Unlocking the value in your IS department.

• Author: Klein, Mark M.
• Position: Information systems

Unlocking the value in your IS department

Is there some hidden value in your information systems department? By asking just a few "test" questions, you'll avoid overlooking a moneymaker for your firm. Here's a guide to get you started. Senior managers of many corporations are searching for creative ways to increase the value of their companies. And many are finding hidden value in a surprising location--the information systems (IS) department.

Companies are finding that it is possible to increase their market value by an amount equal to one to two times their annual IS budget, or even more. Some are accomplishing this by leveraging their IS assets into new businesses, others by moving their IS organizations to new levels of productivity. But either strategy raises serious management issues.

Restructuring--macro and micro

American industry has been restructuring--recapitalizing, merging, acquiring, divesting--in order to increase the value of an enterprise to its owners. While some individual transactions have been controversial, the overall trend--to uncover and unlock undervalued corporate assets--has undoubtedly been beneficial.

The primary thrust of this restructuring has been to translate the value of an internal business operation to the enterprise into its value in the marketplace.

A common mode of restructuring has been the conversion of an embedded business operation (typically, a division) into a more or less stand-alone business. Sometimes, ownership of the new business, or free-standing division, remains with the parent. In other instances, ownership of the new business changes: to parent company stockholders (spin-off); to new owners (sale); or to the managers of the business and related investors (leveraged buyout).

According to the logic behind the restructuring, when the managers of the new business unit have greater control and greater incentives, its profitability can be increased. Furthermore, since the financial markets will now assess the parent and new business separately, the value of the parts may be expected to exceed the value of the whole.

Candidates for successful restructuring typically have the following characteristics:

* They can stand alone; they have well-defined products and/or services, their own markets, and assets distinct from the parents'. * Independence may result in lower costs; their cost structure is driven by factors different from those affecting the parents' cost structure. * They have assets, such as products, that are underutilized and could be exploited more effectively. * They have predictable and stable cash flow. This is important, because restructuring frequently involves the addition of substantial new debt, and cash flow must be sufficient to service the debt.

From this perspective, the IS departments in many large companies are ideal candidates for restructuring.

First, a department's products and services are information support, which has a potential market that includes at least all of...