Ariticles Summary

Feature Article: The Real Business Value of Information Technology In today's fast-paced business environment, the management of knowledge and intangible assets has become of great significance in determining real business worth. Although standard financial measures are an important part of any such assessment, they have not been expanded to incorporate critical non-financial drivers of business value. Despite a wealth of available information, concrete measures that are objective, comparable, auditable leading indicators of true business value have not been included in the standard externally reported measures. Thus, decision-makers have lacked relevant information for evaluating real business value and have resorted to riskier, more-uncertain and more-subjective approaches to decision making. Standardization provides many benefits to investors and business executives. Essential for capital markets to function, accounting standards provide the foundation for auditing the financial results of an enterprise, thus increasing the credibility of financial reporting. Correspondingly, standards must be developed that reach beyond existing accounting measures to the operational measures enterprises use to increase business value. Standard measures provide a common language and set of definitions for discussing operational performance and comparing performance among enterprises and among entities within the same enterprise. Hence, it is crucial to develop performance measurement standards. Prior to a discussion of performance measures, it is important to define two concepts: standard and non-financial. Standard, as delineated herein, refers to well-defined mean performance measures that are used commonly and consistently. Non-financial is defined simply as those performance measures that are not financial. Financial measures are set by recognized accounting authorities for external reporting purposes. Thus, non-financial measures are all other business performance measures. In the United States, the Financial Accounting Standards Board (FASB) uses a set of values to define generally accepted accounting principles (GAAP). Because the rate of change in the forces driving business value has exceeded the rate of progress FASB has made in defining standards to measure such drivers, a measurement gap has resulted. With FASB and GAAP forming the foundation for external reporting, it is imperative that these standards are expanded to encompass all the measures that determine real business value. According to financial analysts, the market price of an enterprise's stock is based primarily on projected future earnings. However, dramatic and unanticipated swings in expected earnings have occurred despite a mass of available information. With unexpected declines in earnings come loss of jobs, vanishing businesses and shaken consumer confidence. Knowledge management and the management of intangible assets have been measured inadequately by accounting standards, thus creating a measurement gap. In 1998, 80 percent of market value in the S&P 500 was unexplained by GAAP (see Figure 1). Consequently, measurement gaps create uncertainty and require business executives to use ad hoc, subjective and non-audited measures as the basis for creating business value. Because uncertainty increases risk, perceived shareholder value often is impacted negatively. Usually, the greater the uncertainty, the lower the market value of an enterprise. Thus, understanding the impact of standard non-financial business measurement on the real value of an enterprise is crucial for increasing enterprise agility in a globally connected economy. The intellectual capital, technical infrastructure and methodologies that currently exist set the stage for this to happen. Undoubtedly, many methodologies and organizations (e.g., the balanced scorecard, Supply Chain Council, total quality management, European Foundation for Quality Management and Six Sigma) have reached beyond the traditional accounting measures. With the automation of business transactions in software applications such as enterprise resource planning and customer relationship management, performance measures at all levels of management have become available. Furthermore, the hundreds of predefined key performance indicators provided by such systems have created a processing issue for management. Because managers can handle only a limited number of these indicators on a continuous basis, management faces information overload and must concentrate on only a few such measures. Consequently, it is critically important to select the measures that are leading indicators of financial performance. In addition, it is essential to validate the results of those measures and determine the necessary intelligence on which to base decisions. Thus, industry-relative benchmarks and standardization are key. Of the various initiatives that reflect aspects of real business value beyond the traditional accounting measures, the balanced scorecard has served as a means to translate vision into action. Selected operational performance measures operate to provide feedback regarding whether the designated actions actually contributed to the vision. Total quality management, European Foundation for Quality Management and Six Sigma facilitate the identification of non-accounting operational measures that can serve as leading indicators of financial results. Recently, reference models have been developed to aid in the quest for managing performance. Reference models contain predefined measures for specific business processes. The Supply Chain Council and the Product Development and Management Association have initiatives in this area (e.g., a reference model of standard performance measures for collaborative product development). Together with benchmarking services and best practices, such endeavors have created state-of-the-art business performance measurement. With enterprises focusing more on core competencies and pursuing outsourcing of other business processes, the integration of business processes between suppliers and customers is escalating in importance. As enterprises become more interdependent, cooperation to produce standards increases. For product enterprises, the Supply Chain Council has defined a set of collaborative performance measures to ensure that efficiencies are maintained as business functions are transferred externally. Service-level agreements facilitate an assessment of value provided and received. In addition, virtual enterprises require non-financial performance measures that are generally accepted among enterprises so that comparisons and decisions can be made quickly. Not only must standard measures be created, but also understanding how they are integrated to build an effective business performance framework is crucial. To close the measurement gap, a business measurement framework consisting of a set of precisely defined performance metrics that extend past the traditional financial reporting measures and represent a comprehensive view of an enterprise's business operations is essential for determining real business value. To this end, investors and business executives need an organization whose mission is to establish and improve standards of operational performance for the guidance and education of business management. Measuring non-financial aspects of business performance including an enterprise's ability to innovate as well as manage demand, supply and shared services using standard metrics that are objective and that can be audited is essential for increasing real business value. Source: Audrey Apfel, Gartner Measurement, [email protected] Ken Bergstrom, Gartner Measurement, [email protected] Craig Hekking, Gartner Measurement, [email protected] Michael Smith, Gartner Measurement, [email protected] Writer: Carolyn LeVasseur, Gartner Measurement http://www.gartner.com/4_decision_tools/measurement/measure_it_articles/2002_10/trbvit.jsp