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Bottom-Line Principle 3: IT improves strategic and operational effective-
ness by carrying out management™s strategic intentions.


Bottom-Line Principle 1: IT™s bottom-line impact is based on its direct contri-
bution to profitability.


Of course, improved bottom-line performance ” that is, profitability” is the
fundamental goal for companies. Whatever we do with IT, at the heart of it, we
do it to directly or indirectly improve bottom-line performance. This is the result
that is always being sought by the management team. For government or non-
profit entities, the equivalent goal is mission performance; whatever we do with
IT, we do with the expectation of improving the agency™s mission performance.
The problem is: What constitutes direct contribution to profitability? The
easiest answer may be direct cost reduction; when IT reduces costs, then it
directly contributes to profitability. IT could produce revenue directly by offer-
ing services directly to the customer, as well. For example, IT could be the mech-
anism for selling information from a database. But beyond these simple examples,
the idea of direct contribution to profitability becomes murkier. Where IT™s
direct contribution to cost reduction or revenue improvement can be measured,
it should be, reflecting IT™s financial contribution. However, this is the minor-
ity of situations. In most cases, IT™s contribution is reflected in improvements
in some aspect of the business™s organizational performance.
The reason for this is that IT is, fundamentally, an enabler of business activ-
ity. IT may enable managers to manage better, or marketers to target more prof-
itable markets or customers. IT may enable reengineering of business processes
to reduce time cycles, and therefore reduce errors, or improve service quality,
or increase customer satisfaction. But in all these cases, IT™s contribution is to
enable a more efficient or effective business activity, which in turn results in
improved profitability. IT is a partner in the bottom-line result, but it isn™t the
only factor.
Traditional IT financial analysis works to translate IT™s enabling character
into concrete estimates of reduced cost or increased income and thereby produce
a measure of IT™s contribution to profitability, or ROI.6 This is laudable but it
40 CONNECT TO THE BOTTOM LINE


confuses IT™s basic contribution of enabling and improving business activity with
the financial measure of its contribution.
Bottom-Line Principle 1 states that IT™s bottom-line impact is based on con-
tribution to profitability, with the understanding that directly measuring it may
be difficult.


Bottom-Line Principle 2: IT™s direct contribution to improved profitability is
based on improving the company™s operational and strategic effectiveness.


IT can certainly enable improvements in a company™s operations. Improve-
ments can take the form of cost reduction, time reduction, improved flexibility,
increased quality, and so forth. If these business operational improvements
reduce cost or improve revenue, IT will have contributed to profitability. Such
improvements may be measured by estimating the amount of cost reduction or
revenue improvement, and consequently an ROI can be calculated. In other
cases the process improvement can be measured (e.g., in terms of time, quality,
error rate, etc.) but the connection to profitability may be less clear (e.g.,
improves customer satisfaction, or customer loyalty, etc.).
IT also can enable the success of a company™s strategy. For example, for a
medical insurance company, a key strategy is increasing customer loyalty through
improved customer service. If IT provides the environment and information for
improved customer service, or if IT enables the reengineering of business
processes to improve customer service, then IT has bottom-line impact because
it enables the success of the strategy which, in turn, will result in improved prof-
itability.
To reiterate, IT™s bottom-line impact is based on: (1) improving the com-
pany™s operational effectiveness and (2) improving the company™s strategic effec-
tiveness. In the first case, the operational performance improvement in some
cases is measurable, and possibly directly connected to profitability. In the sec-
ond case, the strategic effectiveness is connected to the bottom line through man-
agement™s intentions ” through the strategy” to improve company performance.
The underlying idea is, again, cause and effect, based on a bottom-line
impact chain concept. The direct cause of an improvement may be IT enabling
a basic capability, such as management information or reduced time cycle for a
process. The effect of this capability is improving a business process (e.g., in
terms of cost or cycle time reduction) or achieving a strategy (e.g., improved
customer retention). The critical element is the definition of the cause/effect
connection, or bottom-line impact chain, between the things IT enables, as well
as the ultimate connection to the bottom line.
Over the past two decades, there has been a remarkable convergence of
thinking on this point. For example, the original Information Economics focused
on justifying and prioritizing IT investments based on management factors7 such
as strategic match, competitive advantage, competitive response, and manage-
ment information in conjunction with ROI or other financial measures. These
41
Principles of IT™s Bottom-Line Impact


management factors were adopted precisely because a company™s financial per-
formance is most directly improved through improving these performance drivers.
Shareholder Value and Economic Value Added (EVA), emerging in the late
1980s, expressed this idea directly. Although these are financial disciplines, they
recognize the cause-and-effect linkages of activities such as product devel-
opment, marketing initiatives, and cost reduction programs as the drivers of
financial performance. McTaggart states, “Managing to improve shareholder
bottom-line impact means generating, choosing, and implementing the best
alternatives for any business strategy or operational issue.”8 This is a key point
for us as well: generating (via Strategic Demand/Supply Planning and Innova-
tion), choosing (via Prioritization and Alignment), and implementing (via Cul-
ture Management and Performance Measurement) the alternatives with the best
bottom-line impact.
These alternatives fall into two general categories: strategic effectiveness fac-
tors and operational effectiveness factors. These are the causes, and financial per-
formance is the effect.
In our work with clients, we frequently use a diagram (shown in Exhibit 3.1)
which is adapted from bottom-line impact management and shareholder bot-
tom-line impact literature that illustrates this relationship. What matters are
those things that most directly influence strategic effectiveness and operational
effectiveness. By managing to improve those effectiveness factors (the causes)
through information technology, we will have contributed to the company™s
overall financial performance (the effects). By prioritizing, aligning, planning,
and measuring IT™s performance with strategic and operational effectiveness as
the focus, we can improve and communicate the bottom-line impact of IT to
the enterprise.
We cannot overstate the importance of this point. The identification of the
cause-and-effect factors affecting strategic effectiveness and operational effec-
tiveness is the basis for defining strategic intentions for the NIE prioritization
and alignment practices; this underlies our approach to integrated planning. See
Exhibit 3.3, which emphasizes the cause-and-effect relationships.
Other authors have reached similar conclusions. Kaplan and Norton™s
work on the Balanced Scorecard is based on cause-and-effect linkages between
customer-, internal process- and people-related measures, and financial per-
formance. Their notion of “leading” and “lagging” indicators is, at heart, an
elaboration of cause-and-effect relationships. Also consider Michael Porter™s
contributions to the understanding of competitive strategy. He defined generic
strategies of cost-leadership, differentiation, and focus. In developing these ideas
in his 1996 Harvard Business Review article, Porter remarked on the difficulty
companies have in defining and executing strategy: “The root of the problem is
the failure to distinguish between operational effectiveness and strategy. The
question of productivity, quality, and speed has spawned . . . management tools
. . . and bit by bit, (they) have taken the place of strategy.”9 His point is that
operational effectiveness ” things like productivity, quality, and speed ” are
important, but strategy (and, in our words, strategic effectiveness) is equally
important. Porter echoes McTaggart™s point: “The essence of strategy is in the
42 CONNECT TO THE BOTTOM LINE


EXHIBIT 3.3 Improvements in Effectiveness Produce
Revenue/Expense Improvement which
Produces Bottom-Line Impact

Results, or Improvements here ....


Strategic
Produces Results here
Effectiveness


Revenue,
Bottom Line
Expense (and
(and Mission)
Cause and Effect
Mission)
Impact
Performance

Operational
Produces Results here
Effectiveness

Results, or Improvements here ....




activities ” choosing to perform activities differently or to perform different
activities than rivals.”10 The key is choosing among alternatives, which is the
heart of integrated planning, and following through on the cause-and-effect
chain to implement IT solutions that support and enable those choices.
This defines the cause and effect between IT enabling improvements in oper-
ational effectiveness or strategic effectiveness, and the company™s bottom line.


Bottom-Line Principle 3: IT improves strategic and operational effectiveness by
carrying out management™s strategic intentions.


By focusing on strategic and operational effectiveness, management is encour-
aged to focus on the company™s bottom-line impacts. That is, management has
to define its strategic intentions and what it intends to do to improve the com-
pany™s performance through those strategic intentions. At the same time, man-
agement defines the basis for its operational goals ” the improvements in cost,
performance, customer satisfaction, product quality, and all the other dimen-
sions of the company™s activities. Again, management defines its objectives for
such improvement, always with an eye toward improving financial performance
by improving operational effectiveness.
This is bottom-line impact-based management. By extension, the NIE prac-
tices apply these ideas to IT and the contributions IT makes toward strategic
and operational effectiveness.
43
Summary and Additional Implications


For example, in prioritization, the management team assesses how each IT
project increases strategic effectiveness or operational effectiveness. (See, for
example, Exhibit 3.4. In this exhibit, the six strategic intentions cover the com-
pany™s intentions about both strategy and operational improvement.) In Align-
ment, the management team considers how the IT lights-on spend connects to
strategic and operational effectiveness. (Chapter 8 describes both the Prioriti-
zation and Alignment practices.) In Strategic Demand/Supply Planning and in
Innovation, the objective is to define exactly what IT can do to promote impro-
vised effectiveness. (Chapter 9 describes the Strategic Demand/Supply Planning
and Innovation practices.)

EXHIBIT 3.4 Dollars in New Development,
in Support of Strategic Intentions

30
$26.5M
25
Total Project $(M) with
Strong Support of a
Strategic Intention




20 $17.9M
$14.8M
15
10 $7.6M
5
$1.3M $.3M
0
Revenue
Growth
Expense
Control
Customer
Service




S1
Improvement


Compliance
Regulatory




Utilization
Resource
Quality




Strategic Intention




SUMMARY AND ADDITIONAL IMPLICATIONS
We have made four basic points. First, our objective is to control the IT spend
and improve IT™s bottom-line performance. Second, we do this through improv-
ing the company™s operational and strategic effectiveness. Third, these improve-
ments are represented by management™s strategic intentions, and fourth, we
connect IT to the bottom line by directly supporting those strategic intentions.
We can have direct connections through immediate cost reduction or revenue
enhancement, but the real challenge and opportunity is to make the connection
for the entire IT spend.

Implications for Project Business Cases
Improving the company™s operational and strategic effectiveness is the key to

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