Two and a half years ago, when IBM launched its Smarter Planet strategy, it calculated that the move would expand its available market by 40%. Suddenly, the company was developing new technology-based solutions capable of helping to transform the way complex systems, large organizations, industries, cities and even whole societies work. But how do you measure the impact of this kind of activity?
Not by traditional methods that are commonly used in the tech industry. They measure the return on investment in new technology products and services–mostly operational efficiencies within the IT department and productivity gains throughout the business.
So what’s needed is a new way of thinking about the impact of technology–going beyond traditional return on investment, commonly called ROI. Tech market research consulting firm Forrester Consulting and IBM have been working together for nearly two years on a new theory and methodology for evaluating the potential gains from Smarter Planet-type projects–an approach they call Expanded Value for Smarter Planet. “One of the important elements of Smarter Planet is you’re looking at the impact of investments on a whole system. You’re looking not just at internal operational improvements but at the effect on the company’s brand, at strategic advantages it brings and even at the impact on society,” says Jon Erickson, an a principal consultant with Forrester Consulting.
The first results of this work are coming out now, in form of three reports. They include two case studies, one about law enforcement and the other about healthcare. An overview, Measuring the Total Economic Impact of IBM Smarter Planet Solutions, will be published soon.
This is the second in a series of three essays about the potential payoff from applying Smarter Planet thinking to businesses. The first essay can be found here. The third will be published on July 29.
The reports and analysis are based in part on Forrester’s Total Economic Impact methodology, which it has been using with corporate clients since the late 1990s. Previous return-on-investment methodologies only evaluated the impact of investments on IT expenses and efficiency. The TEI approach expanded to consider the effects of investments throughout a business–including assessment of risks and flexibility gains. IBM asked Forrester to explore more deeply the operational improvements achievable through Smarter Planet engagements and to expand the scope of the analysis to include impact on the company’s brand, on positioning the organization strategically for future success and on creating social, cultural or environmental benefits.
For their research, Forrester consultants interviewed IBM and Forrester technology and domain experts, surveyed 145 business and technology executives, and performed in-depth studies of the use of an information exchange in healthcare, business intelligence in law enforcement, service-oriented architecture software in telecommunications and analytics in retail. Their conclusion in the overview report: “The advancement and pervasiveness of technology has allowed technology investments not only to create expanded or broader value inside the organization but to enable a broader set of value that goes outside the organization.” The study concludes that the use of Smarter Planet solutions does indeed allow organizations to realize benefits within the four areas that IBM asked Forrester to examine. Erickson says business leaders who are familiar with this thinking are reacting enthusiastically. “They realize there’s a class of investments where just talking about operational benefits won’t tell the whole story,” he says. ”
Some of the impact of such engagements can be quantified relatively easily. For instance, in the healthcare study, Forrester found within the operational benefit category a 40% efficiency savings from faster record access, a 20% reduction in the cost of sharing and transferring patient records and other gains–contributing to an estimated three-year, risk-adjusted ROI of 123%. Other benefits can’t be quantified, but can be spelled out . For instance, Forrester says an effective health information exchange has clear societal benefits–including identifying potential misuse of prescription drugs, improving the quality of care in emergency room visits and reducing health care inequities across the region in which the exchange operates.
This kind of analysis is still in its infancy, but already it’s clear that the evaluation methods of the past are no longer sufficient. If businesses don’t take into consideration the positive effects of their transformational investments on the world beyond their corporate walls, they’ll be missing major elements of the value they create–and ones that should not be ignored.
In fact, this shift in thinking is becoming an imperative. Think of its this way: In the environmental sphere, for example, the very sustainability of life on earth is at stake. A planet with soaring temperatures, a shortage of fresh water and inundating seas seas won’t be a very good place to do business.