Analysis

By CIOinsight  |  Posted 11-11-2002 Print Email
: What's The True Measure Of Vendor Value?">

What's The True Measure Of Vendor Value?

When Rod Hamilton, the CIO of Hygeia Corp., a Miami-based provider of health insurance administration services, needed someone to host a secure Web site through which providers and insurers could process claims, he spent nearly a year investigating two dozen companies. "This is mission critical, and we're staking our future on it," he says.

Could the vendor guarantee 100 percent uptime? Would it respond quickly to problems? Would it be around awhile? "We demanded access to very senior financial people so that our CFO would be comfortable that they would be here when we need them," Hamilton says. "Companies are dropping like flies out there."

Reliability in all its manifestations topped the list of criteria for measuring vendor performance among the respondents we spoke with. When we talked with analysts, however, we heard something different: The ultimate measure should be whether a vendor's offering improves its customers' bottom lines.

There can be little doubt that reliability is important. Robert Moon, vice president of information services at ViewSonic Corp., a Walnut, Calif.-based maker of visual display products, recently watched one of his Hewlett-Packard machines go down on the Saturday of a holiday weekend. H-P immediately sent someone out to fix it. "When you're running a global, $1 billion business, you can't go down," Moon says. "You just can't."

This is why price takes a backseat to reliability in our survey—even basic systems like e-mail and Web servers can be seen as mission critical. "If we're enrolling students on the Web site and it's down for a day," says Ken Stafford, vice chancellor for information technology at the University of Denver, "How many students do we lose? That's money."

The analysts we spoke to acknowledge the importance of reliability. Still, they think that in the current economic climate, CIOs should also judge their vendors on how their products and services improve the business. "With capital expenditures under pressure and free cash flow so critical, there's a greater opportunity to do that," says Howard Bass, practice leader of the Decision Analytics Practice at Ernst & Young.

According to Calvin Braunstein, chairman and CEO of the Robert Frances Group, which provides business advice to IT executives, only 25 percent of companies do anything about ROI or financial measurement. "Less than 10 percent do a decent job. It's closer to 5 percent for those who measure upfront but also on the back end to validate their expectations. Very few make executives accountable: 'You say this software will cut your sales costs by 10 percent, so I'm taking 10 percent out of your budget.'"

Ideally, Bass says, business units should be held accountable for very specific performance metrics on IT investments. If it's a call-center initiative, for example, by how many minutes are calls reduced, and how many customer issues are resolved in the first call? These metrics should be checked three, six, nine months out. "This is hard, and it shouldn't be done across the board," he says. The idea is to apply it to the 20 percent of IT investments that cost the most and have the most impact on the business. Two additional benefits: Such measurements help set IT priorities, and they win greater buy-in from users because they understand what a new project is meant to achieve.

To help, CIOs should demand better performance information from vendors, Bass says. True, a recent Ernst & Young survey found that only 2 percent of IT buyers have a high degree of trust in vendor-supplied performance metrics. "Still," says Bass, "the vendor has to make the effort to really understand your operation today and offer a clear roadmap of how their solution will provide what you want."

The first step, Bass says, is to take a hard look at the decision-making process. How much responsibility resides in IT, how much in finance, how much in the business unit? Can they all agree on a measurement process?

"In the coming years, CIOs and CFOs are going to sit down together and ask how they can get this increased level of measurement," Bass says. "I believe that major companies are doing a good job of vendor management. But in today's economy, IT management could take its due diligence to another level by holding business units to a greater specificity about the business impact of technology."—Terry A. Kirkpatrick



 

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