy's success on improved morale.
With these similarities in mind, organizational leadership should treat IT investments no differently than other types of investments: If they don't understand, believe, or trust the proposal, or proponent, they shouldn't approve it. More importantly, organizations should make sure that they take steps to reduce or eliminate factors that dilute IT value overall and for individual IT initiatives.
John Glaser is vice president and CIO, Partners HealthCare System, Boston.
Questions or comments about this article can be sent to the author at email@example.com.
a. Glaser, John, "Analyzing Information Technology Value: Are You Using the Best Approach?" hfm, March 2003.
b. Quinn, J. Brian, et al., Information Technology in the Service Society, Washington, D.C., National Academy Press: 1994.
c. Weill, Peter, and Broadbent, Marianne, Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology, Cambridge, Mass., Harvard Business School Press, 1998.