September 2004      

	WHAT'S NEW! IDC’s European IT Forum 2004, Sept. 27-28 in Paris, France. For more information, go to IDC’s Website Live Worldwide Business Conference Oct 20-22, 2004 Las Vegas, NV, United States Hosted by BetterManagement. Click here for more information Learn how to use Alinean Peer Comparison™ to gain competitive advantage and create shareholder value -IT Vendors (Opportunity Analysis solution). -Executives and Consultants      (Corporate Governance Solutions).
	IN THIS ISSUE: FEATURE STORY: Is CIO Compensation Driving Shareholder Value?» CIOs Need to Shift Focus from Cost to Value»
	Quote of the Month "There's a creative element in IT that applies to the business needs of strategic elements in an organization. Some organizations are successful and others are not successful. We hear over and over that IT people must be strong business leaders, that they must interpret business needs. That can't be a commodity." - David Luce, CIO of Rockefeller Group International and incoming president of Society for Information Management
	SEND TO A FRIEND Email this Newsletter to:   ^ Email Address   About Alinean Today’s rapidly changing economic climate supports the renewed need for information technology cost-justification. Alinean aligns IT spending and business performance through research methodologies and customized software tools, which measure and quantify the value of technology investments. For more information on Alinean and its tools for vendors, consultants and IT/Finance professionals call 407.382.0005 or visit www.alinean.com.

Is CIO Compensation Driving Shareholder Value?

Corporate America is currently struggling to address one of its greatest corporate governance issues, namely the ability to link IT investments to shareholder value. More than 80% of Fortune 500 companies acknowledge the issue, but less than 10% have formal IT spending governance programs in place. Most simply don’t know how to connect their largest capital expenditure (50% of most companies’ capital budget) with shareholder value.

Even highly paid CIOs are struggling with the corporate governance issue of producing shareholder value from IT investments. Among this group, (CIOs who earned more than $500,000 in 2003), only 33 percent are earning their salaries, with a very strong (0.95) correlation between IT spending and shareholder value. An astounding 47 percent actually show a negative correlation of -0.71.

Ultimately, alignment between CIO compensation and shareholder value is necessary if IT investments are expected to create positive shareholder value. Wal-Mart and GE are good examples of companies that have successfully crafted comprehensive plans that align compensation with shareholder return in order to deliver profitable growth.

Lifting the Veil on CIO Performance
Alinean’s ROIT™ metric, which compares EVA® to IT spending, has expounded on the overall lack of correlation (-0.03) between IT spending and shareholder value.

Figure 1: Leading companies are achieving significantly greater correlation and value from IT spending

What’s even more interesting is exploring how CIO compensation is (or isn’t) aligned with the creation of shareholder value.
Baseline’s recent article on CIO pay was a starting point for this research. Here, we’ve focused on the 30 companies with CIOs that earned more than $500,000 total in 2003.

These findings allow us to draw a number of conclusions:

1) Top Paid CIOs are struggling (like all CIOs) to ensure a link between IT spending and shareholder value – the overall correlation is weak (0.14).
2) 53% of these companies have positive ROIT scores and show a much stronger correlation between shareholder value and IT spending (0.69). The correlation between shareholder value and IT spending is even stronger (0.95) with 33% of the companies that have an ROIT score above 50%.
3) There is a strong (-0.71) inverse correlation between shareholder value and IT spending for 14 (47%) of these 30 highly compensated CIOs

Figure 3: Highest Paid CIOs appear to be facing the same challenges as other companies trying to link IT spending with shareholder value

The research findings suggest that many of the well-compensated CIOs are investing wisely based on the relationship between their IT spending and the shareholder value being created by their organization. Some are potentially underpaid given the impact of the IT function they lead.

However, there is a clear disconnect between CIO compensation, IT spending, and shareholder value for many organizations on the list. As most of these companies are large, complex, and heavily IT-dependent organizations, high compensation levels for their CIOs should not be misinterpreted as CIO non-performance, but rather one of corporate governance that has failed to link compensation to results.

Given the strong correlation between shareholder value and IT spending for companies with high ROIT scores, the use of ROIT as a CIO performance metric would provide companies with an effective mechanism to align CIO (and IT team members’) incentive compensation with shareholder value and in so doing, create greater alignment between IT and bottom line performance.

CIOs Need to Shift Focus from Cost to Value

With 2005 budget planning already in the works, CIOs need to quickly adopt a more strategic approach to communicating IT value to company stakeholders. The focus is shifting significantly this year away from costs-based justification, to delivering bottom-line returns. Organizations that incorporate a more strategic IT investment approach will be able to capitalize on dynamic market trends and gain competitive advantage.

A shift in 2005 budgets from inward, bottom-up cost analysis to an outward, top-down value approach incorporates how businesses stack up to the competition, outlines the value of last year’s investment decisions, and sets priorities for the year: planned projects, expected returns, and how each investment aligns with the overall business objectives.

Out with the Old...
The old, tactical way of presenting the IT budget was to focus on the direct relationship between spending and technology, to lower the total cost of ownership (TCO) by proceeding through a set framework:
1. A systematic review and analysis of the current budget
2. Overview of projects successfully implemented
3. Discussions about cost reduction initiatives
4. Debates on the incremental budget requests for various projects, to calculate the total new budget requested
5. Talks about technical initiatives and architectures

This cost-based focus is not how the new generation CIO will succeed in the boardroom. While cutting costs of commoditized IT spending – such as operations, administration and upgrades – delivers value, Alinean’s research reveals that increasing spending on innovative projects will be the best driver of shareholder value in 2005.

...In with the New
Forward-looking CIOs are already starting to think and act as the CEO of IT, giving a high-level “state of the union” address on what’s working, what can work better, and ultimately, how IT can be agile enough to drive bottom-line business value.

1. A competitive top-down presentation of IT spending vs. performance; a look at ROIT™ (Return on IT) data of the company and its peer group. IT stakeholders can evaluate an IT spending performance “report card” of ROIT data that compares a company’s IT investments and financial results against its peers – by industry, geography and/or size. Such insight empowers IT executives to speak the CFO’s language to identify high-performing technology investments, drive improvement of current initiatives, and uncover new opportunities where reallocation of technology investments can boost a company’s shareholder value and competitive advantage.
2. A bottoms-up comparison and contrast of planned performance vs. actual performance of overall IT spending, derived benefits, and impact that IT had on the overall corporate financials in the past year. This includes hard numbers on costs, benefits and ROI.
3. Based on the successes and challenges highlighted in these assessments, the new plan should have the proper context to win over company stakeholders. This should have a top-down focus, highlighting how the overall plan will contribute to higher ROIT and corporate financial improvements to revenue, COGS, SG&A and the bottom-line.

CIO's Role as the CEO of IT

The key to analyzing IT’s strategic value is advancing from cost management to business management. The CIO who understands technology purchases in this light gives the business an edge over competitors by adopting a handful of strategic processes for budget planning in 2005 and years to come:

1. Implementing the new bottoms-up and top-down methods of prioritizing for the 2005 budget. Core analysis should incorporate portfolio management and ROIT for internal and competitive benchmarking.
2. Continuous measurement and improvement on existing and new IT investments. Quantifying projects’ cost and return is not just an up-front exercise.
3. Establishing new organizational changes to address the shift in IT management. Several larger organizations have installed VPs of Finance for IT to help implement these value measurement programs. Some assign the CIO to focus on the financial portion of IT management and on collaboration with the business units, while a CTO manages the technology and projects. In both cases, though, there is still a significant risk of concentrating too much on cost management and not enough on business value drivers. Still, this nascent organizational structure is expected to mature, leaving time and flexibility to fully adopt the business management approach.

Bottom Line

CIOs will be responsible for taking the lead in this transition, which can be a complex, sometimes painful process, as shareholders at all levels need to fundamentally re-assess the criteria for supporting IT projects. Those CIOs who are successful at communicating the value of IT investments as it applies to the bigger business goals, will find it much easier to drive approval and funding for innovative initiatives that fuel competitive advantage in 2005 and beyond.

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ROIT is a metric developed by Alinean to measure the efficiency and effectiveness of IT spending when comparing companies in a peer group. The formula for ROIT is EVA / IT Spending, where EVA® is a Stern- Stewart metric for corporate profitability, and IT Spending is the total IT spending for the organization including formal IT, business unit IT (20-30% of total spending for a typical company) and shadow IT spending (consuming from 5 to 15% of the total spending for some organizations).